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Synovus Financial Corp. (NYSE:SNV)

February 13, 2013 11:00 am ET

Executives

Kessel D. Stelling - Chairman of the Board, Chief Executive Officer, President and Chairman of Executive Committee

Analysts

Craig Siegenthaler - Crédit Suisse AG, Research Division

Craig Siegenthaler - Crédit Suisse AG, Research Division

Up next, we'll have Synovus, a U.S. regional bank with its footprint positioned in the core southeast. Specifically, Synovus has most of its branches in Georgia, Florida, Alabama and South Carolina. The bank recovered its DTA valuation allowance in 4Q, lifting its tangible book value to almost $3, well above the current stock price. And with TARP repayment expected between 2Q '13 and 4Q '13, there still may be catalysts ahead for Synovus.

Here to provide details on the bank, we're pleased to present Synovus' CEO, Kessel Stelling. With that, I'll hand it over to Kessel.

Kessel D. Stelling

Well, thank you, Craig, and thank you all for taking time this morning and this week to be with us and to hear the story of our company as we continue to move along a path of progress that we outlined, hopefully several years ago, but certainly last year at this conference. I was reminded last night by one of our investors that maybe our story wasn't flashy but we had done what we said we would do 1 year ago and 2 years ago, and that really is our story, it's one of execution. And I think this past quarter and past year is a further testimony to that.

I want to also welcome my colleagues. To my far right, Kevin Howard, our Chief Credit Officer; Tommy Prescott, our Chief Financial Officer. In the audience, Pat Reynolds, Head of Investor Relations; and Nelson Bean who is CEO of our first commercial bank in Birmingham and runs our Alabama franchise. As we are on the road this quarter, we think it's more important than ever to talk about the opportunities we're seeing for growth. And certainly, our Alabama franchise has been a key to our franchise throughout this crisis.

I'm going to walk you through the earnings deck. There's not new information, so if you were on our earnings call, it might be a little bit of a repeat. But hopefully we can clarify anything in this presentation and also in the Q&A.

We refer to this as a milestone quarter. And again, the story of the quarter was $713 million in earnings, $775 million in earnings for the year, diluted earnings per share of $0.78. And that was the big headline in this graph. Hopefully it jumped off the page, it did at us. And it was again a milestone quarter, a transformational quarter, transformational year. But there were I think a lot of components that maybe got lost in the noise, I want to walk you through.

As we said last year at this conference, and we said in October, we believe we will recover the deferred tax asset no sooner than the end of the year and no later than the end of the second quarter. We felt confident in that guidance. We were pleased that we did recapture the deferred tax asset of approximately $800 million at year-end, a big, big event for our company. And we also executed the most successful bulk sale in our company's history, $545 million we announced on December 10. The bulk sale was announced in December 10, and again drove acceleration and credit quality and that, coupled with DTA in the same quarter, I think really does set the stage for the next big events of our company.

We were equally excited though about net loan growth of $345 million in the fourth quarter. That was up from $240 million in the third quarter. And again, I think a great testimony to the health of our franchise and the activity across our footprint.

Reported total loans were down $190 million sequentially. But again, that was after the bulk sale of $545 million. About $475 million of that was loans, the other was other real estate. But again very, very successful quarter not just by financial measures but by the activities that were so key to our continued progress.

A little bit more about the DTA. Again, as I said earlier, $800 million recorded in the fourth quarter. Confidence in the sustainability of future profitability at sufficient levels, as well as continued improvement in credit were important considerations both in the reversal and the timing of the reversal. And again, it was in line with prior guidance that we had shared with you. It drove an $0.89 increase in tangible book value to $2.96. Capital ratios received some boost, some slight, some significant TCE increased 232 basis points to 9.67%. That was the biggest boost. The rest of the DTA, $714 million of that is excluded from regulatory capital but will come back into our regulatory capital stack as we move forward and certainly earn money in the future. So we will have a built-in capital boost as we earn money as projected, and I think it will provide a healthy lift to capital ratios down the road.

Pretax pre-credit costs income declined slightly. Our credit costs were obviously impacted by the bulk sale. Pre-tax pre-credit costs income of $108 million, a little overshadowed I guess by the credit costs associated with the bulk sale, $186 million in all.

Just a couple of the components though that I want to call your attention to. Net interest income decreased about $5 million, primarily due to the higher interest reversals. Non-interest income excluding securities gains was up $5.3 million sequentially. Service charges up almost $0.5 million. Financial Management Services, our trust brokerage and Family Office Groups, up $1 million in revenues over the prior quarter. Again, a very healthy part of our franchise. Other service charges, up $1 million, driven by some of our new fee initiatives and growth. And we had about $1.8 million in private equity investment gains. Again, the credit cost of $186 million, the big driver for that was the $157 million in charges related to the distressed asset dispositions during the quarter. We thought it was a great execution, great timing. Again, announced in December 10, and consistent with our plan to move through this credit cycle and recapture the DTA and move on to bigger and better things as we'll talk about in just a minute.

The net interest margin, I think like most in our industry, we saw a modest decline from 3.51% to 3.45%. The drivers of that, the yield on earning assets, down 10 basis points; effective cost of funds down 4 basis points. Again, tough competition for loans, certainly competitive pricing. We've taken a lot of our deposit costs. We're actually pleased to maintain our margin in that vicinity.

Again, I think as big as the DTA and the bulk sale was the story of loan growth in the quarter we -- I touched on that earlier. But net loan growth of about $345 million, excluding the sales in loans held for sale. That compares to growth of $240 million a quarter ago and $166 million a year ago same quarter. On a reported basis, again, $190 million decline, $51 million growth last quarter, $22 million reported decline, same quarter a year ago. Our C&I and retail loans, again, our company as we laid out a strategy to move from the CRE bank to more of the C&I retail. We had net loan growth of about $250 million in the fourth quarter. Very pleased to see that, as again, I mentioned the reported loan growth was down. That was impacted by the loan sales. For the year, I think this fact might get lost sometimes. We had net loan growth of about $589 million. That compares to a decline of $371 million in 2011. So almost $1 billion swing there. And again, I think a reflection of the effort of the hiring, of the -- will focus on small business and middle market corporate banking efforts.

Speaking of our corporate banking efforts, we've outlined for you before our investment in talent in areas that historically our company was not strong. Our large corporate teams and this just reflects the success of their first full year. The end of the year, $1,216,000,000 in loans outstanding compared to $1,011,000,000 a quarter ago and about $633 million a year ago. That increase is up $583 million from the fourth quarter of 2011, up $205 million from the third quarter of 2012. I think our success is across the footprint with these large corporate teams and syndications, senior housing assisted living are doing a great job integrating with our core bankers across the footprint and opening doors for Synovus that we have previously maybe not been able to open.

On the deposit side, the story again is improvement in mix. We've got continued favorable trend in lower cost core deposits. Our core deposits, excluding time deposits, increased $344 million or 2.1% year-over-year. Total deposits, $21 billion. It was a decrease of about $1.35 billion, but that was due to the planned reductions in brokered and time deposits. Brokered deposits now represent about 5% of our total deposits compared to 8% a year ago. Again, it shifted to the core deposits and let those excess and brokered deposits run off, and so we're very improved with the improvement in mix there.

We talked earlier about the pressure on the margin. You'll see cost of funds here, 30 basis points, down from 34 basis points a quarter ago. 53 basis points in the fourth quarter of last year. On a weighted average, deposit cost for the year, you'll see 38 basis points versus 63 a year ago, 25 basis point improvement in the weighted average cost of our deposits.

We talked about some of the fee income initiatives just a little while ago. 2012 being kind of an issue, contributed about $4 million in additional core banking fees in the quarter, approximately $9 million in the second during the entire 2012.

A couple of other facts there. I think I may have mentioned some of these earlier. Non-interest income, excluding securities gains, was up $5.3 million. Again, the service charges, up $479,000. FMS or Financial Management Services, up $1 million over the prior quarter. So again, helped throughout the franchise there. Our Family Asset Management Group, I hope you all saw that in the I think early in the fourth quarter, named to Bloomberg's Top 50 Family Offices during 2012 and 35th largest in the world. We're very proud of that business as it continues to grow and expand within our footprint. I think it speaks to the diversity of our customer base and hopefully, opportunities for us as we diversify revenue streams longer term.

Total reported noninterest income was $80.1 million in the fourth quarter compared to $73.2 million in the third quarter, $73.5 million in the fourth quarter of 2011. And again, noninterest income, excluding investment securities gains, $71.9 million in the fourth quarter compared to $66.6 million in the third quarter, $63.1 million in the fourth quarter of 2011.

You heard our company talk a lot about efficiency, I did at dinner last night. I'll just remind you we announced in 2011 cost-cutting initiatives of $100 million. We said we'd get $75 million out in '11 and the additional in 2012. In fact, we reduced cost by $95 million in 2011, an additional $25 million in 2012, a total of about $120 million. Total reported 2012 noninterest expense was $692 million, down $87.5 million or almost 10% year-over-year. As I said to the group last night and this morning, efficiency and getting cost out of our model is a way of life for our company. We'll continue to look for ways to get cost out while investing heavily in talent and technology to better serve our customers. So these are net numbers when I talk about the $95 million and $25 million. And while we were taking that cost out, we were investing heavily in adding a lot of great talent to our company. We recently on the call announced an additional $30 million in cost cut that will come from attrition. It will come from some planned reductions in headcount as we continue to tweak our model, rationalize our brand structure, see the processes mature that we consolidated into central operations over the last 2 years and we just continue to get better at doing more with less and so our team is committed to do that. You'll see from the headcount slide here how we reduced headcount by over 2,000 people since 2007, an additional 251 this past year, but steady throughout the cycle. We announced in January of '11 the reduction of 800 people and we exceeded that and another 251. And I'll say to this, because I say it to our team all the time, we don't take pride in headcount reduction. We know every headcount we reduce has a name associated with it, a family associated with it. And so it will be a lot more fun when we get back to an environment where that's not the main topic of conversation. We can talk more about adding so that we can create more revenues. But I think we've been good stewards of our shareholders' money and done what we could to get cost out where appropriate there.

I'll talk a little bit about the bulk sale. We announced it in December of 2010. As we had said throughout the year last year, although Kevin gave guidance to asset dispositions, we always said we were in market every quarter with a large number of assets and in any given quarter, based on market conditions, based on economics, we may choose to accelerate. And we certainly did that in a big sort of way in the fourth quarter and we were very pleased with that execution. About 72% of the assets sold were nonperforming assets; 14% of that, ORE and held-for-sale loans; 58%, nonperforming loans; the balance, 21%, substandard accruing loans; and 7%, special mention or other. About 70% of the assets sold were real estate-related. They were spread across our footprint, no heavy concentration in any one asset class or other than real estate or any one geography, a good mix of assets, good execution. We had strong advisors, and again, very pleased with that execution. But also pleased that we can now take those resources and redeploy them in areas of growth and new business opportunities. So big, big quarter for us there.

Talk again about inflows. You did see a spike. We had said throughout the year that in any given quarter, we might see a spike. We said on the call this past quarter it was due to the addition of 1 larger credit relationship, the nonperforming status. What we said on the call, and I'll say it again, that substantially all of the relationship was previously classified as substandard accruing. So the movement of this relationship had minimal impact on our classified assets in the fourth quarter. We believe with a high degree of confidence that our inflows will return to third quarter levels or below for the remainder of this cycle. Although in any one quarter, you might have a spike. I'll give you a little color about that bucket, the bucket that normally leads to the NPLs. They usually come out of the substandard accruing, and prior to that they're in the special mention. And in that substandard accruing category now, we only had 2 credits greater than $20 million, none greater than $40 million. So 2 greater than $20 million, none greater than $40 million. In special mention, we have 6 greater than $20 million, but again none greater than $40 million. So Kevin and his team and our entire staff have done a great job de-risking our portfolio. Certainly, that problem loan bucket now, both of substandard accruing and special mention is not only greatly reduced in total amount but in terms of concentration in any one borrower. So again, we feel confident that the $115 million level from the third quarter will come in at or below that. And that trend should then continue down for the remainder of the year.

But even with the addition of the one relationship to nonaccrual, you'll see NPAs declined 37% from a year ago. Very pleased to see that number. $703 million, down from $899 million last quarter, down from $1,117,000,000, fourth quarter a year ago. So tremendous movements in the NPA ratio. Just to highlight those for you, NPLs ended the fourth quarter of '11 at 4.40%. This past year, we ended the year at 2.78%. NPA is 5.50% a year ago, 3.57% in the fourth quarter. Certainly still elevated beyond what we'd like, but tremendous progress and I think you can now see a cleared line path as we continue to push that level of NPAs down. And more importantly, take the resources we've dedicated there and get them back to productive things.

The classified asset slide I think is important. We had said all along that one of the keys to our ability to request dividends from regulators upstream to the parent, as we approach TARP repayment. One of the keys would be to get that classified asset ratio to capital below 50%. We ended the third quarter at about 51%. We were on a glide path to get below 50% in the fourth quarter and continue that trend throughout this year, but that bulk sale gave us tremendous lift to push that classified asset ratio down to 38%. Again, compared to 51% a quarter ago, 62.5% a year ago. Again, that's a key factor in our ability to get that capital stack right as we exit TARP and it allows us to continue our disposition strategy without any unnatural pressure as we continue to move assets through the cycle. So that was a big, big positive effect of the bulk sale, one of many.

Charge-offs were certainly elevated, 3.94%. Kevin has told many of you already today that we'll get that down below third quarter levels and trending down in that 1.5 range during the year and hopefully before that. But again the bulk sale certainly had an impact. Past due remained at historically low levels, 0.54%. 0.03% in the accruing over 90 days and 0.51% in the 30-to-60 day category. And again, we think a pretty good indicator of the overall health of our portfolio.

This next slide gives you another slice. We talked about how our portfolio mix has changed, fewer large borrower concentrations, fewer large borrower problem loan concentrations. This shows by risk grade, I think it shows tremendous movement in our portfolio. You'll see the blue bar is certainly the highlight, that's pass-rated credits and they're up $1 billion or 6.4% from a year ago, up $376 million or 9% annualized from last quarter. As you would expect in substandard, special mention and nonperforming loans combined experienced a decrease of $1.6 billion or 37.5% in 2012 versus a year ago and now represent 13% of our total loan portfolio as compared to 20% a year ago. So great shift, again, in borrower concentration and in risk grade as we continue to de-risk our portfolio.

This next slide again is just going to give you a visual of the effect of the DTA. You'll see in the green graph the biggest effect there in tangible book value per share, $0.89 per share increase to $2.96. TCE, to the right, other big beneficiary, now at 9.67%. Our Tier 1 common, 8.72%. Tier 1 risk-based capital of 13.24%. And then on the next slide, again at the Synovus Bank level, which I know most of you track, the consolidated but the bank is critical as we request dividend from the bank to the parents. We just wanted to highlight here those capital ratios as well. Tier 1 leverage, 12.41%. Total risk-based capital, 16.14%. Tier 1 risk-based capital, 14.88%. So very healthy capital ratios at the bank level I think position us well for the next main event, which is and should be TARP repayment. Now just to remind you all that we for the first time in the third quarter tried to narrow the book ends of when we thought DTA and TARP would occur and we gave guidance that DTA would be no sooner than the end of the year and no later than the end of the second quarter. And that TARP would likely follow, which would put it no sooner than the second quarter, no later than the end of the fourth quarter. We still believe that guidance is appropriate. Again, a key driver was the recapture of the $800 million deferred tax asset, the improvement of our classified to capital to 38% at year-end. Again, increases our dividend capacity. Certainly, the ability to request from our regulators is enhanced by that. And so now we'll move down to the real event itself.

And as I've told many of you in one-on-ones, we continue discussions with our regulators. It's primarily a Federal Reserve decision, but certainly the FDIC and the State of Georgia play a key role in there in that they do control and have certainly input the overall plan, but certainly the upstream of dividends has to have FDIC and state approvals. So they're key to that, but we're in discussions with all of the agencies right now as we model our capital, as they review our capital planning process, as they review our stress tests. We believe the outcome of that is we will submit a very well-thought-out plan that shows a combination of parent company cash, of cash to be dividend-ed up from the sub. And then some sort of capital markets action, which could include debt preferred and possibly some common equity as well. I know many of you have suggested in your notes or in your writings that we be more specific or that I be more specific, and if I could I certainly would. But I don't think that's productive right now to throw numbers out that I don't know that the regulators will approve or not. And it puts them in a box, and it may be even worse, puts me in a box. So we'll be as transparent as we can throughout the process. But at the end of the day, our goal is to exit TARP in a way that is very efficient for all of our constituencies. And certainly, the regulators are one. And I think the regulators certainly understand how our investors look at that exit. So it will be a healthy process, one that we think will produce results that we'll all be pleased with and our goal is to get out sooner rather than later. But certainly within the time frame we've laid out.

And I think Craig still has questions. But before I take questions, I want to just add we were asked a lot of questions over the last day or 2 about the overall strength of our franchise, the health of our franchise, the employee morale. And you can't come out of 3 years of bad headlines and $120 million of cost reductions and $30 million more in announcements and say that there isn't some impact on your team. But I will tell you, our team is as energized as I've seen. I think the recapture of the DTA put a little extra spring in everyone's step. I think the deposit share numbers that come out of the FDIC show that we're still top 5 market share in markets represent about 80% of our core franchise. I was looking at those numbers today. We're #1 market share in 14 markets in which we operate. So I think that speaks volumes to the loyalty of our customers, the loyalty of our team members and really to the overall health of our franchise now as we come out of this, remove any lingering doubts about our company with DTA, with TARP repayment, get back on our front foot, play offense and pick up gains hopefully in market share as we go forward.

So I thank you for your attention. Craig, I think you're going to host the Q&A. And I'll turn it over to you now.

Question-and-Answer Session

Craig Siegenthaler - Crédit Suisse AG, Research Division

Okay, so first we actually have 4 survey questions from the audience here. So if we can turn to the first question here. And those of you in the audience, you can use those black remotes in front of you to vote here. But first question is, do you think it's the most important driver for this -- no, what do you think is the most important driver for the Synovus share price in 2013? And there's 8 options here.

[Voting]

Kessel D. Stelling

You're surveying the audience now?

Craig Siegenthaler - Crédit Suisse AG, Research Division

Actually, we're going to give extra weighting to Pat over here in the front row.

Craig Siegenthaler - Crédit Suisse AG, Research Division

All right, let's see the answer here. 52%, which is the largest response here, said TARP repayment. 19% was M&A. Next question, please? What capital actions do you expect Synovus to take to repay TARP?

[Voting]

Craig Siegenthaler - Crédit Suisse AG, Research Division

Let's see. So the 46% of the audience said debt preferred and some common equity. 23% said they expect Synovus to actually acquire it before TARP repayment. Next question, please. When do you expect Synovus to repay TARP? And there's 5 options here.

[Voting]

Craig Siegenthaler - Crédit Suisse AG, Research Division

And the most likely response is #3, in 4Q 2013 with 39%. The second most likely response was 3Q '13, with 26%. And I think that was it for questions.

So Kessel, maybe just to start Q&A here and then we'll move out to the crowd. You said you're top 5 market share in 80% of your market, if it came down to raising some common equity as a requirement from regulators for TARP repayment, would you consider asset or branch sales in the 20% of the markets where you're not top 5?

Kessel D. Stelling

Yes, we would, Craig. We've been very clear. By the way, I love your survey. I actually agree with the answers on all but one question. I won't tell you which one because then I'll probably have disclosure issues. But all but one I agree with the audience, that was helpful for me. We would absolutely consider that. We have done that throughout the cycle. I mean we've, certainly it was, I guess, 2007, we spun off TSYS but we sold our Visa shares, we sold our merchant portfolio. It was suggested during the really the depth of the crisis that we look at branch sales, asset dispositions in markets in which we didn't occupy that type of position. And as I said often, it sounded great on paper, but in reality, the only M&A activity going on then was forced. And so the options were if you exited the market, you sold your good loans maybe at par. If you're lucky, you kept all of your rated loans, you kept your expensive real estate, you gave your low-cost deposits to the acquirer and you kept the rest. And so it was not even wasn't capital accretive. But, yes, as we move to TARP exit, we will continue to look at every source of capital because we understand -- we absolutely understand the amount of dilution our shareholders have already taken throughout this crisis. We're sensitive to it. We know many of you are shareholders, maybe all of you are shareholders. And we would look at every avenue as part of TARP exit.

Craig Siegenthaler - Crédit Suisse AG, Research Division

Any questions in the crowd?

Kessel D. Stelling

I just want to add to that, there are not markets we've given up on. Just because we're not top 5 market share, we're in some great markets. You look at markets like Tampa where we have new leadership and a lot of great things going on. Not strong market share, but doing well there. The same in Nashville, some great wins there. And our Memphis market, our large corporate team has had some good success. So we're not retreating. But certainly, when you go through any type of process like we have and go into TARP, you'd look at your options.

Craig Siegenthaler - Crédit Suisse AG, Research Division

A question in the front row. Can we get a mic, please?

Unknown Analyst

So you brought the DTA back into the capital base. What does that mean for your ROEs going forward? And how are you going to allocate this capital? One of the -- the regulators talk about this all the time, one of the most dangerous things in their purview is a bank with too much capital. You just had this slug come in. Do you have any plans as to what you're going to do with it?

Kessel D. Stelling

Well, regulators have not shared with me their opinion that banks have too much capital. So we'd love to have that criticism from them. But I will say that, so it came back for GAAP purposes, but from a regulatory standpoint, less than $100 million has come back into regulatory capital. So I think the bigger issue for us is when you exit TARP, you're going to exit with a point-in-time snapshot of regulatory capital ratios. But there's going to be this built-in accretion overtime that will come from the allowable portion of the DTA as it comes back. So we could likely find ourselves 18 months, 2 years post-TARP with what even regulators might assume excess capital. So you've got to deal with that, whether that's through M&A, whether that's through special dividend, whether that's through a share buyback. We hope that we will get, even though it's not counted as regulatory capital, we will get certainly some recognition and credit for the fact that the DTA is back for GAAP purposes and will come back over time and it's pretty easy to model how that will happen. So that will be a discussion down the road. But I certainly think that, again, 1 year to 2 years post-TARP, capital levels will grow with a boost that maybe some of our peers don't have, which will give us a little courage to try and exit with maybe less. But I'll be careful about that because as I'm sure our regulatory friends are on the line or webcast right now.

Craig Siegenthaler - Crédit Suisse AG, Research Division

I think that's it for questions. Kessel, thank you very much and also just to let you guys know, there's going to be a lunch in the second track with Jonathan Gray who is the Global Head of Real Estate of Blackstone. Thank you very much, guys.

Kessel D. Stelling

Thank you, Craig.

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Source: Synovus Financial Corporation Presents at 2013 Credit Suisse Financial Services Forum, Feb-13-2013 11:00 AM
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