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Executives

Richard Anthony - Chairman and CEO

Fred Green - President and COO

Kevin Howard - Chief Credit Officer

D. Copeland - Chief Commercial Officer

Tommy Prescott - EVP and CFO

Analysts

Nancy Bush - NAB Research

Adam Barkstrom - Sterne Agee & Leach

Steven Alexopoulos - JPMorgan

Christopher Marinac - FIG Partners

Ken Zerbe - Morgan Stanley

Kevin Sampier

Jennifer Demba - Suntrust Robinson Humphrey

Bob Patten - Morgan, Keegan & Company, Inc.

Paul Miller

Steve Covington

Synovus Financial Corporation (SNV) Q1 2009 Earnings Call April 22, 2009 4:30 PM ET

Operator

Good afternoon ladies and gentlemen and welcome to the Synovus sponsored First Quarter Earnings 2009 Conference Call.

At this time all participants have been placed on a listen-only mode and the floor will be open for your questions and comments, following the presentation.

Now, I would like to turn the floor over to your host, Mr. Richard Anthony. Sir, the floor is yours.

Richard Anthony

Thank you very much. And I want to welcome each of you to our first quarter conference call. We are in the middle of earnings season, and we here in the executive group, like you have been paying close attention to the announcements that have been coming from banks.

I guess we all would agree there have been mixed results. The main story; the core of the story for almost everyone is credit. We'll certainly spend appropriate time on credit in our call. But first, I want to recite to you several positives that we feel are noteworthy in the Synovus story.

On the deposit front, I have some details later, but we have had continued good momentum and success in that area in liquidity and deposit gathering. We have an improving story with our margin. We will share some information with you on that.

We continue to work hard on our expense base; we're seeing traction there, we're seeing good results. And throughout our footprint, even though a lot of attention is focused on Atlanta and perhaps parts of Florida; many of our markets remain solid. And as a result, many of our banks continue to be good contributors to Synovus’ performance.

Before I move into the quarterly performance, I want to mention a downgrade that has been announced actually just in the last 30 minutes from Moody's. I'm sure most of you have seen that on the screens.

Synovus was downgraded multiple notches, we were aware of this possibility. We have planned from a capital and liquidity standpoint for it. Moody's and their assumptions has taken a harsh view, particularly with real estate related loan portfolios.

But I wanted to share that with you, in case you had not seen the news, but more importantly I want you to know that this was not a huge shock and that we have prepared from a balance sheet standpoint.

As you saw in our earnings announcement, the net income or net loss for the quarter before the preferred dividend was a $137 million on a per share basis; this converts to $0.46. If you take that back to the fourth quarter of '08, excluding our goodwill write-down, the comparable number was $195 million.

Of course the key driver, as I said earlier, had to do with the credit cost. Our provision itself was $290 million in the quarter, compared to $364 million in the fourth quarter of '08.

Residential construction and development continues to be the largest component of credit cost, with the Atlanta market being the primary area of concern. 40% of the provision that we incurred in the first quarter relates to the Atlanta area markets.

We continue to build our reserve during the quarter. It increased from 2.14% to 2.32%. If you go back a year, it was 1.46% at the end of the first quarter of '08.

Non-performers increased significantly to $1.75 billion, which is 6.25% of the portfolio. The factors to consider here have to do with the contingent migration, related to the housing recession that we all are painfully familiar with.

We did add a large resort/hotel relationship, which is in the form of a restructured loan that is being finalized over the next several weeks. This added almost a 100 basis points to the non-performing asset ratio.

The exits in the first quarter from our NPA list were not at the level that we expect them to be over the next two to three quarters. Few things to consider there, the seasonality factor entered into some of our tactics and that the peak selling season was just around the corner, we were holding back a bit there.

We have been viewing, as you would expect with a lot of interest, the legacy loan program coming from the government public/private partnerships that are being put together. We believe that some new avenues for disposition will be opened up as a result of this program, and we want to see more from that. But the information that we want to see is not yet totally available. So, we will continue to follow progress there.

We had some bulk sales that we entertained. We held back on a few of those because the pricing did not suit us, but we will have a greater level of exits from this portfolio over the next two quarters as I said earlier.

We organized a little differently and I guess in a stronger fashion in the special assets area in recent weeks. D. Copeland, one of our executives has taken on some supervisory responsibilities there for special assets as we have centralized much of the activities in Synovus here at the corporate level.

The tactics are obvious, but if you wonder exactly what we will do to sell these assets that I am making reference to, the auctions will continue. The note sales are going to be increasingly important for us to work this NPA list down.

At the local level, the short sell activity is picking up. It will continue to be used more aggressively by our banks in their local markets and we will always have a bias toward disposition at the local level to buyers who are familiar with the communities, with the markets, with the properties as opposed to bulk selling to those who are coming in from outside trying to pickup something at a highly reduced price.

I’ll shift into deposit activity now, I said earlier, it was a positive story. Core deposits are up $1.5 billion over last year or 6.9%, and on a linked-quarter basis, 7.5% or $410 million.

The mix of our deposit base continues to be better as it improves and moves into the lower cost transaction account categories as we have become even more disciplined on the CD pricing. And our certificates of deposit, percentage of core deposits is declining some, certainly it did in the first quarter.

We have this unique advantage that no one else has with our shared deposits, both CDs and money markets, meaning that, through our charters, we can pool in our 30 charters insurance coverage giving a single customer up to $7.5 million of protection on a single account.

This more disciplined pricing that I am referring to is showing up in the margin. I'll speak a little about that. If you go quarter-to-quarter, you'll see that our margin declined from 3.20% to 3.05%, there is more to the story.

Six basis points of the decline was credit related and nine basis points reflected the rate reductions that took place in the fourth quarter. But if you look within the quarter, you would see that from January to March, we had improvement from 2.96% in the margin in January to 3.16% in March.

On the asset side or on the loan side, we have worked diligently in our banks and throughout the company on loan pricing, pricing better for risk, inserting floors in pricing. So, in addition to funding costs, improving our asset yields or our loan yields are improving as well. So we are optimistic as we look forward that we will continue to see some improvement in the net interest margin.

Expenses are an equally important topic for Synovus. They have continued to trend downward as we push hard on all of our expense channels. Project Optimus continues to move through the implementation phase.

We continue to be confident that the targets that we communicated to the public which total $75 million in pretax benefit will be attained at least on a run rate basis, as we get on into the latter stages of this year and next year. We have taken some of those ideas out even further and taken thoughts that merged in Project Optimus to work on additional possibilities for efficiency throughout the company.

Our year-over-year fundamental expense category is down $14.1 million from the first quarter of 2008 which is a 6.9% reduction. Our headcount in the company, if you go back to the first quarter of '08, is down 611.

Now, we're excluding some categories, if you're trying to reconcile this with the information that we have provided, so for now we've excluded credit costs, we have excluded the FDIC insurance premium charges. We've excluded restructuring charges, charges and some cost or expenses that we have incurred through the Visa litigation.

Other G&A is down 5.4 million; this is a component of the numbers I gave above. But we are looking in addition to headcount all of these discretionary areas, reflecting belt tightening.

Fee income held its own; we had some negative movement, as you would expect in the businesses that are tied to the equity markets, with our money management, with our trust, capital markets and brokerage activities.

But it was offset by strength and extremely good performance in mortgage banking, where they have had a great early part of the year and our corporate analysis service charges as we have been successful in growing, our corporate business relationships have been strong within the banking operations.

If you look ahead, we believe that our pretax, pre-credit cost, income trends should increase, as we move out through the remainder of the year. And this is a result of the positive direction of the margin and expenses and stable fees.

I'll remind you that despite the Moody's downgrade, our tangible capital ratio continues to be extremely solid, 7.8% at the end of the quarter. Our tier one ratio is over 11%, 11.05%.

And we, as you would expect, are doing our own projections and stress testing, which indicate to us that we will have adequate capital, even with the burn rate that we are incurring in the construction and development portfolios, which incidentally are defining and represent certainly less exposure today, than we had six months or 12 months ago.

The immediate future, I would say, will have a tough second quarter. Some of that will be driven by more aggressive asset disposition, which involves taking some losses on these assets that I am referring to.

This will of course drive a continued higher and elevated level of provisioning. We do expect to see some moderation late in the year in 2009, and we are eagerly anticipating that.

Those are the high level remarks that I wanted to make, and Fred Green is here with me. He will now share a few other thoughts, and go a little bit more in-depth into the subject of credit.

When he concludes, he will turn it back to me and I will open the floor for questions. Fred?

Fred Green

Thank you, Richard. As Richard mentioned, credit continues to dominate our performance. In the first quarter, as he also said, our problems remain concentrated in the residential construction and development category, and our Atlanta portfolio continues to be our biggest challenge as well.

As you would expect, we have had some deterioration in other areas of the portfolio and in other markets, but there's nothing systemic about the deterioration.

A little more color around the most visible credit metric we have, which is our non-performing loan increase of $519 million this quarter. As Richard also said, the increase was impacted by one large relationship, and also some disruption in our disposal plans.

Seasonality did play a role in reducing the disposition of the residential inventories, and again the government's introduction of the legacy loan program caused some of our anticipated note sales to be delayed until this quarter and beyond.

We expect more sales activity in housing, as a result of the seasonal impact now behind us and we also expect our note sales as I said to increase.

By portfolio type; as to the one large customer that we mentioned that impacted our NPLs; we are in the process of restructuring their debt, but felt it was appropriate to quote it as an NPL.

We are comfortable with the restructuring. We think it will allow for an orderly reduction in their debt. But during the quarter it did cause our hotel portfolio NPLs to increase by around $220 million.

We also had an increase in our shopping center NPLs of around $40 million, and again, this was primarily attributable to one other customer that had multiple projects throughout our footprint. And as I mentioned earlier, the residential C&D portfolio continues to be stressed, NPLs in this category increased by $117 million this quarter.

We would like to point out we do have a very low threshold for impairing our NPAs. That threshold is $1 million. 83% of our NPAs have been impaired or they are going through impairment testing with an average of 25% markdown on that portfolio.

Let me shift to some other components. Our consumer portfolio of $4.3 billion continues to perform well. The NPL ratio in this category was up slightly for the quarter to 1.4%. Our CNI portfolio of $11.2 billion is also performing well. The NPL ratio in this category was 1.81%, up slightly from 1.57% last quarter.

In summary, our residential construction and development, primarily in Atlanta, continued to be our biggest challenge. Seasonal slowdown reduced our disposition experience and we expect a pickup in sales activity going forward. Legacy loan program I think might be beneficial going forward but its introduction late in the quarter also disrupted some of our planned note sales.

And finally, the restructuring of the debt of our largest borrower, will be very beneficial to us and to them as we go forward. And Richard, I'll turn it back over to you.

Richard Anthony

Thank you Fred. I'd like now to invite questions from the audience.

Question-and-Answer Session

Operator

Thank you very much ladies and gentlemen. The floor is now open for questions. (Operator Instructions).

And we'll take the first question from Nancy Bush. Ma'am your line is live.

Nancy Bush - NAB Research

Couple of questions here, the auctions, sales, et cetera, et cetera. You guys had anticipated, I think, if you'd refresh me to be about $125 million a quarter, is that correct? That was initially the expectation.

Richard Anthony

That is correct.

Nancy Bush - NAB Research

Are you still expecting that? And now that we had to kind of put that off, a couple of quarters, is it going to be sort of a catch up or if you could just update those expectations?

Richard Anthony

I'm going to ask D., to speak to that. But Nancy, you're right in recalling that number and we did not meet that number. I believe that the number D. would have been more in the 70, somewhat $1 million range. The answer to your question, going forward is yes, there will be a catch up definitely now. I'm going to ask D., to put some color around that.

D. Copeland

Yes, for the first quarter we had total sales of assets of $106 million which wasn't far off of the 125 that we had given. So the number that Richard quoted was the net proceeds of that book value. We do think that we will increase from that level in the second quarter and we are pooling together assets to look at those increasing levels in the quarter.

Richard Anthony

But I will say D., it will be well above 125 million.

D. Copeland

That is our expectation, yes.

Nancy Bush - NAB Research

Could you just update us as well on what kind of, how much on the dollar you've been getting on these things and if you could sort of expand between developments in land and that sort of thing?

D. Copeland

Sure, I guess if you take the total for the first quarter, we were just north of $0.60 on the book value.

Richard Anthony

D., I'm going to make sure we clarify this now. Are we talking on the legal balance or on the written down balance? Let's make sure we clarify that.

D. Copeland

That is 60% on the written down balance, is what we received in the first quarter, our current book value.

Nancy Bush - NAB Research

Okay.

D. Copeland

And then maybe to segregate between some of those, we did do some in auctions, we did some ORE sales, note sales and short sales to maybe look at that way in the auction level and in ORE sales, we were in the 60% to 65% range. The short sales that we did were in the 80% range and the note sales were in the 50% range.

Nancy Bush - NAB Research

Are you finding on the short sales that that process is getting easier because of having encountered that in Atlanta myself, in trying to buy a house, it initially was quite cumbersome?

Richard Anthony

I think it may be getting easier for the end-user. We would just say that there is a lot more volume that is out there right now, which is hurting from a pricing standpoint.

Nancy Bush - NAB Research

And if I could just ask a follow-up question on the restructured resort credit, how long will that remain? Does that remain six months in restructuring? How does it get back to accrual?

Richard Anthony

We believe and Fred you can correct me or add to it. I believe we'll have to have a one year period of performance before it could return.

Fred Green

That's right Richard. We have covenants in the loan that would require pay down operating performance and interest paid. And we feel like it would be appropriate at the end of one year to review how they are doing, and again would anticipate moving it back to the accrual status at that point.

Operator

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

Adam Barkstrom - Sterne Agee & LeachRichard and Fred, I wonder it's just a follow-up on the CRN credit. You talked about the restructuring. Any color you could give as sort of the measures you've taken or how you went about doing that and what gives you confidence that we might see that credit back on accrual within a year?

Fred Green

Adam, I'll jump in, this is Fred. Again, we're not going to talk about a credit by name, but the credit that I mentioned in particular, the plans are to sell certain non-operating assets.

There would be a lot of activity associated with that sale right now that should allow the debt to come down at the prescribed amount. Operations within the resort have continued to improve as they have made various shifts.

I'll mention that we are the lead bank in a group of banks on this particular one, and have worked with our bank partners to create a structure that we think is beneficial to us, and allows the company to execute on their plan as well.

Adam Barkstrom - Sterne Agee & Leach

Okay. Thank you. I apologize. I didn't mean, if it works to the amount of [named] credit, I apologize. Any sense you could give us with your current CRE portfolio? Any sense of could you quantify the principal balance that has interest reserves left on it in that portfolio?

Richard Anthony

To get to your question, D. and Kevin I think have a quick way of saying this, but our CRE portfolio is diversified into four or five components, that would be retail shopping centers, our multi-family, our Hotel/Motel portfolio and office exposure, office building is less.

I think we have pretty equally dispersed among those what close to the $1 billion or there about D?

D. Copeland

That's correct.

Richard Anthony

And we are doing, I will say we are taking each of those components. And unlike our traditional loan review, which has been more at the bank or market level, we are taking these categories or exposures and following them throughout the banking operations regardless of the charter.

So, we are getting our arms around this exposure. We started with the retail shopping center piece. And Mark, loan review reports up to you, do you want to give a quick description of our findings there with the shopping center piece and then explain where we go from here and breaking. I think we are going into the land component here before long?

Mark Holladay

Well I'll just say we've reviewed the hotel and shopping center categories, and we are pleased with our findings at this point in that portfolio, and are looking at the land and commercial development components this quarter.

And we'll be able to assess that portfolio as well. But we are not seeing dramatic deterioration at this point in those portfolios.

Richard Anthony

And we don't have interest reserves in any of these categories. I am confident of that.

Kevin Howard

Specific interest or a quarterly reserve as loans are graded along the way, this is Kevin. We did and Mark, also, we did a pretty extensive hotel review, and we really don’t have in the entire investment commercial real estate portfolio any concentrations by geography, tenant mix in shopping centers as well as the hotel, any particular brand hotel. So, we continue to go thoroughly through that portfolio.

We did have a couple of one-offs as Fred mentioned earlier, but we don’t see a lot of deterioration there. Certainly we are aware of some products.

Fred Green

Let me just jump in on that comment on the interest reserve. I think Kevin was referring to the loan loss reserve when we said we do it based on loan grade.

We have very little if any interest reserve on any of our loans Adam, and so it would represent less than 1%.

Adam Barkstrom - Sterne Agee & Leach

You mean for the entire portfolio or just the CRE piece?

Fred Green

Really the entire portfolio. We have not had a practice of setting aside large interest reserves on our loans over time. The category that might have had it early on or that might have had it the most would have been in the construction area, but all of those have matured and there is no more interest reserve there.

Adam Barkstrom - Sterne Agee & Leach

All right. Just so I am clear. You are saying that if we were to quantify the interest reserve number for the entire portfolio it would be less than 1% of the entire portfolio. Is that, am I hearing it clearly?

Fred Green

You are.

Adam Barkstrom - Sterne Agee & Leach

Okay, fair enough. And if I could, just one more follow-up and then I will jump off. Richard, last quarter or for a couple of quarters but particularly the last quarter we talked a lot about, maybe you talked about [European market] I missed it, but the establishment of a problem asset subsidiary. And I am just kind of wondering if you could give us some more color on where that is within, et cetera.

Richard Anthony

I will, Adam. I did not say anything about the Broadway asset management subsidiary that we created. We did move $500 million in assets. We had some write downs following that. But we took those levels of assets out of our banks and of course, given the multiple charters that we have really provided a better regulatory view and really freed up the management teams in those banks to concentrate more on the customer related activities rather than the problems. As we have shifted more responsibility for problem assets into the corporate [stance].

Now that does not mean everything is being shifted because there is tremendous value that comes from the local officers that managed these accounts in the past and continue to be involved. I would say that as far as selling assets out of this BAM unit in the quarter, not much activity there. We did take some further write downs as we have gotten updated appraisals.

Today, the book balance in BAM is $347 million. So, you can see that most of that decline as I indicated has occurred through markdowns or write downs. But it has achieved the purpose of providing a place to warehouse. Particularly, some of these lot loans we will continue to write them down but disposing of subdivisions in Atlanta right now is poor timing and they will be warehoused in this unit.

So we have created this vehicle I think to help the individual banks. It should be really no different to an outsider who views our company on a consolidated basis. D., do you want to add anything to the Broadway Asset Management topic?

D. Copeland

No, I think that was most of the message and rather specific.

Richard Anthony

Okay, any question on that Adam.

Adam Barkstrom - Sterne Agee & Leach

No, I think you covered it. Thank you.

Operator

Thank you very much. We'll take the next question from Steven Alexopoulos, your line is live.

Steven Alexopoulos - JPMorgan

I want to start with a few more questions on this 220 million or so restructured hotel loans.

Richard Anthony

Yes.

Steven Alexopoulos - JPMorgan

Is that the entire loan relationship that you have to that borrower?

Fred Green

That would represent 90 plus percent of it.

Steven Alexopoulos - JPMorgan

What do you guys estimate the value of the collateral for that loan?

Fred Green

The collateral far exceeds the debt.

Steven Alexopoulos - JPMorgan

Understood. You would not need a specific reserve then?

Fred Green

Not it's got a reserve as all of our loans would have, but as it relates to impairment testing obviously we're going through that and have not taken any write downs on it because of the appraise value.

Steven Alexopoulos - JPMorgan

Richard, could you just review for us quick, why you hold such a large credit on the balance sheet? I guess it's a little over 8% of tangible equity?

Richard Anthony

It is a large credit and we started - well first of all there, I would say in the latter stages of the renovation that took place in this credit, there were some advances that we made that went beyond the original expectations, as our plans changed, as cost overruns were incurred and needs became apparent. So the original concept would not have been to this level. This is a much higher exposure than we think is appropriate for our company.

Going forward, we have a large borrower policy limit that would be well below this. But this is where we are at this point in time. But I tend to agree with the - I think the tone of your question in that a company of our size needs to have tighter limits on large borrower concentrations and we are clearly moving in that direction.

Steven Alexopoulos - JPMorgan

Okay. Maybe just a follow-up to shift direction for a second. What's the outlook on the Atlanta resi construction, that's still performing looks like about 75%? And what reserves do you have for Atlanta resi construction at this point?

Richard Anthony

Kevin?

Kevin Howard

We have around six in the portfolios that is probably had the more run rate of new NPLs. There's about little over $600 million in the residential development and one to four construction left that is performing.

Probably about a year ago that was about a $1.03 billion, so you can see it's come down quite a bit and that's where we are appropriately reserved like we do the other. Probably 15% to 20% appropriately reserved.

Richard Anthony

What we do in our methodology is, I think you would know is, our internal risk grades, they start at one, but when you get in beyond fours and fives, the watch list type of credit would be six and then the performing criticized credits would be what we call a seven.

So, in order to give you an accurate disclosure on the reserve, we would have to pull up the percentage of those credits that are in sixes and sevens, but a six would be reserved at 6.5%

Fred Green

It's around 7%, a watch list.

Richard Anthony

And a grade seven is reserved at 25% to 26%. So you can see that it steps up, based upon the migration that occurs in the portfolio.

We went though a very targeted and I think stringent look at the portfolio in December, and a lot of the portfolio migrated into sixes and sevens.

But I am unable to tell you, nor do I think we would want to disclose exactly what the current mix is, but we are being aggressive in pushing those loans if they are weak into sixes and sevens.

Operator

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

Christopher Marinac - FIG Partners

Just want to follow-up on the Broadway Asset Management one more time. So, Richard, when you mention that the book balance was $347 million, so that would imply that there is another $100 million mark on that this quarter. I am just going back to what the 10-K had said with the $50 million when you transferred it at year end?

Richard Anthony

All right. Can we reconcile that D.

D. Copeland

I guess when we originally pulled it into Broadway Asset Management there was a $50 million mark on that number. There was a reduction of $73 million during the quarter. Of that, $42 million was write-down, $31 million was sales.

Christopher Marinac - FIG Partners

And then is there a difference between your legal balance and the 347, just from a nomenclature?

Fred Green

Chris, the legal balance would be what the customer would owe us. Our book balance is what is marked down to.

Christopher Marinac - FIG Partners

And I am estimating, but would you say perhaps the legal balance would be about 450, 440 - 450?

Fred Green

The original balance when it came in was 470, so it would just be hair north of that.

D. Copeland

It was 40% marked legal balance versus what is booked balance on that.

Richard Anthony

Are you clear on that Chris?

Christopher Marinac - FIG Partners

I think yes. So that’s a 40% marked than from the 470 down at 347. That’s great. Okay. Thank you, guys. I appreciate it.

Operator

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

Ken Zerbe - Morgan Stanley

Okay thanks. Just in terms of related to the hotel, NPA; can you tell us how many more large credits you have over $100 million that have not yet gone non-performing?

Fred Green

They are four over 100 million that are all performing.

Ken Zerbe - Morgan Stanley

And are those in CRE, CNI?

Fred Green

I'm sorry, I didn't hear the question.

Ken Zerbe - Morgan Stanley

I'm sorry. In what loan categories, are those construction related or theory related loans?

Richard Anthony

There are four he mentioned and they are below 150 at this time. Three of those are real estate related and one of those is CNI.

Ken Zerbe - Morgan Stanley

Okay. All right.

Richard Anthony

The estimate property is in real estate category.

Fred Green

Multiple projects.

Ken Zerbe - Morgan Stanley

Okay. The other question I had, can you just remind us what areas of your business are most affected by the recent Moody's down-rated jump?

Richard Anthony

As far as managing our balance sheet, and I'm going to ask Tommy with [Jerry Larry's] help to go over the contingency planning that has been in place for this.

Tommy Prescott

Yeah. We've assumed that in this environment and watching what's happening to others and even seeing the Moody's pre-release about five weeks ago that, us and 22 other regional banks were under review that there'd be this type of activity.

The final outcome was harsher than expected and certainly harsher than our own modeling. But we've assumed that we'd have a multiple notched down grade and have been positioned and accordingly we've positioned ourselves to have a buildup in our Federal Reserve account and we have a significant amount of unencumbered securities and that type of thing. It weren't needed, but from a technical standpoint what really happens is their funds, lands would likely contract. And then also you have to provide some collateral with the derivatives positions that are fairly small amount and those are the main factors on the balance sheet. The way we think about it and we are planning as if we will have - we have been planning as if it would occur.

Fred Green

Last fall timing we moved out of any fed funds borrowings, I believe that was not -

D. Copeland

The land -

Fred Green

But we quit using our lands several months ago.

D. Copeland

The lands are not used today and we believe that there is chance that the or likelihood even that some of the bearable right demand notes that are out there will end up on our balance sheet. I think we got almost 800 million that are out there and can be put back to us and seems to have some writing sensitivity in many cases and we've been planning as if that would happen.

Ken Zerbe - Morgan Stanley

All right, so the restructure you are funding to some extent, does that have any impact on the deposit side with say, municipal entity?

D. Copeland

The municipal deposits are either FDIC backed or they have pledged collateral behind them. So there should be no direct action there. And then also great hedge that we have this unique tier company as Richard mentioned earlier is the share deposit program. And when people - as we saw in the fall when the industry was under stress we had great growth in that category, but it's very a unique beginning. So it allows us to gain and keep deposits with the broader FDIC coverage.

Operator

Thank you. The next question we'll take from Kevin Sampier, your line is live.

Kevin Sampier

Good afternoon. Just wondered if you could tell me, I noticed absent from your credit quality disclosures is the level of FAS 114 non-performing loans, the impaired non-performers. Number one, I'd like to ask you what those are? And number two, why the disclosure change?

Richard Anthony

I'm not following you on the disclosure change.

Kevin Sampier

Well as I look at the fourth quarter you have a note on non-performing loans that tells us that it included 618 million as of December 31st, of impaired loans for which there is no reserve?

Kevin Howard

I'll answer that question. Our impaired loans are about $1.2 billion, that makes up about 84. I think Rich said 83, but it's about 84% of our non-performing loans. And 785 million of those impaired loans have no reserve against them. I'm not sure why that's not in the report that those are the facts.

Kevin Sampier

Okay. So the 785 would compare to the 618 at December 31st?

Kevin Howard

That's correct.

Kevin Sampier

Okay. I think Fred mentioned average 25% mark. Is that an average 25% mark on the 785 or would it be a larger percentage of 785?

Kevin Howard

It’s a $1.2 billion, $1.3 billion amount.

Kevin Sampier

So 25% mark on that $1.2 billion?

Kevin Howard

That's correct.

Operator

Thank you. We'll take the next question from Jennifer Demba. Your line is live.

Jennifer Demba - Suntrust Robinson Humphrey

Richard, can you give us some more color around your comments that you think provision could back off in the second half of the year?

Richard Anthony

Well, Jennifer, if you look, I think Kevin was talking about the 50% decline in the performing C&D portfolio in Atlanta which is where a higher percentage of the pressure is coming from. And as we get on through - I mean this thing is coming down at a fairly rapid pace, either through migration into NPA and impairment testing or in the case of sales.

And I would say that the answer to your question too centers around our anticipated ramped up and more aggressive activity levels in the second and third quarters. We really will be moving out of NPAs a much larger number in dollars than we have been experiencing.

So we will be working on to stay ahead rather than falling behind. And then just looking at economic forecast and views on housing, I am not polling you about this, but I do think if you look at some of the statistical data that inventory levels are working their way down slowly, but coming down.

Prices we think by the end of the year have a good chance of bottoming out, and I am counting on some fundamental improvement in the marketplace by the end of the year. It just sort of coincides with the bottoming out of the economy overall.

Jennifer Demba - Suntrust Robinson Humphrey

Okay. That’s helpful. And I was wondering, if Kevin could give us any numbers he may have on the watch list, and how that’s looking first quarter versus fourth quarter?

Kevin Howard

We don't usually disclose that watch list.

Operator

We'll take the next question from Bob Patten. Your line is live.

Bob Patten - Morgan, Keegan & Company, Inc.

What's left? I guess let us talk about the NIM. Obviously, you said it started to accelerate in the last couple of months, up to 316, so would you assume continued acceleration beginning in the quarter and going forward?

Tommy Prescott

We took on the remaining pain from the severe rate cuts that occurred late fourth quarter and in fact that of course the 82 basis point average prime rate.

Production in the first quarter compared to fourth quarter was something in our balance sheet. It takes a little while to absorb, but low watermark was 2.96 in January. The high watermark in the quarter was 3.16. Great improvement there in the quarter. Our guys are doing a good job on the frontline of pricing loans, and prudently pricing deposits, getting floors and loans and pricing appropriate.

And so the incremental business and the repricing is incremental to the margin and we do see continued improvement there. It's not going to go up 20 basis points every two months like it was. But we believe it will continue to escalate.

Bob Patten - Morgan, Keegan & Company, Inc.

Okay. And then on the FDIC special [suspense] in second quarter, have you guys played around with the numbers of 6 to 10 basis points. What it's going to be?

Tommy Prescott

Just a simple math on the thing would be, put it in the high 20's.

Bob Patten - Morgan, Keegan & Company, Inc.

And also in terms of the question of legal book versus book balance, last cycle there were a lot of recoveries that came back coming out of the cycle. Banks pursued borrowers for deficiency judgments and so forth. Do you see that following this cycle, or will it be, once you get that legal balance, that legal balance is done.

Richard Anthony

We certainly have got a long list of potential deficiency judgments that we can pursue Bob, but realistically even though we will have recoveries and they will probably be noticeable, as a proportion of the credit that's flowing through books right now, it's not going to be substantial, because these borrowers are depleting their liquidity in this religious not much to follow back on.

Bob Patten - Morgan, Keegan & Company, Inc.

Yes. And then one last question, in terms of the large hotel credit, obviously if your portion is 220 or there about, the other two banks probably have commensurate proportions, would that be fair to assume?

Richard Anthony

Well I don’t think we have their permission to disclose that.

Bob Patten - Morgan, Keegan & Company, Inc.

Okay. So when you look at the credit though, when you look at the collateral value, it's in excess of total credit, not just Synovus'?

Richard Anthony

That's correct. The total credit and we continue to update our appraisals. The last round we had was I think early December. And there are some updates that are going on even now.

Operator

Thank you very much. We'll take the next question from Paul Miller your line is live.

Paul Miller

Thank you very much. And I'm new to covering this company, but my big question is that your allowance for loan losses is right around $640 million, while you charged-off certainly in the $250 million range, which is roughly only about two to three times charge-offs.

So just wondering why, compared to other companies, this appears to be somewhat low and we'd like to see unlike four to five quarters worth. Can you just address that a little bit for us?

Richard Anthony

Lot of it has to do with the low scope or impairment process as Fred talked about earlier, a million dollar relationship or above. When it hits non-performing it gets immediately impaired and charged off.

So a lot of the banks have higher scopes on their impairment charge and retain reserves against those loans. We take our hits and then each quarter we reevaluate those loans with updated market data or appraisals and then take further hits against those if the market declines.

Paul Miller

Okay. So basically you're taking hits at rates when it goes in the non-performing assets, you are charging a portion of it off.

Richard Anthony

We're charging it down below the appraised amount, the current appraised amount.

Paul Miller

Okay. The other issue I asked a lot of banks is, if you guys give any guidance here on employment rate, do you guys have any view into that and do you think where we are going to be a year from now relative on the macro side?

Richard Anthony

I don't think we have an official view. We've been of course following the assumptions that are there in the stress testing that we all read about. Kevin has some information here that - Kevin would this be relevant.

Kevin Howard

We certainly are following like Richard said the unemployment rate. We realized it's crept up in the lot of the states we are in and it's certainly a factor in watching our consumer portfolio - in any kind of shopping centre portfolio, a lot to know and trying to get ahead of that. We haven't felt as much pain in the consumer portfolio as others. But we are watching it.

Richard Anthony

I would say that our internal projections and stress testing today would assume certainly over 10% unemployment rate as the peak there.

Paul Miller

Okay. Thank you very much. I want to be very honest with you guys. That that's a first time I heard a bank say over 10%, I think you probably are one of those honest guys that come out and say that. But thank you very much.

Operator

Thank you. We'll take the next question from Steve Covington, your line is live.

Steve Covington

Good afternoon guys. I guess just a follow-up on the hotel credits. Is all of that credit in the hotel category of the non-performing loan table? Or is that spread out throughout various credit categories?

Richard Anthony

Steve, we mentioned earlier that 90% of it is in that category.

Steve Covington

90% in that category, okay. And then you mentioned that you couldn't disclose how big the other parties to the credit are. Did you say how many they are or are there three total you said?

Richard Anthony

There's a total of three including us.

Steve Covington

Then does the downgrade this afternoon impact, I know you talked, it impacts your funding of the balance sheet, but does it impact any of the investment banking or the fiduciary business?

Richard Anthony

No.

Steve Covington

Then in the C&I portfolio, could you just give some general color, you saw a little pick up in non-performing loans in the C&I area? Could you talk about what you are seeing in the C&I portfolio?

Richard Anthony

Yeah, I mentioned Steve, that we have seen an uptick in the NPA ratio in C&I and is fairly well concentrated in a couple of individual credits and I will ask Kevin just to comment about category where those are.

Kevin Howard

As you saw in the press release, our NPLs were up $25 million, that's a 181 NPA ratio up from 157. There was one large reality company in South Carolina that (inaudible) and then there was a construction company in Alabama. It was $6 million of that and that's pretty much the color behind the increase there, as far as the new non-performing loans.

Operator

Thank you very much, ladies and gentlemen and the last question we have today will be coming from Gary (inaudible), your line is live.

Unidentified Analyst

I wondered if you could break out in the one to four family property category between Atlanta and west coast of Florida as well as the relative NPLs.

Richard Anthony

Hang on one second, we will pull that out.

Unidentified Analyst

Okay, and if I could ask a question while you are looking for that perhaps. Richard, regarding the hotel credit, did you say at the outset that it added a 100 basis points to that total NPAs.

Richard Anthony

It added nearly that.

Unidentified Analyst

Nearly 100 basis points. Okay. Just wanted to make sure I didn’t miss it.

Richard Anthony

Maybe 90 basis points.

Unidentified Analyst

90 basis points. Okay. That helps. Thank you.

Fred Green

As we mentioned before on the residential portfolio, in the West Florida area, it represents $300 million in West Florida, and we'll try to give it to you by state here in just a minute.

Let me give you that again. The residential portfolio - residential development portfolio which is just under $2 billion, $1.9 billion, is broken out into Florida, $264 million. About 100 like I said, about half of that is the West Coast of Florida, and $1 billion is in Georgia, and about $400 million of that is in the residential development category.

And before, I mentioned there was a little over $600 million, that included residential in Atlanta, a minute ago, that included one to four construction, and residential development performing loans in Atlanta, so I broke out the residential part of that in that answer.

Fred Green

Are there anymore questions?

Operator

There appears to be no further questions. Do you have any closing comments you'd like to finish with?

Richard Anthony

Just a couple. I want to thank everybody for listening. I thank you for your questions. We appreciate your interest, and challenges come from our being here to answer, what's on your mind. I'll just quickly close by taking about a planning exercise that we have gone through over the last month or two, and pretty obvious what our short-term priorities need to be. And we have talked about them on the call. But it has to do with this, asset disposition strategy; it also has to do with execution on expenses.

And now the pricing on the balance sheet, sort of moves up end of that category particularly since we're seeing some benefits come from that long-term, keep in mind first of all the capital position the 7.80 tangible common ratio. The markets that we are in, I continue to believe firmly are well positioned markets that are going to serve us well as we come out of this down turn.

Our strategy, regarding the diversification into middle market companies within our footprint, I think is a sound one involves relationships. It gets us away from the dependency that we've had for a number of years on commercial real estate categories. And our commitment still to the community bank model which is backed up with the big regional bank, specialized services, we call that community banking powerfully connected.

So thanks a lot. We'll continue to communicate with you. Have a good afternoon.

Operator

Thank you very much ladies and gentlemen. This concludes today's presentation and we disconnect your lines and have a wonderful day.

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Source: Synovus Financial Corporation Q1 2009 Earnings Call Transcript
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