Synovus Financial Corp (SNV) 2011 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Synovus third quarter 2011 earnings 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, Pat Reynolds with Investor Relations. Sir, the floor is yours.

Thank you, Kate, and thank all of you for joining us today on our call. During this call we will be referencing the slides and the press release that are available within the investor relations section of our web site at synovus.com. Our presenters today will be Kessel Stelling, President and Chief Executive Officer; Tommy Prescott, Chief Financial Officer; and Kevin Howard, 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 our SEC filings, which are available on our web site. Further, we do not intend to update any Forward-looking Statements to reflect circumstances or events that occur after the date these statements are made. We disclaim any responsibility to do so. During the call, we will discuss non-GAAP financial measures in reference to the company's performance. You can find reconciliation of these measures to GAAP financial measures in the appendix to 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 webcast is located on our web site. We respect the time available this morning and the desire to answer everyone's questions. We ask you to initially limit your time to two questions. If we have more time available after everyone's initial two questions, we will reopen the queue for follow-up questions. And, now I'll turn it over to Kessel.

Thank you, Pat, and thanks to all of you who are listening in this morning. You have seen our release by now and the headline that we did report a profit for the third quarter of 2011. And, as I said in the release, we are pleased to return to profitability. It's a key milestone for all of our stakeholders, certainly for our employees, for our customers, and for our shareholders, many of whom are listening on the call today. So, let me jump right into the deck on page 4 and start with our financial results summary. As you can see, net income available to common shareholders was $15.7 million compared to a net loss of $53.5 million in the second quarter of 2011, and a loss of $195.8 million in the third quarter of 2010. Our net income per diluted common share of $0.$0.02, compares to a net loss of $0.07 in the second quarter of 2011and a net loss of $0.25 in the third quarter of 2010. We're pleased that our pre-tax, pre-credit cost income was up $2.5 million to $119.4 million, that's up $2.5 from the second quarter of 2011. Our total credit costs were $142.5 million, down $15.4 million, or almost 10%, from the second quarter of 2011, and down $158.4 million, or 52.6%, in the third quarter of 2010. Kevin Howard will talk in depth about that later.

Our earnings did include net securities gains of approximately $63 million. Tommy Prescott will discuss the investment portfolio repositioning later in this presentation and take any questions on that. A big part of our story and a big part of our recovery continues to be that our credit metrics continue to improve. So, let me lift out some slides that Kevin will follow later and just talk a little bit about them. We're on page 5. Credit costs declined for the 9th consecutive quarter. And, as you'll see, down 9.8% from the second quarter and again almost 53% from the third quarter. Our charge-offs were $138.3 million, or 2.72%, compared to $167.2 million, 3.22% in the second quarter, and $237.2 million, or 4.12% in the third quarter of 2010. As you recall, Kevin had guided in the 3%, 3.5% range, and we were pleased to see that number come in at 2.72%.

Our distressed asset sales totaled $168.6 million dollars in the third quarter, slightly higher than we had guided, but pleased to continue to work down our levels of distressed assets. If you'll continue on page 6, again, on credit our metrics, our NPO inflows totaled $222 million. As many of you will recall who were on the call last quarter, we had seen a significant decline in the second quarter from $306.5 million in the first to $231.1 million in the second. And, had guided that we expected inflows for the third quarter to be somewhat stable or flat compared to the third quarter. We were actually pleased to see the slight decline to $222 million and expect that to further decline in the fourth quarter. And, again, Kevin will talk about that as well.

Our total NPAs ended the quarter at $1.6 billion, a $54.3 billion decrease from the second quarter and a $392 million decrease from the third quarter of 2010. We're also pleased to report that our potential problem commercial loans declined 21.4% from the second quarter of 2011, down 49% from the peak in the third quarter of 2010. And, also pleased to report that special mention loans declined 10.2% from the second quarter of 2011. I want to take you through a few highlights on our balance sheet. On the loan side, total loans ended the quarter at $21.1 billion. That represents a decline of approximately $400 million from the second quarter, driven primarily by a $353 million decline in CRE loans.

Our loan mix continues to improve. Our combined CNI and retail portfolios now represent 63% of our total loans. Our CRE portfolio represents 37% of total loans. That's down from 41% in the third quarter of 2010 and down from a peak of 45%. We are still experiencing, as are our competitors, sluggishness in this economy; and certainly loan demand is soft. I do want to share with you just a couple of improving growth indicators that give us confidence that we will stabilize our balance sheet and return to a position of growth in the not too distant future. We achieved reported growth in owner occupied real estate and small business loans, both of those reflecting the target sales effort of our bankers. Our new loan funding were up approximately $130 million, or 22%, from the second quarter. And, we continue to be encouraged by our loan pipeline both in new areas that we previously talked about and throughout our footprint. That pipeline continues to increase monthly, especially on the CNI side.

The deposit story is certainly a good one. The overall performance of the deposit portfolio was strong. Our core deposits increased $767.4 million dollars, or 15.1%, annualized from the second quarter of 2011. We had growth in the total number of accounts. I'm particularly pleased to see that our number of non-interest bearing accounts, the net number grew by 3,123 accounts, or 3.6%, annualized from the second quarter. Again I think a reflection of our customer based and community based focus throughout our footprint. The mix continues to improve. Broker deposits declined as planned, about a $533 million decrease in broker deposits.

On the expense management side, on slide 8, we do remain on track to generate the $75 million in projected expense savings in 2011 and the $100 million in 2012. And, on track to eliminate 850 positions in 2011. When we announced the 850 positions that was not a net number, that was just 850 positions. You'll see now that our head count, net, has decreased 824 since December of 2010, and that includes some of the very strong, strategic investments in new talent. So, we're very pleased with how we continue to manage the head count of this company. You'll see in the chart core expenses for the first 9 months of 2011 are down $67 million, or 11%, versus the same period of 2010. And, on that expense front I just want to reassure everyone that we continue to pursue expense-saving opportunities, not satisfied with just what we have already announced. We are pursuing opportunities across our footprint, including branch rationalization, both the number, the size, the efficiency of our branch structure, the procurement function, the facilities function, which includes management of our corporate real estate. And, a number of other initiatives that we think will generate additional savings to the expense line. And, we'll talk more about that later if you have questions.

I'd now like to turn it over to Tommy who will give you a more in-depth look at our financial results.

Thank you, Kessel, and I'm going to take you to slide 10, which illustrates the trends of the third quarter against the second quarter that Kessel just talk about. And, it's really an income statement just driven by the positive results and pre-tax pre-credit cost income, continued improvement in reduction of credit costs, and also included, as Kessel mentioned, the $62.9 million in securities gains. I wanted to point out to you a couple of things on this slide. The share count bumped up significantly from the third quarter, and that's related to the [Tmeds], which are now counted in the EPS equation, because we supported profitability for the quarter. Also wanted to mention the tax line, you'll see a tax benefit for the current and the second quarter, and a tax expense, similar amounts that occurred in the third quarter, and those are both related to the securities portfolio. In the second quarter, we had that benefit from the unrealized gain increase that occurred during that quarter. In the third quarter, we realized some of those gains and the primary component of that tax expense is a reverse of what occurred in the second.

Slide 11 illustrates the loan trends that Kessel was describing. We ended the quarter at $20.1 billion in the loan portfolio. We saw the continued moderation of loan balance declines with a big driver of the decline being the continued reduction of commercial real estate loans. That was $353 billion of the decline as a key driver. Slide 12 illustrates the deposit trends, and, as Kessel mentioned, a very strong quarter in deposits. $767 million of core deposit growth, 15.1% annualized over the previous quarter. Non-interest bearing deposits led the way with a $1billion increase over a year ago, $372 million for the quarter, up 30% linked quarter now at 25% of the core deposit mix.

We continue to move away from the wholesale funding, primarily broker CDs. And, also moving away from core time deposits to lower costs core deposits. During the quarter we shrunk the broker portfolio $533 million in total deposits. Ended the quarter at $23.1 million, increasing $234 million on a linked quarter basis. Slide 13 addresses the margin. Also, it shows a trend in net interest income with a slight reduction in each. The margin was down 4 basis points, that was the product of a 9 basis point decline in earning asset yields driven by re-pricing both securities and the maturing loans during the quarter. The reposition of the portfolio was all done fairly late, had probably a 1 basis point impact on the margin in the quarter. So, that was not a key driver in the quarter. The earning asset decline was partially offset by a 5 basis point decline in the effective cost of funding largely from downward pricing maturing core deposits or core timed deposits.

Expenses are illustrated on slide 14. Kessel described the trends and really showed, I guess, very graphically what the year to date numbers, the magnitude of the expense takeout we've had. This illustrates the quarters, and you can see the step-down from the fourth quarter last year and the continued downward movement in expenses. I'll point out that the employment expense is up slightly for the quarter. Really had to do mostly with two more pay days during the quarter. And, also was impacted by the higher level of variable compensation that's tied to production incentives, mortgage solutions, and that type of thing. Which are -- all have a revenue side to them also. Pre-tax, pre-credit costs income of $119.4 million for the quarter, up $2.5 million. And, that was a product of a little bit of strengthening to the net interest income, but more than offset in non-interest income and in core expenses.

Slide 16 illustrates the investment portfolio. And, you can see on the slide with the shift of the mix of the portfolios and also the growth in the portfolio. Really the market conditions in the quarter presented an opportunity to reposition the portfolio. In doing so, to fast forward capital and lock in capital, and also to gain a little better control and a lower prepayment risk. You'll also see that we added to the portfolio with the tremendous deposit increases we've had and our desire to continue to bring the balance at the fed down, as we did in the quarter, about $350 million. We did add to the portfolio also during the quarter.

Capital picture is illustrated on slide 17, and what this slide really shows is the growth in all the regulatory ratios. The tangible common equity ratio did not enjoy that growth as the unrealized security gains were already included in that. And, so that ratio did not up-tick like all the regulatory ratios. But, all in all, capital ended the third quarter in good standing and in good direction. I'm going to stop there and turn it over to Kevin Howard, our Chief Credit Officer

Thank you, Tommy. If you'll go to slide 19, I'll review our credit trends for the third quarter, starting with credit cost. Our total credit costs were down 10%. Our provision expense down 15% compared to last quarter. The two primary drivers of the provision improvement for lower mark-to-market expenses, as we get further into that portfolio, the marks seem to be a little less, and also the new stuff that's come in that's defaulted doesn't quite contain the loss that comes in. So, we've had some improvement there, continued improvement, and we expect to see that going forward. Also, we had improvement in our overall migration costs. Those were the two primary drivers there.

Our ORE expense, component of credit cost, was up $3 million to $41 million, about 75% of the OR expense is comprised of dispositions and mark-to-market costs with the rest of the expenses related to Hammond ORE such as maintenance, foreclosure expense, legal, et cetera. While we remain cautious, given the uncertain economic climate, we do anticipate our total credit costs to continue its declining trend at a more significant pace next quarter, led by approved disposition results based on slightly less volume which typically leads to better realization rates. We also expect continued improvement in migration trends and mark-to-market expense results due to the existing mark-downs that are already on our troubled assets, which is displayed in the appendix, which is marked down 44%.

Charge-offs were down 17%, or $39 million, from last quarter. Again, the improvement here was primarily attributed to lower mark-to-market costs as well as improvement, pretty significant improvement, in our CNI losses and had improvement as well in our retail portfolio charge-offs. Our charge-off guidance for the fourth quarter is that will be below 2.5%, and we expect to see continued improvement through 2012. That improvement is based on some of the things I've mentioned already as well as the confidence going into 2012 that we have a much better positioned balance sheet, and we really assumed little, if any, economic lift. Our loan loss reserve decreased 12 basis points to 2.96. This decrease was due to a number of factors, primarily loans sold with reserves attached and improved migration, demonstrated by, as Kessel mentioned, the lower potential problem loan and special mention balances. Will mentioned our pass rate of credit did increase during the quarter. Those obviously carry a lower reserve requirements. As shown in the bottom right hand chart, our past use continued to trend just below 1% for the quarter.

Slide 20 reflects an overall view of our nonperforming asset trends in the third quarter. Our total MPAs were down $55 million during the quarter to 5.71%, and our nonperforming loans were down $13 million to 4.34%. This was the sixth consecutive quarter of declines in MPAs, now down 37% from the peak in first quarter of 2010, and down 26% year over year. Our third quarter nonperforming inflows, as Kessel mentioned, were $222 million, a $9 million decrease. The bottom right graph on the slide shows the mix of the new inflows. And, as you can see our inflows in investment real estate continued at lower levels, and we had improvement, again, in our residential and land related inflows. We also -- we do expect to see improvement next quarter with continued improvement into 2012 in our inflows. This is based on the significant progress we've made in reducing our potential problem loans and special-mention balances and our exposure in the land and residential portfolios, which we will view later in this presentation.

Slide 24 -- excuse me, slide 21 shows our continued efforts in disposing of problem assets. We sold $169 million this quarter. It's a little higher than we guided, and we achieved $0.37 on unpaid balance. The makeup of the dispositions this quarter was $52 million of ORE, $77 million nonperforming loans, and about $40 million were performing loans. The mix, sold by asset type, was about 35%, was land acquisition and residential related, 49% investment in CRE, 12% CNI, and about 4% was retail. I do want to comment on our disposition strategy, which is always subject to change due to market conditions. But, going into the fourth quarter and on into 2012, we'll target sales of about $100 million to $150 million in dispositions a quarter. This range was really chosen based on our confidence in our migration within the portfolio will continue to improve. And given, as I mentioned, given a lower target of disposition volume, our expectation is better realization rates, which also supports our expectation of improvement in our disposition costs going forward.

Slide 22 displays the potential problem commercial loans, which we define as commercial substandard accruing loans excluding 90-day past dues and TDRs, which are recorded separately. Our potential problem loans were down close to 22%, or $257 million, this past quarter, and we're down 50% from just a year ago. I do want to point out, only $30 million of this $257 million decline is attributed to loans moving to TDR status with the remainder of the decrease reflecting fundamental improvement in our potential problem loans. And, it should be noted, as Kessel mentioned, our special mention loans, which are reflected in another chart in the appendix, were down 10% from last quarter and down over $400 million since March 31.

Slide 23 takes a look at our TDRs and their mix. Our accruing TDRs increased by $88 million, or about 16%, from last quarter while non-accruing TDRs increased by $30 million. This increased primarily do to the market rate component of the new TDR guidance. However, the impact to provision expense and loan loss reserve was minimal. I do want to point out that 31% are in the residential and land-related portfolios, and also that 39% of our accruing TDRs are in our past or specially mentioned grades. Additionally, over 94% of the accruing TDRs are paid current.

Want to take a quick view of the portfolios, start with slide 24 an overview of our investment real estate. As shown earlier, the NPO inflows were $32 million. And, if you exclude our smallest commercial development portion of that portfolio, which is land related, it's less than $300 million. But, if you excluded that, just based on our income producing properties, the NPL inflows this quarter would have been just $15 million, and our NPO ratio would have been less than 1.5%. The charge-off ratio did increase this quarter, mainly due to -- we sold a higher portion of managed dispositions in the assets related to investment real estate. Past dues continued to remain at low levels,0.51%. Lastly, I want to point out as well we recently finished our quarterly review of loans greater than $1 million. It represents about 83% of that portfolio, loans that are above $1 million, and the review reflected continuing stabilization of the debt service coverage ratios and fewer loans with debt service coverage's less than 1 to 1. So, fundamentally we're stabilizing and even improving in the investment real estate.

Slide 25 takes a look at our residential C and D and land portfolios. While these 3 categories once made up 22% of our portfolio, they now comprise only 7%, 7.5% of our loans, but still represent close to half of our NPLs. Our progress in dealing with these portfolios is demonstrated by the fact that now only 28% of our substandard loans are in these categories, and 11% of our special mention loans were in these categories. So, this gives us greater confidence that these weaker -- that this weaker segment of our balance sheet will have much less impact on credit costs going forward. Past dues just slightly over 1%, at 1.09% in these portfolios.

Slide 26 reflects our CNI portfolio, which remains stable from last quarter. As we stated in the past, this is a well diversified portfolio by industry, as demonstrated on this slide. Net charge-offs were only -- significantly down, 0.67% in the quarter, and past dues were at 1.06%. Our last slide in the credit presentation is our retail portfolio. Good trends here as well. This was third consecutive quarter of declining NPO inflows, and the lowest quarter of inflows since the third quarter of 2009. Charge-offs declined for the seventh consecutive quarter to [1.64%]. Again, this portfolio is a credit scored almost exclusively in market lending, and we feel like this portfolio has performed relatively well during this entire credit cycle. That concludes my comments. So, I'll turn it back over to our CEO, Kessel Stelling.

Thank you, Kevin and Tommy, for your presentations. Before we turn to the Q&A, I want to address just a few other points that I'm sure are on your mind, they're certainly on ours. The first would be our view on profitability in the fourth quarter and beyond. As we mentioned in the release, our goal is clearly long-term sustained profitability and growth. We do believe that we'll be profitable in the fourth quarter and specifically that our pre-tax, pre-credit cost income, excluding any securities gains we may realize, will exceed our total credit costs for the quarter. You can do that math yourselves, but we do expect credit costs that will require a further decline there, and we do expect that will happen.

As to the DTA, I'm going to refer to you page 29 of the deck, or actually it's the first slide in your appendix, and has further detail. But, just in summary, we do expect to reverse most of the DTA valuation allowance once we've demonstrated a sustainable return to profitability, perhaps to the point where we have significantly improved credit quality, and experienced profitable quarters, coupled with the forecast of sufficient profitability. As we've stated before, the reversal of that allowance is subject to considerable judgment, and we believe that it could be a 2012 event.

Finally, on TARP, again, as we've said before, repayment of TARP is not necessarily linked to our DTA recovery. But, the events that allow for one are similar to the events that allow for another, specifically sustainable core profitability, improvement in our credit profile, and the forecast of sufficient continuing profitability. Therefore, the timing could be similar, or linked, but it does not necessarily have to follow the DTA recovery. As it relates to TARP we want to do what's prudent for our company, certainly for our shareholders, and in consultation with our regulators. And, as we have the ability to be more specific on timing there, we certainly will. At this time, operator, I'll turn it over to you to open the line for questions.

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

(Operator Instructions)

Our first question is coming from Steven Alexopoulos. Please announce your affiliation, then pose your question.

Hi, guys. JP Morgan. Maybe I'll start my first question. The increase in TDRs, related to the new FASB guidance, seem to be much greater than we're seeing out of other banks. Most other banks are saying this is a non-material event for them. Can you guys give more color on why the TDRs went up so much related to the new provision?

I'll just say, first of all, but for the guidance that was implemented in the third quarter, we would have had a slight reduction in TDRs this quarter. But, almost all of the increase was the look back into loans we renewed in the first half of the year that the new guidance called for where the rate was not modified to a market rate, so to say, and the new guidance now requires us to go back and identify. So we really -- it was more the look back of looking at those rates, and it was more market rate related, not restructure related.

Got you. And just for a second question -- that's helpful. The inflows into non-performer have come down a lot, right, $220 million, but it's still a big number. Can you talk about why it's so high given that you are seeing special mention come down. And, did you expect that to trend down more materially in coming quarters? Thanks.

We do, Steve. Let me start there. I'll let Kevin touch on that. We do expect that to trend down materially in coming quarters. As you all know, we had, and still by certain measures, have a higher concentration of commercial real estate loans. We mentioned we brought it down from 45 to peak to 41, now to 37. But, those legacy assets still have to flow through the cycle. So, we had again guided, in the third quarter, numbers similar to the second quarter. We were pleased. We do expect that to come down. I think Kevin mentioned $175 million to maybe $200 million. If he didn't, that's our expectation, that it does come down significantly. There's no magic formula as to when it goes to non-performing. We work with customers where we can, and as they default or as they don't meet our test for performing status we continue to move in that way.

I'll add that there were, as I think we could have said for the last several quarters, very few surprises in that portfolio. The resources we dedicated, both on the credit side and the investment real estate side, I think, allow us to stay ahead of the curve as it relates to migration. And, in general, no real surprises for the quarter.

Is that a fourth quarter target, the $175 million to $200 million, or is that just the range you're trying to drive down to?

That would be a range that we expect. The numbers are what they are. But, that's what we expect based on our existing credit profile, our deep dive into our substandard accruing credits and special mention credits. Kevin, with his regional officers and regional CEOs and with D. Copeland and all the bankers, take almost weekly looks at all of those problems. And, again, I would say for the last several quarters at least, we've had a high degree of accuracy in our ability to predict the defaults.

Okay. Thanks.

Thank you. Our next question today is coming from Ken Zerbe. Please announce your affiliation, then pose your question.

Sure. Morgan Stanley. From what I can tell, it looks like a lot of the reason why you posted a profit this quarter is because of the large security gain you took in the quarter. Can you just tell us how much more work do you have to do before you're done with your portfolio repositioning?

Sure, Ken. I'll take -- this is Tommy. I'll take a shot at that. The third quarter was really the main event, I would describe. That's -- reposition the portfolio is something we do ongoing. The unique opportunity that was presented in the third quarter caused us to take a pretty good bite. And, I mentioned some of the benefits of it, of a fast-forwarding capital and to reposition the portfolio. We saw the market reaction after the FOMC announcement to be a pretty extreme reaction, so we just couldn't turn that down. I'd say that we'd never rule it out in any quarter, including the fourth quarter, but consider the third quarter the main event, and we'll just go from there.

Okay. And, I think I heard on the call that you said it happen late in the quarter, so it only had a 1 basis point negative on NIM. When we look to the fourth quarter, what's your estimate for a run rate impact just due to the repositioning you did this quarter?

Yes. The portfolio repositioning was done, really, in the last two months of quarter. But, a lot of the settlement occurred very late, so it wasn't a big impacter on the third quarter. We would estimate that the impact of the repositioning would be about 8 basis points on the margin during the fourth quarter. We also believe that we've got a good bit of room in the core funding side to continue to push that down and push out some of the higher-price CDs and decline the brokered balances some more, and we think that will largely offset the 8 basis points.

Got it. So, an 8 basis points versus 1, so a 7 basis point Delta Q-on-Q.

Yes.

All right. Perfect. Thank you.

Thank you. Our next question today is coming from John Pancari. Please announce your affiliation and then pose your question.

Evercore Partners. In terms of the cost saves, can you talk to us about how much in the targeted cost saves you achieved this quarter and how much is in the run rate? And then, if you could talk a little bit more of the pace of the cost saves that you expect to realize over the next couple of quarters?

Yes. We are -- we've targeted the $75 million lift-out that would be accomplished this year, the impact on this year, and we feel like, actually, we're going to exceed that number some. If you do the math and you assume a similar, maybe slightly lower, G&A trend in the fourth quarter, which we believe will happen, then you actually get closer to a $100 million difference over 2010. There's a lot of moving parts there, because all the while we're doing this, we are strategically lifting out cost in the company. But, we're also adding things where appropriate in risk areas and in front-line areas or speciality areas. So, it's -- you've got to think of both sides on it. But, we think that we're largely there on the installation of the programs.

We'll see a little bit of an incremental continued benefit in the fourth quarter. And then, we made the point earlier, and I'll make it again, that in this environment, the, I guess, expense management is a new way of life in banking, certainly in our company, and have to respond to the size of the balance sheet. So, we'll keep looking hard and keep pushing on every front, strategically and tactically.

Okay. And, when you said that you're ahead, is that mainly just when it comes to the pace of the realization, or do you expect that you could up the size of the amount of cost saves ultimately that you could receive through 2012?

We're going to stick with the previous guidance, as you think about just the restructuring. But, all the while we've been doing what you do as you're trying to find more efficiency. And, in addition to some of the cost saves that come from the strategic plan, we actually are just continue to make -- doing common-sense things to push expense down in every category. So, we stand by the $100 million reduction from the restructuring standpoint. And, a good bit of that is just being realized in 2011. So, you'll -- but you'll continue to see a downward trend in the G&A core trend line as you get into 2012.

Okay. Great. Thank you.

Thank you. Our next question today is coming from Craig Siegenthaler. Please announce your affiliation and then pose your question.

Credit Suisse. Thanks, guys, good morning, everyone. I don't think you said this specifically in the last response. But, of the $75 million that you planned for calendar year 2011, how much was in the run rate for September 30, so as of the end of the third quarter, and how much for June 30, as of the end of the second quarter?

We hadn't disclosed it that precisely. But the $75 million was really, what we said is, that we see that benefit that would occur in 2011 by the end of the year that we would have installed all of the programs that would get you the $100 million total benefit on a go-forward basis. So, we feel like we're on track for that plan. And, again, I mentioned there are a lot of moving parts with some tactical reductions that occurred along with the strategic and also some add-backs. So, I think the best way to describe it is if you look at the run rate in the third quarter of this year, we see it continuing to move down in the fourth quarter. And then, it will continue to bump down some in the 2012 quarters.

Got it. And then, just a follow up question on middle market and commercial banking, probably where your loan growth rate is the highest, relatively, out of all of your portfolios. And, I don't know if D. Copeland is on the line to help out here, but how does the pipeline of new activity in this book compare to the level of credit that's actually rolling off? And then, also, how did the yields compare? So, the yields of the business you're putting on versus the yields of the business from about five years back that's rolling off.

Yes, Craig, a couple of things. I would say one, I'll address maybe the pipeline piece that is there. We've had good growth in the pipeline in CNI second -- from the third quarter over the second quarter. If you look at it in the CNI category it would be also our strongest pipeline on a go-forward basis as well. If you go in and look at it from a rate standpoint, I will maybe say versus the previous quarter, we would be, just in the CNI portfolio, really would be stable. There hadn't been a big change in our new and renewed rates in CNI. If you go over a 5 year period, I think that is going to get property or customer-specific, depending on what you're doing there. The fixed rates, of course, that we do will be lower. But, on a variable rate, there was some pretty aggressive rates five years ago, and I would say we've not gotten back to those levels at this point.

Got it, guys. Thanks for taking the questions.

Thanks, Greg.

Thank you. Our next question today is coming from Jefferson Harralson. Please announce your affiliation, then pose your question.

Thanks. It was good to hear that the originations -- the loan originations are picking up. I was trying to gather when loan growth might turn around and turn positive. I was thinking the best by to ask that would be to ask you the size of what you think the runoff book is and the amount of shrinkage you're getting from that each quarter?

Yes. I don't know that we have disclosed when we would say we would see the balance sheet to turn. I think we would all say it's a 2012 event, because as you go in with the portfolios, as Kevin stated earlier, your past portfolio has continued -- grew this past quarter. We still be working through some of the challenged assets in the portfolio.

So, one of the reasons we are tracking and looking at the overall core growth that you see has a positive continuing trend is so that you can get a feel for new business versus working through the legacy problem and challenged assets that are out there. I will say, in addition that, the positive signs that we do have is significant growth in new fundings in third quarter over the second, as well as a growing pipeline of third quarter over fourth quarter, which should lead to improved results in that in the fourth quarter as well.

All right. As a follow-up on the liquidity question, how much excess liquidity do you have now? How did that change quarter to quarter, and what's on deposit at the feds?

We ended the quarter with a $2.6 billion at the fed balance. That's down $350 million or so during the quarter. We had the tremendous surge of core deposits coming in, but we also ran off a lot of brokered deposits, and were able to invest additional dollars in investment portfolio. We continue to push the fed balance down, and we'll continue that path and trying to do it wisely and in the most productive way. But look for us to continue to push that down.

Okay. And, just real quickly, how much is left in that CD product, the aggregated product that was, I think, driving some of that liquidity needed at the fed?

$200 million left in the shared deposit program, which it was literally 10 times that size a while back. And, it now consists of CDs that are maturing, and the bulk of those will be gone by the end of this year with a little spillover in 2012. So, it's really not a key player in deposit base or liquidity now.

All right. Thank you, guys.

Thank you.

Thank you. Our next question today is coming from Kevin Fitzsimmons. Please announce your affiliation and then pose your question.

Good morning, guys.

Good morning, Kevin.

Kessel, something you said earlier in your comments about reversing the DTA. You noted how you need to show improved, or sustained profitability, but also improved credit quality. And, with that, I'm just trying to reconcile that with Kevin's commentary about the disposition strategy.

Specifically why would we be slowing down disposition activity instead of ramping it up? Especially we've had this big spike in TDRs. Granted it, it's more of an accounting true-up. But, a lot of us and a lot of investors, because we don't know what to do with that bucket we end up slotting it into nonperforming. So, your nonperforming bucket just optically looks bigger right now. And, if you're looking to really make up for that and to move things out more quickly, and assuming OREO is marked accurately, why wouldn't we be ramping up the speed of disposing of those assets as opposed to, it seems like, deliberately slowing it down?

Yes, Kevin. Let me try to hit several of those points. First, in the TDRs, they were up 16%. I'll make the point that Kevin made again. 94%, actually a little more than 94% of those loans are current. Another way of looking at those are the fixed problem loans. So, and I can't speak to how others did it. Again, ours were up 16%, but that was not a material change for us, and we don't view that portfolio really any differently today than we did last quarter as Kevin said. It's sometimes hard to determine a market rate for substandard credit. So, when you take that look at it, some go into that bucket that are performing today and always have performed. And I'll just again highlight that the potential problem loans came down, special mention came down. So, if you look at the overall profile, again, we feel that credit will improve.

Now, getting back specifically to DTA, we talk about profitability and improvement in credit, they both have -- improvement in credit has to happen to get you to profitability. We believe the migration trends slow down, and we've, again, don't disclose a lot of it. We saw a lot of positive migration in some of our special mention categories this quarter, where those loans went from special mention back to a five rated loan status. Again, we don't disclose the details. So, overall we see improvement in all buckets, and that will just allow us to slow down slightly the disposition activity. As we've always done and always said, we don't lock ourselves into any number in any given quarter. If the market conditions are right and the bids are healthy, you may see something north of that. But we think that's a good target for our company; for our bankers. We still sell a lot at the local level, and also allows for our bankers to spend a little more time playing offense as well.

So, have you seen any material change in the activity or the marks out there? Or is it more simply a case of going bulk versus the strategy of just doing individual sales in terms of the latter being better for you all?

Yes, Kevin. That would be probably what the main driver is. If we operate in that $100 million to $150 million range that Kevin had talk about, it allows us to carry a lot of those sales at the local level which have better returns. When you push past that, you end up with more bulk sales, which actually hurts you on a return standpoint. So, that's one of the main reasons that we give there. It has a -- there are different economics on the two sales.

Okay. Great. Thank you, guys.

Thanks, Kevin.

Thank you. And our next question today is coming from Nancy Bush. Please announce your affiliation and pose your question.

Hi, NAB Research. Good morning, guys.

Good morning, Nancy.

Two questions for you. On the loan growth side, can you just flesh out for us what is coming from new customers and what is coming from existing customers? And are you moving market share?

And, I would end up saying new customers versus existing customers, I probably can answer that more anecdotal. I would say, on the new funding side that we have it would be acquisition of newer customers. Now, I will say they are coming from competing institutions. We are not seeing a lot of new loan growth in the market. This is basically those growth and those new fundings are actually coming from competitive -- really competitive situations. And then, the second piece of the question?

Yes. Just does that mean you're moving market share?

Nancy, I'll just add, too, and this is what D. was referring to, we are in certain segments. Certainly our new large corporate banking initiative is paying dividends for us. The senior housing group, the large corporate, the syndications, that's moving market share. We also had growth in the small business again. As D. said, that's anecdotal in terms of where that came from. But, I think across the foot print, if you look at new customer acquisition on the deposit side, which we can track a little better in terms of new customers, it would spill over to loan side. So, certainly on the large corporate we think that's coming from taking market share, and probably a mix of that in the small business as well.

And, just secondly Kessel, if I could ask you, you spoke about branch rationalization as being a part of the expense control equation.

Yes.

Does that mean that you would think about leaving markets? Does that fall into the branch rationalization category?

I wouldn't rule anything out. I don't want to get off on that tangent. But I understand your point. It could. We announced earlier last year 39 branch closures. And, that exercise was very healthy for our company and caused us to take a deeper look. As you know well because you've followed for us for so long, our company was built on acquisitions. And so, not just number of branches, but there are probably 30 or 40 headquarters buildings out there as well.

So, when I speak of rationalization, I think we could get by with fewer branches. I think we could get by with smaller branches. We could combine some and hopefully build new. So, it's a mix of all that. Would we exit markets? I would never rule it out. We're pleased with the performance in all of our markets right now. But, as I've said before, if we don't over time gain traction in certain markets, then longer term, I think our company has always been a market leader, and I think that gives us pricing and other competitive advantages on both the loan and deposit side. And, we're still top 5 market share in most of the markets in which we operate.

Thank you.

Thank you. Our next question today is coming from Kevin St. Pierre. Please announce your affiliation, then pose your question.

Good morning. Sanford Bernstein. Kessel, just -- you mentioned on your outlook for the fourth quarter that we can do our math. I just want to be sure that we're starting from the same point. So, where pre-tax, pre-credit costs being above total credit costs, so that would be the $119.4 million on pre-tax, pre-credit costs this quarter, and the $142.5 million on total credit costs, correct?

That's correct.

Okay. Great. Next, second, on the head count reduction -- given the head count reduction, I would have expected by now to see a bit more of a decline in the employment expenses which have been flat for the past three quarters. Is there some severance in there? If we look at employment expense per head count, it's actually up since the end of last year.

Kevin, the severance is outside of that category. But, keep in mind that we have -- while we're doing the lift-out to our own target, and actually ahead of the strategic reductions, we have added some back in some specialty areas, as I mentioned. Also, in the -- particularly in the third quarter, I mentioned the two extra days, which has a cost that goes with it, two extra pay days. I guess, on the positive side of that expense increase, we have some incentive based and production-based pay, like the mortgage area and so forth, that has a revenue offset to it that shows up in another line. I think, if you look back at the early slide in Kessel's presentation, where we show the year over year reduction, you can more dramatically see the results of the work that's been done in 2011 on reducing expenses.

Okay. Great. And finally, Tommy, you mentioned the tax rate or the taxes this quarter, mainly a reversal on the securities sales. Am I correct in saying, as we move forward, you would expect little to no tax expense as you report profitability?

Yes. That's what we believe. That's correct.

Okay. Thanks very much, guys.

Thank you, Kevin.

Thank you. Our next question today is coming from Mike Turner. Please announce your affiliation, then pose your question.

Good morning. Compass Point. Just want to ask two follow-ups to earlier questions. What, in general, were your average origination yields in the quarter? I know you've got a lot of different products in there, but just maybe if you can ballpark that, that would be helpful.

Yes, if you average --. You're talking about from a rate standpoint?

Yes. Just gross origination yields, the loans you put on the books in the third quarter.

Yes. It's just south of 5%.

Okay. Great. And also, just on the TDRs. Of the $88 million -- the accruing TDRs -- of the $88 million increase, can you talk about what predominantly product drove that? I mean, was it CRE? Was it residential? Was it across the board? And then, also, maybe it would be helpful if you can give an example that might -- of that type of loan and walk us through that. That would be really helpful.

Yes. We took a look at that. It's pretty much -- it's divided almost evenly, CNI, investment real estate. It's still a little residential. But, you can see the makeup of the overall TDRs, it's only 30% of those residential and lands.

So, a lot of it is -- just an example would be a loan we could have -- again, the increase was the look back, and we could have renewed a loan back in March or say, and it was just renewed at the existing rate, and at the time, the guidance was -- that was not necessarily identified as a TDR. And, to look back into that example now was, in the recast, you needed to identify that as a TDR. We went back and identified those. But, they were mainly -- where we didn't move the rate up high enough, or we were just working with a customer and gave what would be considered a below market rate for the risk on a credit of that type.

And, are you taking any charge-off for this, or are you just keeping it below market rate because they -- cash flow is tight or --?

Well, again, most of the TDRs -- you can see, and something I wanted to point out, 40%, I think, of those TDRs are either pass or special mention. The ones that are pass on there, those are primarily AB notes where we did take charge-offs on those. Those are going to be the ones that pretty much we took the charge-offs on, and we charged off the BPs. And, it lined up with our policy in the pass rated credit at that point. And, we identified -- you still have to keep it even though it is a pass rated credit in the TDR status until the end of the year, and then those will roll off. That matches up with about the number of AB notes we've done during the year.

Okay. Great. Thanks. That's helpful.

Thank you. Our next question today is coming from Jennifer Demba. Please announce your affiliation, then pose your question.

Thank you. SunTrust Robinson Humphrey. I think most of the questions have been asked, but I did have a question for you Tommy, specifically on the margin outlook for the next few quarters. I know you repositioned the securities book. I'm assuming, though, you're still expecting compression?

Jennifer, we believe that right now, I would call it stable with maybe a slight amount of more downside risk than upside. We believe that there's room on the funding side to keep pushing down. We took some steps in the third quarter that really hadn't been reflected yet, just like some of the bond yield changes hadn't been reflected, but we think the two will -- one will hurt us, one will help us. And, that net-net we can stay basically stable with just the possibility of a little bit of downside risk in there. So, thanks for the question.

Thank you.

Thank you. Our final question today is coming from Brian Foran. Please announce your affiliation, then pose your question.

Hi, I'm with Nomura. The last two I had is can you just go over again when we model tier one common from here, how the recapture from a DTA perspective works? I thought it was just earnings times 1.1 to reflect a bigger base of tier 1 comment to compare the DTA against. But then, I wasn't sure how the look forward works?

Well, in order to get the benefit of the DTA into tier 1 common, unlike getting it into the TCE ratio, which would be immediate, you have to -- first of all, you have to get it back for GAAP purposes, and that's a separate event from getting it back then for regulatory purposes. The DTA, the regulatory limits, you can't have more than 10% of your tier 1 common be supported by DTA, or you can't -- there's certain limits on forward earnings, so it takes a while to amortize the DTA back into the regulatory ratios. It really is likely a matter of years for that to happen.

But you do, day one, get probably a small benefit in the regulatory ratios. And then, as earnings progresses and you cover with pre-tax income a sufficient amount to cover the DTA, you amortize the DTA into those ratios. So, I hope that answers your question.

I guess I'm still confused by if your tier 1 common goes up by $10.00 next quarter, now you have an extra $10.00 dollars of base to compare the DTA against. So, wouldn't you just automatically be able to bring in $1.00 dollar of DTA for every $10.00 dollars you earn? Or are you saying there's some other -- I guess I'm not clear what the separate restriction is other than 10% of your tier 1 common.

You have to pass -- it's whichever test gets you first. In this case, set aside the one you're using, because the other test that you have to pass first is you have to have sufficient projections, sustainable projection of pre-tax income for a one-year period, and you can bring that amount of DTA in. In other words, if you're going to make $200 million in the next 365 days, you can bring in $30 million of the DTA during that period.

So, it's a one year look forward where you have to cover with pre-tax income, appropriate amount to take bites out of the DTA. So, it takes more than a year or two to get there, but it becomes meaningful pretty quick.

Okay. Okay. Thank you.

Thank you.

Operator, are there any further questions?

That was our final question for today.

Okay. Thank you very much. Let me just close very briefly by thanking all of you listening on the call today -- to the analysts, and other members of the investment community that follow and support our company. I want to also thank the team members who are listening in; the Synovus team members who just work so tirelessly throughout this cycle in support of our company and in support of our customers. And then, especially to our customers and shareholders listening in as well, I just want to personally thank you all for your continued support. I look forward to bringing all of you further updates about the continuing progress in our company, and I hope you all have a great day. Thank you very much.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation