Synovus Financial Corp (SNV) 2012 Q2 法說會逐字稿

Good morning, ladies and gentlemen.

And welcome to the Synovus second-quarter 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, Mr. Pat Reynolds, Director of Investor Relations.

Sir, the floor is yours.

Thank you, Kate.

And I thank all of you for joining us today on our call.

During this call we will be referencing the slides and press release that are available within the Investor Relations section of our Website at Synovus.com.

Kessel Stelling, Chairman and Chief Executive Officer, will be our primary presenter today, with our entire executive management group to answer your questions.

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 the website.

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.

And you can these reconciliation of these measures to GAAP financial measures in the appendix to our 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 website.

We respect the time available this morning and 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.

Now I'll turn the call over to Kessel.

Thank you, Pat.

And thank you, Kate.

And welcome everyone to our quarterly earnings call.

We are going to try a little different format today.

I will walk us through the deck in somewhat more abbreviated fashion than in the past and save the members of our executive team for Q&A, hopefully to allow for time for the Q&A which I know generates a lot of interest.

So, the usual crew, our CFO, Tommy Prescott; Chief Credit Officer, Kevin Howard; Chief Banking Officer, D. Copeland, and others are here to take questions following my presentation.

So, let's start on page 4 of your slide presentation, where we are pleased to report our fourth consecutive quarter of profitability.

I think three take-aways for the quarter will be that certainly credit improvement drove profitability.

We'll talk about the continued stabilizing and improving of our balance sheet and our ongoing focus on core performance.

Again, but let's start with earnings.

We reported earnings of $24.8 million for the quarter compared to $21.4 million a quarter ago, and compared to a net loss of $53.5 million in the second quarter of 2011.

Again, quite pleased with that turn.

On earnings per share basis, diluted earnings per share for the second quarter, $0.03 a share compared to $0.02 a share last quarter, and a net loss of $0.07 a share in the second quarter of 2011.

Turning to slide 5. Again, as I said, credit costs drove the improvement.

Our credit costs declined 23% sequentially.

If you look at our graph at the bottom, you'll see a fairly significant decline in credit costs from $91 million last quarter to $70 million this quarter.

The same number the second quarter a year ago was $158 million.

So again, steady, significant declines in credit costs, primary drivers of performance.

The main factors in our credit cost decline, we had positive results in our semi-annual update to expected loss factors, driven by continued improvement in credit quality trends.

We had lower inflow costs due to lower volume of NPL inflows and our negative migration costs improved, as well.

So, very pleased with the decline in overall credit cost.

On slide 6 we'll talk a little bit about inflows.

NPL inflows declined for the fifth consecutive quarter, in line with guidance.

As Kevin Howard had previously suggested, directionally down, but certainly some quarters might have a little bump to them.

But you'll see, again, a decline.

We had $124 million of inflows in the second quarter, compared to $140 million in the first quarter of 2012, and compared to $231 million in the second quarter of 2011.

Again, an 11% improvement from the first quarter, a 46% improvement from the second quarter of '11.

I'll also add that we had a meaningful decline in inflows related to residential and land portfolios.

And Kevin will be happy to talk about that later in the Q&A.

But again, very pleased with the decline in NPL inflows.

Our overall NPAs continued their steady decline.

We're still not proud of the overall level, but it's nice to see a number that doesn't start with $1 billion.

You'll see in the second quarter we ended with NPAs of $961 million, compared to $1.056 billion last quarter.

And compared to $1.219 billion in the second quarter of 2011.

That $961 million is made up of $206 million in ORE, which declined from $220 million the previous quarter, and $755 million in non-performing loans, which declined from $836 million the previous quarter.

Our NPA ratio now stands at 4.83%.

First time it's been below 5% in a while.

It's down from 5.26% in the last quarter, 5.85% in the second quarter of a year ago.

Our NPL ratio is now below 4%, 3.84% compared to 4.21% just a quarter ago and 4.32% a year ago.

The overall decline in NPAs was driven by, as you might expect, decreased inflows, decrease in NPA carrying values, which we dropped from 57% to 55% of unpaid principal balance in the quarter.

And then just the continued steady pace of dispositions.

And again, Kevin and D. Copeland will be happy to take questions on disposition activity later in the presentation.

On slide 8 we'll talk about charge-offs.

Again, net charge-offs below 2% for the second consecutive quarter, a very slight uptick from $95 million to $99 million.

And again, Kevin can get into the components, still below 2% at 1.99%, down 41% from the second quarter of 2011.

We believe the charge-offs will continue to trend lower during the remainder of the year.

And Kevin will be happy to talk about the components of charge-offs.

But again, below 2%, relatively stable for the quarter, down significantly, again, looking at the second quarter of 2011 where we were at 3.22% or $167 million.

No surprises in the charge-offs, and again, we think that will continue to trend down.

Slide 9 is a great slide, probably not sustainable.

Past dues are the lowest level since June of 2006.

Past dues, 30 to 89 days are at 0.47%.

Past dues over 90 days, 0.03%.

We have seen a steady decline.

The last two quarters have been running 0.74% and 0.73%.

Again, I don't know that this type of decline would be sustainable.

We may see past due levels back at the 75 basis point level, which was also an acceptable level.

But very pleased to see us end where we did.

Again, as I said, lowest level since 2006.

The total past dues at the end of the quarter were $92 million, down about $53 million or 36% from the first quarter.

Down $108 million or 54% from the second quarter of '11.

And I'll point out that every portfolio category experienced a reduction in past due levels, so across the board, good performance there.

We talked about stabilizing our balance sheet and we'll talk about maybe stabilizing the loan portfolio.

We'll talk about stabilization and the improvement across asset classes and risk rate.

On page 10, I think graphically, a pretty good picture of how our loan portfolio is now behaving.

I'll take you to the bottom of the page to begin, and you'll see second quarter a year ago, we had net loan decline of $167 million, last quarter, a decline of $25 million, this quarter, a net loan growth of $29.2 million.

This number excludes the impact of loan sales, transfers to loans held for sale, charge-offs and foreclosures.

Reported loans, as you'll see, down about $493 million a year ago, down $236 million a quarter a ago, down $164 million this quarter, but net loan growth of $29.2 million.

I think of even greater importance, on this page you can see that year-over-year C&I and retail loans are up $91 million, up about $5 million this past quarter.

Our commercial loan pipeline continues to strengthen across our footprint.

And I'll show some particular areas of performance later in the slide.

But again, a stable portfolio, growth and stability in the areas where strategically we placed the emphasis.

And as you'll see, even this quarter, $170 million runoff in our commercial real estate portfolio.

You'll also see in that graph that now commercial and real estate loans represent 65% of our portfolio.

Commercial real estate represents about 35%.

For several years, as we spoke to the analyst community, we've talked about moving CRE from its peak of 45% down to 35%, moving C&I from 40% up to 45%, and retail from 15% to 20%.

If you look in one of the appendix slides, you'll see those exact numbers back in late 2007.

And we have now achieved that balance, which we have, again, strategically planned for.

So, very pleased with how our loan portfolio continues to shape up.

On page 11, I think will speak to the strength of the portfolio.

It's a look at the risk distribution by pass and non-pass grade within our portfolio.

The big story there, again, for the quarter, you'll see pass grade credits increase from $15.976 billion to over $16 billion, and again, compared to the $15.688 billion a year ago.

The pass grade credits now represent about 82% of the portfolio.

That was 76% just a year ago.

Pretty good decreases in our problem categories.

Non-performing loans down $81 million or 10%, accruing substandard is basically flat, up about $2 million, and special mention, which are usually the feeders to those substandards, down $314 million or 16%.

So, great improvement there in the special mention loans, and as I said earlier, pass loans are up $229 million or 1%.

Those same percentages year-over-year, nonperforming loans down $130 million, or 15%, accruing substandard down $531 million or 33%, special mention down $632 million or 29%, and our past loans are up $517 million or 3%.

So again, improvement in asset classes and improvement in risk grade distribution across our portfolio.

On page 12, I'd like the to talk about particular area of emphasis that we've been spending a lot of time investing in and talking about, and that's our Large Corporate Banking, Senior Housing and Asset-Based Lending groups, where we brought in some great talent to pair with our existing talent.

And those groups continue to demonstrate impressive growth in high-quality assets that align strategically with how we're trying to position our Company.

If you look at the bar graph, you'll see just in the second quarter a year ago, $482 million.

That has steadily grown.

Last quarter that number was $827 million in outstandings, and today, we're at the end of the second quarter, stands at $968 million.

So again, a $486 million increase from the second quarter a year ago.

$141million increase from the first quarter.

We're real pleased with how that group -- and groups throughout our footprint -- continue to generate high-quality assets.

I'm going to give you a little breakout on that portfolio.

Of the $968 million, $575 million falls into what we classify as Large Corporate.

$246 million, Senior Housing, $147 million in Asset-Based Lending.

All of those components are growing.

I have the breakout for prior years.

I won't go into those.

But again, all components of that group continue to bring on high-quality customers for our Company and allow us to sell deeper into some existing relationships with our Company.

On page 13, again, part of our improving balance sheet.

Talk a little bit about deposits.

And the story here, again, is the improvement in deposit mix.

Broker deposits have declined year-over-year, $1.15 billion or 57.3%.

Broker deposits now represent about 5% of our total deposits.

That was down from a peak of over 30%.

So, we're very pleased to have decreased that reliance on broker deposits.

Core deposits increased $231.8 million, or 11% year-over- year.

Core deposits excluding time deposits decreased $110 million from the first quarter, and that was primarily due to an expected seasonal outflow in state, county and municipal deposits.

I'll also add that core deposits, excluding time deposits, increased $1.18 billion compared to the same period a year ago.

So again, pleased with both our mix and the behavior of our core deposits.

On page 14, a look at pre-tax, pre-credit cost income and its relation to credit costs.

We're pleased to show that pre-tax, pre-credit cost income exceeded credit cost for the third consecutive quarter.

If I take you back to the third quarter of 2011, when we did report profitability, many of you remember that we did have a fair amount of securities gains in that quarter.

But as we now go forward, fourth quarter, first quarter and second quarter, you can see how we are widening the gap where pre-tax, pre-credit cost income exceeds credit cost.

I'll talk about it later.

This is one of many factors that will affect the decision as to the timing of the DTA reversal but we're very pleased to have now these three quarters behind us.

Talk a little bit about the margin on page 15.

Our margin was stable before the incremental impact of first-quarter debt issuance.

Tommy guided that way.

You'll see it was 3.55% in the first quarter of '12.

3.48% reported in the second quarter of 2012.

But we highlight there the 6 basis incremental impact of the debt offering.

So the apples-to-apples comparison would have been 3.55% to 3.54%, which we'll call stable.

That's 6 basis impact was, again, consistent with the guidance.

A little breakout of how the margin happened, the sequential quarter changes.

The yield on earning assets is down 7 basis points, the yield on loans, down 9 basis points, core deposit cost, down 6 basis points.

And I'll just remind you again, the impact on the margin, excluding the negative impact of the non-performing loans, was about 19 basis points in both the second quarter and the first quarter of this year.

That compares to about 25 basis point drag in the second quarter of 2011.

On page 16, I'll talk about non-interest income.

If you exclude securities gains, non-interest income is up $8.3 million sequentially.

I'll talk about the primary drivers.

Mortgage revenue is up $2 million.

We're very pleased with the performance of our Mortgage company.

It's up primarily as a result of increased production in secondary mortgage gains.

The production itself was up $29 million or 9% on a sequential quarter basis.

I'll talk a little bit about mortgage repurchase activity.

It continues for our Company to be minimal.

It's primarily limited to mortgage loans originated during the 2005-2008 period.

Our second-quarter 2012 expenses related to repurchase activity was approximately $2.6 million.

We have an accrual for mortgage repurchase claims as of quarter end of about $3.4 million.

Year-to-date we've received only 48 repurchase claims.

That's down 9% from the prior year.

Of those 48, we've won over 20 of those claims on appeal.

So, again, we don't think the repurchase activity will significantly affect our go-forward business.

Bank card fees up about almost $1 million, $914,000, due to transaction volume.

That's somewhat seasonal.

We did launch in the second quarter our prepaid card product, somewhat of a soft launch but we're pleased with the early reception by customers.

And we'll do a more formal announcement and full product launch in the coming weeks and months.

But again, pleased with the early reception there.

Our service charges were up about $450,000.

In June we initiated our product relaunch, where we tried to more properly align our customers into products that were appropriate.

And we expect that in the second half we'll continue to see positive results here, even with the pressure on NSF fees that I believe we and other banks continue to see.

So pleased with that.

We also reported an increase in the fair value of private equity investments of $7.3 million for the quarter.

I'll remind many of you about that investment.

That is in the TTV fund.

That's an investment in a venture capital fund that was made over 10 years ago.

We do consider it a part of our core fee income.

We recognize gains and losses in prior years, consistent with that fund's reporting.

The carrying value of the fund is now at about $30 million.

It's toward the end of its cycle.

We have no further capital calls.

Again, the second-quarter gain relates primarily to unrealized gains on just one investment.

Again, as I said earlier, we've had gains and losses from this investment in prior quarters.

So we do view it as part of our core fee income.

On slide 17, talk just briefly about expenses.

Our focus remains very intense.

In the second quarter, core expenses were up slightly, 2.6%, still down 1.3% year-over-year.

That was due to some employment expense, annual merit increases, and incentive comp.

And some attorney fees related to problem loan workouts and related litigation expense.

We do expect that core expenses will trend down in the second half of the year.

Again, as I've said previously, we have ongoing efforts to enforce that discipline.

We have numerous initiatives that we believe will produce savings in the back half of the year, such as procurement where we have ongoing contract in vendor negotiations, spend improvements from the launch of a new system, corporate real estate facilities where we're reducing operating costs from surplus property disposition, and again, continued rationalization of our branch structure and of those areas supporting that structure.

So still very intense focus.

Headcount continues to trend down.

Again, a little blip this quarter that we think will trend down in the back half of the year.

Our capital position remains solid.

Tier 1 capital, 13.36%, up from 13.19% in the first quarter.

Tier 1 common, 8.81%, up from 8.67%.

Our risk-based capital ratio is the only one that went down, 16.32%, down from 16.57% in the first quarter, and that's related to reaching the five-year maturity of our 2017 sub-debt.

Tommy can talk more about that if you all have questions, but still healthy ratio there.

TCE 7.12%, up from 6.81%.

And Tier 1 leverage of 10.66%, up from 10.41%.

So again, capital position remains solid.

And we'll answer any questions on that later, as well.

I'd like to now, just before I go to questions, talk about two subjects that I know will generate a lot of the questions, and that's our deferred tax asset and our plans for TARP repayment.

If you'll go to page 24 in the appendix, there's a slide on the deferred tax asset and our valuation.

You'll see valuation allowance now stands at about $800 million or $0.99 per common share.

I'll just call your attention to the text.

We do expect to reverse substantially all of that allowance once we've demonstrated a sustainable return to profitability, perhaps to the point where we've significantly improved credit quality and experienced consecutive profitable quarters, coupled with the forecast of sufficient continuing profitability.

It's subject to considerable judgment and the timing is uncertain.

But as I said earlier, we now have four quarters of profitability under our belt.

We have three quarters where PP&R exceeded credit costs.

We've had declines in all key credit metrics such as NPA levels, inflows, declines in higher risk categories, declines in past dues.

But also key to the DTA reversal is our full review on earnings, and that includes the revenue side of the equation.

And so our view on sustained profitability and our ability to model those go-forward earnings are key to the reversals.

So, I'm not going to be any more specific than I have been in prior calls, other than to say that the discussions with our accountants continue.

We know how important an event it is for our Company.

It is likely a 2013 event.

We haven't given up on 2012, but given that we're now in the back half of the year, it's likely a 2013 event.

Switching to TARP.

We've said repeatedly that we plan to pay our TARP obligation in a time and a manner that's prudent and acceptable to all our constituencies, including shareholders and regulators.

We still believe that the TARP repayment's going to be linked to the timing of our DTA recovery, although not necessarily so.

But given my prior comments about DTA recovery, it would likely be a 2013 event for TARP repayment.

Again, not certain but likely.

We remain in active conversation with the Treasury and our other primary regulators.

We continue to update and stress our capital plan for various scenarios regarding our longer-term capital plan, which certainly includes TARP repayment.

Ultimately, as I've said earlier, we plan to make this payment through a combination of cash at the Parent which stands right at $400 million, I think $396 million today, and then cash that we expect will dividend from the Bank up to the Parent.

That will be subject to regulatory approval.

And then we'll top that off with some other form of capital market activity, whether that be debt or equity.

Again, at this point I think it would be unfair and unwise for me to speculate on that.

But at the point that, again, we're down the road and are clearer on DTA and sustained profitability, and getting further with our capital and stress testing, we'll certainly be more clear with our regulators and certainly with the analyst community.

And we'll be happy to take questions about that, as well.

So, at this time, Operator, I think it would be a great time to open the floor for questions for anything I covered or any of the items in the appendix that the rest of our extended team will be happy to take questions on, as well.

(Operator Instructions) Craig Siegenthaler.

It's Craig Siegenthaler from Credit Suisse.

I see the details on slide 24, and I hear commentary that the DTA recovery is likely a 2013 event.

But you're not totally giving up on the second half.

Now that you've been profitable for four quarters, I'm just wondering what's really holding you back?

Is it the auditors?

Maybe you can give us some color on why it's taking you longer than some of your competitors that actually have recovered the DTA and removed the valuation allowance much faster.

Craig, this is Tommy.

The sequential quarters of profitability is very important.

It's a great foundation to stand on.

It's probably over-rated though, as a true measure of DTA exit.

It's more about the vision of the future.

And so, we're in the process of building our case, using the facts that are out there, using the improvement in credit and operating performance.

And using the four quarters now of profitability as part of that equation.

But the way the exit will really work -- management will come to a point where we believe that it's appropriate to take our ongoing conversations with all constituencies, including the auditors.

When we take that to a level of believing that it's time to release it, and the auditors will work with us, have their view of it, and we'll work through that.

So, we're on that path, on that journey, but just got a little ways to go.

And as Kessel said, we think that, based on where we are from a time standpoint, that's likely a '13 event now.

But certainly we're not closing the door on '12.

And Tommy, are two of the issues potentially the risk of a loss is still too high, given the volatility around provisions, or the fact that pre-provision net revenue is still quite low?

They're both related, but are they factors?

So, should we monitor improvement in those two metrics?

At the end of the day, it's all about taking where we are now and the great trend of improvement, and then extending that into the future in a manner that meaningfully bites off the pre-tax income that's required to cover the DTA, or a part of it, potentially.

And so, the improvement that we've shown in credit cost, the improvement we've shown in profitability is, again, a good place to plant your feet.

It's a little bit in the future to lay out a forecast that has enough grounding, and seasoning I guess, of the profitability trend.

So, it's really all of the things you mentioned, and some others.

But we're on the path and getting closer, but just got a little ways to go.

All right.

Great.

Thanks for taking my questions.

Jefferson Harralson.

My question is on the ability to upstream from the sub to the Bank.

Do you have an estimate for what your leverage ratio is at the sub this quarter?

And what do you think about the timing of the ability to upstream from the sub to the Bank -- to the holding Company, I mean.

Jefferson, this is Tommy.

The leverage ratio at the Bank at the end of the quarter is 11.5%.

The rules being, a Georgia bank got a limitation of 50% of prior year's net income.

So far, the Bank's made $106 million this year.

There's work-arounds available.

We've done it a number of times.

Obviously, even the 50% of prior year's income has to be qualified with performance and regulatory approval.

But the point is, it could be at that level or it could be a higher number, based on the very good capital ratios at the Bank.

Tier 1s, 14.5% almost at the Bank level.

Total risk-based capital's at 15.7%.

So, we've got good ratios at the Bank, and some room there.

At least something that we'll work through as we talk with regulators and work through that.

There is a good bit of capacity in the numbers.

And we'll just have to continue to show performance and play this out with the regulators before we can be more specific on the range of outcomes.

All right.

That's helpful.

I don't know if you guys have talked a lot about the Basel III or the NPR, that kind of thing.

But do you think whatever that number turns out to be, would be a factor in how much money, how much common or debt you raise, or what has to happen to repay TARP?

Or do you think this calculation will be done mostly on a Basel I standard?

I think Basel III will be a data point that will be looked at by all.

But it's a little bit out in the future.

And quite frankly, early modeling does not show a big impact on our Company.

It's early stage.

By definition, it's a proposed rule with a lot of clarity to come.

We've attended Webinars, and we'll be in person at some other learning sessions with the regulators on how to interpret some of the things, some of the components of it.

Our early-stage estimate would be an impact to our capital of 100 basis points.

Likely inside that, based on the way we understand the rule right now.

Certainly could change some.

But unlike some banks, we don't really have a hit on the capital side of any magnitude because we don't have meaningful trust preferred securities like a lot of banks do.

That will have to come out of their equation.

So, we don't have much movement on the capital side.

We do have a good bit of movement on the risk-weighted asset side.

We've done our best to apply the rules as we understand them to the loan book and to the commitment book.

And we've estimated a range of, let's call it, 75 to 100 basis points, depending on which ratio you're looking at.

In a way, Basel III brings some -- that keeps us above all the buffers even without any mitigation that can happen between now and installation of Basel III.

In a way it maybe brings some of the subjectivity of capital requirements to a more [formulated] method, and I think we'll be okay in it.

We're looking at it that way as a data point on a TARP exit.

But maybe not one that's more prominent than the others.

All right.

Thanks, guys.

Ken Zerbe.

Ken Zerbe, Morgan Stanley.

First question I had was -- you mentioned on the compensation line there was a small blip-up this quarter.

Could you be a little more exact?

What caused that small blip-up?

I naturally probably would have assumed it comes down after first-quarter seasonality.

There's a couple of components in there, Ken.

And one of them is not going to go away because it's reflective of merit increases that occurred in a meaningful way in the second quarter.

But the other one is primarily some performance-based compensation that's been accrued.

It won't go away in the future, but it probably is a more catch-up elevated kind of level based on what we saw as we cycle towards year-end in the second quarter than maybe it will be in the third and the fourth.

So, part of it is run rate, part of it is not.

It's beyond your question, but I'm going to keep answering here.

The overall elevated level in the second quarter of the G&A cost, up about $4 million over where it was before -- where it was a quarter ago.

It's because of what I just described.

It's also elevated attorney fees and elevated litigation cost.

And we think a good bit of that will mitigate in the future quarters.

And we believe that we could see the more normalized G&A cost reducing to something that more closely resembles first quarter than second quarter.

We're obviously continuing to push on all the G&A buttons to manage the number the best we can.

That helps.

The second question I had was -- can you just comment on C&I growth?

I know you made an effort in the slide deck to comment on how you're growing in certain loan categories, but we're still seeing, call it, flat to down total or overall commercial growth or commercial balances.

Maybe just qualify the types of loans that you're writing -- the new loans that you're writing.

And I think you mentioned large corporate versus what is running off.

Is there a difference in the loan types?

Yes, Ken, this is D. I'll take that on.

What I would end up saying is -- on new fundings that we have out there, we are taking on both a large number of lines, as well as owner-occupied from a C&I standpoint.

From an overall running off, what we would see some is deleveraging with the existing customer base, where we have had customers just paying down on existing lines.

They still remain out there with us.

There's a small factor in there from disposition of some older C&I credits, as well.

I may give you some clarity or some comments maybe around what we saw this quarter.

The new originations were still strong in C&I.

And the ongoing pipeline is still 60% more from a C&I basis.

Okay.

Great.

Thank you.

Jennifer Demba.

Jennifer Demba, SunTrust Robinson Humphrey.

Just a question for Kevin.

With the housing market seeming to stabilize here, and maybe improve, are you likely to accelerate your (inaudible) sales?

And what kind of pricing trends have you seen recently?

We are pleased to see a little more stabilization in the housing market.

We've sold all the way through houses and lots and land.

We did accelerate.

This last quarter, we sold about 60% of our dispositions was land or residential related.

So, we'll continue that pace.

Hopefully, we do get a lift in there.

We don't have that necessarily budgeted, but it would be a nice lift to get better prices going forward.

But we'll probably continue our pace, somewhere in that $100 million to $150 million range.

That seems to be an efficient pace, and a meaningful pace to reduce our NPAs along the way.

But our hope is, and to answer your question, we'll continue that and maybe we get a lift in there on some price.

Okay.

Thank you.

Steven Alexopoulos.

JPMorgan.

Not to beat a dead horse on DTA and TARP, but if I look at your operating performance and credit improvement over the past few quarters, it seems to be pretty much right in line with the expectations you laid out for us.

I'm a little confused in terms of what really changed from last quarter now, that's pushing this out to 2013.

Steve, I really don't think anything's changed since last quarter.

I think, in prior calls we've said it could be a 2012 event, it could be a 2013 event.

And not to mince words, I could still say it the exact same way.

It could be a 2012 event.

It could be a 2013.

I think what Tommy said with DTA is -- you want to see a widening of that gap on the pre-tax, pre-credit cost income versus overall credit cost.

And you want to see continued reduction in those factors that caused the issue in the first place.

So, as non-performing assets come down, as non-performing loans come down, it just gives us greater clarity and greater ability to model that level of sustained earnings necessary to recapture that $800 million asset.

As I said, and Tommy said, we haven't given up on 2012.

We're just, again, we're now in the third quarter.

And I'll just give you a hypothetical, and it's nothing but that.

If we made the case based on the next two quarters of performance, then the DTA would fall into the first quarter.

And, again, we've said all along, we expect that TARP would likely be following that.

So, a 2013 event.

To be clear, there's been nothing negative that's changed our thought, other than it's just a passage of time.

And as we continue to work through this economy, we want more revenue growth.

We want -- to the question on loan stabilization, we want clear, again, growth as opposed to flat to moderate.

We need a little help from the economy there.

But there's really been no changes.

And certainly not meant to signal a significant change, other than the passage of time, to me, now makes this more likely a 2013 event.

But 2012 is still a possibility.

And, again, TARP repayment follows that.

I think that just by following the calendar, that gets you into maybe early 2013.

Okay.

I appreciate that color.

Maybe for my second question -- on the margin, are you guys expecting a relatively stable margin, given that you still have decent room to lower your cost of deposits?

Steven, this is Tommy.

The answer to your question is yes.

That would be our guidance for the third quarter, to have a margin that's stable with reported margin in the second quarter.

And really, the foundation of that is the ability to -- we know we've got some weight to bear on the earning asset side, on pricing, of both securities book and the loan book.

But we do have some room that remains on the reduction of funding cost.

And that's largely from a significant amount of CDs that will mature in the second half of the year.

It's about $1.7 billion.

Yes.

On the core side, it's about almost $1.9 billion, the brokered side another $444 million.

And the brokered side, it's in addition to the core side, I think $213 million coming off.

And most of those we'll let just walk out the door.

So, a huge opportunity there on that component.

And even on the core side, meaningful opportunity to have better pricing on loans.

Thanks, Tommy.

Thanks for all the color.

John Pancari.

Evercore Partners.

Can you give us a little bit more color around the timing, and maybe the amount as well, of your remaining real-estate-related loan runoff?

Or at least what you have identified as what is likely to run off the books over the next year or so?

We're going to continue to move the lower quality, the land, the residential development.

We move that at a pretty significant pace, probably close to 10% or so a quarter, averaged over the last few quarters.

We'll continue to move that.

The investment real estate part, which is the larger part of the real estate, we feel like we've right-sized our portfolio.

There's a good slide I think in there, page 35, on concentrations.

But we feel like we've gotten our portfolio like we committed to get it from a balance perspective.

And we do feel like the investment real estate, it will more stabilize.

We're lending in those places, multi-family and distribution warehouse-type lending in that area.

So, we feel like most of the work to that is behind us.

In fact, that will be more stabilized, and continue a pretty steady pace of the residential and land decline over the next year or so.

So, it's really just the resi and land book that you're going to see the steady declines in?

That's where more of our elevated problems and higher-risk areas are.

So, there will continue to be a significant runoff in those books.

Okay.

All right.

Then lastly, can you give us an updated view of what would be a normalized reserve level going forward, as we continue to see reserve releases coming out of the quarters for the next few quarters?

I think the pace of reserve reduction will slow down -- something we talk about a lot up here.

I think you probably see it stay, at least while our NPAs are somewhat elevated, even though we're pleased with the reduction we've had overall there, probably move not below 2% in the near couple of quarters coming up.

So, I think basically you'll see a slower pace, a slower reduction there.

But you'll see that move down, just following good credit trends.

And our overall credit trends, credit metrics are all moving in the right direction.

Okay.

Thank you.

Nancy Bush.

NAB research.

Tommy, you said, in discussing the recognition of the DTA, that there would be input from various constituencies.

And I'm wondering whether one of those constituencies has to be the regulatory constituency.

Or are they outside of the process?

And if they're in the process, would the natural time be CCAR submission that this might be part of it?

Nancy, the regulators are on this line today, and hello, everybody.

(laughter) They're very interested in this topic, just like all of us.

When I said multiple constituencies, it may be advisers that help us with tax work and that type of thing.

But you think about the way that we got where we are, it was primarily our auditors and management.

And that will be the lead in getting out of it.

And so, the regulators will be very interested in it.

And I think probably see the connection to TARP repayment; they'll speak to that on their own terms.

But they're interested in it, and have a voice, quite frankly, in anything.

But I think this will be led by us, and with proper accounting being confirmed by the auditors.

Okay.

And my second question has to do with the Large Corporate strategy.

Are there any targets for size of that book or percentage of loans?

And where are you finding opportunities in what has traditionally been a pretty crowded space in the southeast?

Nancy, this is D. I'll let Kevin maybe touch on size of book, and then I'll touch on opportunities, if that's okay?

Yes.

Just from a concentration within [our seer], we manage concentrations within each loan type.

And we're not looking for that, in the next year or two, to be any more than probably 10% of our overall portfolio.

It could be as much as 20% of our C&I strategy.

Obviously, C&I's about 50% of our book.

We're keeping it -- loan sizes, we're not really exceeding -- we're probably $15 million to $25 million in that space.

So, from a concentration standpoint, that's about where we're at on the C&I.

D. can touch on some more color.

Some of the opportunities -- we have, through Curtis Perry and his team, been able to bring in a good group of talent.

One of the successes that we've had has been long-going relationships with that talent, as well as existing relationships we've had in our footprint.

We're able to team up with the local bankers on some of the larger credits because we have brought in the expertise to be able to manage those.

And some of those will be directly managed -- large corporate, credit.

Some of them will be partnered with other banks.

We have not had a ton of that in the past, but we brought on talent to be able to do that.

And it's given us an opportunity to bank those type customers.

The majority of those customers really are folks we have relationships with that we are able to do other personal business with, that we're able to do other company business with.

And so, we're leveraging long-term relationships with new relationships, as well as existing and new talent.

Okay.

Thank you.

Emlen Harmon.

Calling from Jefferies.

First question would be -- seemed, particularly to the loan portfolio, it was slowing some.

It sounds like you're feeling a little bit better about the runoff in the investor real estate portfolio.

Just how are you thinking about loan growth in the second half?

Is it possible we start to see some positive growth here in the next few quarters?

It might take a combination answer there.

We could.

We had hoped to see stabilization and growth in the back half.

We were glad to report net growth in the second quarter.

And we certainly think that measure will be positive for the back half of the year.

From a total reported loan, we believe we get closer to stabilization over the next two quarters, and have the opportunity for growth in that line, as well.

We'll need a little help from the economy.

There's still some, as you all know, a high degree of uncertainty among business borrowers out there -- some political, some financial.

So again, we do see, on a net basis, growth.

And on a reported basis, hopefully a lot closer to stabilization, and still possible reported growth there.

Got you.

Thanks.

And then, just as a follow-up, with the government starting to auction off TARP in some banks here, any thoughts on just how that could affect either just the timing of your exit eventually?

Or any sense whether you guys would look to repay maybe quicker as a result of seeing those auctions happen in the market?

As of today, no.

Based on our most current conversations with Treasury, which I won't get into the specifics, we don't believe we would be part of an auction.

And we believe that Treasury expects us to pay off our TARP obligation at par in a manner of timing that is consistent with what I have laid out for you all.

Now, we all know things can change.

We meet quarterly.

We don't expect to be part of any auction.

We expect to pay that obligation at par, and again, don't expect any of the current auctions to impact that, based on what we have been told to-date.

Got it.

All right.

Thanks.

Kevin Fitzsimmons.

Sandler O'Neill.

Just a few quick questions.

Most have been asked and answered.

Can you give us just a little comfort on accruing TDRs?

I know you mentioned that your NPA ratio has now dipped below 5%.

But the accruing TDR balance continues to get larger.

Some of us do lump those in, whether that's right or wrong, in that ratio.

And that still puts you over 8%.

So, just trying to get a little more comfort on how you guys look at that balance.

Thanks.

Kevin, this is Kevin.

Lumping those in -- you know how that bothers us, lumping those in.

NPAs, we've got $71 million are past credits, and $235 million are special-mention credits that we think are moving in the right direction to actually go to [past] themselves.

But we understand that.

But the TDRs, if you look at them -- we mentioned this before -- I think this number has actually moved even more positive from last quarter.

72% of them are C&I investment real estate, cash flow attached.

So, that's actually an improvement from last quarter.

Less than 1% are past dues.

And again, 44% of them are better than substandard.

So, our story there is -- we only had, I think the number was around $30 million of loans that were TDR last quarter that defaulted into inflow.

So, it's not the higher percentage of loans that defaulted.

Again, our TDRs are not -- early in the cycle they were more relief on credit terms.

I'd say over the last year or two -- I'd say at least over the last year, it's been interest-rate concessions.

And, again, it's hard to make that number come down.

When a loan that is substandard or special mention comes up for renewal, regardless if it's paid on time, or where or how it looks, if you don't give them a pretty high interest rate, we're going to have to label that as a concession because it may not be what a market rate is for that type of loan.

I know you know that, but something that's worth repeating.

We do think the TDRs will level off here, maybe next quarter or the quarter after.

I do think our substandard loans will continue to pace down.

They paced down the last three quarters pretty well.

They were about level this quarter.

We think that will continue to improve.

But the percentage of TDRs that are in substandard will probably continue to increase a little bit because we're going to continue to work with those customers.

They've paid us all the way through this cycle, now, some four years.

And we have structured agreements with them.

And we think by not raising the rate helps get them out of this a little bit faster, and certainly manage this long through it.

So, long answer, but we think that portfolio is continuing probably to stay at the same pace.

Okay.

All right.

(multiple speakers) Thank you.

Great.

And just one quick follow-up.

Tommy had mentioned earlier that he thought on the DTA that the consecutive-quarter requirement gets a little over-played, a little over-weighted.

Just wondering, if you guys were to have the opportunity to bulk sale and to get rid of more of the NPAs, which would be a positive indicator, I would think, for your review of getting the DTA allowance reversed, but it could, if it did jeopardize your consecutive quarters of profitability.

How would that be viewed, do you think, by the powers-that-be that decide?

If you came out and had a big bulk sale, and took your NPAs down by a significant amount, but you took a quarterly loss as a result, would that put you back to square zero?

Or do you think the powers-that-be would view the big picture that that's the smart thing?

Thanks.

We think it's possible that that would be viewed as a smart thing.

I can't be conclusive there.

We've had conversations.

There's a ton of moving parts to DTA exit -- facts and circumstances from a lot of angles.

We think it's possible that you could get past that one, and it could be viewed in a positive way.

But, again, we cannot be conclusive on it.

Okay.

All right.

Thank you.

Christopher Marinac.

FIG Partners, LLC, in Atlanta.

Kessel, wanted to see if you could just give us a quick walk-through of your markets from a perspective of which are stronger, which are weaker?

And maybe customer behavior, and thoughts heading into the next couple quarters.

I'll start maybe here in Columbus, Chris, where we, as you know, enjoy number one market share.

Columbus economy is strong, both with activity at Fort Benning and NCR and Kia up the road.

Again, performing very well here.

Atlanta showing some signs of stability.

You are there, so you know it.

But we saw a presentation just last week from SmartNumbers, which gives us some comfort in overall real estate values, like prices, home prices.

And Atlanta will still take some healing in the real estate sector.

But from a customer behavior standpoint, I think we're seeing some good opportunities, both through, again, the groups we talked about.

And then our core business banking, we've seen some great activity -- some big wins in treasury management across our footprint.

And I won't touch on every Georgia market.

Let me jump over to South Carolina, where we were operating in some markets over there with unemployment that starts with a 6. So, in markets like Charleston and Columbia and Greenville, a lot of optimism.

Charleston with Boeing and some of the ancillary business there.

I was in Charleston just a few weeks ago, and a lot of good activity there.

Columbia as well.

And Greenville, Spartanburg, where we don't have quite as much market share, but a lot of good looks there.

So, we're pleased there.

The coast of South Carolina, maybe that Myrtle Beach area is still pretty tough, but we've taken most of our pain there.

Tennessee, again, saw a big Treasury win there this past Friday.

Our large corporate group is doing a great job blending with our bankers in Nashville and Memphis and Chattanooga to open some doors for us there that we haven't.

Still low market share in Tennessee.

And then swinging down to Alabama, as I've said before, Alabama led us through the toughest times.

They never had the big boom that others did.

They didn't have the decline.

So, still just, again, very stable markets in Alabama, and having some good success stories there.

Struggle a little bit still on the coast, down in Pensacola, but certainly stabilization there.

That bank's not the size it used to be because it was certainly a heavily concentrated real estate bank.

But we've got some great leadership there, and you're seeing signs of stability there.

Our Tampa bank continues to do well in all of our internal sales contests.

Dom DiMaio took over there as President and CEO.

And he and his team, again, getting some good looks.

So, we feel good there.

And just swinging back up through Georgia, there's some rural markets in Georgia that as D. reminded me yesterday, the recession isn't over there in some of those markets.

They don't have certainly the growth opportunities that some of our larger markets do.

Again, I mentioned Columbus.

I mentioned Atlanta.

Rome's doing well; Athens is doing well.

Augusta, we're seeing some good opportunities over there.

Even been looking at opportunities to potentially add a location over there.

So, in general, I think the feeling among our team is stability and some good opportunities.

I would still say, from a customer behavior standpoint, there is a great deal of caution out there, which I think other banks are seeing as well, as people, whether it's healthcare, whether it's political environment or whether it's Spain or other areas of Europe, just overall concern are keeping people from making these big, robust investments.

Great.

That's good color.

I really appreciate it.

Just a really quick follow-up for Tommy.

Just has to do with the loan yield, and your ability to manage that the next couple quarters.

Or is this quarter indicative of what may happen on yields?

Chris, the loan yields have been under pressure.

We're, quite frankly, willing to trade a little bit on yield to generate high-quality loans, and to turn -- to sustain the stability and moving forward to growth.

So, there will continue to be pressure on the loan front, just like on the securities book.

As I mentioned earlier, we do feel like we have some buffer left on the funding side to take care of it.

Great.

Thanks so much, guys.

Mike Turner.

Compass point.

Just really following up to earlier questions.

Maybe not so much on the NIM, sounding like it will be stable.

But on NII, you'll have yield pressure, and definitely some wiggle room on the liability side.

What's your confidence really, in the ability to be able to grow net interest income, you look out over the next 1.5 years or so?

Is the rate environment too much of a headwind?

We talked earlier, Mike, about where we're headed with the loan book.

That's a huge component, obviously, the biggest one, the volume factor of loans.

We talked about the ability to stabilize, and then move forward from there.

The margin we guided for the third quarter, we didn't really go beyond that.

But I will say the CD maturities do roll through robustly into the fourth quarter.

So, you'll continue to have some cushion there.

We really hadn't guided any specifics in the next year.

But, like the rest of the industry and so forth, the rate environment makes it tougher to keep the spread and the margin that's out there, and so we look forward to an uptick at some point.

And we'll just have to continue to manage forward in the meantime -- through it in the meantime.

Thanks a lot.

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

All right, operator.

I'll close by just thanking everyone for joining our call.

Again, we were very pleased to report our fourth consecutive quarter of profitability.

Steady progress in most areas.

Significant progress in some other areas.

But all, again, I think further position our Company for sustained profitability and long-term growth, which are so key to some of the main topics we talked about today.

So, I thank you for your interest, and we'll continue to push ahead on all fronts that we covered today to make sure that we achieve these expected results sooner rather than later.

I also want to thank another big constituency or two that I know is on this call.

Number one, our employee base, our leadership team, our affiliate directors, and directors throughout our footprint who have been remarkably supportive and loyal to our Company, and make it happen every day, more so than the team in this room.

So, to those of you on our team that are out there listening, thank you.

And I look forward to the opportunity of talking to many of you later today.

And then, finally, we have a lot of customers that call in.

Again, I was asked last week in an interview what I was most proud of, and I said our customers, because they have stuck with this Company through some very tough times.

And now, as we deepen those relationships and acquire new customer relationships through this operating model, it just gives me a lot of pleasure.

So, I want to thank those groups on the call, as well.

Hope you all have a great rest of the week, great rest of the Summer.

We look forward to talking to all of you on our next update call.

Thank you.

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.