Synovus Financial Corp (SNV) 2011 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the first-quarter earnings 2011 conference call.

At this time, all participants have been placed on a listen-only mode and we will open up the floor for your questions and comments after the presentation.

(Operator Instructions)

It is now my pleasure to turn the floor over to your host, Pat Reynolds.

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

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

Our presenters today will be Kessel Stelling, our President and Chief Executive Officer; Tommy Prescott, our Chief Financial Officer; and Kevin Howard, our Chief Credit Officer.

Before we begin, 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 differ 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 earnings 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.

Good morning, everyone.

I'd like to add my welcome and thanks to all of you who have joined us today as we report on the continued progress of our Company and move further down this path towards profitability.

I think you'll agree, the key story of this quarter is execution.

Execution on credit resolution, execution on our efficiency initiatives, and execution of our process redesign work as we complete our efforts to simplify our business model and complete a very customer-focused redesign of all of our loan and deposit process, enhancing in a very positive way the experience of all of our customers as we begin to play offense and free up our bankers to focus on sales and service, which they have historically done so well.

I would like to begin with just a brief overview of the quarter, followed by presentations by Tommy Prescott, CFO, and Kevin Howard, our Chief Credit Officer, followed by a Q&A period, where, as usual, all of our senior team will be available to answer your questions.

First, let's talk about earnings.

As you can see from your slide deck, the first quarter net loss attributable to common shareholders was $93.7 million, a 48% improvement from the fourth quarter of 2010, a 59% improvement from the first quarter of 2010.

First-quarter net loss per common share was $0.12 compared to the $0.23 the previous quarter.

Excluding our restructuring charges, which were previously disclosed, the first quarter '11 net loss attributable to common shareholders was $69.3 million or $0.09 per common share.

Let's go into some of the components briefly.

We are pleased to report that our first-quarter '11 pre-tax, pre-credit cost income was up almost $5 million or 4.1% from the fourth quarter of 2010.

You will see that our net interest margin expanded 15 basis points to 3.52%.

Net interest income decreased $4.5 million due to lower loan balances and 2 fewer calendar days in the quarter.

Our non-interest income declined $15.7 million driven by lower mortgage revenues and NSF fees.

Tommy will talk more about that later in the presentation.

Most importantly, our fundamental non-interest expense decreased $25 million, including an $11.6 million decline in our employment expense.

A major part of the story continues to be credit for our Company, as you all well know; and, you will see on the next slide, our credit metrics continue to improve in a very significant way.

Our credit costs declined for the seventh consecutive quarter, the lowest level since the second quarter of 2008.

As you will see, our total credit costs were $177.1 million, compared to $281 million the quarter before, down 37%, and down 55% from the first quarter of 2010.

Our net charge-off declined 56.7% from the fourth quarter and 47.2% from the first quarter of 2010, the lowest level, again, since the third quarter of 2008.

You will see the charge-offs of $167 million, comparing to charge-offs of $385 million just a quarter ago; a very, very dramatic decline and we are very pleased with that.

Our distressed asset sales totaled $192 million during the first quarter.

We will talk about that a little later.

Our NPL inflows were right at $300 million; $306.5 million during the quarter, compared to $295 million the previous quarter, $531 million in the first quarter of 2010.

Those inflows were in line with management's expectations.

And, again, Kevin Howard will give more clarity to that number and our future thoughts on that number in his presentation.

NPAs, past dues over 90 days, and potential problem loans, all declined during the first quarter.

On your next slide you will see a graphic illustration of our margin.

Again, very pleased to report an increase from 3.37% to 3.52%, a 15 basis point increase quarter over quarter.

The primary drivers of that were the continuing decline in funding costs, a lower negative impact of non-performing assets, and a reduction in excess liquidity.

Our efficiency initiatives remain on track, and very proud of our team for their diligence in affecting the changes that we had previously announced.

As you'll see on the slide, we are on track to generate $75 million in expense savings this year, a total of $100 million by the end of 2012, and eliminate 850 positions as we, again, had previously announced.

You'll look at our headcount graph, we ended the year at 6,109; and we are now at 5,518, a decrease of 591 people during the first quarter of the year.

If you look at the graph, you will see that the efforts of the Company have continued, since our peak in the fourth quarter, to bring the headcount down in line with today's economy and the current size of our balance sheet.

Finally, on that subject, our branch reductions across our 5-state footprint are on schedule, with the majority of the closings scheduled to occur in the second quarter of 2011.

Before I turn it over to Tommy, I just want to briefly comment on capital.

As you'll see, our capital position remains strong.

Our Tier 1 capital ratio ended the quarter at 12.79%; Tier 1 common equity, 8.47%; total risk-based capital, 16.33%; TCE to tangible assets, 6.66%; and our leverage ratio, 9.58%.

As I've stated previously, we have a continuous robust process for capital management, including forecasting and stress testing for both expected and more adverse economic conditions.

Based on our current forecast and our execution against our plan, we believe that our current capital levels are more than adequate to carry us through this cycle as we move towards profitability and recovery of our deferred-tax asset.

Although we are certainly modeling TARP repayment as a part of our plan, I think any discussion about capital needs related to that event would be premature; but, I can assure you, we'll be anxious to have those discussions as soon as practical.

Now I would like to turn it over to Tommy for more a detailed review of our financial results.

Thank you, Kessel, and good morning.

I will take you to slide 11, which illustrates the first-quarter performance compared to the fourth quarter of 2010 and then the same quarter a year ago.

You will see, and as Kessel mentioned, the earnings improvement was driven by credit costs, $177 million this quarter; $281 million a quarter ago, and $394 million same quarter last year.

The net interest income declined due to loan shrinkage and 2 fewer calendar days, also partially offset by the 15 basis point margin increase.

Non-interest income decreased $15.7 million, driven by declines in mortgage and NSF.

G&A was impacted by the headcount reductions and other efficiency initiatives.

And keep in mind, for the quarter, we also had the $24 million restructuring charge, as planned and previously announced.

Slide 11 illustrates the loan picture ended the quarter at $21 billion.

The story here is really the decline in loan balances of $588 million, moderated from the 2010 levels and below each quarter of 2010.

Slide 13 gives you a look at the deposit mix.

Our balance sheet has obviously contracted, driven by loan balances.

And across that whole time period, we have been shifting the deposit mix away from brokered and time deposits to lower-cost core deposit categories.

Over the last year, we've reduced brokered deposits almost $1.8 billion; that's gone from 17% of our total deposits down to 13%.

We have also steered away from higher-cost time deposits while growing the targeted categories, lower-cost categories, as illustrated by the growth in PDA.

Total deposits declined $1.3 billion linked quarter, driven by further reduction in brokered deposits, continued wind-down of the shared deposit program, and the expected decline in collateralized deposits.

On slide 11 (sic), one of the benefits of managing the liability side, the deposit side of the balance sheet, is driving the cost down.

And this slide illustrates the cost of core funding all the way back to the first quarter of '09.

The magic of that period is, that's really the same period of which we have been bringing the change in the mix and largely focused around lower brokered deposits.

But, specifically to this slide, moving away from time deposits, you can see the progression there, with the 100 basis-point reduction all the way back to the first quarter of '09 and a 39 basis-point reduction over last year, and a continued improvement in this with a 10 basis-point improvement in the first quarter compared to the fourth quarter of last year.

Slide 15 illustrates the margin.

First of all, the picture at the lower left-hand side of the slide illustrates the trend in net interest income.

Net interest income declined $4.5 million with the balance sheet shrinkage and the fewer days, but it was partially offset by the margin.

The margin increase was driven by lower core funding costs and the reduction in excess liquidity, and the decline in the negative impact of NPAs.

You will see, the graph to the right illustrates the impact of the cost on the margin of the non-performing assets -- 24 basis-point drag in the first quarter of this year against all the way back in 2010; that number was in the 30s, 38 basis points in the first quarter last year, had improved to 32 basis points in the fourth quarter, but trending in the positive direction relative to the margin.

Fee income, as illustrated on slide 16, we have, as mentioned, $15.7 million decline, driven by mortgage revenue, NSF fees, and brokerage revenue.

We had a banner fourth quarter in mortgage; and the decline that occurred was largely expected, based on where we are in this environment, seasonality, and interest rates.

The quarter reflected, overall, some seasonality and the impact of fewer days; and we would expect, going forward, some potential improvement in mortgage and brokerage categories, as we look into the second quarter.

G&A expenses, on a fundamental basis, declined to $180 million, a $25 million reduction from the fourth quarter, key drivers there being employment-related expense, primarily related to lower headcount.

We also had a lot of improvement in most G&A categories, with a couple of the big standouts being the lower DPs and -- DP fees and lower professional fees.

When you assemble all the moving parts on slide 18, the pre-tax, pre-credit cost income, with net interest income going down some -- the non-interest income decline, but that was all more than offset by the reduction in G&A expenses, and, so, we had a $5 million boost in pre-tax, pre-credit cost income.

We would expect that, going forward, to hold fairly close to that level with some continued pressure on fee income.

But we believe that the continued G&A expense and some potential modest upside in the margin should keep the pre-tax, pre-credit cost income stable to possibly moving forward.

The capital ratios are illustrated on page -- slide 19.

The capital ratios really changed only slightly from the fourth quarter due to the moderating losses and the balance sheet shrinkage, and, as Kessel mentioned, remain at what we believe is sound and appropriate levels.

I'm going to now turn it over to Kevin Howard, our Chief Credit Officer, for a credit update.

Thanks, Tommy.

If you will go to slide 21, I will begin covering our credit quality trends for the quarter.

Starting with the provision charge, we were pleased our provision for the quarter was down $110 million, or 44% from last quarter.

This is the lowest it has been in almost 3 years since the credit cycle began.

Significant improvement in provision expense, largely driven by lower costs related to dispositions and assets held for sale, despite the fact we sold over $190 million of problem loans and wrote down approximately $70 million of book value to assets held for sale during the quarter.

Another key factor in the lower provision was approximately a 20% linked quarter reduction in our mark-to-market expenses.

Our expectations are that we will continue to see improvement in provision costs going forward, led by expected lower migration costs, mark-to-market expenses, and improved disposition results.

Moving to charge-offs, you can see we are down, as Kessel mentioned, 57% this quarter to $167 million.

The primary drivers of the decrease were, once again, lower costs associated with dispositions and assets held for sale write-downs and lower mark-to-market write-downs.

Our loan loss reserve decreased slightly, by 3 basis points, or $26 million; a couple of drivers there, smaller -- shrinkage of the loan balance and loans sold which had reserves attached.

Past dues, again, were just 0.96 of 1%, with only 0.05 basis points past due over 90 days.

Slide 22 is a look at our NPA trend.

NPA balances declined $5 million on a linked quarter basis and have been reduced some 31% overall from the same quarter a year ago in the first quarter of 2010, demonstrating good progress in reducing our overall NPA levels over the last year.

Our NPL inflows, which were just slightly above last quarter, but within our expectations, continue to trend at lower levels, down 42% from the same time a year ago.

Our expectations in the second quarter are that NPL inflows will be around the same levels as the last couple of quarters, in the 300 range or lower, with a little lean toward lower.

We do expect our NPL inflow levels in the second half of the year to be considerably lower than the NPL inflow levels of the first half of 2011.

We also want to point out, at the bottom of this slide, that we have written down or specifically reserved against our non-performing assets by 45.7%.

When you compare that number against what we are realizing on asset dispositions, we are now inside 10% on that difference, which demonstrates less imbedded loss in our overall non-performing assets.

Slide 23 demonstrates our continued effort in disposing of troubled assets.

We sold $192 million and realized $0.45 on unpaid balances.

$157 million of the $192 million were NPA, that make-up being about $77 million in non-performing loans, $36 million in asset held for sale, and about $44 million out of ORE.

We also sold approximately $35 million in performing loans during the quarter, which gets us to the $192 million.

The mix -- 25% of investment real estate, 44% residential and land related, 23% C&I related, and 8% consumer.

Slide 24, another good example of how our overall credit quality is improving.

This graph demonstrates that potential problem loans improved again this quarter, linked quarter, by 11%, 31% from two quarters ago.

Over 40% of the decrease in this quarter were in the residential and land portfolios.

Slide 25 takes a look at our TDRs and their mix.

Our overall TDRs did increase around $80 million during the quarter.

It should be noted that 69% of the TDRs come from the investment property and C&I portfolios, which are generally attached to cash flow and have the most potential to be upgraded.

Most of our TDRs are typically interest rate concessions or extension of terms for less than one year.

I do want to point out that less than 1% of the accruing TDRs are past due; and our inflows from TDRs to nonaccrual this quarter were only $21 million.

Slide 26 looks at our investment real estate portfolio.

Our [NPA] ratio is 2.4.

If you exclude commercial development, which is more land related, and by far our smallest portfolio in this category, our NPL ratio would be 1.6%, taking the land equation out.

All sectors are at 2% -- at or below 2%, with the exception of commercial development in NPL ratio.

Charge-offs down 39% in the investment real estate segment on a linked quarter basis.

And the past dues in that portfolio are at our lowest levels since the second quarter of 2007 at only 0.3 of 1%.

One last thing I will point out, as we've mentioned, we review our investment real estate portfolio over -- all of our loans over $1 million every quarter, covers 83% of that portfolio.

Results remain consistent, showing no deterioration in our overall debt-service coverages.

Slide 27 represents a look at our residential C&D and land portfolios.

These portfolios still make up 47% of our non-performing loans, with Atlanta comprising 41% of that number.

I just want to point out the portfolios are now down 72% from what they once were.

Atlanta's performing balances are now down 83% from those peaks.

So, we continue to work down this difficult portfolio.

We do still believe our land portfolio will be the most challenging going forward, but are encouraged that our default rates have improved here; and we are optimistic that the loans that have made it through this difficult cycle have less lost content than previous defaults over the past 2 years.

Slide 28 reflects our C&I portfolio, which continued to exhibit stable credit fundamentals, a well-diversified portfolio by industry, as you can see demonstrated on the slide.

I do want to point out that charge-offs were 55% lower than the previous quarter, at just 1.69%; past dues right at 1%.

Slide 29, our last slide in the credit portion, shows a quick look at our consumer portfolio.

Charge-offs improved to 2.1%.

If you exclude credit card losses out of that portfolio, we are below 2% in charge-offs in the consumer portfolio.

Once again, this portfolio is credit score and almost exclusively in market lending, and performed relatively well during this entire credit cycle.

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

Thank you, Kevin and Tommy, both, for those excellent presentations.

I think Tommy gave you a good look at our financial performance.

Kevin gave you an in-depth review of credit.

Clearly credit is still a key issue for our Company with our elevated levels of NPAs, but, as I hope you took away there, we are on track and on progress there, again, still with a very keen focus there.

But now, I think, equally as important, as we go forward, will be to stabilize our balance sheet, get our bankers back in the business of playing offense and taking care of customers.

We are very encouraged by our loans in the pipeline, by the activity we see and hear in the field.

I would not call it robust, but certainly encouraging; and we are very much looking forward to seeing that activity translate, again, to balance sheet stabilization and, ultimately, growth for our Company.

I think now, operator, at this time we will open the line for questions and be happy to take questions on anything we covered or didn't cover today.

(Operator Instructions) Our first question is coming from Ken Zerbe.

(Operator Instructions)

Ken Zerbe from Morgan Stanley.

Just wanted to ask a little bit about capital.

I know you said you think your capital position is fine right now, and obviously you know you're a little bit below peers.

What assumptions are you making within -- regarding your balance sheet, about your capital position?

Perhaps it's as simple as further balance sheet shrinkage; and please address where you think your balance sheet bottoms out.

Or are there any other factors in there that we should be aware of?

I'll take a stab at that.

We do project some continued shrinkage in the balance sheet, bottoming out in the second half of the year and then beginning a growth trajectory.

Certainly, there is some capital lift there from that.

That's not the way we really want to have it, but that does factor into it.

And then on a go-forward basis, as we said, we test it and stress it, again, not just versus economic conditions but versus regulatory expectations and versus our execution against that plan, and we feel comfortable that we are on track there.

Tommy, I don't know if you have anything else to add there?

Kessel, I think you covered it well.

So when the balance sheet bottoms out and then you start growing in the second half, as you say, do you feel you have a strong enough capital position to support that growth, excluding any TARP repayment?

We do.

Again, the TARP repayment will be the big question, and we have modeled that as well.

I think it would be premature for us to get into the details of that modeling, but we do show capital sufficient to support growth.

Again, the TARP repayment will be a happy discussion to have; and we will just, again, have to at that time look at current capital levels, current regulatory standards and really, more importantly, our view on our go-forward capital look.

We clearly have looked, studied, examined, and discussed with investment bankers every exit of TARP that has occurred to date, and glad to see so many of our competitors coming out, and try our best to figure out what went into what they raised, why they raised it and where their projected pro forma tier 1 was coming out.

All right.

The other question I had, just on foreclosure expenses; I think you had $25 million.

So they've been down in the 20s for the last couple of quarters.

Have you guys changed your thoughts that this might run between, say, 20 and 50, or is there more of a systematic shift that it might remain lower going forward?

Our thoughts are plan out the remaining year probably -- not as high, maybe 20 to 30, would be our expectations in that line.

Okay.

All right.

Thank you.

The next question is coming from Erika Penala.

(Operator Instructions)

B of A/Merrill Lynch.

Good morning.

My first question is on the accruing restructured portfolio.

Could you give us a sense of what the associated allowance and cumulative write-down is on this portfolio, similar how you give us that data with your NPL's?

I'm assuming you're talking about maybe the accruing TDR's.

Yes.

I think the reserve is in the 12% range against the accruing TDR's.

There are not a lot of AB notes.

I think the balances are somewhere between $40 million and $50 million that might be represented as AB notes, where we have taken charge-offs against that in that mix.

Those charge-offs are typically in the 20% to 35% range against those particular ones that have been charged down.

Other than that, again, the reserve factor is around the 12% range.

Should a borrower meet the -- if they are at the end of the temporary concession period, can you give us a sense of what the next step is?

Do you look for more permanent restructuring solutions or do you just bring it down the NPL path?

Most of the loans we have restructured have been more temporary restructures, less than a year.

How they evolve out of that, again, the concessions we expect to get them back to market terms.

And the loans, I would tell you, we are restructuring, our expectations are that they've got a good plan.

They will work their way back into -- out of the TDR identification and potentially be upgraded.

That's our intention to go in there, not to extend it until it gets to non-performing.

Again, only $20 million of that number went to the non-performing bucket.

So again, our expectations are more that they will pull out of this thing and get upgraded.

Got it.

My last question is on the liquidity side.

Could you give us a sense of how much you're comfortable deploying through the year, knowing that we don't quite know what -- the liquidity requirements that the regulators will impose upon the US banks?

Could you give us a sense of how much you are going to redeploy to perhaps continue to support the margin?

Erika, this is Tommy.

I will answer that question.

The liquidity, I guess as evidenced by the excess dollars at the fed, went from about $3.1 billion down to just under, I believe, $26 billion -- I'm sorry, $2.5 billion.

I got some heads shaking in the room here.

I misspoke; I'm sorry.

About a $575 million decline for the quarter.

We really did have some seasonality in deposits, and we had some liability management going on in our angle of attack at keeping some of it.

We brought that balance down.

We expect there to be more capacity to bring it down.

We are really having to size the liability management and the ability to bring that down with really what's going on with the balance sheet, what's the outlook for loan growth and that type of thing.

So we can't give you an absolute number, but directionally, we do intend to bring it down some more.

It is unlikely that it would be at the level that occurred during the first quarter.

Okay, thank you for taking my call.

Thanks, Erika.

The next question is coming from Craig Siegenthaler.

(Operator Instructions)

Thanks.

Credit Suisse, Craig Siegenthaler here.

Good morning, everyone.

We are just nearing the close of the first month of the second quarter here.

I am just wondering what type of visibility do you have into second quarter charge-offs here relative to the first quarter run rate?

I know there's a lot of factors that go into that, like your debt disposition, but from what you are seeing thus far?

We don't have it specific by quarter and don't really want to guide on this quarter, but our thoughts throughout the year, we would range between 3% and 4% in our charge-off rate.

Got it.

And then I notice your loan yields picked up in the commercial and consumer bucket.

I'm just wondering what was the drive in that?

Was that a runoff of lower yielding loans?

Was there any kind of swap positives in there?

Can you help us think about that?

This is Dade.

There are a couple of factors that went into that.

One from a loan yield would be a reduction in the negative carry on the credit cost.

But also an important factor is that our new and renewed rates for the quarter were up.

It didn't move the overall core yield tremendously positive just because of the size of the new and renewed volume this quarter, but it would be mainly those two factors.

Real quickly on capital ratios, is your goal here to keep the reduction in risk-weighted assets or tangible assets significant enough that you can offset any negative earnings impact and maintain at least a stable capital ratio at this point going forward?

Craig, obviously, the denominator of the capital ratio is very important and we have to manage the trajectory of remaining losses and then the move to profitability in there (technical difficulty) keep an eye on the marketplace and ability to grow loans and our own ability to do so.

So it has a lot of moving parts.

At current, we are not purposely managing risk-weighted assets down in any significant fashion to manage capital.

It was a factor in the first quarter.

The moderation of the losses was a big factor.

The fact is the loan book did shrink, was helpful to capital, but we think that as we move back towards turning the balance sheet and moving towards profitability, then we favor actually growing risk-weighted assets a little further out.

Keep in mind, though, as you look at capital, the DTAs still out there, some $820 million at the end of the first quarter.

And while we are not predicting exactly when that comes back -- and you do have to keep in mind, it takes a little while even when it does -- beyond the TCE ratio, it takes a little while to get it all back in the regulatory ratios.

But it is a big factor in the background of all our capital decisions.

Got it.

Thanks for taking my questions.

The next question is coming from Todd Hagerman.

(Operator Instructions)

Good morning.

Todd Hagerman, Sterne Agee.

A couple of questions, but first in terms -- Kevin, I'm just curious if you could reconcile, as I look at just the trends in non-performing this quarter, inflows ticked up a little bit in the quarter, yet the potential problems and classified assets all trended lower in the quarter.

I was wondering if you could just reconcile that dynamic there.

And then talk about, with the guidance or the outlook on NPAs improving significantly in the second half of the year, what that plan is for Q2 in terms of the asset dispositions?

I will start with the potential problems loans and that's I think what you were talking about on the classified, and give you a little bit of information on the inflows.

Obviously, the reduction in potential problem loans are just really three things.

You've got loans that do come out of that bucket that go to non-performing.

You have less migration refilling that bucket, you might could say, maybe from the criticized assets to the classified assets were less.

Certainly we sold $35 million out of that pool; as I mentioned, that was performing; and then you get paydowns.

The good news there is we are not getting that migration from the criticized assets to refill that bucket; therefore we've had continued, the last two quarters, pretty significant reductions there.

I'm thinking maybe what our thoughts are on what you are asking is on our NPL inflows, it may be easier to take you to an appendix slide.

There are actually two of them on inflows, 33 and 34.

And I may be concentrating on 34 by geography.

Our thoughts are going forward is that, again, we said the second quarter will probably look somewhat like the first quarter or maybe the fourth quarter, which were $295 million and $307 million.

Where we think we will get some improvement here is maybe in this quarter, we believe Alabama, even though it has had a couple of elevated quarters, will improve over the next couple of quarters.

We think Florida, we don't have those land tracks.

We don't have condominium exposure and then very little hotel exposure left.

We're going to get some improvement there.

We will have a little bit of noise this quarter and improvement in the second half of the year.

I think Georgia, outside of Atlanta, will trend favorably over the next couple of quarters.

I think in Atlanta we've probably got one more pretty tough quarter, which, again, we were tracking in the 200s to 100s over the last two, three years.

We are now 50 to 87 over the last four quarters, anyway.

We think we probably have one more quarter there about where we are, and we think we will start to see real improvement there in the second half of the year as we work down those more troubled portfolios.

That maybe reconciles, by geography at least, how we will see improvement in the second half of the year.

Kevin, I guess I should ask maybe on the flip side of that or I guess really the heart of the question is in terms of the pace of the outflows in the credit.

With the dispositions coming down in the quarter relative to Q4 -- and I recognize that the Q1, there is a lot of seasonally weak quarter, if you will, for selling distressed assets.

But it looks to me, if I look at delinquency levels are up, the NPL number, as you mentioned, is running around the $300 million level.

so it seems like while the migration to substandard or worse is slowing, it looks like the pace of outflows, whether that's in the form of payoffs or credit upgrades, is also slowing.

If maybe you could talk a little bit about that and again how that translates in the second half.

Because it sounds like your disposition program is not necessarily going to accelerate in Q2.

I will try to start with a couple things you mentioned.

The past dues, I don't think they're elevated; they are still below 1%, so that is a pretty good number there.

Our dispositions, we're going to stay in that $150 million to $175 million range, in that mode.

I think we were $190 million.

We could do more; we could do less.

Maybe the second and third quarters will be better quarters to sell more assets.

We are not seeing the migration.

Again, we are seeing more improved fundamental credit quality trends, is why I believe we'll be more -- we will see credit improvement.

We believe our migration costs will continue to improve.

Our mark to market, we are dealing with less assets than we were over the last couple of quarters, and with more mark downs, we think it will be more improved there.

So our credit costs will move in the right direction.

And on our NPAs -- our NPL's are actually 4.2%, and you figure there is the ORE, which is marked down 57% to 60%, so not much embedded loss in there going forward.

We have, ballpark, $115 million to $120 million in assets held for sale in that NPA number, not much loss left there.

We are encouraged about the trends, where we're written down; and let's hope we get a continued improvement in the economy, is why we believe we will get our credit cost and our balance sheet better positioned in the second half of the year.

Thank you.

The next question is coming from Jennifer Demba.

(Operator Instructions)

Good morning.

SunTrust Robinson Humphrey.

Kessel, I think you said demand was not exactly robust on the loan front.

Could you just give us a little more color about what you are seeing and maybe talk about what hiring you wish to do over the next several months on the C&I front?

Sure, I think we've talked about this before.

We do see demand.

When I say it's not robust, robust will be when it translates to growth in our balance sheet.

But really, across our footprint and in many areas of C&I, and we are seeing a lot of private banking opportunities, medical opportunities; I think I saw where we just scored a big victory there in the past week.

I would say it is really, throughout the footprint, all of our major markets have added talent.

I've stressed over and over again that the efficiency initiatives don't mean we don't hire people.

They just mean we redeploy assets and dollars to people that can create revenue.

We have added additional talent in the last 30 days, I know, in Atlanta.

We previously added talent in Birmingham, Nashville, Columbia, Tampa, throughout our footprint.

Again, all seasoned C&I lenders.

We've got again some key talent we have added and will be adding in Birmingham to focus on very specific C&I markets and hope to talk a lot in the coming quarters about their successes.

Okay.

Thank you.

We will take our next question from Bob Patten.

(Operator Instructions)

Good morning, everybody.

Bob Patten, Morgan Keegan.

Can you just talk about service charges?

That's more than double your next fee component in terms of size on an annual basis.

And it kind of declined more than I had thought and more than the market thought, I think.

Can you give us an idea of what's going on there?

And then I have a follow-up question.

Bob, this is Tommy, I'll take that one.

On the service charges during the quarter, particularly led by NSF fees, dropped almost $4 million as a combination of factors.

The Reg E impact was a little more than expected.

Obviously, seasonality in the first quarter was a big factor and the number of business days is a big factor.

So some of that is recoverable as you get into a longer quarter and move into another season.

Some of the regulatory pressure that's on service charges though is relentless and you just have to keep doing your best to work with that, but you won't totally offset it.

Tommy, can you just update us, as of the first quarter what your revenue impacts from Durbin, Reg E?

And also how you guys are thinking or strategizing about implementation of Reg Q and ultimately the impact on the funding side?

The first quarter impact of Reg E was about $4 million, just slightly ahead of the $15 million annual run rate that we had described earlier.

Durbin, of course, is out there in front of us; we are, like all, watching it carefully and assuming that it will kick in, but we believe that there is some pretty good pressure that may push it out a little bit.

The potential annual impact of Durbin would be $8 million this year, if it does go into play in July; and we believe it could, but, like all, really don't know.

We are pushing hard on all of the categories to attempt to offset those things.

We go through annual fee reviews and that will be a factor.

Some of the charter consolidation changes cause us to commonize fee income and service charges.

And that will have some impact.

We are seeing some positive account growth, which we think will improve the rest of the year.

At this point, we are watching carefully the free-checking scenarios.

We have not pulled that lever, do not have immediate plan to do so, but we are watching the competition as the industry tries to find ways to be compensated for the services that are offered.

Again, we don't expect this year to fully offset the impact of these challenges, but do expect to take a notch out of them.

The one that is the big known factor right now is the Reg E; the incremental impact in 2011 over 2010 is $10 million.

Wow.

And then just the last point, not a lot of discussion on DTA.

Could you update us with your thoughts on where you guys are today in terms of the components of the DTA and what your thoughts are on the recoverability and or if anything has changed or nothing's changed?

Thanks.

The DTA is $820 million at the end of the first quarter, up from about $770 million at the end of last year.

It's mostly federal deferred tax [out of it] reserve.

The expectation is not really different than it has been talking about.

We expect, without being time specific here, we believe that it takes evidence of profitability, typically as supported by a period or multiple periods of reported profitability along with a credible forecast about future profits.

We believe that that is certainly in the medium term horizon, but have not tried to exactly pinpoint the landing spot for the DTA.

Okay, Tommy.

Thank you, I appreciate it.

The next question is coming from Nancy Bush.

(Operator Instructions)

Hi, NAB Research.

Two questions here.

Tommy, first one for you.

Can you give me the impact, the ongoing impact, of non-accruals on the net interest margin?

And if I could put you in the spot of making an intrepid prediction, when credit costs normalize and when the rate situation normalizes -- and let's say fed funds more than zero being normalized rates, what kind of normalized NIM are we looking at for the Company?

Nancy, I think you described quite a prediction here.

But first of all, the impact on NPA factor that is weighting the margin up, I think the best thing to do is go back to normal times.

It has certainly has been at abnormal levels, pushing 40.

If you look back at history, it never goes to zero, but it gets closer to that than certainly where it is now.

I think historically it has been 5 basis points or thereabouts.

Obviously, that does not happen overnight but we are on a journey towards improving that and taking the weight off of the margin.

In the first quarter, of course, that was a 24 basis point burden.

In addition to that, other things that will continue to help the margin are the ability to move excess liquidity down some to take some of the pressure off of that on the margin.

When you look at the first quarter, the way the margin moved was funding costs were down 9 basis points; we think there is some continued opportunity in that category.

It gets a little bit harder, but certainly if rates stay where they are, we believe that there's a little bit more room there.

That fed balance will continue to help us.

It helped us 8 basis points this quarter.

I don't necessarily lay that out as a run rate, but there is more there.

Lower credit costs, as we already mentioned.

And those three things together offset some drag from the lower securities yields.

But going forward, without being time specific, we have talked in the past about the ability to move towards the 4% level.

I know that won't be easy.

Part of it is more or less mechanical, as you lower some of the excess liquidity balances.

The rest of it is just good old hard work that bankers have to do on the front line.

But we see moving in that direction.

Okay, thanks.

Kessel, one question for you, could you just update us on the large corporate initiative?

Nancy, that team has been assembled; it is being led by Curtis Perry.

I don't know if you have met Curtis.

We will introduce him to a larger group tomorrow at our shareholders' meeting.

Again, good success in our major markets, particularly Birmingham and Atlanta and Columbus.

We continue to add talent to that team, both in market segment expertise and specific product expertise, asset based lending, treasury management, and specific commercial segments.

We are very encouraged both by our ability to recruit there and by the activity and results we are seeing.

Just keep in mind that the pipeline and the closing of business in that space has a little longer cycle than your typical business, but we are very encouraged there.

Is there a targeted number, a targeted percentage of the loan portfolio that you would like to see large corporate?

And let's assume that there is a percentage out there that you would not want it to exceed as well.

I don't have specific percentages by category within the C&I space.

Clearly, and we showed this in our press release, we are trying to move both the C&I percentages and the retail percentages over time and decreasing our dependence on the CRE space.

We are down from 45 at a peak to 38 just in CRE lending.

Within the particular C&I category, we have some internal goals that we have not discussed.

We will try to be more clear on our next call about different expectations you might see there.

All right.

Thank you.

Thank you.

The next question is coming from Scott Valentin.

(Operator Instructions)

Good morning.

FBR Capital Markets.

Thanks for taking my question.

Just trying to get some more color around non-interest expense.

It declined more than we thought this quarter.

Obviously initiatives in place and seems to be going according to plan, maybe ahead of plan.

I'm just trying to get a sense of what we should look for as the right run rate for expenses.

I would think first quarter is maybe a base and then it comes down from the first quarter given the projected expense saves over the course of the year and the fact that I think you will see the bulk of the branch closings in 2Q.

But just any more color you could provide around the trajectory of non-interest expense would be helpful.

Scott, this is Tommy, I'll take that one.

If you look at the first quarter as kind of the foundation, how to get there, it actually exceeded our expectation a little bit, declined a little more quickly.

It was a combination of being a little bit ahead in the headcount; some of that's timing; some of it's not.

We also had a broader base of cuts in almost every category that was not totally expected, and the sum of those added up to a little more powerful reduction than we expected.

There was a modest amount of seasonality in the first quarter, lighter G&A expenses that tend to happen with the first quarter and the shorter period and that type of thing.

So that could work slightly against the first quarter base of G&A.

But net-net, we will continuing to push on installing the other parts of our strategic restructuring plan that will be accretive to helping net interest -- to helping G&A.

And also, we are just pushing on every front even outside of that on G&A expenses, and expect it to move downward.

Bottom line, I believe you could take the first quarter base and assume that it will move downward in a fashion that is positive to helping the income statement.

Okay.

As a follow-up on that answer, you mentioned the second quarter will see the majority of branch closings.

I think in the past you had guided to most of those branches being closed rather than sold.

Any change there or just mostly closings?

It's mostly closings.

There may be a few strategic sales in there, but the majority of those will come from just closing those facilities.

Okay.

Thanks very much.

The next question is coming from Christopher Marinac.

(Operator Instructions)

Hi, FIG Partners in Atlanta, Chris Marinac.

I wanted to ask, Kessel, either you or Kevin about the watch list loans, and the fact that potential problem sell would be watch list loans and [falling in]commensurate with that.

We'll disclose those criticized watch list credits in the next couple of weeks.

I know it stayed about in the same ballpark as it was last quarter, and we just weren't going to talk specific yet on that particular line.

Okay, that's fair enough.

Just a general follow-up, as you are looking at various loans to sell and potential offers for those, are there any areas where you have seen pricing improve in the last quarter compared to 4Q and 3Q?

Chris, this is Dade.

I will take that up.

I would say a lot of it is going to be based on what is happening -- where you would see improvement is going to tied to cash flowing of properties, where we may have had some falls in that.

As Kevin said, on the overall, there is some re-leasing, some of those things going.

So anything tied to cash flow would have had improvement on it.

I would say that the land sales are still tough at this point.

I would say probably a better comment would be is the deterioration or falling on the pricing seems to have leveled out and we've been maybe more flat than I would say upticking.

Chris, just as a follow-on to that, I think another component which gives us confidence is our mark to market on our existing NPL book, those ongoing marks, where we retest, reappraise on a quarterly basis, continue to decline, and this past quarter experienced again a very steady decline over what was a really good number last quarter.

So I think the market for disposal still is healthy.

There is capital there and we just have more to move through the cycle.

But again, our marks on our existing book, those marks continue to decline pretty dramatically.

Kessel, does that tie back to the realization rate that you mentioned in the slides on the media presentation?

It does.

You obviously have pain with the new inflows.

Hopefully not as much, because as D.

or Kevin said earlier, the larger land tracks are gone.

That's where we had the largest marks on inflows.

So even though I would hope we have no more inflows, hopefully those that do occur will have more characteristics, as D.

disclosed or described, with cash flow attached.

So the marks on those incoming problems typically would be less than maybe historically.

But, yes, it certainly is reflected in our marks on our existing NPA book.

As Kevin said, we are getting closer and closer to realization rates on a big part of our balance sheet there.

Okay, very well, guys.

Thank you.

We will take our next question from Christopher Nolan.

(Operator Instructions)

Chris Nolan, CRT Capital.

Just a follow-up on the realization rates.

Should we see the realization rates increase because there's going to be a lower component of land sales going forward?

I think where I would feel comfortable saying for the next quarter or so it would be in the consistent range with where it has been.

We have had mix-of-land sales all along.

I think we will continue to have some land sales going forward.

The important piece to realize is as you look at the 45% to 46% realization rate for this quarter, the reality is, as Kevin has said, and we've said over and over again, those have been marked down by a significant level, so that the future loss tied to those has been minimized as we keep moving forward.

Great, thanks, D.

Either for Kessel or Tommy, the outlook on capital, when you indicated that capital was sufficient for the outlook on [forwarding foreign] TARP, does that include a recovery of the DTA is that excluding recovery of the DTA?

Both.

We certainly model it based on our current run rate, our current view on our narrowing losses and ultimately profitability and DTA recovery.

We certainly model our capital with and without because even though we know what events lead to DTA recovery, we can't actually control the timing of that.

That will take progress.

It will take profits, and it will take evidence of sustainable profitability, and we have our view on that and when it will occur, but we certainly model our capital without it as well.

The next question is coming from John Pancari.

(Operator Instructions)

Epicor Partners.

On the credit outlook, I know you indicated that you expect inflows to decline materially in the back half, can you just let us know or give us some idea on how that conveys into your NPA outlook -- I'm not sure if you mentioned that -- in terms of if that should follow the similar trajectory.

We think the outlook for our NPA percentages we believe will stay in the five level throughout the year based on that inflow guidance I gave you, based on the disposition guidance, and I guess that D.

gave you would put you -- we think it'll improve during the quarter.

At least the amount of non-performing balances will decline during the year and probably stay in that ballpark assuming -- and we think it will work its way down as we have less inflows come in.

And then potential upgrades, we are beginning to see some upgrades in non-performing assets and that's the way we like to do it.

That's the free way to get the upgrades.

We think a combination of all three of those things will see a decline throughout the year.

Okay, that's helpful.

On the loan loss reserve, I know you modestly -- under provided and released reserves, modestly this quarter -- as you look at your credit outlook and discussing what you are seeing on the NPA side and well as your loss realization, can you talk about the timing of a more material release in reserves?

This is Tommy; I will take that one on.

The loan loss reserve really has to file credit, and we are seeing improvement in the credit trends and that what's really accounted for modest reduction so far in the dollars in the loan loss reserve.

Kevin has described a glide path where credit will continue to improve and that will naturally bring the reserve with it over a period of time, but we can't really be more specific than that.

Okay.

I guess along the same lines, though, can you talk about how you would view the reserve from a more normalized perspective?

What would you deem a more normalized level relative to loans?

All I can say is that the new normal will be higher than the old normal but less than where it is right now.

We really don't know how to guide it more clearly than that except it can go down but not as low as it was in previous normal times.

Thank you.

The next question is coming from Mike Turner.

(Operator Instructions)

Compass Point.

Thanks, most of my questions have been answered, but I just wanted to find out if you expect any impact from the proposed change of the deposit assessment rates?

Are you talking about the ability to pay interest on PDAs?

No, the FDIC has proposed for the second half of this year changing assessment rates on deposit insurance.

I believe they're going to start to incorporate Camel ratings and come up with a more subjective approach, but I know that's suppose to change in the second half of the year.

Most of that's actually already been -- or some of it has been installed already and we don't see a big impact for into 2011.

Okay, thank you.

We have a follow-up question coming from Erika Panela.

Sorry to do this but just a quick question.

On the DTA recapture, do you have a sense from your conversations with your bankers if the regulators will give you credit for it when thinking about the size of a potential equity issuant on the back of redeem ping TARP, even if the TARP redemption comes before the recapture?

Erika, I think what the regulators might give us credit for at that time would really be tough for us to speculate on.

They are certainly well aware of our balance sheet, our capital stack, our view on DTA recovery.

I think the point at which we will have those negotiations, it would be nice to think that certainly the two previous equity raises that we have done factor in to any discussions -- that the DTA recovery factors into the discussion, but I think to pin our regulatory friends down on that today would be unfair.

They are aware of it.

We model it.

We show our view on it, and I think it would at least be a part of our plan and our request when we get there.

Thank you.

The next question is coming from Steven Alexopoulos.

(Operator Instructions)

Two quick questions.

If the inflows are steady at around $300 million in 2Q and you are working through problematic Atlanta land loans, shouldn't we expect the provision to be about flat for 2Q versus 1Q?

We think it'd probably trend like it did maybe from 4Q.

It could slightly come down for the factors I mentioned, but stay in that ballpark.

Okay.

One other question, out of the $192 million of asset sales in the quarter, how much of that were OREO sales, and just curious, how did the sale price actually compare to where you were carrying the OREO?

Thanks.

OREO sales were right in the 40% range, so that would have been -- note sales would have made up the balance of that.

Where they follow as far as we are carrying, I don't know that we've disclosed that on each of the different kinds that are out there.

But I would say if you look at the portfolio overall as a whole that we are within the 10% of caring -- or within caring on those assets.

Okay, thanks.

Our final question for today is coming from Todd Hagerman.

.

Tommy, just a follow-up on the fed balances and liquidity.

If I understood you correctly, was the function of the decline this quarter more related to the collateral release and some of the deposits held there as opposed to any change with your liquidity requirements with the feds or how you view liquidity?

Actually, it is connected to the liability management, the reduction of the collateralized deposits and of course other deposits, the shared deposits decline.

Even though we reduce the fed balance, alongside we freed up a lot of investment securities that were previously encumbered.

So we have been able to bring that balance down, but keep liquidity in basically the same kind of position.

That's really what it's all about, just managing the liability side now.

I'm just trying to get towards your guidance or your outlook in terms of the margins.

I think you mentioned that the benefit this quarter was basically 8 basis points.

I'm just trying to think in terms of some of that repositioning in your ALCO management and some of the collateral requirements coming off in future quarters, how should I think about that margin benefit and that excess cash over the next couple quarters?

A while ago I gave the longer-term view of potential margin.

But on a short-term, we believe that stable to a slight upside would be the near-term guidance, the Q2 guidance; and that'd largely be the benefit of additional lower excess liquidity balances, a little bit of help from the continuation of the funding costs, probably not as much as we had in the first quarter, and then the trend of lower credit cost.

Terrific.

That's helpful.

Thank you.

That was the final question.

Do you have any closing comments?

Yes, I will be very brief.

I want to close by thanking all of you on the call today for listening, for your questions, and for your interest in and support of our Company.

We heard from many members of the analyst community, but it's not lost on me that we have broad representation from our shareholder base, from our team members, from our directors, from our regulatory partners.

We appreciate all of your, again, support of our Company.

I hope your take-away today is one of steady and continued progress for our Company.

Certainly execution against all of our key initiatives including credit and efficiency, which we went through in great detail.

Also a resign of all of our customer basing processes which we think will pay tremendous dividends in the future.

Finally, I want to speak to the energized team.

I will tell you that our bankers are still keenly focused on what credit resolution.

We know that challenge is still there.

We are encouraged by those trends, but know that we don't declare victory yet and we need to move all of those numbers down and are encouraged by that trend.

More importantly, now we do see the opportunity to both hire new and redeploy bankers throughout our footprint, get them back to that culture of sales and service that's served our Company and our customers so well for so long.

So I really do look forward to updating you throughout the year as we continue efforts to stabilize our balance sheet, begin to grow our business and ultimately return to profitability.

I thank you all and hope you all have a great day.

Thank you, ladies and gentlemen.

This does conclude today's conference call.