Synovus Financial Corp (SNV) 2011 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Synovus second quarter earnings 2011 conference call.

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

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

Pat Reynolds, Director of Investor Relations.

Sir, the floor is yours.

Thank you, Kate, and thank all of you for joining us today on a call about our second quarter results.

You can review the slides and also access the press release on our website at 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 risk 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 and talk 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, and good morning to all of you and thank you for joining us on this earning call as we continue to share the story of our progress.

You have seen the press release by now and the earnings debt.

I will do a brief summary and then turn it over to Tommy Prescott and Kevin Howard for more detail.

But I think as you'll see, the story for the quarter for us, in addition to improvement in our earnings, is the significant improvement in credit, which we will talk about in great detail; the continued execution on key efficiency initiatives, including the customer experience; the building of significant pipelines and loan fundings through existing and new additions to talent -- and a majority of these fundings occurring in the C&I category; and in the continued improvement in our total deposit mix.

And, as you'll see, growth in non-interest-bearing deposits of 14.7% year-over-year, 15.3% length quarter.

But let me turn you to page 4 of the deck, the financial results summary, and I will begin there.

For the second quarter, the net loss attributable to common shareholders was $53.5 million, a 42.9% improvement from the first quarter and a 77.9% improvement from the second quarter of 2010.

The net loss per common share was $0.07 compared to $0.12 the previous quarter.

The net loss per common share, excluding restructuring charges, was $0.06 compared to $0.09 the previous quarter.

If you'll turn to page 5, I think, again, the driver of the performance, as we said, is primarily on the credit side.

I'll walk you through the improvement and some of our key credit metrics.

Most, if not all, showed significant improvement.

The credit cost -- total credit cost declined for the eighth consecutive quarter.

You will see total credit cost of $157.9 million, down 10.8% over the first quarter, down 55.2% over the second quarter of 2010.

NPL inflows totaled approximately $231 million, the lowest level in 11 quarters.

As you will remember, we had guided to levels at or slightly lower than our first quarter inflows, which were in excess of $300 million, and we were pleased with this component of our performance -- certainly this quarter.

Distressed asset sales totaled $195 million in the second quarter -- NPA's, end of the quarter, at $1.22 billion, a $56.8 million decrease from the first quarter of 2011 and a $354 million decrease year-over-year.

In addition, potential problem commercial loans declined for the third consecutive quarter, again all great indicators of future performance.

I

If you turn to page 6, I'll talk about some of the balance sheet trends.

Net pay downs moderated during the second quarter $167.6 million, down significantly from the previous quarter.

And of the $167 million, over $100 million of that pay down was related to our very focused strategy to reduce our large borrower concentration.

We do not expect that type of decline in the quarters ahead, as we have continued to execute on that concentration strategy.

We are very encouraged by our recent quarter lending activity.

New originations steadily increased every month during the second quarter.

Most of those originations, as stated previously, are occurring in the C&I space.

We've built meaningful pipelines with momentum for the corporate banking initiatives, that we have previously discussed.

And we have seen great early success, both in pipeline growth and fundings from our corporate banking team, including our recently announced senior housing group.

I touched on deposits earlier.

We are very pleased with overall performance of our deposit portfolio.

Let me walk you through some of those components.

Core deposits, excluding time deposits, increased approximately $115 million from the first quarter of 2011.

Demand deposits were up almost $179 million or 15.3% annualized from the prior quarter and almost $627 million or 14.7% from the prior year.

We also saw an increase in the net number of demand deposit accounts over 1000 account unit growth in the quarter.

On page 7, I will comment briefly on our efficiency initiatives.

We are on track to generate $75 million in savings in 2011.

As we have said previously, that would rise to $100 million in 2012, and we are on track to reduce our staff by 850 positions -- or eliminate 850 positions in 2011.

The head count has decreased 709 since December 2010, and, again, we continue to look for ways to make our company more efficient in headcount utilization and to invest in key talent to help us grow revenue.

We had said that we would close the majority of our branches in the second quarter -- that we had previously announced.

We did, in fact, close 31 branches during the second quarter.

I would like to remind you that, as we had guided, there would be minimal impact on total revenue and on total deposits.

And the runoff we've expected on these branches, since their closing, has been minimal, because in most, if not all, cases we provided our customers alternative banking locations within a reasonable proximity of their current location.

And, finally, before I turn it over to Tommy, I will talk about the implementation of our enhanced loan and deposit processes and, put very simply, it is a very strong focus on the customer experience.

As stated in the press release, it ranges from the time expected to open a deposit account -- from the time expected to obtain a loan, we have spent a great deal of time again looking for ways to make those processes more efficient.

But, even more importantly, making them better for the customer, and we have now begun implementation.

You also saw an announcement previously this quarter that we had hired Al Gula as our Chief Operations Officer.

Al has a tremendous background in operations and technology, in e-banking and efficiency but all with a lean towards making our banking experience better for our customers.

I'm excited about what he'll bring to our chain and what our customers will it continue to experience as we make this Company easier to do business with.

Now, I'd like to turn it over to Tommy Prescott, who will walk you, in detail, through our second quarter financial results.

Thank you, Kessel, and good morning all.

I'm going to start on slide 9 and give you some more of the details, as Kessel described.

Slide 9 compares the second quarter of 2011 to the first quarter and then also kind of recaps the key drivers.

I'll just walk you down from the top.

Net interest income shrunk approximately $6 million due to the lowering of the loan balances, primarily as the margins state essentially stabled.

Non-interest income up $3.6 million, as we had expected, primarily driven by increase in mortgage revenue for the quarter.

Non-interest expense was up $1.5 million, and we've got some forces that are pushing expenses down, but we had some that partially offset it -- some of that this time, the professional fees and the FDIC insurance expenses being some of the key ones there.

Restructuring charges this quarter are $3.1 million -- was $24 million a quarter ago.

And credit costs, as Kessel mentioned, declining $20 million to $157 million.

And that gets you to the $53 million for the quarter, compared to almost $94 million a quarter ago -- $0.07 a share, as Kessel mentioned, $0.06 a share compared to $0.09 a share, excluding restructuring in both the first quarter and the second quarter.

Page 10 illustrates the loan trends that Kessel discussed in a little more detail, and what you can see here, as you look at a longer period of time, the sequential quarter declines on a gross basis continue to decline.

And, also, the sequential quarter net pay downs continue to decline.

And what you can really make out of this trend line is, with the $167 million fundamental decline this time, excluding the strategic reduction related to concentrations, we are approaching -- approach, during the quarter, becoming stable from a fundamental loan standpoint.

Slide 11 illustrates the deposit story, and Kessel was talking about the mix improvements,.

You can see clearly, as you look back a year, and you look at how the core deposit mix is carved up.

The good increases in transaction accounts, while the time deposits, certainly more expensive, continue to decline.

We had good DDA growth there in the quarter, $178 million year-over-year, up $626 million, and that category now represents 24% of total core deposits.

Total deposits end of the quarter at $22.88 billion down $331 billion, and that is really the result of our continued efforts to push down broker balances, and we also had $130 million of exit related to the wind down of the shared deposit program.

There remains $278 million in the shared CD balances.

And most of that will amortize off during in the remaining months of 2011.

The change in deposits mix continues to drive down the cost of core deposits, illustrated on page 12.

The cost for the quarter is 67 basis points, a 5 basis point improvement over last quarter, 35 basis point improvement over same quarter a year ago.

And then slide 13 illustrates the net interest margin.

Basically, the net interest income, as I mentioned, was down almost solely due to the decline in loan balances.

Net interest margin -- basically stable -- down 1 basis point.

Earning asset yields had some pressure on them, because of the lower loan balances and how that changes the mix of earning assets.

We also are seeing some more competitive pressure on new and renewed loans.

And, also, as we grow the securities portfolio, due to maturity cycles, we have some downward pressure there.

That was mostly offset by the effective cost of funds declining with a net 1 basis point decline in margins.

The income of almost $68 million --about $3.6 million, I mentioned a while ago, the mortgage help we got -- $3.1 million.

Bank card fees were another factor with a richer transaction volume of $1.5 million.

Some of that was partially offset by lower service charges on deposits which was largely driven by lower analysis fees.

That is connected some to the higher DDA balances.

Fundamental line interest expense is illustrated on slide 15.

$181.5 million for quarter -- up $1.9 million.

Key drivers there, as I mentioned, being professional fees, higher $1.7 million FDIC insurance up $1.6 million.

If you look at the employment expense, the bottom category there, you can see a $91.9 million for the quarter, down $1.4 million.

But you need to keep in mind that there are -- we are getting more benefit than that from the restructuring that was done.

But some of that was partially offset this time by things like higher levels of employment insurance, which tends to be kind volatile from quarter to quarter, because of the self-funded plan.

And then also we had 1 more workday during the quarter, which had a negative impact and consumed part of the benefit from the restructuring.

Pre-tax, pre-credit cost income is illustrated on slide 16 -- $117 million for the quarter, down $4.7 million.

And what you'd have in pre-tax, pre-credit cost income for the quarter is really the negative changes in net interest income and expenses being partially offset by the positive change in non-interest income for the quarter.

Capital ratios, illustrated on slide 17 -- basically stable for the quarter compared to 1 quarter ago -- 3 up -- 2 slightly down, and what we have is moderating losses that are helping these rations from declining at that rate that they were previously.

And that was, in some cases, totally offset by the balance sheet lowering at --during the quarter.

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

Thank you, Tommy.

If you will go to slide19, I will begin the credit presentation -- cover credit quality on that slide for the second quarter starting with provision expense.

As we expected, the provision declined again for the eighth consecutive quarter -- down 15% on a linked quarter basis and down over 50% from the 4Q 2010.

We do expect to continue positive trend in provision costs going forward led by expected lower migration cost, market-to-market expenses, and improved disposition results.

Charge-offs were flat compared to the last quarter, in line with our guidance.

The primary drivers of the charge-offs were dispositions in market-to-market costs, which made up almost half of the charge-offs.

Other drivers were costs associated with NPO inflows, AB notes and consumer charge-offs.

We previously guided 3% to 4% in charge-offs for the year.

We expect the second half of the year to be closer to 3% or, potentially, better range.

Are loan loss reserve decreased 15 basis points to 3.08%.

This decrease was due to a number of factors, primarily, loans sold with reserves that [hatched], loans with reserves that were impaired -- basically new inflow costs.

Our potential problems loans and watch list credit balances are now lower, and those are loans that carry higher reserves and changes in the expected loss factors and some shrinkage of the loan balances.

Past dues were just 0.97% of 1%, down $3 million since last quarter.

Slide 20 reflects an overall view of our NPA's which includes inflows, where we have written down those assets and disposition trends.

As you can see, in the top left chart, our NPA levels have continued to trend down for the past 5 quarters, now 34% down from March 2010.

I do want to point out that approximately 27% of the NPA's are categorized as ORE or held for sale assets that typically carry much less loss.

As Kessel mentioned are NPO inflows were down 25% since last quarter and are at the lowest level since the credit cycle began over 3 years ago.

We expect to see inflows continue to improve over the second half of the year.

I'll cover the mix of inflows later in the presentation.

The bottom 2 charts show our continued efforts to be aggressive in dealing with our defaulted loans by having written down or specifically reserved against those by 45% and also continue to maintain our disposition case disposed in a -- as was mentioned -- $195 million of troubled assets achieving once again $0.45 unpaid balances.

During the quarter, the make up of the dispositions were $66 million ORE, $51 million non-performing loans and $20 million out of the assets held for sale.

$58 million was performing loans.

So, about 70% of the assets sold were NPA's.

The mix sold by asset type were -- we sold 42% residential and land related, 36% investment real estate, 17% C&I, and 5% consumer.

If you turn to slide 21, it gives some color on the NPO inflow mix.

As you can see, we were very encouraged by our investment property portfolio performance -- inflows down significantly to just $27 million -- clearly the lowest we've seen since the cycle began.

The residential related and land portfolios, viewed as a whole, saw slight improvement in inflows at $110 million -- down $9 million in those categories combined from the previous quarter.

Both C&I and the retail portfolio also showed improvement this quarter as well.

Slide 22 shows another good example of how credit quality is improving.

Our potential problem loans declined again this quarter and are now down 35% from just 3 quarters ago.

We defined potential problem loans as commercial, sub-standard, accruing loans, excluding the 90 day past dues and TDR's, which are separate.

It should be noted that we also declined 8% in our special mentioned/criticized asset portfolio during the quarter, as well.

Slide 23 takes a look at our TDR's and their mix.

Our overall TDR's increased slightly for the quarter in both accruing and non-accruing categories.

Currently, less than 2% of our accruing TDR's are past due.

And it also should be noted that 69% of TDR's come from investment properties, C&I portfolios, which you can see are generally supported by cash flows and have the most potential to be upgraded.

I will go ahead and comment on the new guidance.

Based on the new guidance, with a bar will be higher on what constitutes a TDR.

We believe there could be an increase in TDR balances; however, we do not expect any material impact to our loan loss reserve, charge-off, or provision expense upon implementation of the new TDR guidance

Slide 24 details our investment properties portfolio.

Again, the story in this portfolio is the NPL inflows were down 66% from last quarter.

The NPR ratio improved to 2.3%; however, if you excluded commercial development, which is the more land related and smallest part of this portfolio, the NPL's ratio would be 1.7%.

Again, it is performing better and is much improved.

Charge-offs improved, as well,during the quarter.

Past dues remained a very low 0.36%.

We just finished our preliminary review of our investment real estate portfolio during the quarter, and it continued to show positive trends in the overall debt service coverage.

Slide 25 shows our residential C&D and land portfolios.

As we pointed out, these 3 portfolios still make up about half of our NPA's, of which Atlanta comprises 37% of these.

It is worth noting that these troubled portfolios are now down 73% from their peak.

Atlanta's portfolio is down 84% of its peak.

In Atlanta, which was once a big part of our inflow story out of these categories, the residential and land category were only $8 million of inflows during the quarter.

Residential and land portfolios, despite dismal results over the last 3 years, reflect that the defaults are slowing down.

Year-over-year, these defaults are down about 43%.

We also continue to believe that loans in the land residential portfolios that have made it this far through this challenge and cycle would have less loss content should they default, and the defaults that occurred -- more so than the defaults that occurred in the earlier stages of the cycle.

Slide 26 -- just a quick look at our C&I portfolio.

The inflows in the second quarter, as you saw previously, were down 16%.

The first quarter 2011 charge-offs did increase about $20 million in the quarter to $58 million, primarily due to 2 large AB note restructures done during the quarter.

We expect to see this charge off ratio improved in the second half of 2011 in C&I.

Again a well diversified portfolio that continues to exhibit stable credit fundamentals.

Finally, our last slide on credit, slide 27, reviews our retail portfolio.

Charge-offs in the second quarter were down 11% from the first quarter 2011 to 1.87%.

-- represents 6 consecutive quarters of declining charge-offs in the retail portfolio.

Non-performing inflows declined as well during the quarter, and past dues remained at 1.27%.

And, as always, we point out this portfolio is a credit scored portfolio and almost exclusively in market lending and has performed relatively well during this credit cycle.

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

Thank you, Kevin and Tommy both, and, before we open it up for questions, I would like to just touch on a couple of other topics that I know you will be interested in and will have questions on.

So, I thought I would hit them before at the Q&A.

First would be TARP and any plans we might have in the timing to repay.

As we have said previously, we are current on all of our TARP dividend payments.

We believe TARP repayment follows profitability and most likely follows DTA recapture, although it doesn't have to.

But if you just sequence those events, and we will come back to profitability, we still believe today that TARP repayment is likely a 2012 event for Synovus.

Of course, circumstances that are within our control and outside of our control could affect the timing, but that's our belief today.

If that time frame or our belief changes, we would certainly update you as to that.

And then to profitability -- this economy has been uncertain, including current events around the world, not particularly in the United States, but these events are not unique to Synovus.

They are clearly affecting our entire industry.

Our forecast still shows profitability in 2011, and we are doing everything we can to make that happen sooner rather than later.

We will take more questions on both of those, I am sure, in the Q& A.

Now, operator, I would like to open it up for questions for any of our team.

Thank you.

Ladies and gentlemen the floor is now open for questions.

(Operator Instructions)

Please hold for just a moment while we poll for questions.

Steven Alexopoulos.

JP Morgan.

Maybe I'll start with the OREO.

Could you first talk about where the OREO is being held relative to the original loan amount?

Yes, it is marked down about 60% from the original loan amount.

Okay.

Can you talk about why the workout costs were so high this quarter, and should we expect this higher workout cost to continue on the rest of the year?

You mentioned the OREO expense?

Yes.

Okay.

It was -- it's up just slightly this quarter.

We sold more OREO, I think, than we sold last quarter.

It's just the mix that -- what we sell is different each quarter, but, I think, last quarter we sold around $44 million in OREO's.

This quarter we sold around $65 -- $66 million.

So, it's just a little bit more mix of OREO's than we did the previous quarter.

It's pretty much the difference.

Okay.

I guess I'm looking at the foreclosed real estate expenses -- up pretty high this quarter?

What about are you looking at?

We can address it.

I'm looking at the foreclosed real estate -- up quite a bit this quarter.

Our ORE expenses are up from about $35 million to $37 million, I believe, in that ballpark.

Some additional market changes in there, too.

Okay.

Just on the deposits, I'm looking at 3 billion in CDs, over 100, 2.5 billion wiry not able to work those down more effectively giving how much it is costing you each quarter?

Yes.

Okay.

Just on the deposits -- looking at -- I guess it's $3 billion in CDs over 100 -- $2.5 billion of the [brokered time].

Why are you not able to work those down more quickly, given how much it's costing each quarter.

Steven, this is Tommy, we -- on the Fed balance was higher this time, and that is kind of the back end of your question.

It was up about $300 million, and it is really a function of ability to roll off the wholesale funding.

We are really interested in keeping our deposits -- core deposit book stable and attractive.

But then in the quarter we had a slight reduction of -- temporary reduction in the securities balances, and the combination of all those things and the fact that we did not have a big quarter of maturities of brokered CD's, like will have in the back half of the year, added to the phenomenon that created that uptick.

I know I've answered more than you asked, and I hope I have answered what you did ask.

Tommy, could you tell us what is maturing in the second half?

Yes, you've got about $600 million in the third quarter and an additional $200 million in the fourth quarter.

And our current intention -- you have to balance this whole thing, Steven, with how loan balances react and how the new activity is.

And we believe that will continue to require some of the liquidity, but it is our intention, right now, to aggressively take down the wholesale funding in the third quarter.

And, even with positive trends in loans, we will have plenty of liquidity to absorb that.

We would also intend to -- I mentioned the temporary reduction in the securities book.

We intend to add back to stable plus maybe a little bit in the securities book.

So, you'll see the reduction happen in a bigger way in the third quarter.

Okay.

Thank you for taking my questions.

Craig Siegenthaler

Credit Suisse.

Just looking at the deposit costs here -- they started to rise in a few buckets, specifically in the national market brokered time deposits and money market accounts.

Has there been an increase in deposit competition here?

And are you seeing any signs that regulators are starting to ask for higher liquidity levels?

Liquidity level is not new.

The threshold there has been pretty high.

We've had big runoff that we have affected, really, in the brokered CDs, and we also, over the last year and a half, have been very willing to not retain all of the local market CDs, particularly those that were more price oriented and those that were non-relationship type CDs.

We have been willing to do that.

We have begun to retain more of that.

We cycled through most of the ones that we were less interested in keeping, and we have been a little more aggressive in the CD price.

And the marketplace is pretty competitive.

We get competition from a lot of the community banks that often have some pricing that really stands out.

We don't have to compete with it dollar for dollar, but we do have to be aware of it, and it does affect the pricing some.

And then the regionals that we compete with, -- we see the specials that are out there that are really do put some impact our pricing.

Got it.

And then maybe I could just follow up to Steve's question here.

In your income statement, your quarterly income statement, you identify foreclosed real estate expense went from about $25 million to $40 million quarter-over-quarter, and, I guess, a lot of that had to do with higher disposition activity and OREO.

Was the second quarter a very high level of activity, and do you expect that to slow in the third quarter?

I'm just trying to get in outlook for that line item in the second half.

Yes, that is correct.

That was a higher level of ORE.

I'll tell you -- the mix in there was a little more land.

Of the ORE, we sold was a little bit more land in residential related and again, as Tommy mentioned, the mark-to-market.

We see that number not being as high over the next quarter or 2.

Great.

Jennifer Demba

SunTrust Robinson Humphrey.

Your NPA's have hovered between $1.2, $1.3 billion for the last 3 quarters -- inflows between $200 million and $300 million.

And my question is are you contemplating, perhaps, another larger problem asset disposal quarter-over-quarters in the future to kind of make more progress in reducing your non-performers?

This is D.

I would say we always kind of have to look a little bit at what is in the market.

I would say, on a fundamental basis, we would actually bring down a hair our dispositions.

That's our plan for the third and fourth quarter.

Should market conditions be tremendous and give us the right opportunity to increase that number with the right economics, we would do it.

But our current plan right now would be not to have a big quarter in the next couple of quarters.

Can you give a sense of what you're seeing in terms of bids.

Are they -- have they stable, or are you still seeing pressure?

Well, I guess, as the volume -- a lot of it is driven on volume and asset mix that we are selling.

We have continued, as we have done all the way through the cycle, sold a large mix of land and other assets, as well.

We were north -- I think Kevin said we were north of 40% in land sales this quarter.

And so, there is always pressure on that right now.

I would say the other sales have been fairly consistent.

I would say we did not have as much pressure on closings this quarter as we have had in previous quarters.

I have 1 more question, if I could.

You said you were going to reduce larger borrower concentration.

Can you give us some color there on what your goals are?

I guess I'll take that.

We have moved down the number significantly.

We have, I guess we are down from a disclosure standpoint, we are down to 2 at this point that we would consider in the largest buckets of concentrations.

And, so, we will continue to move those down.

We were able to move some down during the second quarter as well which would have had an impact on the fundamental $168 million that Kessel referred to earlier.

And the large bucket -- what size credits would those be?

North of $100 million.

Okay.

Ken Zerbe.

Morgan Stanley.

I just wanted to ask a question again related --

Ken, we can't hear you.

Could you maybe get closer or louder?

Yes.

I'll try to talk up.

I apologize.

What I was going to ask is, in terms of the other credit cost, it looks like all other credit cost, including OREO, were actually less than the OREO expense, which to me implies there might have been some net recoveries in the credit expenses outside of OREO.

Is that correct?

That was actually a 7 million recovery on a letter of credit.

Okay.

So, I'm assuming that probably won't recur.

That makes sense.

In terms of the NPA reduction -- obviously you are getting the sales, which is great.

The inflows are coming down, but the NPAs, themselves, just remain stubbornly high.

When you think about the next 1-year forward or even the next several quarters, do you see an acceleration of NPA resolution there, or should we expect NPAs to remain high for some time?

Well, Ken, we certainly see inflows coming down in the back half of the year and then more dramatically next year.

Might actually give us even the opportunity to slow our disposition to make sure it's in sync with the market.

The dollar amount we do expect to see reductions.

The percentage has stayed high as well just because of the decrease in the denominator, but it is high.

We realize it and continually balance the economics of a slower glide path down versus any accelerated strategy, as Jennifer alluded to.

But it will come down, and, again, the key driver will be if inflows continue to behave the way they did this quarter, and as we expect them to behave in the third and fourth quarters and first half of next year.

Okay and just one other question.

You mentioned the TARP repayment is possibly dependent on DTA recovery.

Does that imply that you believe that you could receive a full DTA recovery sometime in 2012?

I will let Tommy talk about DTA recovery.

I don't think it's dependent on full DTA recovery.

I think what I said, or what I meant to say, is that the timing of it is likely to coincide with DTA recovery, which could be a full recovery at one time or it could be over time.

This is probably as good a time as any to ask Tommy to comment on the DTA.

I know there is a slide in the appendix, I believe it is page 29, on the DTA, and, Tommy, why don't you just address that now since I know it is going to come up in a follow-up question.

Yes, I'd be glad to do that.

You may recall, a year ago we had some disclosure in the appendix on how the DTA recovery might work.

We continue to get a lot of questions.

We decided to put it back in.

It basically tells the same story that requirement to recover the DTA is evidence of profitability that's likely to be a quarter or series of quarters of profitability that is driven by core results and in our case that means turning credit.

It can't be from extraneous kind of items or one-time gains.

It has to be core.

And that has to be the foundation of a forecast that provides clarity about the future and allows you to essentially get the DTA back there.

So, there is a huge amount of judgment that goes into this.

There is no strict formula.

There is a lot of debate about how many quarters.

There is no playbook that says it is one quarter or 10, so it's really is based on the clarity about making money.

Keep in mind, also, that the DTA, when you get, it is a good day, and if you get it back for -- flows through your income statement, could be in several lumps.

It's, in my mind, more likely to be a 1-time event where you get it all.

But, also, it doesn't take you a while to get the full benefit of that into the regulatory ratios because those limitations were there.

So, no direct linkage to TARP repayment other than the same conditions that might get you to TARP repayment and the same characteristics are very similar between that and the DTA recovery.

All right, great.

Emlen Harmon.

Jefferies.

Just a point of clarity, I guess, on the DTA if you wouldn't mind.

Do you have a sense -- you talk about reaching profitability and sustainable profitability -- do you have a sense of that needs to be on a core base, or does reserve relief help you get to profitability as far as the DTA is concerned?

The reserve release, as you described is really -- the reserve -- loan loss reserve has to follow credit and credit quality.

So, as you charge off loans that are in the loan loss and have reserves and you don't have to backfill it, then that's in our mind fundamental earnings performance.

So, you essentially can have reduction in loan loss reserve and claim core fundamental improvement at the same time.

I hope that answers your question.

Okay.

That is helpful, thank you.

I don't know if you have Curtis with you today, or maybe somebody else can answer it.

You did talk about a pickup in new commercial borrowing.

Could you help quantify just what you are seeing there and any color on new hires and your ability to offset runoff would be helpful?

This is Kessel.

Let me talk about that.

Curtis is with us, and we would love to have him speak to that.

He has continued to assemble a very strong team, as we previously announced, both in large corporate and syndications and asset base.

Most recently, in the last several weeks, the announcement of our senior housing team, that is housed in Birmingham.

I had the privilege of being with that group last week, as we welcome them to our Company, and they have momentum.

They have a pipeline and funding.

Let me give you a little detail around that from that large corporate banking group and this will maybe show the momentum I'm talking about in.

In the first quarter, as that team came together, they had new commitments of $44 million and fundings of $25 million.

In the second quarter, they had commitments of $170 -- new commitments of $175 million.

So, about 4 times with new fundings of $102 million, also 4 times the first quarter fundings.

And then July, month-to-date, they are on track to significantly exceed the second quarter.

So we, like you, are interested in seeing that contribute more to the stabilization of our balance sheet and I'm confident that that will continue to occur.

Again Curtis is with us.

Curtis, if you would like to add any color you are welcome to.

Thank you, Kessel.

We see a continued improvement in the pipeline both in our large corporate area and within the senior housing business.

As it turns out, the network that our Company has throughout its footprint has been a wonderful provider of new opportunities to senior housing, in addition to the core customer base that that group has dealt with for over 25 years.

Okay.

So, as we think about -- just overall, as we think about new originations, we are talking --between large corporate and senior housing -- we are talking in the $200 million area or thereabouts on a quarterly basis?

Yes, that is correct.

Thank you.

Nancy Bush

NAB Research.

Slide 36, which is the criticized assets and, I guess, this question is sort of ancillary to the non-performers as well.

That number has kind of popped around since 4Q '09, but it has been steadily above $2 billion.

I'm wondering if you could just elaborate a little bit on the inflows and outflows into those categories and whether there is a possibility of a big step down at some point in the near future?

Or if you see these sort of above $2 billion levels persisting here?

Yes, this is Kevin.

I think a couple of things, Nancy.

I think from an inflow and outflow, we do see that number stepping down.

It's hard.

I agree, it's where it was maybe a year or year and a half ago, but it's also -- we feel like we have been a little more aggressive in identifying special assets.

It's hard to not have any residential land this long in the cycle and not at least put it on your watch list.

I feel like it is a stronger special mentioned list.

I think, at one time, they were flowing right through during a diving credit cycle.

I feel like at least prices will stay -- I'm not telling you it will go up or anything, but we see more stabilization in front of us.

So we do not see the flow go through special mentions as rapid as it has been; and, therefore, we should start see decreases in that -- more the special mention watch-list category.

But not sort of big lumps coming out just basically a more steady trending down from here?

No, I think it will be more steady.

Obviously, if we get a better economic environment, I think you could see it improving more rapidly, obviously.

That will probably dictate those type loans that are on the watch-list.

And I would just add there that the key is not just a steady decline, but it is how it migrates, and our belief is that it will not -- that the decline will come through migration up more so than migration through the P&L.

As our director of loan review says often, that is a transitional loan grade.

That is a loan that has characteristics of a classified credit but is still performing.

And, again, as Kevin said, the idea is that those numbers would continue coming down, and our beliefs is we will see more now moving up as opposed to classified.

Although, we still do project, obviously, defaults and NPA inflows out of the bucket.

Kevin, just another question for you.

Atlanta has been, since the crisis, a big part of your credit issues, and I was down there a couple weeks ago.

And the housing market is still not great, and the economic news coming out of that area seems to be worsening a bit.

Do you still see Atlanta staying stable or improving, or is there a possibility that things are going to turn around there?

It is still a very challenging real estate market -- challenged from an economic standpoint.

The good news is we have a lot less, as you can see, on our charts of exposures in those high-risk areas.

We are not carrying -- we are carrying 10% of the balances -- 10%, 15% of the balances that we did.

So, from an economic standpoint, we saw prices slip down.

They actually went up 2 quarters ago -- back up.

Average new home sales slipped down recently this last quarter a little bit.

We still see decline probably middle- to upper-single digits in prices.

And that's how we are forecasting that, but, again, we saw Atlanta improve over the last several quarters.

They only had $40 million -- I think $43 million of inflows.

That number is down quite a bit, so, again, tough environment, but we just have a lot less exposure, and I think we have identified those loans and we are dealing with them.

All right.

Thank you.

Kevin Fitzsimmons

Sandler O'Neill.

Just taking a break from credit for 1 question here.

Could you -- when I look at the core noncredit expenses.

They are running at a little below $180 million, $179 million or so, right now.

And I know you have had the efficiency program, and that is still going.

But are we at what you guys view as a run rate here?

Or are there -- I know a lot of the closings happen in second quarter -- just trying to get sense for how much more if that kind of pace would gap down from here.

And then, secondly, on the fee revenue front -- I was wondering if you could give us an update on your anticipated outlook from Durbin

Kevin, this is Tommy.

We are part way there on our installation of all the efficiency initiatives.

We are -- got more to come in the second half of the year and some of the benefits that will occur from things implemented part-way through the first half will continue to put some downward opportunity on the expense base.

So, we think that we will continue to see some declines there.

The Durbin slide is number 30, and it gives you some idea.

We believe now that the impact of Durbin on an annual basis -- a full-year situation would be about $14 million out of $25 million-base that we are working from in this category.

We believe that the impact for 2011 with the October 1 installation would be about $3 million.

I hope that answers your question.

So, $14 million is the full year hit from it unmitigated.

Yes, that would be unmitigated 2012 event.

Okay.

And we are working hard to mitigate.

Okay.

Erika Penala.

Bank of America Merrill Lynch.

I just wanted to ask you -- as you're thinking about your second half of 2011 budget, in terms of your expectations for both the pace of new loan originations and the pace of credit improvement, have you thought about or factored in what the debt crisis in Washington could do in terms of eroding business confidence?

Or what the spending cuts could do to shave GDP improvement from this point?

Erika, let me take a stab at that.

I don't know that anybody -- there is a bank out there that can quantify the effect of, certainly, a default.

That would be catastrophic, I think, to our country, but as it relates to our forecast -- our forecasts are based on economic conditions staying reasonably consistent with the first half of the year.

We are, as I'm sure you all are, watching the negotiations, or lack thereof, in Washington every day, and I think the default is unthinkable -- the downgrade I don't know, but have we adjusted our forecast based on that potential?

No, we have not.

We certainly would -- as every institution would -- probably rethink a lot of our forecast based on a negative outcome, which we hope does not occur.

Okay, thank you.

Christopher Nolan

CRT Capital.

Kessel, can you give us an update in terms of your outlook in terms of capital sufficiency?

Is the current capital base sufficient to carry you through to profitability?

Yes, Chris, we believe it is, and as I have said on every call, we stress it and model it continuously.

We review it with our board, and, as Tommy showed, the actual absolute ratios stayed relatively flat for the quarter even with the loss.

But, as we begin to stabilize the balance sheet and grow, we do model capital adequacy through the cycle.

And again TARP will be another discussion, and I will just say that capital plan, again, is tested and stressed and reviewed continuously both by our team and our board and certainly shared with our regulatory partners.

But we do believe that.

Great, thanks.

And then a follow-up -- earlier you mentioned that you still project to achieve profitability sometime in the second half of the year.

What's going to be the major driver of hat?

Is it going to be a lower provision?

Lower operating expense base?

Maybe you can you give a little color on that, if possible?

Yes, it's all of the above.

It certainly lower credit cost, so that's lower provision.

It's lower mark-to-market adjustments to existing and new inflows.

It's lower inflows.

It's better behavior in our migration, although we still -- obviously, with the level of, as Nancy mentioned, special mention and accruing classified loans -- we still model inflows there, but we see better performance there.

And that is not just a hope and a prayer.

That is based on very intense scrubbing of that portfolio by our teams -- by our regulatory teams -- by our internal loan review teams.

And so, that is a belief that is found in a lot of hard work and, as Kevin, a lot of conservative scrubbing throughout the year.

So all of those we do believe come down, and we will continue to work on the reduction in operating expenses, the 31 branches closed this quarter and those employees were still with us.

But we have more to come from our process redesign and more efficiency to come from that, and so it will be a combination of everything you talked about.

Thanks for the color.

Kevin St.

Pierre.

Sanford Bernstein.

Just a couple of quick follow ups.

Tommy, on slide 29 on the DTA, you mentioned there is an anticipated $20 million of the valuation allowance that will not reverse.

Could you explain why that is?

That is primarily a state credit or state carry forwards that would likely expire.

They have shorter time frames than the federal [rules], and it's an estimate.

It'll be fluid until the recovery, but I wanted to put that disclosure out there.

Okay, so hypothetically, if losses persisted for a longer period of time than you anticipate, that number could go up?

It could slightly.

There is not a lot in that category to move.

Okay, great.

And then, Kessel, just a quick follow-up on the capital question.

Is it fair to say that you are -- with the stock now below $1.90 -- that you are under no pressure right now to boost your capital ratios from the regulatory relationships that you have?

No, I would not get specific with discussions with regulators, but that they have been very involved in our progress through this entire cycle, and the stock price doesn't necessarily affect their view or our view on capital levels.

Certainly, you wouldn't want to raise capital in this environment, if you didn't have to.

But we have seen no change in our regulatory relationships, and, again, they are part of our process, certainly to review and, again, we think that there are capital levels are sufficient to carry us through the cycle.

We certainly watch the stock price and are concerned with that, for a variety of reasons, but those are, in some cases, things we can control.

Our focus needs to be on all the things we talked about -- credit, efficiency, stabilization and we think that solves the stock price issue.

Great.

John Pancari.

Evercore Partners.

In terms of the outlook for the loan loss reserve, I know you indicated, again, you expect provision to be a big factor in return to profitability.

Can you talk about your expected reserve to loan ratio, as we trend through the back half of the year here -- just given the trends you're seeing on the early credit metrics?

I mean, we expect credit metrics to improve.

We know the loan loss reserve will again, as Tommy mentioned, that will be brought down further --it will lag credit metrics -- and I didn't get maybe the second part of that question.

I was just getting at, in terms of the early stage credit metrics -- everything is pretty much trending in the right direction, so I'm trying to gauge how much in the incremental reserve release we could see through the back half of the year, in terms of where that reserve to loan ratio could end up.

John, this is Tommy, just another angle on that.

Directionally, it will go down some.

I mean that will be a natural trend that happens, as the forces that made it go up, reverse.

And as we charge down loans that have reserves on them and don't have to backfill it, it will go down some.

We do understand that loan loss reserve levels of history 5 years ago probably -- you don't go there.

But we are still at an elevated level, and there is a good bit of room to take it down before you get to any those barriers.

And that naturally happens as credit improves.

Okay.

And then on the pace of future loan sales.

I know you indicated that may level off a bit, but is that largely a market driven decision?

So, if the secondary market appetite firms up a bit, as we move through the back half here, could you actually see a greater demand and, therefore, a greater level of loan sales?

I'd say there are probably several factors that going into it -- one of the reasons I think we're saying it would level off or go down is the book that we have on new NPA inflows.

I think that is one of the reasons we look at it.

If we get exceptional pricing, I think we would look to take advantage of that as that takes place, but we have been pushing to try to maintain the level that we have.

We are willing to let it drop some in the second half of the year, but we'll just have to continue and watch the economics as we move forward.

Okay.

And then, lastly, on the TDR balances -- I know you acknowledged the rule change could impact TDR's.

Outside of the rule change can you talk about your activity around restructuring and if we could expect organic increases in the TDR volumes here?

Yes, -- I don't know about restructuring, but we are working with the customers that have a good plan, that is reasonable.

These customers -- we are talking about the accruing TRs.

They have been performing, and we think that there is again potential to work with those customers during this short term period, and I would say within a year.

We would label those TDRs is with the potential to be upgraded.

Our TDRs are typically out -- are good performers with a good plan.

We would not restructure a loan that didn't make since or that was underwater.

We would call that a non-accruing TDR, so they'll continue to be some restructures and working with customers.

So, it's possibly, especially with the new guidance, that those TDR balances could increase during the second half of the year.

Okay, great thank you.

Christopher Marinac

Just wanted to ask about loss content, Kevin or Kessel, on the potential problem loans in commercial.

Is there a of way we could sort of -- (technical difficulty) in your experience in the past year or 18 months?

What we could expect going forward?

Those would be the loans that obviously have the highest potential to move into the non-performing inflow bucket, and, again, we feel that will be less going forward.

Our inflows are projected to be lower, as Kessel mentioned, in the second half of next year as well.

So a typical loan that is in that bucket has about a 20% -- it's according to the category -- but typically around a 20% or so reserve already against it.

Sometimes more if it is more land related, and then if it were to, obviously, moved through the cycle it would get impaired and then sold.

And you're seeing that we end up, around -- during these days, around 45% on unpaid balances so maybe let you draw your own conclusions there but we see that pace being less.

Do you have success stories of things that are migrating back to past that are, therefore, freeing up reserves or (inaudible) find something new or is it mostly just the same pool that you have had here for the last couple of quarters?

It's hard.

We are getting some back to the past level upgraded.

It is a hard environment to do that in.

We want to be very conservative if we move a loan from the potential problem list back up the chain to potentially the watch list and then past.

We do have a lot of loans identified that have a high potential to be upgraded and just need a little more time, especially in the investment real estate and C&I categories.

So it has been somewhat slow in the upgrades but, again, any kind of stabilization in the economy and maybe some continued progress there.

Some customers are starting to have better financial statements come in that we have seen that came in earlier at the end of the year statements, and we want to see a little more performance.

We want to be conservative with that call.

We don't want to be having it go back and forth, and so we do see that potential happening a little more in the second half of the year than in the first half of the year.

Great.

Just one final point of clarification -- when you mentioned in the financial statements -- the actual statements -- that there is X dollars of past due but accruing those numbers are largely in the slide that you have on the commercial potential problems, correct?

Yes, that is right.

Okay.

Great, Kevin.

Bob Patten.

Morgan Keegan & Co., Inc.

All my questions have been asked but I -- just sort of big picture, Kessel.

We look at credit on slides 19 and 20.

Obviously, it's improving, but the pace of improvement appears to be slowing.

When you look at pre-tax pre, it is going to continue to be under pressure because of excess liquidity and deposits growth, and there's nothing you guys can do about that.

Why wouldn't you strongly consider, with your stock trading below tangible book, at shrinking the balance sheet, selling non-core areas of the bank like Florida?

And the only reason I say that is because Synovus is going to be a C&I bank, changing mix shift as we go forward and Florida is not a C&I market per se.

And get down to a core franchise.

Help your capital ratios.

Get rid of the excess liquidity.

Why wouldn't you seriously think about doing that right now?

Bob, I don't want to speak to Florida, specifically, but -- and I'll tell you, I was actually there in Tampa last week at a board meeting and with their sales team where they were awarding prizes and certificates to team leaders in retail and C&I growth.

And really they had tremendous activity.

And so, our Tampa team is doing strong.

Our Jacksonville team continues to make progress.

Our Panhandle group is certainly strong --1 and 2 market share in most markets.

So, we are proud of that team and their efforts, but, all that said, let me just say I understand your thoughts.

We look at every opportunity to make sure we preserve and grow capital in the most shareholder-friendly manner we can, including shrinking the balance sheet, and Tommy continually looks at that.

And, as I've said before, we would like to grow in strategic markets -- not shrink.

But there is nothing -- again, not Florida specific, but your theory is good, and I can assure you we continue to look at ways to do shareholder-friendly boost either to capital or to long-term values.

So, we hear you loud and clear.

Again, we think there is a lot of progress in some of our key markets.

But, over time, we want to be a significant player in every market in which we operate, and, if we are not a significant player, that calls for a different discussion at that time.

But, right now, our focus is on letting those markets stabilize and grow.

Thanks, Kessel.

Thank you.

We have no further questions in the queue at this time.

Well thank you operator, and thank you to all of you that participated -- that listened -- that asked questions.

Just a closing comment or 2.

We have made significant progress, and I'm very proud of and thankful for the team here that has hung in here to help push this Company through it.

And I, as they know, that there is still much work to be done.

We do believe though that we will continue to see improving credit trends.

We will continue to execute on key efficiency initiatives, and we will continue converting our growing pipeline to loan fundings as we move toward balance sheet stabilization and profitability.

The team is very energized, as we continue to add strong talent to the mix.

Our focus on our customers is intense, and I really look forward to sharing the results of our continued progress throughout the rest of this year and beyond.

Thank you all again, very much, and have a great day.

Thank you Ladies and gentlemen.

This does conclude today's conference call.

Thank you for your participation.