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Synovus Financial Corporation (NYSE:SNV)

Q3 2008 Earnings Call Transcript

October 23, 2008, 4:30 pm ET

Executives

Richard Anthony – Chairman and CEO

Kevin Howard – Chief Credit Officer

Mark Holladay – EVP and Chief Risk Officer

Tommy Prescott – EVP and CFO

Leila Carr – EVP and Chief Retail Officer

Analysts

Steven Alexopoulos

Nancy Bush

Tony Davis

Adam Barkstrom

Heather Wolf

Todd Hagerman

Christopher Marinac

Scott Valentin

Rob Rutschow

Michael Rogers

Kevin Fitzsimmons

Jennifer Demba

Operator

Good afternoon, ladies and gentlemen, and welcome to the Synovus third quarter 2008 earnings conference call. At this time, all participants are placed in a listen-only mode and we will open up the floor for your questions following the presentation.

It is now my pleasure to turn the floor over to your host Richard Anthony. Sir, floor is yours.

Richard Anthony

Thank you very much. I want to welcome each of you to our third quarter conference call. I'll read briefly our Safe Harbor statement. We will be making some forward-looking statements today that are subject to risks and uncertainties. There are factors that could cause our results to differ materially from these statements and they are set forth in public reports we file with the SEC.

Well, I guess, we're among, if not possibly the last regional bank to release earnings and our results, clearly we're impacted by the credit environment. We reported a loss as you saw just a few minutes ago of $27 million or $0.08 a share. And there are a couple of factors I want to point out that contributed to this loss and it could have a bearing on the way you view the results we could anticipate in the fourth quarter and really throughout 2009.

There was an intense review done of the top loans in our portfolio, comprising about 14% of the total outstanding. And there were some downgrades even though these are performing loans that resulted in $40 million increase in provision during the quarter. So I think that particular extra look and review needs to be noted.

Secondly, we put a lot of intensity into our impaired loans, both those coming in to the non-performing portfolio as well as those that are in NPLs. So we had about a $43 million write-down of collateral on these impaired loans, which is about double the amount of the quarterly write-down that we had been experiencing in the past. Those two particular items I wanted to point out.

Now let me just comment about our non-performing assets. They ended the quarter at 3.58%. There was an impact within the C&I portfolio as we added an auto dealer credit to non-performing status. We are not in the pool [ph] planning business. These were dealerships that we have financed. There was a lot of real estate taken as collateral. But 35% of the increase in NPAs was in still residential construction and development. So let me shift over to that now.

About 60% of NPAs remain in the Atlanta and west Florida markets. 56% of residential NPAs are in Atlanta, 12% are in west Florida. There are some other markets that are much less significant that comprise the remaining markets that would contribute to this residential emphasis that we have or concentration in NPLs. But I repeat that 60% of our NPAs remain in residential construction and development.

We had $345 million total inflows into NPAs. I won't get into any of the details of that, either Mark Holladay or Kevin Howard can address that during the Q&A should you wish more information on that particular subject.

A few comments about auction and loan sales activity. The disposition plan that we have for our non-performing assets is critical as we manage this aspect of our company. We have communicated regularly about the results of our absolute auctions, which have been conducted over the last several months. The impact from two of those was felt in the quarter. And those two particular auctions about $40 million of property was sold. We realized roughly 63% of the original loan amount in these auctions.

We're moving ahead with another absolute auction that has just begun and we are planning for a loan sale, a transaction that will occur in the fourth quarter. There was a $5 million charge taken for both of these two events, which have not yet occurred because we have identified the properties, we have some history and experience upon which to base the loss estimate, so $5 million in charges were taken related to this fourth absolute auction and the loan sale which is being worked today.

I will shift now to the balance sheet. We had slight loan growth about as we would have expected 2.93% annualized. We can talk more about this at a later date. But we did have some bond puts that hit the loan book during the quarter $50 million. We'll have more of that happening in the fourth quarter. These are good assets but as liquidity has become strained in these money market mutual funds, many regional banks are receiving puts of credit enhanced bond issues, primarily on commercial credits. So we had a modest impact in the quarter. We'll have more growth in the loan portfolio from that source in the fourth quarter. But the yields on these loans are good. And the quality is actually excellent.

Core deposits and the growth in that category of funding exceeded loan growth in the quarter. As I mentioned loan growth, 2.93%. Core deposit growth 4.3%. We're pleased with that. We're very conscious of the importance of liquidity. We have – we have no fed funds purchased position on the balance sheet. We have really begun to fund everything with deposits. There are some broker deposits. But our core activity is very good. And I think most of you know we have a unique advantage here on the deposit side with our multiple charter system, we have a shared CD and shared money market product that allows a customer to seamlessly have a single account with our company that allows insurance protection, deposit insurance protection today with the $250,000 higher limit, an aggregate of $8 million can be obtained in our company. Nobody else has this unique advantage. And the money is flowing in at a rapid pace.

The shared products at the end of the quarter were $888 million, having grown $585 million during the quarter. But in recent days, the growth has accelerated, has been averaging $40 million per day. And we had $1.4 billion in the shared product accounts as of yesterday. Our estimates are that about one-half of this flow is new money.

The consumer shift that we and I think others are experiencing is directed toward time deposit. We had very good activity and growth in retail certificates of deposit, up $400 million. In almost every deposit category, our unit growth is good. So we're adding customers. We're adding net new customers. But certainly there are plenty of questions in our front line receive from depositors about safety.

I'm really proud of our bankers, our front line customer contact people for the way that they are able to address these concerns, admittedly they have some tools to work with that give them an advantage but we are very careful to thoroughly educate our front line bankers about deposit insurance and ways to alleviate any concerns that come from our customer base there.

The net interest margin is my next subject. It declined 15 basis points during the quarter to 3.42%. Obviously, credit cost impact that. But the impact of the lower rate environment with a lower prime was a factor without a doubt. 5 basis points of this reduction really has to do with our plan and tactic to eliminate our net Fed funds purchase position. So as we moved out of Fed funds purchase into deposit products, some of those or much of that broke – some of it brokered with maturities that had a higher cost that overnight Fed funds. We gave up a little bit in the margin in order to create that element of liquidity.

We had some paydowns on higher yielding fixed rate loans. And we acknowledge as others have before us that the deposit market remains extremely competitive. But overall, I felt like our deposit success is something that stands out in our industry today.

I think I will not say anything about noninterest income. The information has been released. You can bring up any particular questions you might have during the Q&A. The subject of noninterest expenses really should be directed toward headcount. I think that's the story line within Synovus. We are continuing to make very good progress there.

During the quarter our headcount declined by 274 jobs. If you go back to year-end 2007, our headcount is down 326 or almost 5%. Project Optimus is a factor in this. We announced the impact of Project Optimus on jobs on September the 10th. But we were ahead of the game there, even before September the 10th. And we're running the company in a tight fashion and will continue to do so.

Few updates on Project Optimus, some of these facts you would have heard earlier. Most of these were mentioned on September the 10th. But Project Optimus is such as key initiative. It's one that I'm very proud of. It's one that we continue to emphasize to a high degree to make certain that the implementation is successful.

I'll remind you that the projected pre-tax impact as a result of the Project Optimus ideas was 75 or is $75 million, $50 million of that in expense savings, and $25 million in pre-tax earnings from new revenue growth initiatives. These ideas and there was 700 that ended up being good ideas worthy of implementation – will be implemented over a 24-month period. We have a formal process to track this progress. And on these calls we'll always have something to say about the progress that we're making in each of these areas.

So far we have completed, of the 700 ideas, 90 of those. In other words, 90 have been implemented. The team members who are impacted by these job changes, which was precisely 202 actually have recently been notified. They are given chances within the company to relocate at times if there is another position that fits their qualifications but we have completed that communication process. By the end of '08 we will have implemented another 110 ideas so 200 by the end of December would be the number of the 700, portion of the 700 that would be in place.

I'll mention this concerning 2009, the projected pre-tax impact for that year. This is not the run rate, but the impact of Project Optimus is $38.7 million. 60% of that will come from expense savings. We believe that Project Optimus is a transformational process for our company. It is creating a new discipline and way of life in our company to engage people at all levels as we find ways to improve processes and improve the quality of service and the level of performance throughout Synovus.

Capital is a key factor in banking. We all know that. Same comment for liquidity. I want to mention two of our capital ratios at the end of the quarter. Our Tier 1 ratio was a strong 3.83% and our tangible capital to tangible asset ratio was 8.50%.

I'll shift now to the TARP legislation. We had obviously a lengthy discussion in our board meeting today about TARP. We learn more about it everyday. We got a team who is studying the releases that are available again on a daily basis.

I would say that we intend to participate to the maximum level, which could be – which should be a little over $900 million. We're in the process of completing everything necessary for the application which would be filed by November the 14th. We think this is a source of capital that is something that we cannot pass up. We find it to be attractive. And we're moving forward in that regard.

I'd like to shift now to the future and give you anything that I can that might be helpful as you try to gauge our performance in the fourth quarter and in 2009. Our charge-offs as a percentage were 153 in the third quarter. I did mention some special factors. We believe that the fourth quarter provision will moderate from the third quarter's level due to some of the extra costs that we absorbed as a result of the reviews that I mentioned earlier. But our guidance for charge-offs in the fourth quarter would be approximately 1.15%. If you use that number in your projections, I believe you would find that we should have a chance at being profitable fundamentally during the quarter.

And in 2009, our guidance for the charge-off ratio would be in the 115 range to 130 range. This is our best estimate in a difficult environment that is hard to pin down but we upon review have determined that those are the appropriate ranges for us to work with in our forward planning at this point.

Before we open up the floor for questions I want to close with a reminder that we've got some positives that sometimes can be forgotten in this environment that is so concentrated on credit and really just day-to-day and month-to-month performance. But we continue to believe in our operating model, which has got community banking powerfully connected to an array of services and expertise that you would expect from a $34 billion regional bank. Our business customers, our middle market companies find our responsive model to be appealing. We think it stands out.

Our markets, first of all, the southeast in general is going to be, for the next five, ten, or 20 years, a good place to live, a good place to work, and a good place to have a banking presence. We have moved into the key southeastern markets. We continue to strengthen through leadership changes when necessary through the addition of talent.

Our capabilities in these markets whether they be Nashville or Birmingham or Memphis or Tampa or Jacksonville and I can go on and on, and even though Atlanta has got plenty to be concerned about in the real estate marketplace, we're very bullish on Atlanta long-term. So the quality of our markets is going to serve us well over time.

Our strategy is sound. We're not jerking things around there. We are sticking with our emphasis on the C&I strategy, the middle market the business owners that want the trusted advisor who can give service effectively, who can respond quickly and who can resolve problems at the local level. That's the way we do business and it's relationship based.

Another positive that we touched on during the call already, but we need to remember it because I think we're doing very well in this regard, has to do with liquidity. Liquidity in general, and certainly, the shared products that I mentioned earlier.

And from a credit perspective I know we'll get questions about migration, about indicators beyond the residential portfolio, but I can say in general, our income producing investment properties are holding up very well. They still look strong. The portfolio when I hear of these indicators and weaknesses in our industry, our consumer portfolio still is doing very well. And, our credit card business, it's not a large, it's a little less than $300 million in size. But our indicators there whether it be past dues or charge-offs are well below industry averages. And I think it is a tribute to our style of relationship banking.

And the final positive that I'll mention has to do with this momentum from Project Optimus. The two top priorities short-term are Project Optimus and credit management. But this momentum from the work that has come from this idea generating process continues to really produce good results.

And I'm confident we'll make us a stronger company, we aspire to be the finest regional bank in our part of the country when we get to the other side of this credit cycle. And I think these positives will allow us to do that. I'll stop now. I hope there are questions. I know there will be. We'll open the floor.

Question-and-Answer Session

Operator

Thank you very much. (Operator instructions) And we'll take the first question from Steven Alexopoulos. Your line is live.

Steven Alexopoulos

Hi, everyone.

Richard Anthony

Hi, Steven.

Steven Alexopoulos

Is it that possible for the $541 million of the non-performing loans that you break out has been FAS 114 loans. How much have they been written down by an average?

Kevin Howard

Okay. We have Mark.

Mark Holladay

It's about 22% write-down about $120 million.

Steven Alexopoulos

Okay. And when we think about the non-performers is the game plan here just to sell them? I'm just wondering if you really quickly convert through almost a billion of non-performers here in a reasonable time frame?

Mark Holladay

Well that really depends with the TARP. What we're looking at is – and I think what the government's looking at is a flexibility and the ability to move those in a more rational fashion and I think that's kind of where we're headed. We do think our current strategy for '09 is to exit about $125 million per quarter, combination of sales, and existing exits that we've got. We're exiting in a natural fashion. Right now about $60 million per quarter and the rest has been through other activities.

Richard Anthony

Steven let me add a little to this subject. We have – we're in the process of centralizing special assets. And under special assets will be our disposition strategy. So we're going to be making decisions quicker and really at the corporate level concerning all of these distressed assets throughout our footprint. We're going to have, probably four or five key techniques. You'll continue to see absolute auctions. We feel that results we've gotten there have justified continuing on. But this one that's taking place now probably will be it until we get to the late winter or early spring. We will look harder at note sales, whole loan sales. We have the one that I mentioned in the works. But there will be more bulk sale possibilities that come from the – really, the funds and the – and the money that's been pooled for this purpose that – that is contacting us on a regular basis. Short sales continue to be an option for houses in Atlanta. That is a technique that is effective and we will be using that.

There are some other techniques that have been presented to us that we're studying that might involve some disposition of assets, but retention of some contingent positions so that if there is upside realized we could participate to some degree. So there are new techniques that are emerging as we go through this cycle, and as I say, these pools of money are being accumulated and are sort of being directed toward banks. I think you're going to see more innovation taking place on the way assets are disposed of in the future than has been the case in the past. And then our asset disposition strategy is going to be more still directed toward the houses as opposed to the developed lots. It's just still not a good time to really be aggressive there. So as we have some buildup, it's going to occur more with developed lots. I don't find it really tolerable to let the numbers of houses in other real estate continue to accumulate. That's the portion we must aggressively turn and the absolute auction technique is always a tool that can be used there.

Steven Alexopoulos

That's very helpful. Richard, just one final one. How are you thinking about provision expense here relative to charge-offs over the next couple of quarters?

Richard Anthony

Mark?

Mark Holladay

Right now we're – our current estimates or provision expense will be about 125 to charge-offs. 1.25 times.

Steven Alexopoulos

Is that for 2009?

Mark Holladay

Yes. It is. On average about a one and a quarter.

Steven Alexopoulos

Perfect. Thanks, guys.

Richard Anthony

Thank you.

Operator

Thank you very much. We'll take the next question from Nancy Bush. Your line is live.

Nancy Bush

Good afternoon.

Richard Anthony

Hello, Nancy.

Nancy Bush

Couple of questions here. The C&I loan that you said when is a non-performing, the auto dealer can you tell us how big that was and what kind of loss, would you like to take on it, I am assuming it is Bill Hurd [ph] and tell me if I'm wrong.

Kevin Howard

Nancy, I don't believe, we've not been in a habit of releasing that level of detail with individual customers or individual loans.

Mark Holladay

Nancy, it's Mark. That loan was $53 million. That particular dealer had locations in the southwest and the southeast. And really what happened there is their locations in Las Vegas and Scottsdale, Arizona, and Orlando, Florida were the issues that created their problems. We've charged off about $3.2 million on that credit. We have assets located here and in Atlanta and other personal assets we do believe that, that credit can be reduced at about a $20 million level in the next quarter.

Nancy Bush

Okay. Secondly, your view of charge-offs in the fourth quarter, the 1.15% rate and that 1.15% range to 1.30% range in '09, can you just kind of tell me what – because it seems to assume that things do not get dramatically worse from here and we're sort of getting a drum beat of dramatically worse economic news everyday and a pretty poor outlook for '09. How economically dependent is that charge-off range for '09?

Kevin Howard

That charge-off range would not – that would not be the stressed level. That would – there could be some upside to that.

Nancy Bush

Okay. And thirdly, I would ask, I think you said that there – you have, “a chance at being profitable in the fourth quarter,” which is kind of I have to read it there is a chance you are not profitable in the fourth quarter. I guess my question is at what point do you have to just omit the dividend if you have sort of two loss quarters in row is that it or can it go on for a while?

Richard Anthony

I expect the dividend would go on would be my opinion. We got a good capital position. We got our own view of the future. We have reduced it significantly as you know from 17 to $0.06. Our expectation would be that the dividend payment would continue.

Nancy Bush

Even with sort of consecutive loss quarter and maybe occasional loss quarter in '09 as well?

Richard Anthony

I guess anything is subject to further review and capital comes first. So it would be, I mean, you could debate the scenarios. We – the objective would be to – for the run rate to end up in profitable territory, although it's not going to be robust as opposed to consistent rating. And that's why we're trying to get some information that would allow you all to make some projections on your own. But like you say, the economy is highly uncertain. So there is a stress level out there that would involve a set of assumptions that could be more dire. We don't feel that way today. And I'm still really feeling good about some of these other categories that are holding up at this point in time. Even C&I which was impacted by the one big credit is holding its own, the consumer book is as well, I mentioned that and the investment properties too.

Nancy Bush

Okay. Thank you very much.

Richard Anthony

Thank you.

Operator

Thank you very much. We'll take the next question from Tony Davis. Your line is live.

Tony Davis

Richard, good afternoon.

Richard Anthony

Hi, Tony.

Tony Davis

You mentioned that someone would ask about delinquencies and I guess I'm the guy. Wonder if Mark could give us some color here on 30-day, 9-day past dues in the C&I book in home equity in one-to-four family since all of that is so important to driving your provision level. Just kind of wondering what you're seeing here sort of systemically.

Richard Anthony

Okay. Mark, can you take that on?

Mark Holladay

Yes, I think I can. If you take a look at our investment properties – our total past dues were 1.46, for the quarter they were up $38 million. We did have one credit, past due credit that paid current only a few days after the quarter that was $19 million. Had that been made prior to the quarter and that was in a 90-day category. That would have brought our past dues down into the 130s category kind of like it was last quarter. Our 90-days were 18 basis point and that's where that credit actually lied. If you look at our investment properties, past dues were down $14 million, one-to-four family was up $34 million, that's where that $19 million credit landed. Land was flat. C&I was up 10, retail was up 7, and credit card was only up a few hundred thousand dollars. If you look at it by state, I will just give you that.

Tony Davis

If you do that it will be great. Give us maybe NPAs by state, Mark on whether special number for maybe Atlanta, West Florida.

Mark Holladay

Okay. Past dues were for Alabama were down $5.6 million. That are 50 basis points. Florida was up a million at 1.52, Georgia was up $30 million, again that $19 million credit was in there, 1.77. South Carolina has 1.35, it was up $9 million and Tennessee at 0.92. HELOC is that 80 basis points. Mortgage is that 1.54. Other consumer at 1.48, and credit card at 2.44.

Tony Davis

Okay. Right. Tommy, while you there, wonder if you could tell us the other components of the margin impression link quarter and have you seen no relating with deposit pricing competition even after TARP?

Tommy Prescott

I would be glad to, Tony, I think Richard mentioned a 5 basis points that we purposely spent to bar down the Fed funds purpose to lesion. We had one additional basis point of credit carry there in the quarter so that leaves 9 basis points and it was split between some payoffs, paydowns on some high yielding fixed rate loans. In addition to that we had some absorption of the remainder of the residue I guess from the lower average prime rate in the quarter which was 8 basis points on average below the second quarter. And then two, your point on deposits, it's – whatever we can do right now is generally on the asset side. The marketplace is competitive. We got the great edge with the shared deposit and you have to pay a fair rate on it but it's not a hot rate. But the rest of the deposits which you are competing for with the folks that are out there in the marketplace with the very high deposit rates and you have to play on the same field. So and it really has not let up.

Tony Davis

Okay. Thank you very much.

Kevin Howard

Thank you, Tony.

Operator

Thank you very much. We'll take the next question from Adam Barkstrom. Your line is live.

Adam Barkstrom

Hey, gentlemen, good afternoon.

Kevin Howard

Adam?

Adam Barkstrom

Hey, Mark, the auto dealer loans. It's $53 million outstanding. What were you saying about the assets you might reduce that in the next quarter by $20 million, did I get that right?

Mark Holladay

Yes, that's about right. That loan we believe will go down by about $20 million. That's based on a contract – two contract offers that we have. Yes, multiple remaining collateral.

Adam Barkstrom

So why don't we talk about the remaining collateral? What is the remaining collateral on that?

Mark Holladay

Well, we have two auto dealerships. One of those are under contract we've got –

Adam Barkstrom

That's the piece being sold. So the remaining stuff.

Mark Holladay

Okay. We've got a dealership, one additional dealership. We've got some personal property valued at roughly $20 million. Some other assets outside of the dealership.

Adam Barkstrom

Mark, would you specify when you say dealership you're talking about real estate?

Mark Holladay

Real estate, yes, I'm sorry. So it's a combination of assets, primarily real estate is the base assets.

Adam Barkstrom

Probably a tough question to answer at this point because you are probably – perhaps going through the process of valuing all that. But from a collateral position perspective on the full $53 million do you think you guys are going to come out whole on this or – ?

Mark Holladay

We took a loss in the quarter and we do believe that we are at fair value right now.

Adam Barkstrom

Okay. Fair enough. Was curious about, Richard, your deposit system and you talked about that, with the FDIC going up to 250 per account that took you roughly from what $3 million-ish to $8 millionish?

Richard Anthony

That's right.

Adam Barkstrom

How does that – so – that being said – does that what FDIC insured account programs are you guys going to participate in or not participate in going forward and does this kind of give you any kind of competitive advantage on the FDIC insurance cost relative to some of your peers?

Richard Anthony

I don't know about the insurance costs. We are participating in the new program that's available with the ten basis point cost tied to it. Tommy you want to?

Tommy Prescott

Yes, there is really no play on the FDIC insurance cost off of a shared product. But one – the one avenue we have an election on and we have elected and announced to be in the BDA noninterest bearing transaction account coverage and to extend that beyond the base period that FDIC put out initially. And we just felt like that was that we should do to be very competitive with that type of deposit.

Adam Barkstrom

Okay. If I could ask one follow-up. Richard, you'd mentioned the commercial loan puts. Can you give us a little more color or Mark, could you give us a little more color as to how those work, the magnitude of that, and why we (inaudible) Richard, you said it's a high yield and high quality.

Richard Anthony

Yes, this is a good portfolio of loans and we think when the market clears we'll probably get back in the business of putting – placing them with investors with our letter of credit behind them. But we'll have a total of about $800 million likely on our books at the end of the year. These have good yields associated with them. The activity of puts has slowed dramatically and really gone down to nothing in recent days. So there's not any more movement taking place there. But as you know from what we're saying, we have been able to fund that on our balance sheets without even drawing on our Fed funds lines. So our deposit gathering capabilities have allowed us to take this on and really just to be fine with it. We really don't see a lot more happening, although it could. But we have a total including our municipal letters of credit issues backed by letters of credit we have a total of about a $1.6 billion.

Adam Barkstrom

Okay. Thank you, gentlemen.

Richard Anthony

Thank you.

Operator

We'll take the next question from Heather Wolf. Your line is live.

Heather Wolf

Hi, good afternoon.

Richard Anthony

Hi.

Heather Wolf

You had mentioned that you plan on participating in the capital injection program and I know there are some banks that have actually received some informal indication from the regulators that they would qualify for the programs and I'm just curious if you had those conversations yet?

Richard Anthony

I think everybody is having conversations with their regulators and we certainly are on a daily basis. I don't know – I think I have heard actually during the day-to-day that others are reporting specific conversations like you're mentioning. I don't know whether our conversations would fit into that category or not. But we certainly feel great encouragement and we feel that our ability to qualify is extremely high. We have regular daily contact with the regulator. But it may not be the same kind of contact that you're making reference to, Heather.

Heather Wolf

Okay. That's helpful. On the OREO expenses it looks like there was about $25 million that was not related to the auction and I'm curious if that further charge-off than what you had anticipated or if it's just the cost associated with managing the properties.

Richard Anthony

Mark?

Mark Holladay

Yes, Heather, that as Richard indicated earlier in the call, we did have a very intense look at all of our properties and that was fair value write-downs against the ORE.

Heather Wolf

So you wouldn't expect the same delta in the write-downs?

Mark Holladay

That's accurate.

Heather Wolf

Okay. And then just one last question on the commercial real estate. It looks like you guys are starting to experience deterioration in the term and construction. Can you just talk a little bit about what you are seeing there and what you expect going forward?

Kevin Howard

Heather, this is Kevin. In the commercial real estate, within that portfolio, we've had actually improvement in the past dues. We've moved – as Mark mentioned we had $40 million in the second quarter, we moved at $15 million less than that this quarter. 19 basis point. We had a very small office in around northern part of Georgia that was past due. Non-performing loans in the investment commercial real estate portfolio ticked up just a little bit. $5 million. Non-performing ratio there is 20 basis point and our charge-offs are pretty much – I mean they were 4 basis points on an annualized basis. That portfolio is very diverse geographically. It is mixed up between the multifamily hotel and retail. No real concentration again geographically. Hotels within the flags there's no real concentration. Multifamily is real spread out by type – property type and the retail portfolio no real tenant exposure there. We feel real good about that portfolio at this point.

Heather Wolf

That's great. Thanks so much.

Richard Anthony

Thank you, Heather.

Operator

Thank you very much. We'll take the next question from Todd Hagerman. Your line is live.

Todd Hagerman

Good afternoon, everybody. Just the follow-up on the earlier question on the deposits. Richard, just in terms of participating on the transaction accounts and the deposit insurance there, just curious if you can give us a better sense in terms of stabilization in those deposit flows coming out of the quarter into October here. How that insurance is perhaps influencing those flows coming into the quarter?

Richard Anthony

You are talking now about transaction accounts?

Todd Hagerman

Right. The unlimited insurance.

Richard Anthony

Okay. I don't know how much pressure we felt there. I think we did have a decline. I am looking at Leila Carr, she really manages this bit of information for us. Leila, do you want to speak to that?

Leila Carr

In terms of noninterest bearing deposit account base we had a net positive growth linked quarter of 2% annualized and we actually saw a modest increase in average balances linked quarter in the noninterest bearing DDA and we've seen that hold up through the month of October. Had a stable deposit base going through the month of October. So I don't think we have any concern about the noninterest bearing account behavior at this point in time. And actually in the month of September and the height of sort of consumer confidence issue, we monitored withdrawal activity on a daily basis, we monitored closed account and accounts following through the zero balance on a daily basis, even ATM withdrawal activity and we have seen no evidence of fundamental change in our core account base from previous quarters.

Todd Hagerman

Okay. So and just to follow on with that, just no distinguishment between either the commercial account customers or the retail depositors in that regard or any discernible difference?

Leila Carr

No, relatively speaking, probably more growth in the retail account base than commercial, but relatively speaking we have no concerns.

Todd Hagerman

Okay. Terrific. And then just separately, maybe, Mark, just in terms of the sales themselves in terms of the note sales and the bulk sales. Just to clarify I think Richard you may have mentioned that you took a $43 million mark on impaired loans in the quarter which I believe is double from previous quarters. I just want to get a better sense of what type of activity you may have experienced here in the quarter as it relate to those loan sales and if you noticed any discernible differences either by market in terms of geography, investor behavior that sort of thing in terms of the market disruption?

Mark Holladay

Not on the auction. In the second quarter we moved about $40 million if I remember right and took about a $13 million charge against those good auction process. Our yields are remaining in the ballpark of where we've been. We obviously have thought about some seasonality potential, things like that. Right now things look pretty stable. We do have an auction planned in November that we mentioned to you we'd already taken the loss for. The estimate is comparable to what we have been seeing. In terms of the note sales, we've been pretty selective about property types we're moving and we're in the process right now of reviewing loans to determine whether or not we will do that in the fourth quarter.

Richard Anthony

Todd, and I kind of know what you're getting at. These vulture funds and the interest that has been expressed all along has typically involved a pretty widespread between the bid and the ask. And we've had people come to us and then we'll hear ultimately something like $0.20 or $0.30 on the dollar which is just not realistic. I think what you're driving at is whether the money that is out there is getting more serious now to get up in a range that would attract interest from a bank like ours. Is it fair to say that's – is that what you are driving at?

Todd Hagerman

That's a fair assessment or conversely, just given kind of a more sober view of the economic outlook particular whether that's in Metro Atlanta or Florida, if perhaps folks are kind of stepping away from the table at this stage of the game?

Richard Anthony

I'm looking at Mark and Kevin because they get calls weekly, daily. Is there any difference in the appetite that is out there from these funds that are being formed in your opinion?

Tommy Prescott

Well we have had some visits from some people who really want to focus on Atlanta looking at rates of returns that are maybe a little more attractive than we've seen in the past. And I think there maybe is a sense that from an absorption rate that we kind of hit a peak months of supply, Atlanta is at 12 months. But if you look at the starts and the supply that's left we're expecting those absorption rates to begin dropping this year. So we're seeing some interest like that, buying, going in and buying a $100 million pool of loans in a particular area, things like that. But right now we're not seeing anybody moving away from the market.

Richard Anthony

Todd I had a visit a couple weeks ago someone I have known for a long time and they are going to put together $100 million fund that will buy income producing properties and resort markets and condominiums as well as houses and they were pretty close to pulling the trigger but – and they are close to the situation. They felt like they were still about a year away from wanting to commit into this investment program. So that's just an anecdotal situation that I can pass on to you. But they felt like late next year would a better time to embark on that opportunity as opposed to now.

Todd Hagerman

I appreciate. That's helpful. Thank you, Richard.

Richard Anthony

Okay.

Operator

Thank you very much. We'll take the next question from Christopher Marinac. Your line is live.

Christopher Marinac

Thanks. Good afternoon. Mark, I was wondering if you could give us maybe a rundown of your – of the health of your top 5 or top 10 credits or 15 credits from a size perspective are any of those on the non-performing list? Are there any concentration concerns?

Mark Holladay

No, none of those are in the non-performing category. They are all performing.

Christopher Marinac

Okay. And those would out there on the watch list either?

Mark Holladay

We may have one of those on the watch list.

Christopher Marinac

Okay. And then a separate question for Tommy, just related to the changes in the Fed funds purchase. Do you just by that being a permanent change or may that vary as things develop over the next year?

Tommy Prescott

I believe in this current environment we would prefer to stay away from that source of funding as a mainstream source. We'll use it periodically. I mean we're willing to build the deposit base both core and brokered and to keep that to a minimum.

Christopher Marinac

Okay. But from a margin perspective is that incrementally harmful to margins?

Tommy Prescott

There is a cost to the margin for the short haul to do that. And we are interested in keeping these Fed fund lines available and we'll use them some. But there is a tradeoff every day on funding and margin. And we feel like being erring to the side of not counting on these Fed funds every day is a good thing.

Christopher Marinac

Sure. Very well. Thank you.

Richard Anthony

Thank you, Chris.

Operator

Thank you. We'll take the next question from Scott Valentin. Your line is live.

Scott Valentin

Good evening. Thanks for taking my question. With regard to the broker deposits is there a level that you guys see kind of capping that. There has been some rumblings, the FDIC I guess kind of focusing on banks that have high levels of broker deposit, maybe increasing the assessment for such deposits. Is there any level did you think you will peak out at?

Tommy Prescott

As you know there isn't a set of rules or whatever, there is some marketplace discipline, there is a regulatory view. And I think it's in the context of how you're doing otherwise. But we feel like somewhere in the neighborhood of 30% of deposits would be a reasonable threshold.

Scott Valentin

Okay. And then you mentioned the TARP program, application for that. Is there any thought regarding the FDIC debt guarantee maybe paying the fee and having issuing some Tier 1 debt?

Tommy Prescott

Our understanding of the way that works it counts on debt that was extended during the – period that ended on September 30th. And matures I believe some date in '09 and we really weren't in the market at that time. So we don't see that piece as being available to us. But we do see the transaction account piece being attractive and something we've actually already done.

Scott Valentin

Okay. And one last follow up question. Some of your peers made comments that the overstage delinquencies are remaining relativity stable, but one of the problems is moving assets and getting control of the assets through court systems in certain states, and therefore you are seeing kind of an increase in later stage delinquencies and OREO. Is that something you're seeing as well?

Mark Holladay

Well, really only Florida is – that creates an issue for us just from a timing standpoint we're really not seeing that with our other states.

Scott Valentin

Okay. Thank you.

Richard Anthony

Thank you.

Operator

Thank you very much. We'll take the next question from Rob Rutschow. Your live is live.

Rob Rutschow

Hi, good afternoon.

Richard Anthony

Hi, Rob.

Rob Rutschow

I guess first question is on the Fed funds. Do you expect to take that down to zero in the fourth quarter?

Tommy Prescott

No, it doesn't have to be zero. In fact, the real message on these Fed funds is earlier this year we had a $2 billion sort of net Fed funds position. And in the, really, I guess, late first quarter, but mostly in the second and third quarter we just didn't like that. And we decided to move it down and so we're comfortable at a modest amount of Fed funds net position to keep the lines fluid and keep them tested but we just didn't like it at the $2 billion level and would rather have it be closer to zero than that. That's kind of the writing we operate in.

Rob Rutschow

Okay. With regard to the TARP program, first, can you give us any delusion estimates for participating? And second I'm wondering if there has been any indication that a company like yourself that is not earning their dividend would be required to cut it to participate?

Richard Anthony

I'm unaware of that. And I guess the time frame of which the review is done would be a factor on whether your thought to be earning your dividend or not. But the delusion and the cost is pretty simple. The – as you know, the 5% preferred dividend is certainly a cost, and then the 15% warrants that are attached would carry some cost associated with that. One investment banker said, well, just kind of add two points on to the five and you got 7% preferred out there which could not be matched in the real market. So the delusion and the impact is not significant giving – given other alternatives that exist.

Rob Rutschow

Okay. That's helpful. Last question is it sounds like you're going to be flowing down the pace of selling or disposition into the winter months here. I guess if you can give us any idea given your history in Atlanta and elsewhere what that might mean for both the OREO costs and for NPAs as we look at not only the fourth quarter but the first quarter as well?

Richard Anthony

The – we – Mark, do you want to give some guidance on – we have some run rates that were really sort of doubled I guess on those costs in the most recent quarter. I think we see those dropping back down at least in the fourth quarter.

Mark Holladay

Yes, I think our exit strategies for the fourth quarter right now are comparable to what we've been doing. We are – like I said, taking a hard look at that. But our expectation would be to exit at about the same pace. And then end of '09 we actually are projecting to pick that pace up some. The – we're allocating $20 million a quarter for that purpose as well as another roughly $20 million for ORE movement as well. 20 in the provision and 20 in the ORE. So I don't want you to believe that we are slowing things down. We're just making sure we're making the right decisions. Our expectations on, the run rates are going to – are pretty close to what they have been gross run rates around $250 million, $260 million. And then our exit strategies would give us some increase in NPAs in the fourth quarter, but nothing of a real high magnitude, nothing more than what you've seen in the prior quarters.

Rob Rutschow

Okay. Thank you.

Richard Anthony

Thank you.

Operator

Thank you very much. We'll take the next question from Michael Rogers. Your line is live.

Michael Rogers

Yes, hi. Do you give the well above average (inaudible) exposure to construction loans as a potentially significant hurdle in your ability to have the application for new capital approved?

Richard Anthony

We had a discussion with our advisors on that today. And pretty strong opinion we received was it that would not be a problem for us. But we are aware that there will be criteria and that is the kind of example that could come from this review and approval process. But the individuals that we're working with are in pretty close touch with the treasury and the regulators and they felt very confident about our position there.

Michael Rogers

If you do get the full amount of available capital approved for your use where would that bring your Tier 1 capital ratio to? Any estimate?

Mark Holladay

It would be just under 12%. It would be 11.8.

Michael Rogers

So from mid 8 to –

Mark Holladay

From 8.8 to 11.8.

Michael Rogers

Got you. Have you talked to the rating agencies recently with respect to the quarterly results and any feedback from them?

Mark Holladay

We talked to them today actually and had a typical update conversation and –

Richard Anthony

I think they appreciated hearing from us.

Michael Rogers

Thanks very much.

Richard Anthony

Thank you.

Operator

Thank you very much. We'll take the next question from Kevin Fitzsimmons. Your line is live.

Kevin Fitzsimmons

Hi, everyone. Good evening

Richard Anthony

Hi, Kevin.

Kevin Fitzsimmons

Most of my questions have been answered. But I was just wondering I know it came up on the last conference call, Richard. The subject of Sea Island company and that issue came up in the Q&A last time. I was just wondering if you can update us on the status of that and where that stands, is that something that's on the watch list or is it in nonaccrual status now or is it good standing? Thanks.

Mark Holladay

The loan is performing, Kevin, and nothing really is different. They released information to the public a couple months ago about the fact that their financing package had been modified and increased and was in place. And they have had some successes and continue to really represent a premier brand on the East Coast. But we certainly are in constant contact with them and they are working on strategic flexibility for their future and I think doing the right things.

Kevin Fitzsimmons

Okay. Great. And then just a quick follow up. We had a number of questions about the TARP program. Is your preference, Richard, assuming you get approval for it to use that added capital to go even faster in writing down the problem loans and getting rid of it faster or holding that dry powder for acquisition opportunities that will inevitably come out of the shake out probably going to say?

Richard Anthony

Kevin, it will give us a little bit of several things and you mentioned a couple. But I mean, I think that we do want the flexibility to manage to the most effective manner our problem asset, special asset portfolio. And so if we need to accelerate something, I mean we'll have the cushion in place on our balance sheet to afford whatever we need to do. But beyond that, we're looking to a period of time when growth will become possible again and we look forward to being able to capitalize on competitive opportunities in certain markets or even acquisitions of distressed properties or banks in one form or another that come from this shakeout that's going to be going on in our industry. So we would not limit it to any single purpose. It would – this capital would be there to provide this cushion to give us the flexibility to capitalize on opportunities. Right now it would be hard to make a move in some of these directions, but with the TARP money on our books, we probably could.

Kevin Fitzsimmons

Okay, great. Thank you very much.

Richard Anthony

Thank you.

Operator

Thank you very much. (Operator instructions) And we'll take the next question from Jennifer Demba. Your line is live.

Jennifer Demba

Thank you. Question for Mark or Kevin. Regarding the larger loans that were kind of rereviewed during the third quarter, can you give us a sense of how many loans were in that bucket and how many were downgraded?

Mark Holladay

Yes, I think I can. It again, made up about 14% of our portfolio. A review of those – approximately 14 or 15.

Kevin Howard

Were downgraded.

Mark Holladay

Were downgraded.

Jennifer Demba

And that was out of how many loans?

Mark Holladay

Out of roughly our top 50.

Jennifer Demba

Okay. And second question you stated before you were more focused on disposing of finished homes right now rather than lots or land. Can you kind of give us some color behind your thinking there?

Richard Anthony

As we have been saying all along Jennifer, if you look at the risk of holding houses, the deterioration, the maintenance, the taxes, the insurance, the vandalism, there are just risk factors that are there. And we have found that the sooner the better, our performance is enhanced by having a policy that moves that way. There is a constraint from time to time in that we just can't put everything in an auction because we've got some houses that we take in that are in healthy neighborhoods and really can be sold in the normal course of business and sometimes we will allow houses for one reason or another to be marketed in a way that's not going to accelerate the turn. But, our basic philosophy is to deal with houses absolutely as quickly as we can because of those risk factors that I mentioned. Lots and land are not subject to those same risks. And we're willing to live with that a bit longer until we can get better absorption rates and more normal market activity which is going to be a couple of years out.

Jennifer Demba

Okay. Thank you. And one more question back on the larger loan review. How many of those loans are shared national credits?

Richard Anthony

Zero.

Jennifer Demba

Okay. Thank you.

Richard Anthony

Thank you, Jennifer.

Operator

Thank you very much. Gentlemen, that appears to be the last question in queue. Do you have closing comments you like to finish with?

Richard Anthony

I want to thank you for your continued interest in Synovus. We are working as you hear every day to manage this credit situation as thoughtfully as we can. We have really put a lot more resources into that effort just over the last month or two. I think we are more tightly managed around the process than we have been. And it is our top priority as we move to the end of this year and into 2009. So we will continue to communicate our progress. And again we thank you for being involved in the call this afternoon.

Operator

Thank you very much, ladies and gentlemen. This concludes today's conference. You may disconnect your lines and have a wonderful day.

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Source: Synovus Financial Corporation Q3 2008 Earnings Call Transcript
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