Synovus Financial Corp (SNV) 2013 Q2 法說會逐字稿

Welcome to the Synovus second-quarter earnings conference call.

At this time, all participants have been placed in a listen-only mode.

The floor will be open to your questions and comments following the presentation.

Now, I would like to turn the floor over to your host, Director of Investor Relations, Pat Reynolds.

The floor is yours.

Thank you.

Thank you all for joining us on this short notice for our call today.

During the 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.

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, early 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.

You can see the reconciliation of these measures and 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 transcripts provided by third parties.

The only authorized webcast is located on our website.

We do respect the time available this afternoon 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.

Good afternoon to all of you.

I also want to add my thanks to all of you for joining us on such short notice.

By now, I hope you've had a chance to review both our earnings announcement that we released after the market closed today and also the announcement concerning our plans for the TARP redemption and the capital actions associated with that plan.

I will refer you to Pages 19 and 20 in your appendix.

As we've consistently stated, we believe that the major component of our TARP redemption would be from internally available funds.

I think you'll see that's the case, as we've received approval to dividend $680 million from Synovus Bank to the Parent Company, as part of our plan to fully redeem the approximately $968 million of TARP preferred stock.

Additionally, as part of this plan, we've announced an offering to issue $185 million of common stock as well as a planned $130 million preferred stock offering.

While I would like to spend our entire call today discussing our announced TARP redemption, the fact that we've launched a securities offering requires I keep my remarks on that topic to a minimum.

However, I do want to share just a few thoughts on this with you now.

Today's announcement of our planned TARP redemption represents the culmination of our journey to return Synovus to a position of strength that we have discussed for some time.

Over the last several years, we have laid out for our shareholders, our regulators, our customers and our team members, a very clear, deliberate and aggressive plan to return Synovus to sustainable profitability.

This plan includes taking significant actions to strengthen credit quality, to stabilize and remix the balance sheet and improve operating efficiency, while investing in the talent and technology that will enable us to support growth and enhance the customer experience.

We have said that the execution of the plan would lead to confidence and the sustainability of our Company's future profitability, as well as continued improvement in credit quality and that the reversal of our DTA valuation allowance and TARP redemption would follow from that.

As you know, we announced the reversal of the DTA valuation allowance in the fourth quarter of 2012.

Today's announcement, regarding TARP redemption in the third quarter, is the next step in the execution of this plan.

We have engaged in a continuing dialogue with our regulators about the necessary steps that would enable us to redeem TARP, since we returned to profitability in the third quarter of 2011, all of which have factored into the execution of our plan to improve credit, to decrease operating expense and strengthen our capital position over the past 18 months.

We have carefully considered the mix of funds we intend to use for TARP redemption in light of an assessment of our capital needs, liquidity, regulatory expectations and growth in the future.

The size of the offerings announced today is based on discussion with regulators and Management's assessment of the appropriate levels of Tier 1 Common Equity, Tier 1 Leverage and other capital ratios.

Our Tier 1 Common Equity and Tier 1 Leverage ratios, pro forma for the offerings and TARP redemption would be 9.74% and 8.72% respectively.

Following the offerings and the planned redemption of the TARP preferred stock, we believe that our solid capital position will provide us the flexibility to grow our balance sheet as the economy continues to improve and to capitalize on future strategic opportunities.

Currently, the TARP preferred stock, including dividends and accretion of discount, reduces net income available to common shareholders by approximately $59 million per year.

After TARP redemption, the annualized benefit from the elimination of this cost, net of the impact of the above transactions to be undertaken to facilitate the redemption of TARP is expected to result in a net increase in diluted earnings per share of approximately $0.04 based on annualized 2Q 2013 earnings.

I also note that after we redeem the TARP preferred stock, the warrants associated with the Treasury's TARP investment will remain outstanding.

We intend to evaluate the potential repurchase of these warrants directly from the Treasury or through participation in a subsequent auction process, which may or may not be successful.

As I'm sure you understand, there are many questions you may want to ask us on this call that we will not be able to answer, due to the pending securities offering, but we do want to give you a very clear picture about our second quarter performance.

So, with that, I'll take you to Page 4 in your deck and talk about the second quarter, before we open the floor for questions.

I think you will see, as evidenced by the slide, momentum continues during the second quarter.

Pre-tax income was $72.9 million, up $26.4 million or 57% versus first quarter pre-tax income of about $47 million and up $35.6 million or 95.2% over the same quarter a year ago.

Net income available to common shareholders was $30.7 million, $0.03 per diluted common share, compared to $15 million or $0.02 per diluted common share for the first quarter of 2013 and $24.8 million or $0.03 per diluted common share for 2000 -- for the second quarter of 2012.

I will remind you that the 2013 earnings are fully taxed at 37%, while the second quarter 2012 earnings reflected a $2.1 million tax benefit.

Again, another big story in the quarter, credit improvement, certainly a key driver of higher profitability.

Credit costs of $24 million declined $25.3 million or just over 51% from the $49.3 million in the first quarter of 2013 and decreased $46.4 million or 66% from the same quarter a year ago.

Another big story, I think, in the quarter is total loan growth.

Our loans grew $240.4 million sequentially or 5% on an annualized basis.

We'll talk a little bit more about the makeup of that growth on a later slide.

On Page 5, again, graphically, we just wanted to illustrate those credit trends that saw such strong improvement, credit cost, net charge-offs, NPL inflows and NPLs.

I'm going to go into more detail on each of these items on the following slides.

But I think they provide a great graphical illustration of the across the board improvement we continue to see in our credit portfolio.

In addition to the metrics shown here, just a few other key performance metrics that improved and are worth mentioning.

Special mention loans declined over $600 million or 37% over the second quarter of '12 and approximately $230 million linked quarter.

Substandard recurring loans decrease $457 million or 43%, compared to the same quarter a year ago and almost $50 million over the prior quarter.

Our exposure to higher-risk segments of residential C&D and land continues to decrease, down 85% from its peak at the end of 2007.

Loan loss reserve remains healthy at 1.71%.

You'll find additional detail on each of these items in the appendix.

On Slide 6, to dive a little bit more into credit costs.

Again, you'll see credit cost experienced a significant improvement, 51% down from the -- again, $49 million in the first quarter.

The key contributors there -- a larger volume of recoveries; better results on dispositions; lower mark to market costs; and favorable migration trends.

We are hesitant to guide quarter-to-quarter, but we do believe that credit costs for the second half of the year will be slightly better than in the first half.

Our net charge-offs were 47% lower in the second quarter than in the first, coming in at about $30 million or 61 basis points, compared to $57 million or 1.18% in the first quarter.

We had guided previously, that we'd see charge-offs fall below 1% in the second half of the year.

We are pleased to have achieved this milestone earlier than expected.

I think, really, this is the first time that charge-offs has been below 1% since before the credit crisis.

Again, some of the same factors that grow credit costs led this improvement, increased recovery of lower mark to market losses and a better realization on assets sold.

On Slide 7, I think the header says it well, NPL inflows decreased 46.2%, NPLs declined 36% from a year ago.

Again, inflows of $67 million in the second quarter represented a 20% improvement over the first quarter and almost 40% over the same quarter a year ago.

We had expressed confidence in the fourth quarter -- then again last quarter, that our inflows would remain low.

We talked about the make up of our portfolio, that we had very few large credits and either special mention or substandard at the time.

We had two substandard accruing and six special mention credits greater than $20 million.

At the end of this quarter, we now only have three special mention credits greater than $20 million, with the largest being approximately $30 million.

And two substandard accruing credits over $20 million, with the largest at approximately $40 million.

Again, we anticipate NPL inflows will continue to improve.

Overall, we could see occasional bumps based on timing and seasonality.

Non-conforming loans ended the quarter at $483 million or 2.47%, which is a 36% improvement over the second quarter of 2012 and a 6% improvement over the first quarter of 2013.

We believe that this number will trend downwards toward 2% or possibly even below 2% by the end of the year.

Page 8, just a quick snapshot of past due.

We are very pleased.

Last quarter at 0.46% and this quarter at 0.41%.

That continues to give us additional confidence in our positive credit outlook as our portfolio continues to perform according to our expectations.

Slide 9, I think a good graph of our portfolio by risk grade.

Past rate of loans increased $544 million from the first quarter.

Past rate of loans now represent about 89% of our total loans, compared to 82% just a year ago.

Again, as I stated, past rate of loans increased $544 million.

The substandard special mention and non-performing loans had substantial decline -- again, now representing only 11% of our portfolio, compared to 18% a year ago.

A good snapshot of the distribution by risk grade there.

Slide 10, I previously mentioned, loans grew $240 million sequentially, 5% annualized.

I think the better part of the story -- or as good a part is that the growth was broad-based across many categories.

Growth in C&I certainly across many industries.

The growth occurred primarily in our largest markets, Atlanta, our major market in South Carolina, Birmingham and Tampa, as well as large corporate lending.

C&I loans grew $185 million or 8.2% annualized.

Retail loans grew almost $79 million or 7.9% annualized.

CRE declined by $20.4 million.

Again, I will call your attention to the graph.

You may remember that CRE had peaked at 46%.

We had guided -- over the last couple of years, our intent to move our percentages to a 65% C&I retail and maybe 35% CRE.

That now stands at 68% C&I in retail and 32% CRE as our bankers continue to do a great job penetrating our markets.

We've continued to invest in talent and growth strategies in our major markets.

I think, those efforts as you see are paying off as we focus on relationships in all of those markets.

Slide 11, core deposits grew $144.1 million from the first quarter.

$36.1 million of that was from the Sunrise Bank transaction, which we announced in the second quarter.

Core deposits, excluding time deposits, increased $249.1 million versus the first quarter.

Again, about $23 million of that was from the Sunrise Bank transaction.

Again, as a Company -- our bankers continue to emphasize relationship banking and relationship accounts.

We are very pleased with both the growth and the mix of our deposit base.

On Slide 12, our net interest income's stable.

The margin down slightly on higher liquidity.

Net interest income increased $2.3 million versus the first quarter, due to loan growth and a higher day count.

Our modest NIM decline was 4 basis points versus the first quarter as expected.

About 3 of those basis points were actually due to higher liquidity levels.

Yield on earning assets 3.88%, down 7 basis points.

Effective cost of funds, 49 basis points, down 3 basis points versus the first quarter.

Our cost of core deposits, importantly, 28 basis points, down 2 basis points for the first quarter, down 13 basis points from the second quarter of 2012.

We expect our net interest margin to remain stable in the back half of the year.

On Slide 13, a few highlights on fee income.

Non-interest income increased $371,000 from the first quarter, down $11.4 million from the same quarter a year ago.

That was driven though primarily by the $8.2 million decrease in private equity investment gains and $2.8 million decrease in investment security gains -- again, over the same quarter a year ago.

Core banking fees, $31.6 million, up $449,000 versus the first quarter and $148,000 over the same quarter a year ago.

I think, the year-over-year increase reflects the benefit from fee income initiatives implemented in the second quarter of 2012.

Service charges on deposit accounts down slightly $326,000, bankcard fees up $774,000 from the first quarter, reflecting seasonal increases as we expected there.

Our mortgage baking income remains strong, up $420,000 from the first quarter, down $645,000 from the second quarter a year ago.

We certainly expect a decline in mortgage revenues during the back half of '13 as others in our industry have.

But again, the mortgage revenue is not a tremendous driver of our overall performance.

We think we can manage the decline very well.

FMS revenue, which include trust, brokerage, [GLOBALT], creative, financial and many of our support Companies, our family office, which you remember was recognized by Bloomberg as one of the top 50 in the country just last fall.

All those revenues were stable in the first quarter, increased $1.7 million or 9.5% year-over-year -- again, reflecting the strong and diverse source of income there.

We continue to make strategic talent additions in major markets for both mortgage and FMS business lines.

Slide 14, adjusted non-interest expense down 6.3% versus the second quarter a year ago.

Non-interest expense decreased $1.1 million versus the first quarter, $27.1 million or 13% versus the second quarter of 2012.

Our adjusted non-interest expense increased $4 million or 2.4% versus the first quarter, primarily driven by a $3.3 million increase in professional fees and elevated level of miscellaneous loss items, which we do not think will reoccur.

Again, compared to second quarter of 2012, our adjusted non-interest expense was down $11.2 million or 6.3%.

We continue to do a good job managing our expenses.

Headcount is down 398 positions.

We are almost 8% since the second quarter of 2012.

Our $30 million previously announced expense reduction initiative is on target.

We continue to review additional opportunities there.

As I have said many times before, a way of life around our Company.

You will see continued efforts there.

We expect a decline in adjusted non-interest expense for the back half of 2013, from the second quarter 2013 run rate.

On Slide 15, I call your attention to our solid capital ratios and believe you would agree.

Capital levels continue to build.

Again, I won't go through all of them, but you can see Tier 1 Capital of 13.49%.

These are pre TARP adjusted numbers.

I'll call your attention to that.

Tier 1 Common, 8.97%, total risk-based 16%.

And, again, you can read the others for yourself.

I will also though call your attention to the bottom of that chart.

You will see that we, at the end of the second quarter, have $675 million remaining of a disallowed deferred tax asset.

That will certainly bolster capital levels as it accretes into regulatory capital in future periods.

Slide 16, again, just a reminder of the second-quarter '13 developments, some of which we might have talked about on the last call.

But some happened after that.

In April of 2013, the Federal Reserve Bank of Atlanta and the Georgia DBF lifted our Parent Company memorandum of understanding.

We set the time we expected that the FDIC would follow suit.

In May of 2013, the FDIC and Georgia Department of Banking did lift the Synovus Bank MOU.

Then in May of 2013, we also completed the FDIC assisted acquisition of approximately $57 million in deposits from Sunrise Bank.

Again, that was a deposit only, no loans, no real estate transaction.

I think in summary -- I know you're going to have a lot of questions.

In summary, I will call your attention to Slide 17.

As I've said before and I believe today, this Company is well-positioned for the future.

We are a strong banking franchise coming out of a long, very tough period.

But a strong banking franchise in a thriving geography throughout our bi-state footprint.

I think our numbers prove that it's a great model driven by relationship-based banking.

We are consistently recognized for customer service excellence in retail, middle market and small business banking.

We're growing our market share, certainly in markets across our southeastern footprint.

Our strength in balance sheet, I think, is undeniable as we continue to de-risk the balance sheet by reducing exposure of the high risk asset classes.

We've improved revenue generation capacity from our balance sheet remixing and right-sizing of our expense base.

We certainly have a solid capital position, which helps us create the solid operating foundation and a great segue to our road map for the future.

Again, we have great customer growth, expansion and retention strategies tailored to the markets we serve.

We have had some very seasoned talent additions to add to our -- just very loyal group of bankers that allow us to match high growth opportunity markets and support new and emerging business lines.

As we have said, our investment in people both new and old, not by age, but by length of time here.

But our investment in people and partnerships are our strongest differentiators.

I think our investment in customer experience and growth strategies through our product and technology enhancements continue to pay big dividends for our Company.

So, our team is certainly not celebrating today.

We have executed a step in the plan, which we laid out many quarters ago.

But I will tell you, the team is energized and ready to go to work tomorrow to continue to execute on the many strategies that we have laid out for you here today.

But at this time, operator, I will be happy to take any questions from any of the callers on the line.

(Operator Instructions)

John Pancari, Evercore Partners.

Can you help quantify the amount of excess cash you have on the balance sheet now, post the $680 million that you're going to use for TARP?

I guess, by my math, I'm looking at the unencumbered piece, it could be around $900 million or so that you could redeploy?

So I wondered if you could help quantify that?

Then if you could talk about the expected redeployment or reinvestment of that cash?

John, this is Tommy.

You are -- certainly, pro forma based on quarter-end with the Fed balance approaching $1.5 billion, the main source of that test of liquidity -- so your math is very close.

There's obviously going forward a lot of moving parts that will make that move around some.

But that is a good target.

I guess the other part of that question might be the Parent Company cash and the proceeds of these transactions will slightly bolster both a little over $200 million is sitting in the Parent right now.

Okay.

All right, that's helpful.

Then I guess if you could just talk about the timing of the expected redeployment of that cash.

Are you going to look more opportunistically at the bond portfolio given the steeper curve?

Or, purely organic into the loan portfolio?

We will utilize the excess cash as part of the TARP repayment.

Over time, I think it's reasonable, particularly the rates moving on a bond portfolio.

We would love to pull that up somewhat.

Some of that will depends on the flow in the loan demand that's out there.

Okay.

Thanks.

Then, just one other follow-up.

Is the -- amount of environmental costs in your P&L, can you just help quantify that again?

The total amount of credit related costs excluding the provision that are in your operating expenses right now that could eventually decline?

Yes.

This is Kevin, John.

I will take a shot at that.

Our other credit costs that are not provision related, I guess were around $11 million this quarter.

About $7 million, $7.5 million of that was ORE related and the other was other credit costs related to problem loans.

We do think both of those will work down in the second half.

I think we guided $10 million to $15 million in that total number, the first half of the year there.

I look at that headed more towards $10 million on the lower side of that in the next couple of quarters.

That other cost that's not ORE related or provision related.

It is about $3.5 million, I think it will work down.

I'll just touch on the total there, it's probably $10 million or even better towards the end of the year.

Great.

Thanks for taking my questions.

Kevin Fitzsimmons, Sandler O'Neill & Partners.

Just a couple quick questions.

Number one, how do the rating agencies play in this castle?

I would assume TARP has been something they've been waiting to be dealt with.

What do you think the timing is on -- that they could step in and take you back up to investment grade with this development?

Thanks.

Kevin, probably the best way I can answer that is, I really can't predict what the ratings agencies will do.

We have certainly done our best to bring the ratings agencies up to date on our performance and our plans.

We've maintained a very close contact there.

I think Tommy said it better than me before -- I don't want to appear critical of any of them.

But sometimes they are a little quicker to take you down than they are to take you up.

So, I would not want to predict their timing, but we have, again, laid out our plans and our performance for them in a very clear way.

I will just have to leave it up to them as to the timing.

Okay.

Then just a quick follow-up.

I just wanted to clarify.

So, your statement in the release that getting rid of the TARP dividend, but also taking into account, I guess this, the common offering.

I'm assuming also the preferred offering, you are calculating a $0.04 per share increase to annualized EPS.

Is that how to interpret that?

Yes.

We've -- in that same calculation, calculated an opportunity cost of the $680 million that we'll give up.

Not that, that's been earning a lot, but it's a combination of that number, again, plus the additional shares plus the expected costs on the preferred offering.

I'm sorry.

What was the opportunity cost you mentioned?

The opportunity cost is the $680 million that's sitting and earning 25 basis points at the Fed.

We ramped that opportunity cost up a little bit, but we considered it in the calculation of the $0.04.

I see.

Okay.

Okay.

I was just going to ask, have you done something similar with tangible book at period end?

I see AOCI must have knocked that down a little.

But have you netted all of these items together?

I'm sure we can all do that, but just wondering if you've done something similar?

There's actually a pro forma on the capital ratios post TARP that are shown in the appendix of this document.

Okay.

Great.

Thank you.

Ken Zerbe, Morgan Stanley.

First question I have, just on credit costs.

I know this is kind of a really tough question to answer.

But when you think about credit costs going forward, was there anything unusual, say, in this quarter?

Where do you see total credit costs over the -- say, the back half of the year?

I just ask, because obviously with the NPA sale, a couple quarters ago provision was still high, thought it would come down.

It didn't, but now it came down a lot.

Was it a lag issue?

Are we at a kind of a sustainable level at this point?

Or is there something that we need to consider?

Ken, this is Kevin.

Kessel mentioned -- we believe this at this point, the second half of the year will be less credit cost total.

I think we are $73 million in the first half of the year.

We think that will work down in the second.

I think the second half of the year will be a little better than the first half.

I think the first half of next year, will be a little better than the second half.

It may not go exactly quarter by quarter.

The number is a lot lower.

There could be some bumpiness down there.

In this particular quarter, we had a -- Kessel mentioned it, we had good recoveries.

That's not always a given quarter to quarter, but we do believe we will get our share of recovery over the next 12 months.

So, that is kind of where we are at with credit costs.

We think ORE expense and provision -- again, second half of the year, lower than the first half of the year.

Got it.

Okay, that helps a lot.

Then the other -- the last question I had.

Just now that you've repaid TARP or will repay TARP, does it make you more likely or more interested in pursuing other small bank acquisitions?

I'm not going to get myself in that trap today.

(laughter) I will say again, as I said before, the Sunrise was certainly not any kind of strategic departure.

It was Synovus playing it's role in the orderly liquidation of a bank that needed to, again, be dealt with.

I do think over time, as we have said, there will be opportunities like that.

It is not what our focus is day to day.

Our focus is on continued improvement in credit, continued improvement in efficiency and growing our balance sheet internally, as evidenced by this quarter's performance of $240 million loan growth.

But I think it would be wrong for me to say never, because I do think there will be opportunities down the road to do transactions that certainly have little to no risk for our Company, but allow us to leverage the scale we have and the expertise we have that certainly has demonstrated a very long and successful record of resolving problem assets.

So, short answer is -- again, not part of our core strategy, but certainly opportunities should present themselves down the road.

We'll be very cautious about pursuit of those.

Great.

Thank you.

Erika Penala, Bank of America.

My first question is on what we should expect on the loss trajectory.

I appreciate the guidance on the provision for the second half of the year.

But what we have been seeing from your peers all year is that the losses continue to come in much lower than we are expecting.

I guess my real question here is, what do you think a normal loss range for Synovus is going forward?

Also, how long do you think Synovus could operate sub normal for -- as the recovery of the balance sheet continues?

From a loss standpoint -- Erika, this is Kevin.

Again, we think credit costs will work in our favor -- hard to get to a normalized cost right now.

We've still got some work to do.

We are still at 3%, a little above that on NPAs.

We're going to still spend some money to work down those problem loans.

We are doing that pretty efficient.

You can see the credit costs are going in our direction.

But just -- no more than right guessing at it, just based on historical.

Basically, we believe, we will model to.

I can't really tell you when it will be.

I would tell you it's probably 35 to 45 basis points somewhere in there, is what I am thinking.

So, that is my best guess at this point.

But we've still got some work to do on getting to normalized credit costs.

Got it.

My follow-up question is to -- on the ratings agencies.

Are there any potential opportunities once you finally get the upgrades in terms of balance sheet restructuring that could be accretive to your P&L that we are not thinking about currently?

All of those things, I guess are taken into consideration with the ratings agencies.

But it's like Kessel said a while ago, we will give them our full story.

Their decision will be their decision.

Erika, I will just add to that.

I think it certainly is confidence both to our corporate bankers and the customers that they are doing business with and allows us potentially to participate in transactions that we would otherwise not be able to participate in with our current credit rating.

So, again, I can't quantify that for you, but certainly, I think, gives us the opportunity for additional business based on potential actions by the agencies.

Got it.

Thank you.

Nancy Bush, NAB Research.

Congratulations on being free at last.

Not yet.

(laughter)

Yes.

Tommy, could you just talk about the balance sheet?

You have historically been one of the most asset sensitive banks in the industry.

Where you stand in an asset sensitivity position right now?

What it's going to take to shift that?

Nancy, we're slightly asset sensitive right now.

I guess our best scenario would be to have modest up-tick, including the short-term rates.

We continue to manage interest rate risk, being very thoughtful about some of the longer term loans that our competitors are out there with.

We certainly compete with that.

But to strike a balance, I think, on how far we go with it.

We will continue to probably push out some liabilities a little longer, assuming that we get some modest rate increase going forward.

But again, we are still slightly asset sensitive and looking forward to the days when rates move up a little bit.

Yes.

As part of that, if you could just update us like you used to on what percentage of the assets are variable rate versus fixed rate?

Yes.

We're about 50/50 on fixed variables, but when you consider the floors that are out there, we are at about 70% on fixed.

Okay.

My second question would be, I know you are out from under the MOU, but I've go to believe that neither you nor the regulators want to go through this experience again.

So, I'm wondering if they're going to be -- if you are under any kind of special examination regimen?

Or do we just now go back to the regular exams that you were going through before?

Nancy, we're just on -- we're on a continuous exam program with our regulatory agencies.

They really take place throughout the year.

I don't see a big change there.

I think there are targeted large credit reviews, capital planning reviews, enterprise risk management reviews.

I don't think we will let our guard down at all or expect anything different than what we have always had.

We have a very rigorous process.

I think our team has developed a great relationship with our regulators.

I'm sure they are on this call.

So, if they would like to go easier on us, they are certainly welcome to.

But we don't expect much of a change there.

Again, I think that what we are doing today will serve us well into the future.

All right.

Thank you.

Christopher Marinac, FIG Partners.

I guess, one for Kevin, just about the new loan growth that we've seen this quarter.

Is any of that coming from purchased sources or maybe some of your loan syndications that you've been involved with as you got into the C&I growth over the past several quarters?

Yes.

That's part of it.

But we -- what I liked about the growth story this quarter, it was mixed.

It was across the board.

It was balanced.

We had real estate.

We had multi-family growth.

That's a segment we like.

We had a little office growth, warehouse growth.

That's something we've been targeting.

So, our investment real estate was up a little bit.

Our residential, it went -- as we wanted it to, it shrunk quite a bit.

Our C&I growth -- that was part of that story, about $180 million of the $240 million growth was C&I.

I think D tells me about maybe half of that was syndicated related.

We also grew retail loans about 7% or 8%.

So, I think the balanced growth was probably the best part of the growth story.

But syndications have been part of that story.

We've been in that business a few years.

Very good.

Then Kevin, does it make sense to do any portfolio of ARMs going forward in future quarters?

Is that at all attractive within the loan mix?

Yes.

This is D. We have been doing some of those portfolio.

That contributed to some of the loan growth that we had that Kevin talked about on the consumer side.

Yes.

I think it does make sense to do that.

It will be tough, especially with the refinances with the long rate jumping a little bit.

But the shorter ARM rates will probably be advantageous to us.

Okay.

Very well guys.

Thank you.

Jefferson Harralson, KBW.

Now with DTA back and TARP repaid and a credit improvement as a Parent, what is the next one or two major projects or major things you are thinking about to increase that pre/pre ROAs, are you thinking more on the expense side?

Are you thinking more on the revenue side?

Or can you just talk about how you are thinking about the pre-tax pre-provision earnings or pre-credit earnings and the best ways to move that higher?

Yes.

Jefferson, so, I will let Tommy take your model question.

But let me talk about from a strategy standpoint.

You hit them both.

We think there is certainly still improvement in credit to come.

Not just from a direct credit cost, but still the amount of resources that we don't do a very good job -- just because it's hard to do -- of quantifying as to those resources allocated to continued resolution of credit.

So there is direct credit costs to continue to come out.

Certainly that will happen.

Certainly costs associated with the resolution, which we don't do, again, quantify.

So, that is number one.

From an expense side, yes, we're on track with the $30 million.

But those efforts have never slowed down.

We will continue to push down expenses.

You won't see them dollar for dollar, but you will see them, as we continue to get more efficient throughout our footprint.

We have a number of initiatives underway today.

It will, again, continue to develop through the rest of the year.

Then, on the revenue side, we talked about, I think, the very diverse, stable and in some cases, growing business lines through our FMS families.

But just from a pure balance sheet standpoint, I think it's obvious now that our investments in talent and the technology to associate -- to support some of the efforts of our corporate bankers is paying off.

$240 million in loan growth was certainly a strong number for us.

But we've, again, added talent to business lines throughout the footprint.

We have invested in some talent in some markets that you will be hearing about in the coming days, weeks and months as we beef up -- again the really core, strong team we have.

I think we will have additional opportunities there on the revenue side.

I don't know that we can get into a forward look at the pre/pre, but I think it is certainly a combination, again of credit of efficiency and the more fun side of that, which is seeing the balance sheet and revenue associated with that in the other business lines grow as these talent additions -- primarily in major markets -- but begin to pay dividends for us.

Tommy, you may have something to add about that.

You've covered it well.

All right.

You probably already said this, but what type of loan growth are you expecting in the second half of the year?

I think what we would be willing to say at this point is that we would expect to have loan growth in the second half of the year.

I would say, the second quarter would be probably towards the high side of that expectation.

But we would still expect to have loan growth for the second half.

All right.

Thank you, guys.

Jefferson, as long as I have -- you said, again what type?

I'm not sure that might have meant what amount as well.

But I think the key is we are seeing it in the right categories.

We actually believe we have room on the CRE side to be very opportunistic and get some really strong earning assets, as that number has pushed down to 32% of our total balance sheet.

Again, we see some good opportunity.

We have been very selective, but we don't really want to see that number run down much more.

So, you will see broad-based growth -- again, in major markets, strong in the C&I side.

But again, we'd like to see some certainly stabilization to replace of runoff on the CRE side as well.

Okay.

Thank you guys.

Joe Stieven, Stieven Capital.

Actually my question was on loan growth, which you just answered.

So, Kessel, congratulations you guys.

Good luck.

Thank you, Joe.

We appreciate your support.

Now, that's a great last question.

(laughter)

So, operator, if there are no other questions, we will close the call.

Again, we apologize for the short notice.

I hope all of you understand the circumstances which led to the short notice.

We were pleased to be able to release early and make the other announcements that accompanied the earnings release.

Again, we've got some work to do tonight and tomorrow.

I can assure all of you, the work of our team will not slow down based on the execution of this step in the journey.

So, we appreciate your support.

I want to, again, say to all of our team members that are listening in, how much I appreciate what you have all done to help us reach this point.

Again, I appreciate in advance all you are going to do to help us to continue to deliver for our shareholders.

So thank you all very much for joining in.

We look forward to sharing additional news as news develops in the coming days, weeks and months.

Thank you.

Thank you very much, ladies and gentlemen.

This concludes today's presentation.

You may disconnect your lines.

Have a wonderful day.

Thank you for your participation.