Synovus Financial Corp (SNV) 2012 Q4 法說會逐字稿

Welcome to Synovus' fourth-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 executive management team available to answer all of your questions.

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

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

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

We do not assume any obligation to update any forward-looking statements as a result of new information, future developments or otherwise except as may be required by law.

During the call, we will discuss non-GAAP financial measures in reference to the Company's performance and you can see the reconciliation of these measures to our 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 transcript provided by third parties.

The only authorized webcast is located on our website.

We do respect the time available this morning and desire to answer everyone's questions.

We ask that initially you 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 will turn it over to Kessel Stelling.

Thank you, Pat and good morning, everyone, and thank you for joining our earnings call.

Slide 4 in the deck maybe says it all.

It was certainly a milestone quarter for our Company and a milestone year as well.

I am tempted to spend the entire call on this slide, but there are a lot of other developments that I think are important to share with you.

But as you will see on this slide, net income for the quarter of $713 million, that relates to $0.78 on an EPS basis.

The highlights of the quarter included an $800 million income tax benefit from our deferred tax asset recapture.

It also included, as previously announced, the successful execution of distressed asset sales of approximately $545 million, which drove dramatic acceleration in credit quality improvement.

As you know, we had announced the bulk sale earlier in December.

We also had net loan growth of approximately $345 million in the fourth quarter, up from approximately $240 million in the third quarter of 2012.

We had reported loans decline by about $190 million, but keep in mind that's after the impact of distressed loan sales of approximately $475 million.

We also had reported C&I and retail loan growth of $103 million sequentially, 3.1% annualized, and that grew $291 million or 2.3% from a year ago, all a great reflection of the overall health of our franchise and the great job that our bankers are doing across our footprint.

I will take you to page 5 and talk a little bit about the DTA.

As I just said previously, we did have an $800 million benefit from the deferred tax asset recapture.

It was recorded in the fourth quarter and it was consistent with prior guidance on timing.

As it relates to timing, it was confidence in the sustainability of future profitability at sufficient levels, as well as continued improvement in credit quality, were important considerations in the deferred tax asset valuation allowance reversal.

The recapture drove an $0.89 per share increase in tangible book value per common share.

That now is at $2.96.

Capital ratios also benefited from the deferred tax asset recapture.

The biggest benefactor there was our tangible common equity ratio which increased 232 basis points to 9.67%.

Approximately $714 million of the net deferred tax assets continue to be excluded from regulatory capital at December 31, 2012.

The disallowed DTAs will decrease over time thus creating additional regulatory capital in future periods.

On slide 6, I will take you to pre-tax pre-credit cost income.

We did see a slight decline in the quarter and credit costs were certainly elevated, impacted by the bulk sale, as previously disclosed.

I will take you through a few of the components there though.

Net interest income decreased about $5 million from the prior quarter primarily due to higher interest reversals.

Non-interest income, excluding securities gains, was up $5.3 million sequentially and a few contributors there were service charges on deposit accounts up about $500,000; our financial management services revenue was up $1 million over the prior quarter; other service charges were up $1 million driven by increases from some of our new initiatives and growth; and then we did have $1.8 million in private equity investment gains.

Credit costs of $186 million for the quarter were largely impacted by the $157 million in charges related to the distressed asset dispositions completed during the quarter.

And as I mentioned before, that was previously announced in December.

On slide 7, our net interest margin declined modestly.

Quarter-over-quarter, the yield on earning assets was down 10 basis points, the effective cost of funds was down 4 basis points.

On page 8, and another big story of the quarter, although the DTA, the net earnings and the bulk sale may grab the headlines, a big story for us internally was the increased net loan growth.

I want to call your attention to several categories here.

We had sequential quarter net loan growth of approximately $345 million, that compares to growth of $239.6 million in the third quarter of 2012 and $166.8 million same quarter a year ago.

C&I and retail loans on a net basis grew approximately $250 million for the fourth quarter of 2012, again, reflecting the major effort we began several years ago to shift this Company from one that had more of a Commercial Real Estate focus to a much more broad and diverse C&I portfolio.

As mentioned earlier, reported loans on a sequential quarter basis declined and that decline was impacted by distressed loan sales of approximately $475 million.

That excludes the ORE; the total distressed sales for the quarter were $545 million.

We had net loan growth for the year of approximately $589 million versus a decline of approximately $371 million for 2011.

On slide 9, I will speak again to the corporate banking teams.

We did complete our first full year and I think it was a success by any measure.

Again, that team consists of loans in syndication, senior housing and other corporate business lines.

Outstandings from the group ended the year at $1.216 billion compared to just over $1 billion in the third quarter and about $633 million in the fourth quarter a year ago.

The outstandings are up $583 million from the fourth quarter of 2011 and up $205 million from the third quarter of 2012.

Great success from the group and also great success and how that group is working with our bankers across our footprint to capture more and more new business opportunities.

On slide 10, we see continued improvement in our deposit mix.

Favorable trends in the lower cost core deposits.

Core deposits excluding time deposits increased $344 million or 2.1% year-over-year.

Total deposits of about $21 billion decreased $1.35 billion versus the fourth quarter of 2011 due to planned reductions in brokered and time deposits.

Brokered deposits declined almost $700 million or 38.7% from the fourth quarter of 2011, now represent only 5.2% of our total deposits compared to 8% a year ago.

Again, good behavior in our deposit portfolio and great effort by our bankers as we continue to shift the mix there.

On page 11, again, we mentioned earlier continued decline in the effective cost of core deposits, 30 basis points for the fourth quarter compared to 34 basis points for the third quarter of 2012, 53 basis points for the fourth quarter of 2011.

On a weighted average basis, the average cost of core deposits for the full year 2012 was 38 basis points compared to 63 basis points in 2011, a 25 basis point improvement year-over-year.

Page 12 talk a little bit about how our fee income initiatives contributed to core banking fee growth.

Our non-interest income excluding securities gains was up $5.3 million sequentially.

I will walk you through a few of the components there.

2012 fee income initiatives contributed about $4 million in additional core banking fees during the fourth quarter and approximately $9 million during the full year 2012.

As I mentioned earlier, service charges on deposit accounts up about $479,000 or 2.3% from the third quarter of 2012 and up $1.7 million or 9% from the fourth quarter of 2011.

Our FMS group, Financial Management Services, revenue was up $1 million or 5.4% from the third quarter and up $1.1 million or 6% from the fourth quarter of 2011.

And one team within that group, our FAM group, or Family Asset Management, I just want to call your attention again; they were recently named to Bloomberg's list of top 50 family offices in 2012 and recognized as the 35th largest in the world.

We are very proud of that group and that team and what they do for our customer base.

Total reported non-interest income was $80.1 million in the fourth quarter compared to $73.2 million in the third quarter of 2012 and $73.5 million in the fourth quarter of 2011.

And again, non-interest income excluding investment securities gains was $72 million in the fourth quarter compared to $66.6 million in the third quarter of 2012 and $63.1 million in the fourth quarter of 2011.

I'd like to talk a little bit about efficiency on slide 13 and highlight the fact that we have achieved substantial progress in aligning our operating costs with a sizable organization while continuing to make investments in talent and infrastructure that enhance the customer experience.

Core expenses decreased by $25.1 million and $95.3 million in 2012 and 2011 respectively, reflecting the impact of the efficiency initiatives announced in early 2011 as well as additional efficiencies implemented during 2012.

Our total reported 2012 non-interest expense of $692.3 million was down $87.5 million or 9.7% year-over-year.

And as previously discussed, we've recently completed a company-wide analysis of our cost structure.

We have identified new expense savings initiatives of approximately $30 million.

Implementation has begun and will continue during 2013 and we continue on a daily basis to focus on identifying additional opportunities there.

As we have said before, it is a way of life around our Company and I want to compliment our leadership and our team members for continuing to look for ways to make our Company more efficient while focusing our attention and service levels on the customer.

You will see the headcount slide at the bottom now just under 5,000 employees, down 261 employees year-over-year.

Again, the graph goes back to 2007 and you will see that's about a 2,400 employee decrease.

On slide 14, I'll talk a little bit about the bulk sale and you may have questions for Kevin Howard later, $545 million in distressed asset sales during the quarter.

Again, the major component of that was the bulk sale which was previously announced.

I will give you a little breakout of what that consisted of.

About 72% of that total was non-performing assets consisting of 14% ORE and held for sale loans and 58% non-performing loans.

The balance was 21% substandard accruing loans and 7% special mention and other loans.

About 70% of the assets sold in the fourth quarter were real estate related.

Again, a very successful execution not just of the bulk sale but of the additional sales that occurred at the bank division level and we are very pleased with the results of that disposition activity in the fourth quarter.

On page 15, you will see that our NPL inflows did spike up during the quarter from $115 million to $263 million this quarter.

We do expect that inflow level to trend downward from 3Q 2012 levels and return to normalcy in the quarters ahead and I'll talk a little bit about that.

The increase in the fourth quarter was due primarily to the addition of one larger credit relationship which was moved from substandard accruing to non-performing status.

Again, substantially all of this relationship was previously classified as substandard accruing so it resulted in minimal impact on our classified assets in the fourth quarter of 2012.

As I said earlier, we expect the NPL inflows to return to 3Q 2012 levels or below during the first quarter of '13 and to trend downward thereafter.

We feel we can give that type of guidance with some degree of confidence as we continue to de-risk our portfolio.

If you look at the makeup of our substandard and special mention credits which are where the large majority of potential defaults come from, we now have only two substandard accruing credits and six special mention credits greater than $20 million, none of which are over $40 million.

So again, those pools of loans have decreased in overall size and certainly size of individual loans as our team has continued to de-risk our balance sheet.

On page 16, again, big story there a decline of 37% in NPAs from a year ago, ended the year at $703 million compared to $899 million in the third quarter of 2012 and, again, $1.117 billion fourth quarter year ago, a 37% decline.

It was actually a 22% decline just from the third quarter of 2012.

Our NPL ratio now stands at 2.78% compared to 4.40% a year ago and our NPA ratio stands at 3.5% compared to 5.50% a year ago.

And again, I will point out, even with the impact of the larger credit relationship that I just referred to, NPAs still experienced a significant decline this quarter, down $196.3 million or 22% from the previous quarter and down $414.3 million or 37% from a year ago.

So very pleased at how our NPAs have continued to decline.

On page 17, we've talked a good deal about bit about effort at the Bank to reduce classified assets and how that effort was key to our ability to dividend cash from the Bank to the parent at the appropriate time and key to what we believe would be seeking regulatory approval and we have said we wanted to get that below 50%.

So we are very pleased to report our classified asset ratio in the fourth quarter of 2012 at 38%, $1.347 billion, down from about 51% in the third quarter of 2012.

So we had guided that we would get that below 50% at year end.

Certainly the bulk sale gave us a big jump start and we now stand at 38%.

That was 62.5% just a year ago.

So very pleased with the downward movement of classified assets.

On page 18, you will see our charge-offs of $194 million or 3.94%.

Certainly the net charge-offs were elevated by the bulk sale.

We expect to see meaningful reductions in charge-offs during 2013, again trending down from previous levels and I'm sure Kevin Howard will get into that in the Q&A today.

On page 19, just a brief comment on past dues -- continue to remain at low levels.

Total past dues at 0.54%; 30 to 89 days past due -- past dues at 0.51%; and our accruing over 90 at 0.03%.

So I think it speaks to the continued healing of the portfolio and the efforts of our bankers to work with customers over time.

But very pleased with the past due ratio there.

Page 20 speaks to -- again, we talked about how we continue to de-risk our portfolio earlier, certainly in the number of problem credits and the size of those problem credits.

This is another great slice of looking at our loan portfolio by risk grade.

I think the key take-aways here; past rated credits are up $1 billion or 6.4% from a year ago and up $376 million or 9% annualized from last quarter.

Our substandard special mention and non-performing loans combined experienced a decline of $1.6 billion or 37.5% in 2012 versus a year ago now represent 13% of our total loan portfolio as compared to 20% a year ago.

So again, big increase in past rated credits, decline in the categories you would expect a decline, further evidence of the de-risking of our balance sheet.

On page 21, show you a little bit of the effect of the DTA recapture and its effect on different capital ratios and tangible book value.

Again, the graph on the upper left, tangible book value per common share increased from $2.07 to $2.96 in the fourth quarter.

Moving to the right, the tangible common equity ratio increased from 7.35% to 9.67%.

Our Tier One common ratio remained relatively flat, 8.73% to 8.72% in the quarter.

And our Tier One risk-based capital ratio moved from 13.23% to 13.24%.

And again, as I said previously, some of the disallowed DTAs will decrease over time and it will create additional regulatory capital in future periods and I'm sure Tommy will be happy to talk to that again in the Q&A.

Slide 22, again, just want to show the effect of the DTA recapture on our bank capital ratios.

And I know you all follow the consolidated, but certainly the bank capital ratios will be a factor as we seek approval later this year to dividend capital from the Bank up to the parent.

So you will see Tier 1 leverage ratio in the quarter move from 12.12% to 12.41%; total risk-based capital move from 15.85% to 16.14%; and our Tier 1 risk-based capital ratio, 14.59% in the third quarter to 14.88% in the fourth quarter.

Healthy capital levels at the Bank level.

And then my closing side of the deck before we transition into Q&A, that really the fourth quarter was just continued execution of the plan we have laid out we believe well positions us for TARP repayment later this year.

As we had said previously, the DTA and TARP repayment weren't necessarily linked, but we did believe one was important to the other and we are pleased that we did have the $800 million DTA recapture in the fourth quarter.

We had said that it was important to get our classified to capital below 50% and, as we've said previously, we had improvement in that ratio to 38% at year-end.

Both of those results we believe improve our ability to upstream dividends to the holding company, certainly subject to regulatory approval.

As we have said before, that repayment will come from three primary components -- parent company cash; dividends from the Bank up to the parent with regulatory approval; and the balance from some combination of debt and/or equity.

So I can't give further guidance at this point other than we continue to work with our regulators as we refine our plan, refine our capital planning process, [stress] our balance sheet and have the discussions that we believe will be necessary with all of our constituencies, regulators, treasury and others to have the appropriate efficient exit during this year.

We had said earlier it would be no later than the fourth quarter of this year.

We still believe that and we will be anxious to share the details with all of you as we get further down the road in our discussions with our regulators.

So with that, operator, I'll be happy to open the line up to questions.

I have Tommy Prescott, Kevin Howard, D. Copeland and others standing by for questions.

So I will turn it back to you at this time.

(Operator Instructions).

Todd Hagerman.

Good morning, everybody.

Kessel, I just have a question just in terms of the DTA and the TARP repayment, if you will.

As you mentioned, with the DTA recapture, it reflects your outlook in terms of the sustainability of profitability of the Company.

You've also alluded that you've met some of the hurdles as it relates to the regulators, but I'm just curious.

Can you kind of square where you are in terms of what the accountants and the DTA recapture relative to the outlook for the TARP kind of no later than 2013?

And I believe last quarter it was more of a function of the first half of 2013.

I'm just trying to square what your model suggests and kind of what the regulators perhaps are still looking for as, again, you emphasize the sustained profitability outlook for the Company.

Todd, I'll try and take a stab at that.

We have not changed our guidance on TARP repayment at all.

We had said last quarter that it would be no sooner than the second quarter and no later than the fourth quarter of this year and we still stand by that guidance.

We had said that the DTA would be no later than the fourth -- no sooner than the fourth quarter and no later than the second quarter so the TARP was going to follow that sequence.

As it relates to the accountants, and this DTA recapture has been certainly a rigorous process for our Company.

And without going into all of the discussions and tests, certainly for us to release earnings today and share the news of the DTA recapture, that would suggest that our accountants have certainly agreed and signed off on our financial presentation.

As it relates to the regulators, I certainly -- and I can't speak for them, they are on the phone right now.

I think they also were looking for this DTA recapture not just for its financial impact on our statements, but for the sign of confidence of the sustainability of future earnings or the sign of the credit healing that certainly went into this.

So I think it certainly will factor into how and when they discuss the TARP exit.

So is it relates to timing -- again, this is a big event, it's hot off the press.

This now factors into our forward capital planning because certainly we will have capital accrete over time and it's a big event.

But it will move right back into again the discussions of our longer-term views on capital, our longer-term views on, if we stress the capital through the planning period, what that might do or not do the capital levels we have and that will just be part of the regulatory dialogue.

So it's absolutely consistent with our plan, it's consistent with the plan we had shared with the regulators.

And it, again, moves us just into the next phase of planning which is check off the DTA and now we will focus on the other things which are continued performance, continued loan growth, continued earnings growth as we get the TARP exit.

But I don't want to box ourselves or them in on specific timing other than to say we have regular conversations with all of the agencies today and that will continue with a lot of energy over the coming months.

Okay, that's very helpful and, if I could, just a follow up.

In terms of profitability, as you acknowledged, the PP&R slipped a little bit this quarter as it relates primarily to credit-related costs.

But the number is at a relatively low level versus what you've seen the last couple years, if you will.

Could you give us any kind of a sense -- again, with the credit clean-up this quarter on a go-forward basis, I mean where do you see kind of the underlying profitability of that PP&R going?

What is your outlook again as you look to that sustained positive trajectory on profitability?

Unless Tommy wants to trot me and go further, I don't want to guide a number there.

I would say this, that I will talk about the components and we were very pleased to see actually the reported loan growth down $190 million after sales of $475 million was pretty strong.

We won't have those types of loan sales going forward and we had net loan growth of $345 million.

So there is certainly pressure on that line, but, as I talked about, our bankers across the footprint performed well to get net loan growth at $345 million.

Our other business lines, mortgage, advisory services and other lines are doing well.

Our family office we mentioned.

So I don't want to give specific guidance as to the number, but the components we will just continue to work on and hopefully see increases in.

Thanks very much.

I appreciate it.

Thank you.

Kevin St.

Pierre.

Good morning, Sanford Bernstein.

Tommy, maybe you could help us out with the DTA which we now can see in all its glory on the balance sheet.

Maybe you could comment on the mechanics and speed at which you expect it to migrate into regulatory capital.

Yes, Kevin, I'll be glad to do that.

And of course, there is an additional slide in the appendix that gives you a little more color on the DTA, but the $810 million reversal of DTA valuation allowance was -- $800 million of that fell straight into the equation.

The $714 million out of that $810 million was excluded from accounting and regulatory capital right now.

We would expect that that would grow -- it would be a dynamic process over each quarter of the year as we look out into the future.

And the impact on -- immediate impact on the fourth-quarter capital was about a wash with the bulk sale loss that we took or the loss that we took for the quarter.

An example of that would be Tier 1 common was -- impacted at about 39 basis points and was basically offset with the quarterly loss.

But we would expect as we go forward we will continue to refine our assumptions and refine the outcome of the capital on a go-forward basis and I hope that answers your question, Kevin.

Okay.

Just an unrelated follow-up.

But if you could help us maybe identify the impact of the $157 million on the bulk sale on the income statement line items.

Can you tell us where that $157 million is split up on the income statement?

Yes, I think Kevin Howard wants to answer that question, so I'm going to be glad to let him do that.

It just shows up in the ORE expenses and in the provision within the credit cost and that's what I'd --.

Yes, it's a component of all those.

So do you have a breakout of how much is in the ORE expenses and in the provision?

I can tell you the overall provision was $147 million and the ORE expense was $35 million.

That's the total credit cost.

The expense associated with this was about $29 million in ORE and the remainder of the $157 million would have been in provision.

Okay, thank you.

Craig Siegenthaler.

Credit Suisse.

Good morning, guys.

Can you remind us what the key capital for leverage ratios are within the regulated Bank sub relative to the regulatory hurdles and really how this impacts your view of 12-month forward dividend capacity?

Ladies and gentlemen, please hold for just a moment.

And we apologize.

I think Craig was asking a question as we lost him, so if we could go back to Craig.

Okay, great.

So I'm just going to repeat the question and this is Craig Siegenthaler from Credit Suisse.

Can you remind us what the key capital or leverage ratios are within the regulated Bank sub and then really how this impacts your view of 12 month forward dividend capacity?

Craig, I will be glad to answer that.

We really didn't cut the line off because of your question because we hadn't heard it yet, but we apologize for that.

You can see the Bank regulatory capital that's on the slide 22.

And we always say that the one that gets the most attention is the one that's the weakest I guess, but in reality they are all important.

The Tier 1 leverage ratio I believe in our previous disclosure was announced that it needs to be at least 8%, so we have got a nice buffer there.

The other ones don't have specific rules on them right now, but they are very robust ratios with total risk-based capital at over 16%.

And then Tier 1 risk capital at almost 15%.

So it's safe to say that at those levels, even before the DTA recapture, that there was sufficient runway to approach regulators at the appropriate time for a meaningful dividend.

But these are the ratios for the entire Company, right, not just the Bank where you're going to request the dividend and the capital from?

Well, the Bank ratios on slide 22 are the important ones.

That is not the consolidated ratio; that is the Bank only.

So that is key ratios that would go with the request.

Got it.

And then just as I follow up, if you are not able to dividend as much capital as you would have liked this year and there is a common equity component, could that change your view of timing, maybe pushing the TARP repayment into 2014?

Or would you rather have it done this year with a common equity component?

Craig, this is Kessel.

That is a hypothetical I don't want to get to.

I think certainly time has been our friend and obviously in this process, but we are mindful of the increase in rate in December of 2013 when the TARP dividend would go to 9%.

So we don't want to push right up against that date.

We believe the Bank and the Company continues to improve its risk profile through the year.

Our classified to capital is already at 38%.

We expect that to trend down, and so it could push our timing out during the year.

But at this point I don't foresee anything pushing our timing out beyond what we've already discussed other than lack of regulatory approval which, again, is not a warning or anything we expect, it's just that's what happens or what we have to go through to get the repayment.

So it could push us closer to the December date, but I do not see us going into 2014 with TARP on our balance sheet.

All right, Greg.

Guys, thanks for taking my questions.

Sure.

Thanks, Craig.

Kevin Fitzsimmons.

Sandler O'Neill.

Good morning, guys.

Just a few quick ones if you could.

You mentioned before about one of the sources of repayment being parent cash.

If you can remind us what that amount was at year-end.

And then secondly, if you can just talk about -- you had what you guys called a successful bulk sale this quarter.

What does that do about your likelihood of doing further sub sales in the next two or three quarters?

Thanks.

Kevin, parent company cash was about $360 million at year-end.

As far as the sales, certainly don't expect to see a bulk sale.

But I'll let Kevin Howard talk a little bit about what he believes will be our disposition activity in the first quarter and for the remainder of the year.

Yes, thanks, Kessel.

Good morning, Kevin.

We expect -- our pace of dispositions will lighten with the bulk sale and the big number we posted in the fourth quarter.

We had guided previously $100 million to $150 million.

We see just with lower MPA levels, lower classified levels and hopefully a better environment where we are not going the disposition route as much as we would like to restructure, upgrade credit, maybe just self liquidate some of the credit.

So our disposition volume going forward should be somewhere in the $50 million to $75 million a quarter.

And we still believe we will achieve good reduction in NPAs and classified assets.

Okay, thank you very much.

Nancy Bush.

Good morning, NAB Research.

Two questions, guys.

The first one, I mean we've had a milestone quarter here, as you said.

But after we've seen these milestone quarters at other companies, we also see a lot of cleanup costs that follow.

Could you just give us your thoughts about costs we will see in coming quarters?

About costs will see -- are you talking about credit (multiple speakers)?

Clean up costs, I mean legal, etc., etc., that are -- and we already know that there is a possible settlement out there that was announced last week.

Is there anything else that is going to be coming down the pike here?

Well, Nancy, I mean there is always some.

We expect obviously legal costs to continue to trend down as our problem portfolio comes down.

As it relates to what you mentioned last week, there's no material impact there to that specific incident.

Litigation risk is a risk that our industry deals with now, and so that's always out there on the horizon of cost.

But there's nothing major that we know of today in terms of a cleanup cost is just continuing to work through the cycle.

We hope legal fees come down; we hope consulting fees come down.

And we disclose in the Q and the K the potential cost of litigation that's out there and it's a broad, broad range.

I'll look to Tommy and Kevin to see if they want to be any more specific than that.

I'll be glad to just add on a little bit.

The events of the fourth quarter being the bulk asset sale and DTA recovery, those things on their own should not have any sort of residual impact or cleanup related to those.

But as Kessel said, stuff can happen along the way but we are assuming a more stable environment than that.

Okay, thank you.

Secondly, there was a big jump in bank card income from third quarter to fourth quarter.

Can you tell us what that was about?

Yes, Nancy, I'll be glad to do that.

There was some seasonal lift in that and also an adjustment that was related to a points program that had expired.

So, Tommy, does that mean that we go back to the levels, that sort of $7 million plus that we saw in third quarter and before?

Just directionally I would say that both the items that lifted the fourth quarter were nonrecurring, seasonal and then a one-off.

So I think the old run rate is closer to the future run rate.

Okay, great.

Thank you.

Jennifer Demba.

Good morning, SunTrust Robinson Humphrey.

Question, Kessel, do you have any visibility at this point as to when you think the balance sheet could stabilize and loans could start growing again?

I know the bulk sale impacted you in the fourth quarter.

Yes, Jennifer, we have been close and, again, to show a decline of $190 million after a bulk sale that included $475 million in loans, we were really pleased in the fourth quarter.

So I think as the disposition activity trends downward, as Kevin talked about, and we still see the kind of production that we are seeing out there, we will start to see an upward trend.

But I don't one of the time specific about that.

But in general, again, the loan sales will slow down and we will invest in bankers that can help us grow earning assets.

So we are cautiously optimistic about 2013 and beyond.

Can you give us a sense of the source of the loan production you had in the fourth quarter by industry or geography, syndicated, senior housing, whatever the case may be?

Yes, I will ask D. Copeland to take that one for us.

Yes, Jennifer, a couple things that are out there.

As Kessel pointed out in the slide, you had roughly about $200 million of that net loan growth was in large corporate group.

That would have been split between senior housing, which would have been the larger part of that, and then some of the loan syndications that we have done would be the smaller part of that piece in the $200 million.

If you look at the additional $145 million in loan growth, which would've been across the geographies, let me maybe attack that in two different ways.

One would be based on the new loan fundings that we had for the quarter.

From a geography standpoint it really was dispersed across all five states pretty well.

So that was a very good sign for us on new fundings and our new fundings in the fourth quarter would have been very similar to the third quarter as well.

As far as industries in that category, the movement would be some additional local healthcare.

It would have also been ag-related.

That has been a very good market for us in our neck of the woods and for a couple years and we had some good growth there.

In addition to that, on investment property, we had some growth in the multi-family side as well.

Part of that was growth and part of it was there was not much of it included in the asset sales that took place.

So kind of jumping around a little bit, but I think those would be the major components of the growth.

That's helpful, thank you.

Mike Turner.

Compass point, good morning.

Just on the operating expenses, it looks like your core expenses excluding credit-related costs are around $170 million a quarter.

What's your ability to maintain that or potentially even garner further savings going forward?

And I don't know, is there also an ability to reduce your FDIC-related expenses?

Mike, the third quarter number was about $167 million, and, you are right, we were just over $170 million for the fourth quarter and we had guided that that's about where would land.

And really the fourth-quarter run up had to do with some additional performance-based incentive pay and some elevated professional fees.

We think those are mostly one-offs and should subside some in the first quarter.

In the first quarter, of course, you always have the front end loading of employment taxes and so forth, but bottom line, we think from -- kind of taking it from where we are right now to about $171 million, we think in the first quarter that you could see a number that looked more like the third quarter.

Then as some of these efficiency initiatives kick in we believe, particularly in the second half of the year, you could really begin to see some downward traction on the expense side.

Keep in mind, we are reinvesting along the way so every penny of the $30 million savings we mentioned may not show up on the financial statement.

But directionally we can see first quarter slightly down, second may be stable, and then the back half of the year some meaningful traction on the efficiency initiatives.

Hope that answers your question.

Yes, no, that's very helpful.

Then on the origination side, where are new loan origination yields, I'd say maybe in the C&I?

Like, what did you book in the fourth quarter, what were average yields?

I think as far as we have gone from the overall disclosure is that basically what we've done from a new and renewed standpoint, we would have been in the low [fours] on an overall new and renewed for the quarter.

It would have been down about 10 basis points, approximately 10 basis points over previous quarters.

So there has been some pressure on match line and we continue to see there probably will be a little pressure on that going forward.

Okay, great.

And sorry, just a follow-up to an earlier question that was asked, could you maybe remind us of the mechanics of the recognition for the disallowed DTA?

Like how do we think about modeling that or how long will that take to get back into regulatory capital going forward?

Yes, this is Tommy; I'll give you a little bit of info there.

It's a little over -- it's in the neighborhood of $2.1 billion of pre-tax income that is required to support the amount of DTA that we just recaptured.

So it's obviously multiple years.

We're really not prepared to disclose I guess the exact amount of years that we modeled.

But it is multiple years and that will evolve along the way as we watch actual performance, but that's really as far as we can go right now.

Okay, that's helpful.

Thank you.

Christopher Marinac.

Thanks, good morning FIG Partners in Atlanta.

Tommy, I wanted to ask from another direction of Nancy's question earlier.

The expenses for OREO write-downs this quarter, how much was kind of normal or that was unrelated to the asset sale?

Kevin would like to answer that question.

$10 million to $12 million, in that range, would have been unrelated.

Okay.

Should that number, Kevin, come down at all during the course of this year or is that going to be pretty stable for a while?

Yes, it should.

It has been tracking around $20 million -- before this big quarter, in the low $20 million, mid-$20 million.

We expect that to track down probably in the $15 million, probably moving its way down during the course of the year.

But yes, it should comfortably get below $20 million in the forward quarters coming.

Okay, very well.

And then Tommy, just on -- I guess from the capital question post TARP, the leverage ratio appears like it is going to be more important as you make other capital decisions.

Would you agree with that and how would you look at dividends and other capital deployment from a leverage perspective since that leverage ratio is sub 8% after TARP?

Chris, the leverage ratio gets a lot of attention at the Bank level and it will be one of the guard rails, if you will, as to how far you can go in moving any dividend from the Bank to the parent company.

So I agree that's an important one.

They will all be important though as we go through this exercise.

Okay, very good.

Thank you very much.

Ken Zerbe.

Sure.

It's Ken Zerbe from Morgan Stanley.

A question on the net interest margin.

Obviously it has held up pretty well over the last year or so, but just given where cost to deposits have come down to, given the substantial improvement in the NPAs already, obviously as a result of the bulk sale, going forward, should we start to expect more of an industry average decline in margin or are there other things that we should be taking into account?

Ken, this is Tommy.

We are not immune to the forces that are affecting the whole industry, but I can go -- when you look at the fourth quarter, you had 10 basis points decline in earning asset yields and some of that came from the securities portfolio.

We are largely on the investment portfolio cycled into the low rates and we will still have some downward pressure on the maturities but a lot of that is behind us.

On the loan side, that accounted for the biggest part of the 10 basis points, about 4 of those basis points were related to interest reversals.

And we believe that that's probably not recurring so you wouldn't have as much pressure without that.

I guess on a -- we also had a 4 basis point decline in the cost of funds which provided some buffer, so the 10 minus 4 got you to a 6 basis point decline.

It really I guess was within our guidance where we said that the 3.51% in the third quarter would be down modestly.

On a first-quarter basis, I think that is off of the same guidance that we'd have a modest decline and I would say that that decline would likely not be as much as it was in the fourth quarter.

Beyond that will be -- a lot of the future of the margin will have to do with how successful we are with growing loans and how competitive we need to be and how aggressive we need to be on the funding side.

So we will just have to continue to watch it beyond the first quarter, but I hope that answers your question.

No, it does, yes.

And then just one follow-up question in terms of the tax rate going forward.

Now that you have the DTA back, should we be modeling in a 35% tax rate on a earnings all earnings going forward?

Yes, I would call it mid 30%'s.

That would be right in the zone.

Perfect, thank you very much.

Emlen Harmon.

Good morning, calling from Jeffries.

A question -- I guess this would probably be for D., but if we think about I guess maybe the life cycle of the kind of corporate banking initiatives that you guys have, you have had very good growth the last couple of quarters.

Just kind of a question on what the sustainable growth rate is there.

Obviously, probably on a percentage basis it's going to come down, but I mean, do you guys think that you can put up the kind of couple hundred million dollars of growth on a quarterly basis that you've seen the last couple quarters?

Yes, thanks for the question there.

Maybe a couple of points I would end up making.

One, absolutely on a percentage basis, I would expect that to reduce.

Or absolute dollars, I would say we would model something similar to what we had done in 2012.

One of the things, as you pointed out in the lifecycle, as we have now gotten into it as some of these loans are maturing, we will have more pay downs in that group as well.

So it will take a little more volume to actually keep the same pace of growth, but I would say right now we would be looking at in the ball park -- could be down slightly but it would be in the ball park of the same type dollar growth for 2013.

Got you.

And are you still adding new lending teams in all?

Yes, we are in the market looking for the right kind of talent all the time.

We are having conversations as we speak and in both the large corporate and different geographies and in different specialty lines, we have had good success with that.

I would say the conversations that we are having currently give me optimism that we will be able to have success with that in 2013 as well.

Great, thanks.

As well as we will continue to look at acquiring talent across the geographies as well for additional growth.

Got you, thanks.

And then a quick one, just throwing it back over to credit.

We think about NPL inflows, you had indicated that the third-quarter level of inflows is where we should start ramping down our inflow expectations.

I guess a couple of questions on that front.

One, could you give us a sense of just how large that one credit that came in to NPLs was that pushed the number higher in the fourth quarter?

And then also, should we -- I guess if we think about it, you guys pulled a bunch of potential problem credits out of the mix this quarter.

Should we be thinking about a pretty significant drop-off from that third-quarter level or just how should we be thinking about the pace there?

As Kessel mentioned, we do expect that pace to continue trending down from the second- and third-quarter levels, I think $124 million and $115 million.

Certainly could be some bumps as you get into lower levels, but we do expect that to continue to be positive.

Obviously our substandard loans that reduced what -- some 42% during the year from year to year, a lot less level of substandard loans.

We expect that to be a lot less -- more declines -- less declines -- more declines in the NPL inflow.

You mentioned -- you asked about the larger credit.

I'm not going to get into too specific on any customer information.

We'll tell you that it was multiple properties and multiple states.

It was a larger credit, it was over $75 million.

It did influence the spike in the commercial.

If you looking at it by property type, our commercial development and our land portfolio somewhat, but we don't have really -- we don't expect that type going forward.

We have only -- our internal hold limits have been established around $75 million and below.

We have just two of those left.

One of them is right over $75 million, a little over $75 million, less than $76 million.

It is a strong pass credit and the other one is approximately $100 million and it is a very strong past credit as well.

And we expect that credit to be below $75 million before the midpoint of the year.

So we don't expect spikes like that in the future and Kessel laid out the substandard and the special mention levels we have.

So going forward, we are pretty comfortable guiding improvement and based on all of the indicators that Kessel mentioned as he went through the credit part of the deck.

All right, thanks for taking the questions.

John Pancari.

Thanks, Evercore Partners.

Can you talk to us about how we can think about the impact of the potential upstream from the sub in terms of the potential to divvy up in terms of -- basically how significant of an amount could be upstream and how do you think about that benefit?

And Tommy, the question was how much could be dividended up from the Bank and how would we follow that?

We're having a little bit on volume trouble.

Yes, and we haven't disclosed the amount of cash that we would even request.

Obviously you have to go to through an approval process and look at capital ratios, look at liquidity and performance of the Bank.

And we think that there's any meaningful level out there that could take a reasonable bite out of the TARP obligation, but that is not something we're prepared to disclose.

Okay.

Then in terms of a potential debt raise on the other capital to be raised to get out of TARP, can you talk about how you think about the cost there?

And if there could be any changes from the rating agencies, how that could benefit or impact your cost of raising debt?

Well, I believe that costs would be a lot less than the last time we went to the window.

And the markets have been favorable to that kind of opportunity and just directionally it would be a move in a very positive direction.

But I'm not prepared to disclose a rate.

Okay, all right, thank you.

Erika Penala.

Good morning, Bank of America.

I just have a follow-up question to Kevin Fitzsimmons.

You mentioned that at the parent you had $360 million of cash.

Could you give us a sense of how many years of cash you typically like to keep at the parent to cover your liquidity obligations?

Yes, I will be glad to do that.

The $360 million at the end of the fourth quarter, we'll use about $70 million of that to complete the payoff of the 2013 sub debt that matures in February.

So you will bring that number down closer to $300 million.

The current regulatory two-year I guess agreement, guidance, however we want to think of it, is in the $270 million required range.

That number should go down closer to $200 million required to have two times coverage in a post-TARP environment.

Making some assumptions about the mix of the TARP backfill.

And obviously we will be involved in activities as we repay TARP including the dividend and maybe certain capital market activities that could end up adding some to the parent company along the way.

So I hope that answered your question.

Okay, yes, thank you.

Steven Alexopoulos.

JPMorgan.

My question was looking at the $1.2 billion of corporate bank loans which you have on slide 9, could you guys break out the rough balance of that which are for loans that you are participating in the credit but not the lead Bank?

And then maybe you'd give us some idea if we look at the 4Q loan growth, same sort of thought, what percent are you participating but not the lead?

Yes, on all of the loans that we would be participating in, we are not the lead in, we are not leading any -- very few of those credits at this point.

So the vast majority of the syndicated credits that we would have are -- I would say we are not the lead in.

And then as far as a breakout, I need to look as far as which ones were syndicated versus which ones are in.

And I may need to -- 60% of the credits are actually in the syndicated bucket.

So as you see, of the syndicated, we are not leading the vast majority of those and that would make up how much of those credits are syndicated.

Okay, thanks.

Just one final one for Tommy.

I know there are a ton of questions today on cash and capital, right, needing to repay TARP.

Just from your view, will you need to do some type of raise just do have enough cash at the holding company to repay TARP this year whether it be debt or equity?

Steven, the dividend from the Bank will account for a meaningful amount.

We believe that and parent company cash currently on hand would not likely be enough to repay TARP.

So you then go down the list of other categories that might include debt or preferred stock first before you move into any other category.

So we don't believe that there is -- cash is not sitting at the parent company or in a dividend for the Bank to totally cover it we don't believe.

But I can't really disclose any more detail than that.

All right.

Okay, I appreciate that color.

And if that's our last question, I understand, I will wrap it up.

I want to thank all of you for joining.

We apologize for the communication failure.

I hope we didn't lose any of our questions due to that.

We do appreciate your interest and your time in listening to our story today.

As we said earlier, it was certainly a milestone quarter.

We said it was a transformational year.

It was both and we are very pleased to enter 2013 with this type of momentum.

I know the main stories were about the DTA recapture, the $713 million in earnings, the bulk sale and those are certainly all game changers for us.

But I want to make sure that all of our audience understands our focus as we enter 2013 is, yes, certainly on efficiency as we look for ways to take additional cost out of our organization.

But our primary focus is on our customer and our customer growth initiatives.

We will work strongly using our very strong community bank model.

We will, again, complement that with additions to our corporate banking team that we have made and continue to make and then all other business lines.

I just want to remind the group that the evidence of our ability to do this is reflected in the numbers today.

We had net loan growth in the fourth quarter of $345 million for the year, $589 million.

We had strong performance across multiple business lines, advisory, brokerage, investment services.

Again, our FAM group was recognized in the top 50 and the 35th largest in the world.

So our model is working and is working because not only do we have loyal customers, but we just have a great team.

So I want to close by speaking to that team, many of whom are on this call.

And I did in the press release but I do I want to do it again now.

Their loyalty, their perseverance and their passion for taking care of our customers is what got us here today and it's what will define us going forward.

So I want to thank all of them who are listening.

I want to thank our customers who might be on the line who have shown tremendous trust and confidence in our Company and into the many shareholders and analysts community that are there.

I will just assure you on behalf of the entire team that our work is not done.

We understand the challenges ahead and we are enthusiastic and energized about the quarters and years ahead.

So thank you all very much for your interest today and we look forward to speaking again to all of you in the very near future.

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.