Synovus Financial Corp (SNV) 2010 Q3 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to the third quarter 2010 earnings conference call.

At this time all participants have been placed on a listen-only mode.

The floor will be open for your questions and comments following the presentation.

It is now my pleasure to turn the floor over to your post, Patrick Reynolds.

Sir, the floor is yours.

Thank you Tom, and thank you all of you for joining us on the call today for the third-quarter results.

You can review the slides and also access the press release on our website www.synovus.com.

Today I will be followed by Kessel Stelling, our President and Chief Executive Officer, who will give you an overview of the quarter.

And Tommy Prescott, our Chief Financial Officer, will talk about the financials, and Kevin Howard, our Chief Credit Officer, will give the credit metrics for the quarter.

And then we will have summary comments by Kessel as a follow-on.

Before I get started, I need to remind you that our comments may include forward-looking statements.

These statements are subject to risks and uncertainties, and the actual results could vary materially.

We list these factors that might cause results to defer materially in our press release and in our SEC filings, which are available on our website.

Further, we do not intend to update any forward-looking statements to reflect circumstances or events that occur after the date the statements are made.

We disclaim any responsibility to do so.

During the call, we will discuss non-GAAP financial measures in talking about the Company's performance.

You can find a reconciliation of these measures to GAAP financial measures in the appendix of the presentation.

Finally, Synovus is not responsible for and does not edit or guarantee the accuracy of earning teleconference transcripts provided by third parties.

The only authorized webcasts are located on our website.

And now, I will turn it over to Kessel.

Thank you Pat, and I would like to thank you all of you for joining us on this earnings call this afternoon.

I would also like to pass along greetings to all of you from our Chairman, Richard Anthony.

As you have read, we recently went through a transition here, as I know you are aware of, but Richard has returned as our Chairman.

He continues to progress in his recovery, and he was in the office early today to offer his encouragement and asked me to pass along his greetings to all of you.

Let me begin by giving just a high-level overview of our quarter before turning it over to Tommy and Kevin for a more detailed presentation of our financials and credit.

I think the story of the quarter is continued progress, as evidenced by our credit trends, but certainly, neither I nor anyone else on our senior team is satisfied with our level of loss, nor will we be until we return this Company to profitability, and we'll talk more about that on the call, as well.

But again, credit trends still continuing to move in the right direction, the single biggest driver of our return to profitability.

Again, an overview of the highlights, as you'll see in your slide, the net loss available to common shareholders was $196 million, reflecting a 19% improvement from the second quarter of 2010, and a 57% improvement from the same quarter a year ago, quarter three of 2009.

Our third-quarter net loss per common share represents $0.25 per share on average share count of 785 million shares.

Another encouraging piece of our quarterly performance is our pretax, pre-credit cost income was stable, it was actually up slightly at $123 million compared to $119 million in the second quarter of 2010.

I want to shift to credit trends, again, the single most important indicator of our progress.

Total credit costs decreased for the fifth consecutive quarter to $301 million, as compared to $353 million in the second quarter of 2010.

Of note, this is our lowest level since the third quarter of 2008.

Our total net charge-offs were $237 million.

Again too high, but the lowest in the last seven quarters, and down $196 million from the second quarter of 2010, when they were at $433 million.

NPA inflows totaled $422 million in the third quarter, compared to $339 million in the second, $531 million in the first.

I will remind everyone that the decrease in the second quarter was much greater than we had anticipated, and we did speak of potential lumpiness during the years.

But the cumulative inflows are well within our internal forecast, and we expect these positive trends to continue.

Our total NPAs into the quarter at $1.56 billion, down $16 million from the second quarter, our second consecutive quarterly decline, and our past dues remained at favorable levels, with total past dues of 1.12% and past dues over 90 days of 0.11%.

Now some non-credit highlights.

Our loan portfolio did shrink, but showed signs of moderation in the third-quarter.

Our new and renewed loan volume was actually up over the previous quarter, and in fact, the last several months have seen an increase in the level of loans for approval in our pipeline, certainly an encouraging sign for our Company and the industry in general.

Our net interest margin remained stable at 3.33%, as compared to 3.34% in the second quarter.

And again, of note, we continued to improve our deposit mix.

Our total core deposits, excluding time deposits, grew 2.5%, annualized from the second quarter, and 6.1% over the same period a year ago.

This was driven by continued strong momentum in consumer and small business demand deposits, as well as as consumer money markets.

The sequential quarter decline in total deposits was impacted by the planned runoff of approximately $627 million in brokered deposits.

And finally, before I turn to Tommy, I want to just reiterate our strong capital position.

We ended the quarter at a tier one capital ratio level of 13.06%, tangible common equity to tangible assets of 7.26%, and a tier one common equity ratio of just over 9%.

During the quarter, we also completed a refresh of our three-year strategic plan, and I will speak more about that after Tommy and Kevin have made their presentations, but at this time, I would like to turn it to our CFO, Tommy Prescott, for a presentation on our financials.

Thank you, Kessel, and I'm going to start with slide seven and walk you through some of the financial details that Kessel has actually sort of set up.

I will give you a little more detail on it.

Slide seven is an illustration of the income statement for the third quarter of 2010 compared to one quarter ago and same quarter a year ago.

I am not going to spend much time on that, but I'm going to point you towards the bottom of the page, third line from the bottom.

You can see the trendline of the improvement and the loss that Kessel mentioned.

And then, if you look at the fourth line from the top, the provision for loan losses, you will see -- really the key driver of that improvement as the provision has reduced when you combine that with the other credit costs that are embedded in non- interest expense, then those are really the key drivers of the improvement in this financial statement.

I will cover some of the other trends that are shown in this financial statement as we go through the slides.

Slide eight is a picture of the trend in the loans outstanding.

We ended the quarter at $22.6 billion.

We were $23.4 billion a quarter ago.

That is a $764 million change quarter to quarter.

Just kind of reflecting a little bit on what Kessel was talking about, the declining rate of this trendline of loan shrinkage, the previous quarter shrinkage was $1.1 billion.

I'll just give you a couple of other facts between the second quarter of this year and the third quarter of this year.

If you take the shrinkage numbers out of the second quarter and if you take the gross shrinkage number and you were then to isolate and set aside charge-offs and then isolate asset dispositions, then you would have about a roughly $500 million decline, net of all of those things, and that would compare in this quarter to a $346 million decline.

So, as Kessel well described it, it is signs of a changing of that trend, and we look forward to watching that and hope that it continues as we move forward.

We have used the opportunity that's presented by the shrinkage in the loan book, as you look at slide nine, to continue to improve the quality and cost of our funding mix.

Obviously, the balance sheet has been shrinking driven by the loan decline, and we have actually brought the deposit mix to a higher quality level and declined the total level of deposits.

Actually, in the quarter, core deposits declined $395 million, and really all of that late quarter decline is driven by a decline in the higher priced time deposits, including the shared deposits.

Outside of that category, total core deposits that excludes time deposits grew 2.5% annualized on a linked quarter basis.

We have also used the opportunity to change the mix and the percentage of our balance sheet that's funded by brokered CDs.

We've continued to bring that down in meaningful amounts each quarter recently, and this time we brought that down $627 million.

What that does for you, as illustrated on slide 10, where you can see the trendline in the loan book first, the green line, and then you can see the trend line in the core deposit line, and right now, sitting at the end of the third quarter, we are sitting at 96% funding by core deposits compared to 85% a year ago.

Slide 11 is an illustration of the trend in net interest income and the trend in the margin.

Net interest income you can see on the bottom left, it took a little bit of a decline during the third quarter, largely driven by the shrinkage of the balance sheet, as Kessel described, the margin base we described it as stable, technically down one basis point.

The driver on the margin was the pressure we are seeing on the reinvestment of investment securities.

We are coming out of something with as much as a four in front of it, and putting back something and two in front of it, and obviously getting a little bit of pressure there.

On the positive side we had a decline in the funding cost that was driven by the maturing time deposits that we described a while ago; a little bit of decline also in money market accounts.

We also had a modest decline in the negative carry that comes from the nonperforming assets, a 33 basis point negative carry last time, last quarter that is, and 30 basis points this time.

We continue to have some burden on the margin from the excess liquidity that we have, the dollars sitting at the Fed.

Actually, we brought that balance down about half a billion dollars here in the quarter, but on average it was actually up a little over $100 million.

And really that is a function of the fact that much of the dollars that affected that via the capital raise in the second quarter were not in the second quarter for the whole period since the transaction close in May.

So the average impact was less in the second quarter than the third, but we did bring it down on a quarter end basis and will continue to watch that line carefully and move it down as we are able to.

Slide 12 is a picture of the fee income line, noninterest income, up almost of $8 million for the quarter.

The key drivers there, I guess this isn't a big driver but one you are interested in I know, and that's the Reg-E impact.

We had estimated the Reg-E impact to be about pushing $2.5 million; it's actually $1.9 million, so we're doing a little better on that.

We continue to be pleased with the opt in rates we have seen.

We have covered almost one half of that at risk revenue, about 48% opt in on the at risk revenue, and feel like that number could continue to improve a little bit.

Otherwise, the big drivers fee income were in the Other category.

There is little over $3 million venture capital gain that helped us for the quarter, and then we also had a very robust mortgage banking income level, up $3.8 million dollars from the second quarter.

The fundamental line interest expense is illustrated on slide 13.

What you see here is a couple million dollar increase, and the key drivers there are in the employment expense line is the most of it.

And the biggest component of that is the extra commissions that go with the extra mortgage revenue that I described a moment ago.

We also had one additional pay day, in effect eight hours of pay because of the longer work day quarter, and then while the other line net net is down slightly due to a variety of smaller factors, we had higher professional fees that tended to try to push that up, but that was offset by some of the other miscellaneous items.

You put all of that together, pretax, pre-credit cost income is illustrated on slide 14, up about $4 million for the quarter.

The big things that were impacting that were, in a negative fashion I guess, the decline in net interest income, about $4.6 million, and on the positive side, more than offsetting the net interest income decline was the boost in fee income that I described.

So we bumped from $119 million a quarter ago to $123 million.

And Kessel mentioned the capital ratios that are illustrated on slide 15.

Basically, they all reflect a modest amount of capital decline, the lowest being in the low teen decline; the highest being the total common equity ratio that was down 44 basis points.

And you can see the trends here, and while all slightly down, still at a very robust and healthy level.

I am going to stop right there and turn it over to Kevin Howard, our Chief Credit Officer.

Thanks, Tommy.

If you will, go to slide 17, and I will begin covering our third-quarter credit trends.

Starting in the upper left column, you will see that we continued our trend of improvement in our provision expense, which was down this quarter by 20%.

Overall, as Kessel mentioned, credit expenses, which includes ORE costs were down around 15%.

Under that chart is the graph showing our charge off trends, which were below the first-quarter charge off level, as we had gathered it would be, down to 4.1%, which was a 45% decrease from the previous quarter.

Our loan loss reserve was flat during the third quarter.

We did absorb a $19 million increase during the quarter, which is the result of our annual update and recalibration of our probability of default calculations, which was done in the third quarter, but for that we would have had a 2% to 3% increase in our reserve during the quarter.

Past use continued to stay healthy, at a healthy level of about 1.12%.

Slide 18 shows a comprehensive look of our nonperforming assets and disposition activity.

As seen here, we did experience a decrease in our overall NPAs, as Kessel mentioned, now down 16% from our peak in the first quarter of 2010.

Below that chart shows our inflows of the quarter, which did increase from our second-quarter number.

And as we guided, we could see some lumpiness in our inflow number; we could see that going forward as we move towards our expected descent to lower levels of nonperforming loans.

At the top right of the page, this demonstrates our continued effort to aggressively clean up our balance sheet.

Our cumulative write-downs coupled with specific reserves on NPAs are now over 46%.

This number, along with an ORE mark of 59%, represents a total of right at 50%, which is either specifically reserved for or written down against our total nonperforming assets.

Just below that is a chart demonstrating our asset disposition activity for the third quarter.

We sold $172 million at $0.39(Sic-see presentation slides) of unpaid balances, which was an improvement from last quarter's $0.34(Sic-see presentation slides) of unpaid balances.

We did guide that our expectations of sold assets would be in before 475 to 500 range for the second half of the year, and at this point we are still confident that we will achieve this, based on what we know today, will sell in the fourth quarter.

We do expect that our percentage yield on unpaid balances will increase back to above $0.40 during the quarter from unpaid balances.

Page 19 - - excuse me, slide 19 demonstrates a look at our overall TDRs and the mix.

We did have an increase of $61 million in accruing TDRs this quarter, which is down from the increase of $89 million the quarter before.

As you can see a large majority of the TDRs, over 70% come from investment properties in the C&I portfolio, which are loans typically attached to cash flow, and a high majority of these were interest rate concessions.

The past due ratio of these accruing TDRs was only 2.6%.

Slide 20 is a chart you have seen before that demonstrates our diminishing exposure in our Residential Portfolio, as seen in the upper left corner.

Almost half of our NPL's have come from these three troubled portfolios, with about 36% of that number coming out of Atlanta.

This quarter, the inflows from these three challenged portfolios did declined once again this quarter.

These portfolios, by far our worst-performing, are now down 65% from what they were, and Atlanta's performing balances are down right at 79% of what they once were.

Slide 21 represents the trends in our Investment Real Estate Portfolio.

The total nonperforming loans did trend down, as well as charge-offs during the third quarter.

Our new NPL inflow did pick up a bit this quarter to $70 million, but that was still below what was in the first quarter of the year and fourth quarter last year, well below those numbers.

There are a couple sectors in this portfolio I will highlight.

One is the Shopping Center Portfolio, which did have an elevated NPL number this quarter, which made up most of the total inflow number for all of the Investment Properties portfolio.

$40 million of the $52 million you see on this slide in that Shopping Center Portfolio were two loans, one in Atlanta and one in Nashville.

We've thoroughly reviewed this portfolio, and we do expect the inflow number to improve in the fourth quarter in the Shopping Centers.

Another area I want to point out is the Commercial Development Portfolio.

While we have an elevated NPL percentage in that category, you can see we are making progress, as this reflects a lower inflow number than what you have seen in the past.

The good news here is that our remaining performing balances are now less than $370 million, about half of what it once was, and so we do feel we have most of that behind us.

All other properties within the Investment Real Estate portfolio are performing well.

I will remind you that our Hotel NPLs are concentrated almost exclusively in one credit.

Finally, I want to point out that in our most recent quarterly study of all of our Investment Real Estate properties above $1 million which represent a portion of that portfolio, we did see an improvement in both the debt service coverage ratio of the portfolio, as well as a decline in the number of properties with debt service coverage is less than one to one.

Slide 22 details our C&I Portfolio.

Overall, the C&I Portfolio is healthy.

Our charge-offs are down from 3% last quarter to just 2% this quarter.

Our past dues improved to 0.84 of 1%, and our overall NPL ratio is 2.8%.

We did have an increase this quarter in our NPL inflows compared to last quarter; however, we do not feel this will be a trend and expect the inflow number to decline from third quarter number next quarter.

And finally, our last slide in the credit portion presentation shows our Retail Portfolio.

Past dues were at 1.67% within the Retail Portfolio, charge-offs still well below 3% at 2.6%, and the NPL only 1.83% in that portfolio.

With that, I will turn it back over to our CEO, Kessel Stelling.

Thank you, Kevin, and before we go into the Q&A, I would like to cover just a few other topics, some of which I mentioned previously.

First, as I had said, we did complete a refresh of our three-year strategic plan during the quarter.

The plan does call for a return to profitability in 2011 and a recovery of the deferred tax asset in that same time period.

As you know, we had previously stated that the Company had an opportunity to return to profitability in calendar year 2010, based on declining inflows, a decline or reversal of negative credit migration and general economic recovery consistent with our forecast earlier in the year.

On the last call, I did talk about the fact that the recent economic events had certainly put pressure on that timing, and again, believe now that profitability is a 2011 event for our Company, and again, our plan demonstrates that as well.

A few other highlights on our planning process, it was a comprehensive review of our organization encompassing every department across our footprint.

There was a strong focus on top line revenue growth, with an emphasis on growth in certain balance sheet categories consistent with our own concentration limits, a focus on the acquisition of key talent across our footprint, an enhancement of both product and service delivery, and we are well underway in all of those initiatives.

The plan also called for significant cost reduction through streamlining and right-sizing of our organization.

I will talk a little more about that call for balance sheet improvement and a more centralized and integrated approach to our non- performing loan management and disposition efforts.

We are currently finalizing our implementation teams and validating our own top-down targets.

I know that many of you would like more clarity, more specifics, but it is just very important that this process be thorough, and that I and others do not get ahead of our own internal process, including communications to our own team, so more to follow about that.

You might recall on our second quarter call, Tommy stated a targeted efficiency ratio of 55% as evidenced by a 2011 year-end run rate.

That would equate to approximately $100 million in a combination of revenue and expense.

And as we have said before, it is a lot more fun to get it on the revenue side, and good work does continue to take place there.

We're encouraged by those activities, as I had mentioned earlier, recent loan production, recent loan demand, the addition of top talent and other initiatives, as we focus on the C&I side of the balance sheet.

But it is very clear that we have to be relentless in our focus on the cost side and not wait for any economic recovery over and above what we think is prudent to, again, get the cost side of the organization in line.

So, I believe that most, if not all of the $100 million referenced by Tommy could and should come on the cost side, and opportunities above that would be added to the cost efforts, involve heading count but not limited to that; it involves an ongoing review of our branch network and efficiencies associated with proper utilization there.

It involves an ongoing review of all of our third-party spend.

It does involve right-sizing of the organization in both the production and the support staffing, and just as a reminder, this Company is down over a thousand employees from the peak in 2008.

The plan calls for the realignment of our local and regional support models as they relate to the new single charter enterprise.

Again, our Project Optimus exercise, which did take a lot of cost out and did not contemplate the charter consolidation and work continues there.

And at the end of the day, just an overall simplification of our organization, the ultimate goal being more efficient, more streamlined, and more focused on just a simplified, optimal customer experience.

I believe you will see the results of these efforts in the fourth quarter, and we'll be able to give more clarity in the following calls, and as public disclosures become appropriate, we will certainly make those.

Now just a couple of statements on topics that may be of interest, and then we will open it up for questions.

First as to the mortgage issue that seems to have gripped our industry, just take a minute there to address that from a Synovus standpoint.

As you know, our wholly owned subsidiary, Synovus Mortgage, originates home mortgage loans and sells those loans to investors, and does not retain the servicing rights, so we are not a direct party to the foreclosure process for those mortgages.

We do handle foreclosures for mortgages on our balance sheet and home-equity loans on our balance sheet, not a major part, and foreclosure volume has, in fact, been fairly nominal this year.

It's low enough that our own staff is able to manage the accounts, ensuring all procedures and documentation follow legal and regulatory requirements.

We are confident that Synovus as a Company, has very limited exposure to the issue in the industry involving the robo-signers and documentation errors in the mortgage foreclosure process, and we can take questions about that.

But again, we do not see that as an issue for our Company.

And then finally, and hopefully this will be one of the last times we do address it, a brief statement on the Sea Island Company.

Again, as you know, we do not normally comment on specific credits, but in anticipation of any questions, I just want to make a statement there, because we are still not in a position to make additional comments beyond this statement.

On October 11, the Sea Island Company announced its recent agreement to sell substantially all of it assets to a partnership of global investment firms as a result of a bankruptcy, court approved auction.

We will direct you to public statements by the Sea Island Company and the bidders for information about the transaction.

We have followed and will continue to follow our established policies related to loan loss reserves in dealing with the the Sea Island Company credit, and will continue to analyze the information available about the credit as we make decisions regarding the appropriate accounting treatment of this loan.

This includes decisions regarding timing and amount of charge-offs, all of which are made in accordance with our well established policies and in compliance with applicable accounting requirements.

We believe this is really all that is appropriate for us to say on the subject.

At this point we will not be taking any questions on the call regarding this credit.

With that, Operator, we would like to now open the call to any questions.

Thank you.

Ladies and gentlemen, the floor is now open for your questions.

(Operator Instruction) Our first question is coming from Steven Alexopoulos.

Please announce your affiliation, then pose your question.

Hello on everyone, JPMorgan.

Maybe I'll start, you guys said that you expect inflows into NPL to improve on the C&I in Shopping Centers in 4Q.

Can you talk about your view on the overall portfolio, do you expect total total inflows to slow?

We do.

This is Kessel Stelling, and I will let Kevin give any specific.

But again, in the first quarter, inflows were in the $500 million range.

We were pleasantly surprised in the second quarter, and did not believe that rate of decline, or maybe even that level was sustainable.

But overall, we do directionally believe the trend will continue down in the fourth quarter and in quarters beyond.

I would refer to Kevin for any comments about any specific portfolio or geographical break out there .

We do think - - Kessel covered a lot of the overview there, but we do think a couple like we mentioned, the Shopping Centers had a couple of larger properties in there; we don't see that reoccurring again this quarter, and we have done a pretty thorough review there.

But overall, investment properties, again, we are about half what we guided a couple of quarters ago.

We tend to think it's going to stay somewhere maybe between that second and third quarter number.

Residential, the Land, the Residential properties, including Atlanta.

We've got a slide in the Appendix, it's slide 27 going through the portfolio types of how the breakdown came in.

But those, we think, as we are continuing with those properties to get less and less each quarter as we are running down that portfolio.

And the C&I, we did see a spike, probably a little more in smaller businesses this quarter than we typically see .

We've done, again, another thorough review of that, and believe based on the past dues and migration, that we will see it get better next quarter.

And then the Retail, probably somewhere stay in the same ballpark, maybe

Okay.

Regarding the loan sales you expect in the fourth quarter and the marks you talked about, do you have contracts in place to sell these already?

I am just curious how you know the amount and the price you are going to get from sale.

This is D.

Copeland.

I would say there are a couple of things.

One, there are negotiations that are going on place, and then we do have a few that would be negotiated prices at this point.

So it would be a mix of both.

Okay.

Maybe just one final question.

Looking at the $62 million you break out of other credit costs out of your pre- credit cost income, how long do you expect that to be a factor to this degree?

Is as an item that's going linger for a while or does it normalize pretty quickly in 2011?

Thanks.

We think the ORE cost will probably be a little bit lower working through this coming quarter and moving into 2011.

That is what that mix of that $62 million is, about 90% are ORE costs.

Okay.

Thanks.

(Operator Instructions) Our next question is coming from Nancy Bush.

Please announce your affiliation, then pose your question.

Hi, NAB Research.

A question for Tommy, Tommy could you just speak to the impact on the margin from the excess reserves or the excess liquidity being held at the Fed?

And you made a comment about that continuing to come down quote, as you are able.

Can you just expand on that a little bit?

Nancy, good afternoon.

One of the main things that we are looking at is the direction of the shared CD and money market products.

As you know, we put in motion back in May with charter consolidation, a program that would - - or, I guess, one of the things that goes with the charter consolidation is the moving away from this shared program, and at the time it was about $1.7 billion and some change in that category.

Now there is about $1.4 billion, just in round numbers that is in it.

We have actually been able to retain a good bit of the dollars that have moved out of that category and still have a reasonable amount of dollars that are in the institution, even though they are not in the shared product.

But in November, we will have the six-month anniversary of the charter consolidation, and the grace period for these products will go away.

What will happen on that day is the money market accounts, will become, I described it as more at risk.

Today there is $472 million of money market accounts there.

We expect to keep a reasonable amount of that, but really, for those that came in just for the insurance don't expect to keep it all.

The CDs have had chances during this grace period to renew during this six-month period, and while the CDs will play themselves out beyond November based on remaining maturity, some of those will - - there will be customer actions that we will have to stay close to and watch.

But, I'd say that is the next big event in watching the level of this excess the liquidity, and one of the reasons for it.

So November will be a defining moment, and then we will have to test our own belief in what this ought to be from a prudent standpoint, and the regulatory folks always have a view on this also, and we'll work together to determine what is reasonable.

But that is kind of the immediate future on this excess liquidity.

We were able to bring it down, as I mentioned, in the quarter, even though it didn't show up in the average, and would expect that number to continue to move down.

And the impact on the margin was, do you have just sort of a rough estimate there of what - - ?

Just in rough numbers, it's about 1.5 basis points for every $100 million there, so we had for the quarter, I guess, - -

Two basis points.

About a two basis point impact.

Hang on one second.

Yes, compared to last quarter, the incremental impact is about two basis points.

If you do the math on the just over $3 billion that is in there, then, let's see, then you are looking at something in the mid- 40s on the overall negative carry that's associated with that.

Now, I want to be fair with that.

You would not bring that level in the current environment, for sure, don't to zero, so that doesn't mean that much is out there available to just flip a switch, but there is a meaningful amount of negative carry that can be reversed as we move forward with this program.

Do you guys have any estimate of when you will be - - I know it is entirely speculative at this point, but any thoughts about when you will be able to not be on double secret probation from a liquidity standpoint?

Well, and part of this is just matching it up against known potential leads in our own prudence; there isn't any formulae kind of answer there.

And quite frankly, the best answer will be to, as Kessel described to us, returning to profitability, and I think as that occurs, there will be a simultaneous ease of the pressure on this particular category.

And just, Tommy, another question for you.

The tax rate in here gets really funky, to put it mildly.

How should we think about taxes going forward, if you can give us any guidance at all?

I will give you some simple guidance on the fourth quarter and beyond, and it's just call it zero, until we do hit that magic moment to recover the BTA.

Last quarter we had a pretax - - an income benefit, I mean a tax benefit of $5 million against $233 million loss from continuing operations before taxes.

Back in the beginning of this year, we would have expected that number, even last quarter, to be about zero.

What happened last quarter and in the first quarter was the tax gain that had to be recognized with the sale of the Merchant Portfolio gets amortized during the course of this year.

That is what you saw in the second quarter happening.

What happened this time was there was a series of discrete items in the tax category that really offset the modest tax benefit that would have been shown from that amortization and brought that number down to a slight tax expense.

In the fourth quarter I believe, absent any discrete items, it will move closer to zero.

Okay, and just one final question for D.

The dispositions in the third quarter were, I think, a bit less than we had expected.

Was there any, I mean was this things just sort of hit a wall because of what was going on in the economy, or where their pricing issues, or what happened?

Well, I would say they would be lower than you would have expected.

It was within the forecast of where we expected it to be for the third quarter.

We had made comments that we would sell, I guess high fours over the next two quarters; we still intend to do that.

We've got some larger transactions that should take place in the fourth quarter.

And I think the other thing is we also report it on our current book value, and as we've continued to pull those numbers down, as we've continued to pull down our book value down, that that number has gotten a little bit smaller.

But we still planned to be there, and we expected it not be too even numbers for the two quarters.

Okay.

Thank you, very much .

Okay, our next question is coming from Bob Patten.

Please announce your affiliation and then pose your question.

Hi, guys, Morgan Keegan.

I guess the first one, I'll just follow up on Nancy's last question.

If we are looking at two to three in the fourth quarter, is that exclusive of Sea Island effect?

No, Bob, that would include credits that we have scheduled to close.

And again, to D.'s point, we had guided high $400 million to $500 million over the two quarters.

We always believed it would be back weighted to the fourth quarter because of that, and we have tested and re-tested that guidance and still feel comfortable, which would imply if we were at 172 in the third quarter, that would imply $300 million or a little more than that in the fourth quarter, but that would be inclusive of that disposition that you are referring to.

Okay, and if we can exclude that one credit, can Kevin just go through what the top five exposures are by industry type or size, just to get a feel for the granularity of what's left in the NPLs?

You are talking about what the individual industry's nonperforming?

The biggest five nonperforming, Kevin, just so we get a feel for what is left in there in terms of size?

I guess within the top five, it is a lot of some land-related relationships, residential, - - I will tell you that there are some owner-occupied in there, and - -

Can you get a little color as to it's a $30 million, it's a $25 million, because we know the one was quite a bit larger.

So I am just trying to get a feel for how much the granularity has dropped down without that credit.

Within our nonperforming loans?

Yes.

Okay, probably the next five are going to range in the 20 to 40 range, in that range is probably the five after that.

And then would you say the granularity drops down quite a bit after that, or are there still a few more after that?

I just took five as just a throw out number.

I would say it drops down from there pretty - - we did not bank a lot of large credits over $20 million to $30 million.

It was pretty granular.

You are probably, the mean of what's in that nonperforming base probably goes from $2.5 million to about $10 million.

Okay.

And then Kessel, the last question I have is you talked about some loan production, renewals, and so forth.

What kind of loan production are you seeing?

Are you seeing mostly it's renewals of existing credits, or are you guys actually taking share?

Well, we have actually seen an increase and D.

and Kevin were sharing with it me late last week when I was questioning the same thing, Bob.

We have seen a fairly consistent increase over the last several months, over new loan requests for approval.

Now that doesn't necessarily translate to funded loans on our books, but the approvals in our pipeline throughout our footprint, we have seen a consistent increase over the last several months.

That is based on activity of the committee here, which reviews all of the larger loan approvals, and then the new and renewed volume was up substantially quarter over quarter.

Again, not enough to stop the shrinkage of the balance sheet, but certainly, an encouraging sign as the shrinkage begin to moderate.

Thanks, Kessel.

Richard, if you are out there, get better, buddy.

Thanks, everybody.

Our next question is coming from Ken Zerbe.

Please announce your affiliation and then pose your question.

Morgan Stanley.

So when you think about the balance sheet, obviously it has been decreasing whatever it is, half a billion dollars per quarter, give or take, at what point does that bottom out?

What is the target minimum levels of the balance sheet that you expect?

We have not given guidance as to where it bottoms.

I think implied in our forecast it is a 2011 trough, but in terms of any specific level of where it bottoms out, we have not given guidance there.

Our efforts, every day, are on getting our bankers out of the workout business through some of our centralization of our NPL activities and getting that bankers back out into production.

We hear anecdotal evidence of increased activity, but not enough for us to declare that the shrinkage is over and give any specific guidance as to what that level is.

Okay.

The other question I had just on capital, it looks like your tier one common came down 44, I guess, basis points on a sequential basis.

I understand that your plan is to return to profitability and you get the BTA benefit at some point once you do return to profitability.

But if we continue to see sort of a 40, 30, 20 basis point correlated reduction in capital, is there a level where you actually might find it useful to raise additional capital before you return to profitability?

Ken, this is Tommy.

Keep in mind that the accrual common equity ratio is really penalized by the excess cash balance, which is kind of counterintuitive, but obviously that counts dollar per dollar.

So it's penalized by that, so I guess one of the mitigants could be that change in the balance there.

We have capital models and we have run them out and we've applied them to management's estimate and feel comfortable with where we are headed.

We compared it to the basal] numbers as they emerged and while some of the basal impact is sort of beyond the horizon in terms of implementation, we feel comfortable with where we are headed.

Okay.

All right.

Thank you .

Our next question is coming from Adam Barkstrom.

Please announce your affiliation, then pose your question.

Sterne Agee.

Hi, good afternoon, guys.

Hi Adam.

Tommy, one for you maybe, just kind of following up on Nancy's question and the balances held at the Fed.

You mentioned that you guys have $1.4 billion in the shared CD product, but then also talked about perhaps some of the money market product that could potentially run off.

Is that another $1.4 billion, $1.5 billion?

What kind of size are we talking about there?

The $1.4 billion includes the money market; the CDs are sitting at 924; the money market is 472.

And our expectation for this product is based on studying the customer base, and some interaction with them is that for the long haul that we could retain a target amount of about 40%, even post the extra insurance coverage.

So obviously, we are planning liquidity as if it doesn't turn out that good, but we are certainly working as if it will turn out that favorable, in terms of retaining those deposits.

Okay.

Keep in mind, also, that the CDs aren't all exposed to a liquidity event in November.

The money market accounts will do whatever they do, and we believe we will keep some of those dollars in the house.

But the customers will work through that in November.

But the CDs all have - - some have been renewed and have maturities that will run out through next year .

Got you, okay.

Is there something I am missing, then?

Because I mean, looking at the balance sheet number, you are talking $3.1 billion there, versus potential worst-case scenario of $1.4 billion in risk, I guess, of run off.

I am just curious, any other things that we are not thinking of that is driving that number to be seemingly higher than it needs to be?

We are continuing to push down the upsell funding some, and that is another burn, to some degree, on that excess liquidity.

And again, in the environment that we have been through and to the degree that we are still, and the industry is still working it's way out of it, I mean, there is a prudence factor in our judgment that you do keep some excess assets out of liquidity since overnight liability side liquidity can never be assured in this environment.

Okay.

And then just one follow-up to that, and I apologize if you guys mentioned this earlier in your comments.

What are you guys thinking as far as margin looking out in the next couple of quarters?

There is, I guess, some opportunity and some pressure as we look for it on the margin.

From a pressure standpoint, as long as the rates stay as low as they are, we will continue to have some pressure on the securities, as we roll those out.

I guess in this case, it is fortunate that we have a relatively small Investment Portfolio, and we'll be replacing those if we have to from a point of the liquidity and maybe from a replacing standpoint; certainly a great earnings source right now with current rates.

And from an opportunity standpoint, there is still a little bit of room in the cost of funds - - I guess we have been through the sweet spot in that, but there is still some opportunity in cost of funds.

The NPAs, as that book works it way down and we are able to actually make some loans to replace those, then that is an upside opportunity.

And then this excess liquidity, while it continued to hurt us some in the third quarter, eventually, when you look out a little bit further into the future, that is a burden that will reach a more natural state and some of that pressure will be removed.

So I guess, just looking out a quarter, when you put those moving parts together, we would estimate a stable margin in the fourth quarter, lots of moving parts that I just described that we are piecing together, that's what we see.

Okay.

Last question.

You talked about this before, but the BTA, looking out into 2011, when you guys think you're going to start to achieve profitability at some point during next year, how would you envision that the BTA - - how is that going to play out, the recapture of that?

We have been to school on all of these scenarios and look forward to the day that we actually get to execute it.

I think what we have described in previous disclosure is that there isn't a formula, there isn't a one, two, three set of facts that you have to have, but in general, you have to have evidence that whatever the burden that created the negative result to the Company has to be fairly clear evidence that it has moved away.

And having a quarter or two profitability behind you is not a bad fact in that, but there isn't any magic number of orders that you have to achieve.

But most importantly, you have to have a forecast that's supported by the clarity of the economy and the environment that would allow you to show sustained profitability into the future.

And so that is what we believe, and again, we studied this and had a lot of discussions on it and believe those are the criteria to recapture the BTA.

Okay.

Thank you .

Our next question is coming from Jefferson Harralson.

Sir, please announce your affiliation and then pose your question.

KBW.

Good evening.

Hello, Jefferson.

I want to ask you about, how should we think about the loss content, the $422 million of inflow?

I know they are more C&I heavy, they are more commercial real estate heavy; I know that the NPA's are currently marked at around $0.50 on the dollar.

S I wanted to ask you of the $422 million, those are newly in, where are those marked and how should we think about the loss content of the inflows in this quarter?

I think as you mentioned, the mix is a little bit better asset to sale, as we mentioned about 200 out of that came out of investment properties and C&I, typically, some cash flows, some property, some owner occupied.

We look at the assets that have come in and the mix that's coming in today, were assets that held on a little bit longer in this recession, made it two, three years through this, and they are a little bit better asset that did make it through and have just ran out of gas.

So we believe that we should do better on what is coming in, based on the mixed and the time that these assets have come in.

All right.

Can you talk about where they are marked now; I know some banks, as they come in, it takes them a quarter to get the appraisal in and market him.

So if that is the case, maybe it's - -

It is all about timing, and you are right, when they come in during the quarter, if they came in early in the middle of the quarter, you have time to get the appraisal in quicker and go ahead and mark those assets down.

There is not as much overall hangover into the next credit.

We usually have them pretty addressed from a write-down standpoint by the time this call has happened.

So we are, probably, if our average write-down and reserve comes out at about 50%, the stuff that's coming in new is probably in the 20% to 30% range, just because we haven't completely gotten all of the appraisals in, some that come in due to a timing, and we have to make those adjustments.

Alright, thanks, that is helpful.

And you guys mentioned something about a reserve adjustment that I did not quite understand.

Could you go back, something I think that boosted your reserve higher due to some kind of review?

Okay, that would be just on an annual basis, we go through our loan loss reserve and recalculate, recalibrate the probability of default calculation, and we did that in the third quarter this year.

And I guess with 2009 mixed in that history now, pretty tough year created that to come down slightly, which was about a $20 million impact, and it hit us during the third-quarter.

So, basically, you re-reviewed your current NPL's and OREO, is that, as I understand, where that $20 million came from?

No, that would be based on an average - - it's a probability of default calculation that we do on an annual basis.

It's a look back five-seven years of historical losses and has projections, it's something that - -

I see, you are re- forecasting the good loans.

Yes, that's on the performing portfolio, that is correct.

Alright, thank you.

Sorry.

Have a great night.

Thank you .

There are no further question think you at this time.

Do you have any closing comments you would like to finish with?

Yes, just a couple.

And thank you all very much for your time and attention this evening.

I do want to reiterate that, certainly, management is not satisfied with an operating loss of $196 million, and we don't want to create any impression that would suggest that, but we do believe that credit is the big driver, and there were continued positive credit trends that we believe will push us closer and closer, again, total credit costs down for five consecutive quarters, net charge-offs the lowest in seven quarters, again, the declines in NPAs and overall past-due levels.

We were encouraged by our stable operating performance and believe that is a strong indicator of stability in the long term.

Our earnings capability and, again, the strong capital ratios suggest that we certainly have the ability to weather any future losses as we get closer to the end of this cycle.

Let me just mention a couple comments about the future.

Our work will continue as we work to streamline this organization, and I am very confident that our efforts will be productive and totally embraced by our entire team.

And again, as further color is available, they will certainly share it with you.

We are encouraged that the shrinkage in our balance sheet is moderating.

Again, no results yet to suggest that it's stopped, but encouraged by the new and renewed volume and the new approval requests in the pipeline, and then excited about the efforts to rebuild this growth engine as we move bankers out of the workout area, as we make additions of top talent in some of our key markets, and as we work on continued enhancements to both products and services, especially in our C&I area of our Company.

I remain confident that our efforts around credit and cost and growth will continue to drive this Company back to profitability, and our senior team remains totally focused and committed to this goal, and I just appreciate all of your interest and support of our Company and hope you all have a good evening .

Thank you, ladies and gentlemen.

This does conclude today's conference call.

You may disconnect your phone lines at this time and have a wonderful day.

Thanks for your participation