Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Pat Reynolds - Director, Investor Relations

Kessel Stelling - Chairman and CEO

Kevin Howard - Executive Vice President and CCO

Tommy Prescott - Executive Vice President and CFO

D. Copeland - Executive Vice President and Chief Banking Officer

Analysts

Todd Hagerman - Sterne, Agee & Leach, Inc.

Kevin St. Pierre - Sanford Bernstein

Craig Siegenthaler - Credit Suisse

Kevin Fitzsimmons - Sandler O’Neill

Nancy Bush - NAB Research

Jennifer Demba - SunTrust Robinson Humphrey

Mike Turner - Compass Point

Christopher Marinac - FIG Partners

Ken Zerbe - Morgan Stanley

Emlen Harmon - Jefferies

John Pancari - Evercore Partners

Erika Penala - Bank of America

Steven Alexopoulos - JP Morgan

Synovus Financial Corporation (SNV) Q4 2012 Results Earnings Call January 22, 2013 8:30 AM ET

Operator

Good morning, ladies and gentlemen. And welcome to Synovus’ First -- Fourth Quarter Earnings Conference Call. At this time, all lines have been placed on a listen-only mode, and we will open the floor for your questions and comments following the presentation.

It is now my pleasure to turn the floor over to your host, Mr. Pat Reynolds, Director of Investor Relations. Sir, the floor is yours.

Pat Reynolds

Thank you, Kate, and I thank all of you for joining us today on our call. During this call, we will be referencing the slides and press release that are available within the Investor Relations section of our website at synovus.com.

Kessel Stelling, Chairman and Chief Executive Officer will be our primary presenter today with our executive management team available to answer all of your questions.

Before I begin, I need to remind you that our comments may include forward-looking statements. These statements are subject to risks and uncertainties and the actual results could vary materially. We list these factors that might cause results to differ materially in our press release and in our SEC filings, which are available on our website.

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

During the call, we will discuss non-GAAP financial measures in reference to the company’s performance. And you can see these -- the reconciliation of these measures to our GAAP financial measures in the appendix to our presentation.

Finally, Synovus is not responsible for and does not edit or guarantee the accuracy of earnings teleconference transcript provided by third parties. The only authorized webcast is located on our website.

We do respect the time available this morning and desire to answer everyone’s questions. We ask that initially you limit your time to two questions. If we have more time available after everyone’s initial two questions, we will reopen the queue for follow-up questions.

Now, I’ll turn it over to Kessel Stelling.

Kessel Stelling

Thank you Pat, and good morning, everyone, and thank you for joining our earnings call. Slide four in the deck. Maybe says it all, it was certainly a milestone quarter for our company and a milestone year as well. I’m tempted to spend the entire call on this slide but there are a lot of other developments that I think are important to share with you.

But as you’ll see on this slide, net income for the quarter of $713 million, that relates to $0.78 on an EPS basis. The highlight of the quarter included $100 million income tax benefit from our deferred tax asset recapture. It also included as previously announced, the successful execution of distressed asset sales of approximately $400 -- $545 million, which drove dramatic acceleration in credit quality improvement, as you know we had announced the bulk sale earlier in December.

We also had net loan growth of approximately $345 million in the fourth quarter, up from approximately $240 million in the third quarter of 2012. We had reported loans declined by about $190 million, but keep in mind that’s after the impact of distressed loan sales of approximately $475 million.

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

I’ll take you to page five and talk a little bit about the DTA. As I just said previously, we did have an $800 million benefit from the deferred tax asset recapture, it was recorded in the fourth quarter and it was consistent with prior guidance on timing.

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

The recapture drove $0.89 per share increase in tangible book value per common share that now is at $2.96. Capital ratios also benefited from the deferred tax asset recapture, the biggest benefactor there was our tangible common equity ratio, which increased 232 basis points to 9.67%.

Approximately $714 million of the net deferred tax assets continue to be excluded from regulatory capital at December 31, 2012. The disallowed DTAs will decrease overtime, thus creating additional regulatory capital in future periods.

On slide six, I’ll take you to pre-tax, pre-credit cost income. We did see a slight decline in the quarter in credit cost. We’re certainly elevated impacted by the bulk sale as previously disclosed.

I’ll take you through a few of the components there. Our net interest income decreased about $5 million from the prior quarter, primarily due to higher interest reversals. Non-interest income excluding securities gains was up $5.3 million sequentially and a few contributors there were service charges on deposit accounts up about $500,000, our financial management services revenue was up a $1 million over the prior quarter, other service charges were up a $1 million driven by increases from some of our new initiatives and growth, and then we did have $1.8 million in private equity investment gains.

Credit costs of $186 million for the quarter were largely impacted by the $157 million in charges related to the distressed asset dispositions completed during the quarter, and as I mentioned before that was previously announced in December.

On slide seven, our net interest margin declined modestly quarter-over-quarter, the yield on earning assets was down 10 basis points. The effective cost of funds was down 4 basis points.

On page eight, and another big story of the quarter, although the DTA, the net earnings and the bulk sale might grab the headlines, the big story for us internally was the increased net loan growth, and I want to call your attention to several categories here.

We had sequential quarter net loan growth of approximately $345 million. That compares to growth of $239.6 million in the third quarter of ‘12 and $166.8 million same quarter a year ago.

C&I and retail loans on net basis grew approximately $250 million for the fourth quarter of 2012. Again reflecting the major effort we began several years ago to shift this company from one that had more of a commercial real estate focus to a much more broad and diverse C&I portfolio.

As mentioned earlier, reported loans on a sequential quarter basis declined and that decline was impacted by distressed loan sales of approximately $475 million that excludes the ORE, the total distressed sales for the quarter of $545 million. We had net loan growth for the year of approximately $589 million versus a decline of approximately $371 million for 2011.

On slide nine, I’ll speak again to the corporate banking teams, we did complete our first full year and I think it was a success by any measure. Again, that team consists of loan syndications, senior housing and other corporate business lines, outstanding from the group end of the year at $1,216 billion, compared to just over $1 billion in the third quarter and $633 million in the fourth quarter a year ago.

The outstandings are up $583 million from the fourth quarter of ‘11 and up $205 million from the third quarter of 2012. Great success in the group and also great success in how that group is working with our bankers across our footprint to capture more and more new business opportunities.

On slide 10, we see continued improvement in our deposit mix, favorable trends and lower cost core deposits, core deposits excluding time deposits increased $344 million, or 2.1% year-over-year.

Total deposits of about $21 billion decreased $1.35 billion versus the fourth quarter of ‘11 due to planned reductions in brokered and time deposits. Brokered deposits declined almost $700 million, or 38.7% from the fourth quarter of ‘11, now represent only 5.2% of our total deposits, compared to 8% a year ago, again good behavior on our deposit portfolio and great effort by our bankers as we continue to shift the mix there.

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

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

Page 12, talk a little bit about how our fee income initiatives contributed to core banking fee growth, our non-interest income excluding securities gains was up $5.3 million sequentially.

I’ll walk you through a few of the components there, 2012 fee income initiatives contributed about $4 million in additional core banking fees during the fourth quarter and approximately $9 million during the full year of 2012.

As I mentioned earlier, service charges on deposit accounts up about $479,000 or 2.3% from the third quarter of ‘12 and up $1.7 million or 9% from the fourth quarter of 2011. Our FMS group, financial management services revenues was up $1 million or 5.4% from the third quarter and up $1.1 million or 6% from the fourth quarter of 2011.

And one team within that group our FAM group or Family Asset Management, just want to call your attention again, they were recently named to Bloomberg list of Top 50 Family Offices in 2012 and recognized as the 35th largest in the world. We are very proud of that group and that team and what they do for our customer base.

Total reported non-interest income was $80.1 million in the fourth quarter, compared to $73.2 million in the third quarter of 2012, and $73.5 million in the fourth quarter of 2011. And again, non-interest income excluding investment securities gains was $72 million in the fourth quarter, compared to $66.6 million in the third quarter of ‘12, and $63.1 million in the fourth quarter of 2011.

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

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

Our total reported 2012 non-interest expense of $692.3 million was down $87.5 million or 9.7% year-over-year. And as previously discussed we recently completed a company-wide analysis of our cost structure. We’ve identified new expense savings initiatives of approximately $30 million. Implementation has begun and will continue during 2013 and we continue on a daily basis to focus on identifying additional opportunities there as we’ve said before it’s a way of life around our company and I want to complement our leadership and our team members for continuing to look the ways to make our company more efficient while focusing our attention service levels on the customer.

You’ll see the headcount slide at the bottom now just under 5,000 employees, down 261 employees year-over-year. Again, the graph goes back to 2007 and you’ll see that’s about our 2,400 employee decrease.

On slide 14, I’ll talk a little bit about the bulk sale and you may have questions for Kevin Howard later. $545 million in distressed asset sales during the quarter, again the major component of that was the bulk sale which was previously announced.

I’ll give you a little breakout of what that consisted of about 72% of that total was non-performing assets consisting of 14% ORE and held-for-sale loans and 58% non-performing loans. The balance was 21% substandard accruing loans and 7% special mention and other loans, about 70% of the assets sold in the fourth quarter were real estate related.

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

On page 15, you will see that our NPL inflows did spike up during the quarter from $115 million to $263 million this quarter. We do expect that to -- that inflow level to trend downward from 3Q ‘12 levels and return to normalcy in the quarter’s ahead, and I’ll talk a little bit about that.

The increase in the fourth quarter was due primarily to the addition of one larger credit relationship, which was moved from substandard accruing to non-performing status. Again, substantially all of this relationship was previously classified as substandard accruing. So it resulted in minimal impact on our classified assets in the fourth quarter of ‘12.

As I said earlier, we expect the NPL inflows to return to 3Q ‘12 levels or below during the first quarter of ‘13, trend downward thereafter. We feel we can give that type of guidance with some degree of confidence as we continue to de-risk our portfolio.

If you look at the make-up of our substandard and special mentioned credits, which are where the large majority of potential defaults come from. We now have only two substandard accruing credits and six special mentioned credits greater than $20 million, none of which are over $40 million. So again those pools of loans have decreased in overall size and certainly size of individual loans as our teams continue to derisk our balance sheet.

On page 16, again big story there, decline of 37% in NPAs from a year ago ended the year at $703 million, compared to $899 million in the third quarter of 2012 and again $1.117 billion, fourth quarter a year ago, 37% decline. It was actually 22% decline just from the third quarter of 2012.

Our NPL ratio now stands at 2.78%, compared to 4.40 a year ago. And our NPA ratio stands at 3.5% compared to 5.50% a year ago. And again, our plant even with the impact of the larger credit relationship that I just referred to NPA still experienced a significant decline this quarter, down $196.3 million, or 22% in the previous quarter and down $414.3 million or 37% from a year ago. So, very pleased to how our NPA should continue to decline.

On page 17, we’ve talked a good bit about the effort at the bank to reduce classified assets and how that effort was key to our ability to dividend cash from the bank of the parent at the appropriate time and key to what we believe will be seeking regulatory approval and we’ve said we want to get that below 50%. So we’re very pleased to report our classified asset ratio in the fourth quarter of 2012 at 38%, a $1.347 million down from about 51% in the third quarter of 2012.

So we had guided that we would get that below 50% at year end. Shortly, the bulk sale gave us a big jumpstart and we now stand at 38%. That was 62.5% just a year ago. So very pleased with the downward movement of classified assets.

On page 18, you’ll see our charge-off for $194 million or 3.94% and certainly the net charge-off for elevated by the bulk sale, we expect to see meaningful reductions in charge-off during 2013, again trending down from previous levels and I’m sure Kevin Howard will get into that in the Q&A today.

On page 19, just to brief comment on past dues continue to remain at low levels. Total past dues at 0.54%, 30 to 89 days past due, past dues at 0.51% and are accruing over 90 at 0.03%. So our -- I think it speaks to the continued healing of the portfolio and the efforts of our bankers to work with customers over time. I’m very pleased with past due ratio there.

Page 20 speaks to, again we talked about how we continue to de-risk our portfolio earlier certainly in the number of problem credits and the size of those problem whereas this is another great slice of looking at our loan portfolio by risk grade. I think the key takeaway is here, pass rated credits are up $1 billion or 6.4% from a year ago and up $376 million or 9% annualized from last quarter.

Our substandard special mention of non-performing loans combined experienced a decline of $1.6 billion, or 37.5% in 2012 versus a year ago, now represent 13% of our total loan portfolio as compared to 20% a year ago. So again big increase in past rated credits, decline in the categories you would expect to decline, further evidence of the de-risking of our balance sheet.

Page 21 show you a little bit of the effect of the DTA recapture and its effect on different capital ratios and tangible book value. Again, the graph on the upper left tangible book value per common share increased from $2.07 to $2.96 in the fourth quarter, moving to the right the tangible common equity ratio increased from 7.35% to 9.67%.

Our Tier 1 common ratio remained relatively flat, 8.73% to 8.72% in the quarter and our Tier 1 risk-based capital ratio moved from 13.23% to 13.24%. And again as I said previously, some of the disallowed DTAs will decrease over time and it will create additional regulatory capital in future periods. And I’m sure Tommy would be happy to talk to that again in the Q&A.

Slide 22, again just want to show the effect of the DTA recapture on our bank capital ratios. And I know you all follow the consolidated but certainly the bank capital ratios will be a factor as we seek approval later this year, the dividend, capital from the bank up to parent.

So you’ll see Tier 1 leverage ratio in the quarter move from 12.12% to 12.01%. Total risk-based capital moved from 15.85% to 16.14% and our Tier 1 risk-based capital ratio 14.59% in the third quarter, 14.88% in the fourth quarter, healthy capital levels at the bank level.

And then my closing slide on the deck before we transition in the Q&A that really the fourth quarter was just continued execution of the plan we’ve laid out. We believe well-positions us for TARP repayment later this year. We -- as we’ve said previously the DTA and TARP repayment were necessarily linked but we did believe one was important to the other and we’re pleased that we did have the $800 million DTA recapture in the fourth quarter.

We’ve said that it was important to get our classified capital below 50%. And as we’ve said previously we had improven that ratio to 38% at year-end, both of those results we believe improved our ability to upstream dividends to the holding company, certainly subject to regulatory approval.

As we’ve said before, that repayment will come from three primary components, parent company cash, dividends from the bank up to the parent with regulatory approval and the balance from some combination of debt and/or equity. So I can’t give further guidance at this point other than we continue to work with our regulators as we refine our plan -- refine our capital planning process, stress our balance sheet and have the discussions that we believe will be necessary with all of our constituencies, regulators, treasury and others to have the appropriate official exit during this year.

We’ve said earlier it would be no later than the fourth quarter of this year. We still believe that and we’ll be anxious to share the details with all of you as we get further down the road in our discussions with our regulators.

So with that operator, I’ll be happy to open the line up to questions. I have Tommy Prescott, Kevin Howard, D. Copeland and others standing-by for questions. So I’ll turn it back to you at this time.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question today is coming from Todd Hagerman [Sterne, Agee & Leach, Inc.] Please announce your affiliation and pose your question.

Todd Hagerman - Sterne, Agee & Leach, Inc.

Good morning, everybody.

Kessel Stelling

Good morning.

Todd Hagerman - Sterne, Agee & Leach, Inc.

Kessel, I just have a question just in terms of the DTA and the TARP repayment, if you will. As you mentioned, with the DTA recapture reflects kind of your outlook in terms of the sustainability, profitability of the company, you’ve also kind of alluded that you’ve met several of the hurdles as it relates to the regulators.

But I’m just curious, can you kind of square where you are in terms of with the accountants and the DTA recapture relative to the outlook for the TARP, kind of, no later than ‘13. And I believe last quarter, it was more of a function of the first half of ‘13. I’m just kind of square, what your model suggest and kind of what the regulators perhaps are still looking for as again you emphasize the sustained profitability outlook for the company?

Kessel Stelling

Yeah, Todd, I’ll try and take a stab at that. We have not changed our guidance on TARP repayment at all. We said last quarter that it would be no sooner than the second quarter and no later than the fourth quarter of this year. And we still stand by that guidance.

We have said that the DTA would be no later than the fourth -- no sooner than the fourth quarter and no later than the second quarter. So the TARP is going to follow that sequence. As it relates to the accountants and this DTA recapture has been certainly a rigorous process for our company and without going into all of the discussions and test certainly for us to release earnings today and share the news of the DTA recapture that would suggest that our accountants have certainly agreed and signed off on our financial presentation.

As it relates to the regulators, I certainly and I can’t speak for them. They’re on the phone right now. I think they also were looking for this DTA recapture not just for its financial impact on our statements but for the sign of confidence of the sustainability of future earnings or the sign of credit healing that certainly went into this.

So I think it certainly will factor into how and when they discuss the TARP exit. So as it relates to timing, again this is a big event. It’s hot off the press. These now factors into our forward capital planning because certainly we will have capital accrete over time and it’s a big event. But it will move right back into again the discussions of our long-term views on capital, our long-term views on if we stress the capital through the planning period, what that might do or not do to capital levels we have and that will just be part of the regulatory dialog.

So it’s absolutely consistent with our plan. It’s consistent with the plan we had shared with regulators and it again moves us just into the next phase of planning, which is check off the DTA. And now we’ll focus on the other things, which are continued performance, continued loan growth, continue earnings growth as we get the TARP exit. But I don’t want to box ourselves or them in on specific timing other than to say, we have regular conversations with all of the agencies today and that will continue with a lot of energy over the coming months.

Todd Hagerman - Sterne, Agee & Leach, Inc.

Okay. That’s very helpful. And if I could, just a follow up, in terms of the profitability, as you acknowledged, the PP&R slipped a little bit this quarter as it relates primarily to credit-related costs. But the number is at a relatively low level versus what you’ve seen the last couple of years, if you will.

Could you give us any kind of a sense, again, with the credit clean-up this quarter on a go-forward basis? I mean, where do you see kind of the underlying profitability of that PP&R going? What’s your outlook again as you look to that sustained positive trajectory on profitability?

Kessel Stelling

Yeah. Unless Tommy wants to trot me and go further. I don’t want to guide a number there. I would say this that I’ll talk about the components and we were very pleased to see actually the reported loan growth down $190 million after sales of $475 million was pretty strong.

We won’t have those types of loan sales going forward and we had net loan growth to $345 million. So there is certainly pressure on that line. But as I talked about our bankers across the footprint performed well to get net loan growth to $345 million or other business lines, mortgage, advisory, services and other lines are doing well, our family office, we mentioned. So I don’t want to give specific guidance as to the number, but the components were just continued to work on and hopefully see increases in.

Todd Hagerman - Sterne, Agee & Leach, Inc.

Thanks very much. Appreciate it.

Kessel Stelling

Thank you.

Operator

Thank you. Our next question today is coming from Kevin St. Pierre. Your line, please note your affiliation then post your question. Your line is live.

Kevin St. Pierre - Sanford Bernstein

Good morning. Sanford Bernstein. Tommy, maybe you could help us out with the DTA which we now can see in all its glory on the balance sheet, maybe you could comment on the mechanics and the speed at which you expect it to migrate into regulatory capital?

Tommy Prescott

Yeah. Kevin, I’ll be glad to do that. The and of course, there is an additional slide in the appendix that gives you a little more color on the DTA. But $810 million reversal of the DTA valuation allowance was $800 of that fell straight into the equation, the $714 million out of that $810 million that was excluded from accounting and regulatory capital right now.

We would expect that that would grow. It would be a dynamic process over each quarter of the year. We look out into the future and that the impact on -- immediate impact on the fourth quarter capital was about a wash with the bulk sale loss that we took or the loss that we took for the quarter, example of that would be Tier 1 common was impact at about 39 basis points and it was basically offset with the quarterly loss.

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

Kevin St. Pierre - Sanford Bernstein

Okay. And then just unrelated follow-up, but if you could help us maybe identify the impact of the $157 million on the bulk sale on the income statement line items. Can you tell us where that $157 million is split up on the income statement?

Tommy Prescott

Yeah. I think Kevin Howard wants to answer that question, so I think I’ll be glad to let him do that.

Kevin Howard

I think it shows up in the ORE expenses and in the provision within the credit cost and that’s where that.

Tommy Prescott

Yeah. That’s component of all those.

Kevin St. Pierre - Sanford Bernstein

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

Kevin Howard

We are -- I mean, I can tell you the overall provision was $147 million and the ORE expense was $35 million, that’s the total credit costs. The expense associated with this was about $29 million in ORE and the reminder of the $157 million would have been in provision.

Kevin St. Pierre - Sanford Bernstein

Okay. Thank you.

Operator

Thank you. Our next question today is coming from Craig Siegenthaler. Please note your affiliation then post your question. Your line is live.

Craig Siegenthaler - Credit Suisse

Good morning, guys.

Kessel Stelling

Good morning.

Craig Siegenthaler - Credit Suisse

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

Operator

Ladies and gentlemen, please hold for just a moment. Ladies and gentlemen, please hold for just a moment, we are experiencing some technical difficulty, we’ll be back on in just a moment. Ladies and gentlemen, please continue to hold for just a moment, we will resume the conference momentarily. Ladies and gentlemen, please hold for just a moment. Ladies and gentlemen, we do apologies for the delay please hold for just a moment more. Ladies and gentlemen, the speakers have rejoined us.

Kessel Stelling

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

Operator

Certainly. Craig Siegenthaler, your line is live.

Craig Siegenthaler - Credit Suisse

Hey. Great. So I’m just going to repeat the question. This is Craig Siegenthaler from Credit Suisse. Can you remind us what the key capital or leverage ratios are within the regulated bank sub? And then really how this impacts your view of 12-month forward dividend capacity?

Tommy Prescott

Yeah. Craig, we -- I’ll be glad to answer that. We really didn’t, cut the line off because of your question because we hadn’t heard it yet, but we apologize for that. The -- you can see the bank regulatory capital that’s on the slide 22 and we always say that the one that gets the most attention is the one that’s the weakest, I guess. But in reality there are all important Tier 1 leverage ratio, I believe in our previous disclosure has was announced that needs to be at least 8%, so we got a nice buffer there.

The other ones don’t have specific rules on them right now, but they have very robust ratio with total risk-based capital at over 16%. And then Tier 1 risk-based capital at almost 15%. So it’s safe to say that at those levels even before the DTA recapture that there was sufficient runway to approach regulators at the appropriate time for meaningful dividend.

Craig Siegenthaler - Credit Suisse

Okay. But these are the ratios for the entire company, right, not just the bank where you’re going to request the dividend and the capital from?

Tommy Prescott

Well, the bank ratios on the slide 22 are the important ones for, that is not the consolidated ratio that is the bank-only.

Craig Siegenthaler - Credit Suisse

Yeah.

Tommy Prescott

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

Craig Siegenthaler - Credit Suisse

Got it. Then just as I follow-up, if you were -- if you are not able to dividend as much capital as you would have liked this year and the -- there is a common equity component. Could that change your view of timing, maybe pushing the TARP repayment into 2014, would you rather have it done this year with a common equity component?

Kessel Stelling

Yeah. That, Craig, this is Kessel, that’s a hypothetical. I don’t want to get to. I think certainly, time has been our friend and obviously in this process, but we’re mindful of the increase in rate in December of 2013 when the TARP dividend would go to 9%.

So we don’t want to push right up against that date. We believe the bank and the company continues to improve its risk profile through the year. Our classified to capital is already at 38%. We expect that to trend down.

And so, it could push our timing out during the year. But at this point, I don’t foresee anything pushing our timing out beyond what we’ve already discussed other than lack of regulatory approval, which again, is not a warning or anything we expect, it’s just what, that’s what happens or what we have to go through to get the repayment. So it could push us closer to the December date, but I do not see us going into 2014 with TARP on our balance sheet.

Craig Siegenthaler - Credit Suisse

Okay. Great. Guys, thanks for taking my questions.

Kessel Stelling

Sure.

Tommy Prescott

Thanks, Craig.

Operator

Thank you. Our next question today is coming from Kevin Fitzsimmons. Please announce your affiliation then post your question. Your line is live.

Kevin Fitzsimmons - Sandler O’Neill

Sandler O’Neill. Good morning, guys.

Kessel Stelling

Good morning, Kevin.

Kevin Fitzsimmons - Sandler O’Neill

Just a few quick ones if you could. You mentioned before that one of the sources of repayment being parent cash, if you can remind us what that amount was at year end? And then secondly, if you can just talk about, you had -- what you guys called successful bulk sale this quarter. What does that do about your likelihood of doing further sub sales in the next two or three quarters? Thanks.

Kessel Stelling

Kevin, the parent company cash was about $360 million at year end, as far as the sales certainly don’t expect to see a bulk sale. But I’ll let Kevin Howard to talk a little bit about what he believe will be our disposition activity in the first quarter and for the reminder of the year.

Kevin Howard

Yeah. Thanks Kessel. Good morning, Kevin. We expect -- our pace of dispositions will lighten with the bulk sale and the big number we posted in the fourth quarter. We had gathered previously $100 to $150. We see just with lower NPA levels, lower classified levels and hopefully a better environment where we’re not going to disposition out as much as we would like to restructure, upgrade credits maybe just self-liquidate some of the credits. So our disposition volume going forward should be somewhere in the $50 million to $75 million a quarter and we still believe we’ll achieve good reduction in NPAs and classified assets.

Kevin Fitzsimmons - Sandler O’Neill

Okay. Thank you very much.

Operator

Thank you. Our next question today is coming from Nancy Bush. Please announce your affiliation then post your question. Your line is live.

Nancy Bush - NAB Research

Good morning. NAB Research. Two questions guys. The first one, I mean, we’ve had a milestone quarter here as you said, but after we’ve seen these milestone quarters at other companies, we also see a lot of clean-up costs that follow. Could you just give us your thoughts about, costs we’ll see in coming quarters?

Kessel Stelling

About cost we’ll see, is about…

Nancy Bush - NAB Research

Clean-up costs, I mean, legal, et cetera, et cetera, that are and we already know that there is a possible settlement out there that was announced last week, is there anything else that, is going to be coming down the pike here?

Kessel Stelling

Well, Nancy, I mean, there is always some we expect obviously legal cost to continue to trend down as our problem portfolio comes down, as it relates to what you mentioned last week, there is no material impact there to that specific incident. I mean, litigation risk is risk that our industry deals with now and so that’s always out there on the horizon of cost but there’s nothing major that we know of today that in terms of a cleanup costs is just continuing to work through the cycle.

We hope legal fees come down. We hope consulting fees come down. And we disclose in the Q and okay, the potential costs of litigation that’s out there and it’s a broad, broad range. I’ll look at Tommy and Kevin to see if they want to be any more specific than that.

Tommy Prescott

I’ll be glad. Just to add on a little bit, I mean, the events of the fourth quarter being the bulk asset sale and DTA recovery, those things on their own should not have any sort of residual impact or cleanup related to those. But as Kessel said, stuff can happen along the way but we are assuming a more stable environment than that.

Nancy Bush - NAB Research

Okay. Thank you. Secondly, there was a big jump in bank card income from third quarter to fourth quarter. Can you tell us what that was about?

Tommy Prescott

Yeah, Nancy, I’ll be glad to do that. There was seasonal lift in that and also an adjustment that was related to the points program that had expired.

Nancy Bush - NAB Research

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

Tommy Prescott

Just directionally, I’d say that both those items that lifted the fourth quarter were non-recurring, seasonal and then one-off. So I think their run rate is closer to the future run rate.

Nancy Bush - NAB Research

Okay. Great. Thank you.

Tommy Prescott

All right.

Operator

Thank you. Our next today is coming from Jennifer Demba. Please announce your affiliation and pose your question. Your line is live.

Jennifer Demba - SunTrust Robinson Humphrey

Good morning. SunTrust Robinson Humphrey. Question, Kessel, do you have any visibility at this point as to when you think the balance sheet could stabilize and loans could start growing again? I know that the bulk sale impacted you in the fourth quarter.

Kessel Stelling

Yeah, Jennifer, I mean, we’ve been close and again to show a decline of $190 million after a bulk sale that includes $475 million in loans, we were really pleased in the fourth quarter. So I think as the disposition activity trends downward as Kevin talked about and we still see the kind of production that we’re seeing out there, we’ll start to see an upward trend.

But I don’t want to be time specific about that. But, in general, again the loan sales will slow down and will invest in bankers that can help us grow earning assets. So we are cautiously optimistic about 2013 and beyond.

Jennifer Demba - SunTrust Robinson Humphrey

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

Kessel Stelling

Yeah. I’ll ask D. Copeland to take that one for us.

D. Copeland

Yeah. Jennifer, couple of things that are out there, as Kessler pointed out in the slide. You had roughly about $200 million of that net loan growth within large corporate growth. That would have been split between senior housing which would have been the larger part of that and then some of the loan syndications that we’ve been done, which would be the smaller part of that piece in the 200.

If you look at the additional 145 in loan growth, which would have been across the geographies, let me may be attack that in two different ways. One would be based on the new loan fundings that we had for the quarter from a geography standpoint. It really was dispersed across all five states pretty well. So that was very good sign for us on new fundings. And our new fundings in the fourth quarter would have been very similar to the third quarter as well.

As far as industries and that category, the movement would be some additional local healthcare. It would also have been ag related that has been a very good market for us in our neck of the woods and for a couple of years. And we had some good growth there.

In addition to that, on the investment property, we had some growth in the multifamily side as well. Part of that was growth and part of it was that was not much of it included in the asset sales that took place. So kind of jumping around a little bit, I think those would be the major components of the growth.

Jennifer Demba - SunTrust Robinson Humphrey

That’s helpful. Thank you.

Kessel Stelling

Thank you.

Operator

Our next question today is coming from Mike Turner. Please announce your affiliation and pose your question. Your line is live.

Mike Turner - Compass Point

Compass point. Good morning.

Kessel Stelling

Good morning.

Mike Turner - Compass Point

Just on the operating expenses, it looks like your core expenses excluding credit-related costs are around $170 million a quarter. What’s your ability to maintain that or potentially even garner further savings going forward? And I don’t know, is there also ability to reduce your FDIC-related expenses?

Tommy Prescott

Mike, the third quarter number was about $167 million and you were right, we were just over $170 for the fourth quarter. And we had guided that that’s about where it would land. And it’s really the fourth quarter run-up had to be with some additional performance based, incentive based and some elevated professional fees.

We think those are mostly one-offs and should subside some in the first quarter. And the first quarter, of course, you always have the front-end loading of employment taxes and so forth. But bottom line, we think from, kind of, taking it for where we are right now to about $171 million, we think in the first quarter that you could see a number that looked more like the third quarter and then as some of these efficiency initiatives kick in we believe, particularly in the second half of the year, you could really began to see some downward traction on the expense side.

Keep in mind, we’re reinvesting along the way. So every penny of the $30 million savings we mentioned may not show upon the financial statement. But directionally we can see first quarter slightly down, second might be stable and then the back half of the year some meaningful traction on the efficiency initiatives. Hope that answers your question.

Mike Turner - Compass Point

Yeah. No, that’s very helpful. And then on the origination side, where are new loan origination yields, I’d say maybe in the C&I? Like, what did you book in the fourth quarter, what were average yields?

Kessel Stelling

I think as far as we’ve grown from the overall disclosure is -- basically what we’ve done from a new and renewed standpoint, we would have been in the low fours on an overall new and renewed for the quarter. It would have been down about 10 basis points or approximately 10 basis points over previous quarter. So there has been some pressure on that line and we continue to see there probably would be a little pressure on that going forward.

Mike Turner - Compass Point

Okay. Great. And sorry, just a follow-up to an earlier question that was asked. Could you maybe remind us of the mechanics of the recognition for the disallowed DTA, like how do we think about modeling that or how long will that take to get back into regulatory capital going forward?

Kessel Stelling

This time I’ll give you a little bit info there. It’s a little over -- it’s in the neighborhood of $2.1 billion of pretax income that’s required to support the amount of DTA that we just recaptured. So it’s obviously multiple years. We’re really not prepared to disclose, I guess, the exact amount of years that we model. But it is multiple years and that won’t evolve along the way as we watch actual performance. But that’s really as far we can go right now.

Mike Turner - Compass Point

Okay. That’s helpful. Thank you.

Operator

Thank you. Our next question today is coming from Christopher Marinac. Please announce your affiliation and pose your question. Your line is live.

Christopher Marinac - FIG Partners

Thanks. Good morning. FIG Partners in Atlanta. Tommy, I wanted to ask just from another direction of Nancy’s question earlier. The expenses for ORE write-downs this quarter, how much was kind of normal or that was unrelated to the asset sale?

Tommy Prescott

Kevin will like to answer that question.

Kevin Howard

$10 million to $12 million in that range would’ve been unrelated.

Christopher Marinac - FIG Partners

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

Kevin Howard

Yeah. It should -- it’s been tracking around 20 before this big quarter, the low 20s, mid 20s. We expect that to track down probably in the 15, probably moving its way down during the course of the year. But yet it should comfortably get below $20 million in the forward quarters coming.

Christopher Marinac - FIG Partners

Okay. Very well. And then Tommy, just on -- I guess from the capital question post TARP, the leverage ratio appears like it is going to be more important as you make other capital decisions. Would you agree with that and how would you look at dividends and other capital deployment from a leverage perspective since that leverage ratio is sub 8% after TARP?

Tommy Prescott

Chris, the leverage ratio gets a lot of attention at the bank level and it will be one of the guard rails if you will as to how far you can go and moving any dividend from the bank to the parent company. So I agree that’s an important one. They will all be important as we go through this exercise.

Christopher Marinac - FIG Partners

Okay. Very good. Thank you very much.

Kessel Stelling

Thanks Chris.

Tommy Prescott

Thanks.

Operator

Thank you. Our next question today is coming from Ken Zerbe. Please announce your affiliation and pose your question. Your line is live.

Ken Zerbe - Morgan Stanley

Sure. It’s Ken Zerbe from Morgan Stanley. The question on the net interest margin, obviously it’s held up pretty well over the last year or so. But just given where cost to deposits have come down to, given the substantial improvement in the NPAs already, obviously as a result of the bulk sale, going forward, should we start to expect more of an industry average decline in margin or is there other things that we should be taking into account?

Tommy Prescott

Ken, this is Tommy. We’re not immune to the forces that are affecting our industry and -- but I can go -- when you look at the fourth quarter, you had 10 basis point decline in earning asset yields. And some of that came from the securities portfolio. We are largely on the investment portfolio cycle then to the low rights and we still have some downward pressure on the maturities but lot of that’s behind us.

On the loan side, that accounted for the biggest part of the 10 basis points. About four of those basis points were related to interest reversals and we believe that that’s probably not recurring. So you wouldn’t have as much pressure without that. I guess, we also had a four basis point decline in the cost of funds which provided some buffer. So 10 minus four got you six basis point decline.

It really, I guess, was within our guidance, where we said that the 351 in the third quarter would be down modestly. On a first quarter basis, I think I had offered the same guidance, we’d have modest decline and I would say that that decline would likely not be as much as it was in the fourth quarter. Beyond that, we’ll be a lot of the future margin will have to do with how successful we are with growing loans and how competitive we need to be and how aggressive we need to be on the funding side.

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

Ken Zerbe - Morgan Stanley

It does. Yeah. And then just one follow-up question in terms of the tax rate going forward, now that you have the DTA back, should we be modeling in a 35% tax rate on all earnings going forward?

Tommy Prescott

I’d call it mid 30s. That’d be right in the zone.

Ken Zerbe - Morgan Stanley

Perfect. Thank you very much.

Operator

Thank you. Our next question today is coming from Emlen Harmon. Please announce your affiliation and pose your question. Your line is live.

Emlen Harmon - Jefferies

Good morning. Calling from Jefferies. A question, I guess this would probably be for D., but if we think about, I guess, maybe the life cycle of the kind of corporate banking initiatives that you guys have -- you have had very good growth the last couple of quarters. Just kind of a question on what the sustainable growth rate is there. Obviously, probably on a percentage basis it’s going to come down, but I mean, do you guys think that you can put up the kind of couple hundred million dollars of growth on a quarterly basis that you’ve seen the last couple quarters?

Tommy Prescott

Thanks for the question. May be a couple of points, I would end up making one. Absolutely on a percentage basis, I would expect that to reduce. On an absolute dollars, I would say we would model something similar to what we had done in 2012. One other things, as you pointed out in the life cycle, as we’ve now gotten into as some of these loans are maturing, we will have more paydowns in that growth as well. So it will take a little more volume. They actually keep the same pace of growth. But I would say we would -- right now, we would be looking at in the ballpark could be down slightly but it would be in the ballpark of the same type dollar growth for ‘13.

Emlen Harmon - Jefferies

Got you. And are you still adding new lending teams in all?

Kessel Stelling

Yeah. We’re in the market looking for the right kind of talent all the time. We’re having conversion as we speak in both large corporate and different geographies and in different specialty lines. We’ve had -- we’ve had good success with that. I would say the conversations that we’re having currently give me optimism that we would be able to have successes with that in 2013 as well.

Emlen Harmon - Jefferies

Great. Thanks.

Kessel Stelling

Emlen, as well as, we will continue to look at requiring talent across the geographies as well for additional growth.

Emlen Harmon - Jefferies

Got you. Thanks. And then a quick one, just throwing it back over to credit. We think about NPL inflows, you’d indicated that the third-quarter level of inflows is where we should start kind of ramping down our inflow expectations. I guess a couple of questions on that front. One, could you give us a sense of just how large that one credit that came in to NPLs was that pushed the number higher in the fourth quarter?

And then also, should we -- I guess if we think about it, you guys pulled a bunch of, kind of, potential problem credits out of the mix this quarter. Should we be thinking about a pretty significant drop-off from that third-quarter level or just how should we be thinking about the pace there?

Kevin Howard

Yeah. As Kessel mentioned, we do expect that pace to continue trending down from the second and third quarter levels. I think 124 and 150 certainly could be some bumps as you get in the lower levels but we do expect that continue to be positive. Obviously, our substandard loans that reduced what some 42% during the year from year-to-year, lot less level of substandard loans. So we expects that the -- lot less -- more declines -- less declines, excuse me, more decline in the NPL inflow.

You mentioned you ask about the larger credit that might get into two specific on any customer information. We will tell you that it was multiple properties and multiple stage. It was a larger credit. It was over $75 million. It did influence the spike in the commercial.

If you look at that our property type, our commercial development and our land portfolios somewhat but we don’t have really -- we don’t expect that type going forward. We have only -- our internal hold limits have been established around $75 million and below. We have just two of those left, one of them is right over $75 million -- little over $75 million, less than $76 million.

It’s a strong past credit and the other one is approximately $100 million. And it is a very strong past credit as well and we expect that credit to be below $75 million before the mid-point of the year. So we don’t expect spikes like that in the future and Kessel laid out the substandard and the special mentioned levels we have. So going forward, we’re pretty comfortable guiding improvement and based on all of the indicators that Kessel mentioned as we went through the credit part of the deck.

Emlen Harmon - Jefferies

All right. Thanks for taking the questions.

Operator

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

John Pancari - Evercore Partners

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

Kessel Stelling

And Tommy, the question was much could be dividended up from the bank and how would we follow that? We’re having a little bit on volume trouble.

Tommy Prescott

Yeah. And we haven’t disclosed the amount of cash that we would even request. Obviously, you have to go though on approval process and look at capital ratios, look at liquidity and performance of the bank. And it’s -- we think that there is a meaningful level out there that could take a reasonable bite out of the TARP obligation but that is not something we’re prepared to disclose.

John Pancari - Evercore Partners

Okay. Then in terms of a potential debt raise on the other capital to be raised to get out of TARP, can you talk about how you think about the cost there? And if there could be any changes from the rating agencies, how that could benefit or impact your cost of raising debt?

Tommy Prescott

Well, I believe the cost would be a lot last than last time we went to the window and the markets has been favorable to that kind of opportunity. And just directionally, it’d be -- move in a very positive direction but not fare to disclose our rate.

John Pancari - Evercore Partners

Okay. All right. Thank you.

Tommy Prescott

Thank you.

Operator

Thank you. Our next question today is coming from Erika Penala. Please announce your affiliation and pose your question. Your line is live.

Erika Penala - Bank of America

Good morning. Bank of America. I just have a follow-up question to Kevin Fitzsimmons. You mentioned that at the parent you had $360 million of cash. Could you give us a sense of how many years of cash you typically like to keep at the parent to cover your liquidity obligations?

Tommy Prescott

Yeah. I’ll be glad to do that. The $360 million at the end of the fourth quarter, we’ll use about $70 million of that to complete the payoff of the 2013 sub debt that matures in February. So you are bringing that number down closer to $300 million.

The current regulatory two year, I guess, agreement guidance, however, we want to think of it is, is in the $270 million required range. We -- that number should go down closer to $200 required that they have two times coverage in the post-TARP environment, making some assumptions about mix of the TARP backfill.

But, so and obviously, we’ll be involved in activities as we repay TARP, including the dividend and might be certain capital market activities that could end up adding some through the parent company along the way. So hope that answer question.

Erika Penala - Bank of America

Okay. Yeah. Thank you.

Operator

Thank you. Our final question today is coming from Steven Alexopoulos. Please announce your affiliation then post your question. Your line is live.

Steven Alexopoulos - JP Morgan

JP Morgan. My question was looking at the $1.2 billion of corporate bank loans which you have on slide nine. Could you guys breakout the rough balance of that which are for loans that you’re participating in the credit but not the lead bank? And then maybe you’d give us some idea if we look at the 4Q loan growth, same sort of thought, what percent are you participating but not the lead?

Kevin Howard

Yeah. I would on all of the loans that we would be participating in, we are not the lead in -- we are not leading any, very few of those credits at this point. So the last majority of the syndicated credits that we would have are we -- I would say we’re not the lead in.

And if those and then as far as I breakout I need to look as far as which one were syndicated versus which ones are and I may need to 60% of the credits are actually are in the syndicated bucket. So as you would see, yeah, the syndicated, we’re not leading the vast majority of those and that would make up and that would make up how much of those credits are syndicated.

Steven Alexopoulos - JP Morgan

Okay. Thanks. And just one final one for Tommy, I know there are ton of questions today on cash and capital, right, needing to repay TARP. Just from your view, will you need to do some type of raise just to have enough cash at the holding company to repay TARP this year whether it be debt or equity?

Kessel Stelling

Steven, given that you, the dividend from the bank will account for a meaningful amount we believe but that and parent company cash currently on hand would not likely be enough to repay TARP. So, you then go down the list of other categories that might include debt or preferred stock first before you move into any other category. So we don’t believe that there is, cash is not sitting in the parent company or the dividend for bank to totally cover, we don’t believe, but can’t really disclose any more detail on that.

Steven Alexopoulos - JP Morgan

Got you. Okay. I appreciate that color.

Kessel Stelling

And that’s our last question I understand. I’ll wrap it up. I want to thank all of you for joining. We apologize for the communication failure. I hope we didn’t lose any of our questions due to that. We do appreciate your interest and your time and listening to our story today. As we said earlier, it was certainly a milestone quarter, we’ve said it was a transformational year, it was both and we’re very pleased to enter 2013 with this type of momentum.

I know the main stories were about the DTA recapture, the $713 million in earnings, the bulk sale and those are certainly all game changers for us, but I want to make sure that all of our audience understands. Our focus as we enter 2013 is, yeah, certainly on efficiency as we look for ways to take additional costs out of our organization. But our primary focus is on our customer and our customer growth initiatives.

We’ll work strongly using our -- our very strong community bank model. We’ll again compliment that with the additions to our corporate banking team that we’ve made and continue to make and then all other business lines.

I just want to remind the group that the evidence of our ability to do this is reflected in the numbers today. We had net loan growth in the fourth quarter of $345 million, for the year $589 million. We had strong performance across multiple business lines, advisory, brokerage, investment services. Again, our FAM group was recognized as in the Top 50 and the 35th largest in the world. So our model is working, I mean is working because not only do we have royal customers but we have just a great team.

And so I want to close by speaking to that team, many of whom are on this call and I did in the press release, but I want to do it again now, their loyalty, their perseverance and their passion for taking of our customers is what got us here today and is what will define us going forward. So I want to thank all of them who are listening.

I want to thank our customers who might be on the line who have shown tremendous trust and confidence in our company and then to the many shareholders, and analyst community that are there. I’ll just assure you on behalf of the entire team that our work is not done, we understand the challenges ahead and we are enthusiastic and energized about the quarters and years ahead.

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

Operator

Thank you. Ladies and gentlemen, this does conclude today’s conference call. You may disconnect your phones lines at this time and have a wonderful day. Thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Synovus' CEO Discusses Q4 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts