Synovus Financial Management Discusses Q1 2013 Results - Earnings Call Transcript

Apr.23.13 | About: Synovus Financial (SNV)

Synovus Financial (NYSE:SNV)

Q1 2013 Earnings Call

April 23, 2013 8:30 am ET

Executives

Patrick A. Reynolds - Director of Investor Relations

Kessel D. Stelling - Chairman, Chief Executive Officer, President, Chairman of Executive Committee, Chairman of Synovus Bank and Chief Executive Officer of Synovus Bank

Thomas J. Prescott - Chief Financial Officer, Executive Vice President, Chief Financial Officer of Synovus Bank and Executive Vice President of Synovus Bank

Kevin J. Howard - Chief Credit Officer, Executive Vice President, Chairman of Credit Risk Committee, Chief Credit Officer of Synovus Bank and Regional Chief Executive Officer of Synovus Bank

Roy Dallis Copeland - Chief Banking Officer, Executive Vice President, Chief Banking Officer of Synovus Bank and Executive Vice President of Synovus Bank

Analysts

Kevin Fitzsimmons - Sandler O'Neill + Partners, L.P., Research Division

Stephen M. Moss - Evercore Partners Inc., Research Division

Nicholas Karzon - Crédit Suisse AG, Research Division

Ken A. Zerbe - Morgan Stanley, Research Division

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

Erika Penala - BofA Merrill Lynch, Research Division

Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division

Rick Kraemer

Emlen B. Harmon - Jefferies & Company, Inc., Research Division

Michael Turner - Compass Point Research & Trading, LLC, Research Division

Christopher W. Marinac - FIG Partners, LLC, Research Division

Operator

Good morning, ladies and gentlemen, and welcome to the Synovus First Quarter Earnings Conference Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Pat Reynolds, Investor Relations Director. Sir, the floor is yours.

Patrick A. Reynolds

Thank you, Kay, and I thank all of you for joining us today for 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 the 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 may be required by the law.

During the call, we will discuss non-GAAP financial measures in reference to the company's performance, and you can see 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 2 questions. If we have more time available after everyone's initial 2 questions, we will reopen the queue for follow-up questions. Now I'll turn it over to Kessel Stelling.

Kessel D. Stelling

Thank you, Pat, and good morning to all of you. By now, hopefully, you've had a chance to review our press release, our earnings deck and 8-K filing earlier this morning. I'll talk about all of those, events in our time today. So again, thank you for joining us.

I guess the story of the quarter, pre-tax income increased to about $47 million for the first quarter of 2013. That was the highest level of pre-tax income for our company in about 5 years, up almost 30% from $35.9 million in the first quarter of 2012. Net income available to common shareholders was $14.8 million or $0.02 per diluted share. The first quarter results include $4.9 million in restructuring charges and income tax expense of approximately $17 million as our earnings are now fully taxed at 36.5%, after the fourth quarter DTA recapture.

A couple of clarifications about the comparative quarters, just as a reminder, fourth quarter of 2012 results included the investment securities gains of $8.2 million, approximately $157 million pre-tax charges from distressed asset dispositions and income tax benefit of approximately $796 million, primarily from deferred tax asset recapture. The first quarter of 2012 results included security gains of $20.1 million and income tax benefit of about $77,000. So just trying to give you a little comparative data there on those quarters we just referenced.

Again, the big story, our performance was driven by continued improvement in credit quality and further expense reductions. I'll take you to Page 5 and talk a little bit more about that, and you'll see graphically there indicated the tremendous improvement in credit costs over the 5-year horizon and also decline in core expenses. In fact, credit costs also fell to the lowest level in over 5 years to $49.3 million for the first quarter of 2013 compared to $185.8 million for the fourth quarter of 2012 and $90.9 million for the first quarter of 2012. That number is down $41.6 million compared to the first quarter a year ago, about 45.8%.

A little breakdown, in the first quarter, credit cost provision expense was about $36 million; ORE expense, about $11 million; other credit costs, $2.7 million. In addition to improvement in credit costs, we also saw continued improvement in core expenses as our efforts to drive those down continue to produce positive results. Core expenses, excluding restructuring charges, other credit costs and Visa indemnification charges were down -- were $163.8 million, down $7.6 million from $171.4 million in the fourth quarter of 2012, down $10.6 million from $170.4 million for the first quarter of 2012. We realized, across the boards, reductions and our initiatives to reduce our previously announced $30 million target in 2013 are well on track and we'll talk about that later in the slide deck.

On Page 6, you'll see our net interest margin declined modestly, close to stability there at 3.43% compared to 3.45% a quarter ago. Yield on earning assets was down 4 basis points. Our effective cost of funds, down 2 basis points.

Page 7, we'll talk about our loan balances, certainly impacted by borrowing patterns, our own pricing discipline and CRE pay-downs, I'll talk a little bit about that. And I'll call your attention to the bottom and just walk through the numbers with you. On a net basis, we had net decline of $51.6 million compared to growth of $345 billion a quarter ago, and decline of about $25 million a year ago. On a reported basis, when we declined approximately $174 million compared to $190 million a year ago -- a quarter ago, $236 billion a year ago. As I said previously, we continued to assert discipline in pricing and structure. Certainly, we saw lots of opportunities in the markets at rates and terms that we were not inclined to try and match. So again, I believe, we're very disciplined and it was the right strategy for our company this quarter. And we'll continue to stay disciplined and look for opportunities for growth that meet our profitability targets. We did have growth in a large corporate area, total loan growth of about $158 million there. About 60% of that is from large corporate, 40% from senior housing. And it's a pretty good mix, almost 50% each in related syndications and direct originations, so still really good activity there. We saw some CRE paydowns as the permanent market became more attractive to some of our commercial real estate customers who may avail themselves of some refinance opportunities, but that's part of a healthy cycle, and again, we're okay with that. We see opportunities now in our pipeline that meet our targets in terms of profitability and feel good about what those indicators tell us about future loan balances, again, both in pipeline and commitments increased activity there. And we do expect net loan growth in the second quarter of 2013. So again, down for the quarter, we do expect to rebound and grow net loans in the second quarter.

On Page 8, talk about deposit. Deposits ended the quarter at $20.6 billion, down about $500 million from the previous quarter, primarily due to decreases in non-interest-bearing demand deposits and NOW account balances. Our core deposits ended the quarter at $19.2 billion, down $735.7 million compared to the fourth quarter 2012. Core deposits, excluding time deposits, were down $634.6 million compared to previous quarter. And it was due -- primarily due to the expected reductions in clearing and SCM temporary accounts, which were all at elevated levels at year end. That was the primary driver of the core decline. We saw minimal impact from the exploration of the TAG program and do think that this quarter's deposit base is more indicative of our core base. On the broker deposit side, I just -- a fact I think you'll find interesting, our peak balance was $6.34 billion at December 31, 2008, about 22% of total deposits. That number today is $1.33 billion or 6.5% of total deposits at March 31, 2013. So the point being, I guess, a much healthier deposit mix as we have focused on growth in relationship-based non-collateralized core deposits and our team is doing an excellent job there.

On Page 9, you'll see the cost of core deposits stable versus the first -- versus the fourth quarter, 30 basis points continuing for the fourth quarter to the first quarter of 2013.

On Page 10, noninterest income, we had a decrease there driven by declines in securities gains, which I've mentioned in the previous quarters. Mortgage banking income down from elevated levels of the fourth quarter and some seasonality there. We did have increases over the first quarter in 2012 in service charges on deposit accounts and other fee income. And that was driven by previously implemented fee income initiatives. Our aggressive pursuit of cross-selling strategies reflected in the linked quarter and year-over-year growth in brokerage and fiduciary and asset management fees, so good performance there. We have sequential quarter decline in bankcard fees due to one-time benefit in the fourth quarter and some seasonality there as well. And then mortgage banking, as I said previously, declined $2.1 million from the elevated levels we saw in the fourth quarter of 2012. We expect the remainder of 2013 to be at similar levels to the first quarter, but again, the mortgage company has been a strong source of earnings and fee income for -- a company that continues to do a great job for us.

On Page 11, again, further declines in noninterest expense and core expenses, both graphically illustrated there. Noninterest expense declined by $31.1 million or 14.6% versus the fourth quarter 2012. And again, as previously stated, the first quarter of '13 included about $5 million in restructuring charges compared to $2 million in the fourth quarter of '12. Core expenses decreased by $7.6 million or 4.4% versus the fourth quarter, despite $3 million seasonal increase in payroll taxes. Again, as previously stated, we realized, across the board, expense reductions. We saw head count continue to trend down, down another 169 positions from the fourth quarter of 2012 to right at 4,800 employees, down from 5,163 a year ago. And again, our initiative to reduce expenses by $30 million are well on track. As I said, and Tommy has said on numerous calls, you won't see those reductions dollar-for-dollar as we continue to make what we considered to be very smart investments with the right people, the right talent, come along and help us grow and diversify our revenue stream. So we'll continue to take cost out, continue to invest in talent and technology. It's a way of how we run our business and I think you'll see the results of those efforts throughout the remainder of the year.

On Page 12, I'll go to the credit story, once again, significantly improved this quarter led by a 46% reduction in credit costs year-over-year, $49 million. Credit costs are down 73% compared to the fourth quarter on a reported basis. And also we experienced a decrease, fundamentally, we exclude the fourth quarter '12 bulk sale component. But again, $49 million versus $186 million a quarter ago, $86 million in the third quarter. If you could see that trend line, it's in line with guidance, in line with our story of continued progress and continued healing in our portfolio there.

On Page 13, again, I think this is a very important slide for us. Given the maybe the bumpiness in the fourth quarter. Our NPL inflows did decrease 40% from a year ago. For those of you that were on the call last quarter, we did talk about a spike in inflows related to a large credit relationship and I think went to great lengths to discuss why we believe that was not a circumstance that will repeat itself and that in fact, inflows would return to levels at 3Q12 or below, and in fact, they did, again, $84 million below what Kevin had guided versus the $115 million in the third quarter and versus the $140 million, first quarter a year ago. So a good trend there. And again, as we stated last quarter, in terms of the overall volume, the loan portfolio and the tremendous effort companies made to reduce large borrower concentrations, I'll just call your attention again to the fact that we currently have 2 substandard accruing credits and 6 special mention credits greater than $20 million, none of which are over $40 million. So again, much smaller concentration of loans from which our default is normally low. So Kevin will talk more about the credit in a little bit -- but I believe -- we think this trend we'll get into that, will continue throughout the year.

On Page 14, again, improvement both in NPLs and classified assets. I'll walk through some of those numbers with you. You'll see from the chart, NPLs are now $513 million or 2.65%, down 39% from a year ago. We expect to see these steady declines throughout the year as we continue to experience lower levels of inflows, as well as executing on our disposition strategies. So again, I think a strong improvement there. And then on classified assets, you'll see, we've climbed 35% versus a year ago to $1.3 billion, it now stands at 36.7% of our Tier 1 capital allowance for loan loss reserves. Consolidated ratio is 43.5%. We continue, again, to expect to see both of those levels trend downward throughout the year. And again, we talked last quarter and again, we'll mention this quarter that, that ratio and that ratio continuing to trend down is key to our proposal to have dividends upstream from the bank to the parent.

On Page 15, just continued evidence of credit healing. I'll call your attention to the charge-off slide first. Again, well within our guidance. I think Kevin had guided 1% to 1.5%. Last quarter, our net charge-off ratio was 1.18%, certainly, the lowest in some time, some $57 million, and again, in line or better than guidance, and Kevin can talk more about that later in the call. And then our past dues, again, remain at low levels, and that's, again, I think the sign of the overall strength and health of our loan portfolio, and certainly, the efforts of our bankers to keep those credits properly structured and performing.

Page 16, talk a little bit about TDRs. I know some of the investment community lumps these in with our NPLs, and we like to point out the different characteristics and suggest that maybe, you shouldn't do that. So this is a look at our performing TDRs. And again, you'll see performing TDRs are down 7.5% this quarter. Into the quarter, it's $624 million, just a little bit, the pie chart will tell you composition, but a little bit of color on those performing TDRs, over 99% of those are paid current. There are no 90-day past dues in that portfolio. 58% of the performing TDRs are rated better than substandard, so they are rated pass or special mention. Most of them are designated that way due to interest rate concessions. 71% of the performing TDRs are not residential or land related. So again, we want to see that number continue to come down, but that's certainly, I think, a better reflection of the strength of that book by the bullish, we just went through there.

Page 17, I want to take you to our capital ratios, certainly key to company at any time, but over the next several quarters, I know you'll all be looking at these, so we'll go through those again. Tier 1 capital ended the quarter at 13.5%, up from 13.24% in the fourth quarter, up from 13.19% a year ago. Tier 1 common equity, 8.93%, up from 8.72% a quarter ago, 8.67% a year ago. Our total risk-based capital, 16.45%, up from 16.18% a quarter ago. Leverage ratio, 11.27%, up from 11% last quarter and 10.41% a year ago. And again, the biggest, I guess, beneficiary of the DTA is the tangible common equity issue ratio of 9.89%, compared to the 9.66% in the fourth quarter, but 6.81% a year ago, where the DTA was not reflected there. And again, I'll remind you, the $687 million of the net deferred tax assets are excluded from Tier 1 capital at March 31, that compares to $710 million at December 31. That will continue to the accrete to capital as the company continues to earn money over time.

On Page 18, a little different look. But again, on the bank capital ratio, certainly, key to our long-term plans here. You see that Tier 1 capital ratio at the bank level is 15.33% compared to 14.88% a year ago. Total risk-based capital bank, 16.58% compared to 16.14% a quarter ago and 15.55% a year ago. Leverage ratio, 12.80% versus 12.41% a quarter ago and 11.27% a year ago. And at the bank level, a little over $500 million of the net deferred tax assets are excluded from Tier 1 capital at quarter end.

Before I talk about recent developments, I want to share with you excerpts from a slide that I think for those of you that followed our company for a long time, or those of you that may be new, it tells a pretty dramatic story of a company that many of you followed in 2009 versus the company we are today. In fact, this slide was a centerpiece of conversations we had with our ratings agencies earlier in the first quarter and it told a story of, again, dramatic improvement in our company. I just want to walk through that. Again, there are times we don't want to go back to 2009, but I think it gives you a pretty good flavor of the strength of the company today.

I'm not going to go through every one of them, but just -- if you'll just bear with me. Starting with the inflows in 2009, more of a $3 billion compared to $641 million in 2012 and now, just $84 million in the first quarter of '13. Our NPL ratio in 2009, 6.13%, 2.65% today. Again, dramatic improvement. Charge-off ratio, 5.37% in 2009, now, this quarter, at 1.18%. Total credit cost, about $2.2 billion, $433 million this past year, $49 million for the first quarter, great improvement. Our classified asset ratios, both at Synovus Financial and Synovus Bank, and again, we've been through those numbers already, but a very vivid picture here.

Same thing, time and broker deposits, cut in half, 46% then 23% now. Tier 1 common, in 2009, 6.66% and 8.93% today. And again, other ratios are very obvious and then the highlight at the bottom, $1.6 billion in losses in 2009, and that's a pre-tax number for comparative purposes compared to $31 million pre-tax in 2012 and now $47 million in the first quarter of '13.

I share that with you because the point that we made to the regulatory -- to the ratings agency has been -- was that for balance sheet purposes and for comparative purposes, we're really not the same company we were. But for a lot of reasons, we are the strength of our franchise and the market share in the Southeast, the loyalty of our customers, the attitudes of our employees, we are the same very customer-focused company. So I shared that we you because of the way we used it with the ratings agencies and I want to certainly share it with you today.

But let's about some recent developments in our company. In February 2013, we mentioned meetings with the agency. In February 2013, Fitch changed the outlook on Synovus to positive. Also into February, S&P changed the outlook on Synovus to Positive and upgraded our long-term counterparty credit rating by one level. And then hopefully, you saw earlier today at the 8-K filing that effective yesterday, the Federal Reserve Bank of Atlanta and Georgia Department of Banking and Finance lifted the Synovus Memorandum of Understanding and replaced that Memorandum of Understanding with the resolution adopted by our Board relating to, among other things, continued emphasis on improving asset quality and maintaining strong levels of capital and liquidity. At the bank level, Synovus Bank continues to be subject to MOU with the FDIC at the Georgia Department of Banking and Finance, and we expect that MOU to also be lifted in the near term and replaced with a resolution to be adopted by our Board of Directors. And again, that was the details of that R&D 8-K filing today, if you have not seen that.

I'll now move on Slide 21. Before we get into Q&A, I want to walk you through our TARP repayment expectations. We continue to model internally the appropriate levels of capital both now and through the cycle in a stressed environment, and we share those models continually with all of our regulatory agencies. We believe that TARP repayment will likely occur during the third quarter of 2013. Again, we had previously stated no sooner than second quarter, no later than the fourth, and our belief is it will occur in the third quarter of 2013 and we will continue to update as that timeline gets clearer. As to the sources of repayment, again, I think this is hopefully in line with what you've heard before, but certainly in line with what we've said before. The largest single component will come from existing cash, primarily upstream dividend from the bank subsidiary to the parent company. Additionally, we do believe a Tier 1 capital component will be a piece of the exit, that will be a combination of common and/or preferred stock, and the balance will likely be a debt issuance. I know many of you who are following our company give us routine advice on how we ought to exit, and I'll just say again that as we move through the second quarter and get clearer on what we believe are the right capital level for our company and get further our discussions with regulators as to appropriate levels and stacks, we will certainly update the market as we are able to do so.

So with that, I think this will be a good time to pause and open the floor for questions. We have our entire executive team here and then we'll be happy to take questions on anything that we've covered or any topics that we didn't cover that are on your mind. So operator, I'll now open the floor up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question today is coming from Kevin Fitzsimmons.

Kevin Fitzsimmons - Sandler O'Neill + Partners, L.P., Research Division

Sandler O'Neill. Just a few questions. I appreciate the outlook given on net loan growth, positive growth coming in the second quarter. Kessel, can you talk about total loan growth, when you may imagine that stabilizes and starts shifting to positive? And then maybe we can just talk more broadly about spread revenues and what you see the margin doing. Because I think that's -- if we look back several quarters, it's been in a decline in spread revenues, your main revenue source, so just looking at how you attack it, if it's a matter of being able to stabilize the margin and/or shifting total net growth to positive to at least try to stabilize that revenue source.

Kessel D. Stelling

Yes, Kevin, I'll be happy to. I'll let Tommy talk a little bit about the margin, but we've spend a lot of time on looking at results of the quarter from the loan standpoint, so I anticipated your question. So we did talk about net loan growth in the second quarter. I think our balance sheet is at or near the trough. We think there's the opportunity for reported growth in the second quarter and certainly feel like there's the opportunity for reported growth through the remainder of the year. So we believe, on a reported basis, from now through the end of the year, we'll have modest growth in the reported number in the second quarter. Again, confident about net growth and feel pretty good about reported growth in the second quarter as well. But through the back half of the year, we do believe that we've hit that trough and we will see reported loan growth to hopefully offset some of the margin pressures that we didn't see too much of this quarter. Certainly, there was pressure, but not as much reflected in the results. But I think we'll feel more of that on the next quarter. Tommy, do you want to talk a little bit about the margin question with Kevin?

Thomas J. Prescott

Yes, sure, I'll be glad to. Kevin, in the first quarter, we did see very modest margin pressure. It's a function of the 4 basis point decline on the earning assets side and that was some on the loan side and some on the investment security side. That was offset by 2 basis points of reduction in funding costs really all outside of core funding. It was really the wholesale funding cost being less in the first quarter than in the fourth. As we moved into the second quarter, I think it's important to remember, in the first quarter, we had a very low level of interest rate reversals, which was -- put that on an elevated level in the fourth quarter. So that kind of gave us a little bit of buffer with -- so in the first quarter, a very low level of interest rate reversals related to NPLs. And we would expect that to be similar in the second quarter. So we won't have that buffer coming in until the second quarter. We would expect to see, likely, some margin pressures in the second quarter that's moderately higher than what we saw in the first quarter. And we got to strike a balance every day on price of loans and pricing funding and trading a little bit of margin here and there for some loan growth. So that's kind of an ongoing process, but we do expect to see a little bit of pressure in the second.

Kevin Fitzsimmons - Sandler O'Neill + Partners, L.P., Research Division

Okay. And one quick follow-up, just with the announcements on the MOUs. I'm just curious, is that something that is very important in your process of requesting to dividend up from the bank, or is that really something separate? Is that timing just very fortunate for you all that it's coming when it is and how to put that in the context?

Kessel D. Stelling

Kevin, let me try that out. I don't want to tie it to anything or any event. I would just say it's just a sign off continued progress for our company. And I probably will leave it at that. Again, we rather not have it than have it and we're pleased to announce that it's terminated, but I wouldn't necessarily tie it to any future events.

Operator

Our next question today is coming from John Pancari.

Stephen M. Moss - Evercore Partners Inc., Research Division

It's Steve Moss on behalf of John Pancari with Evercore. Just want to start off, I noticed the loan loss reserve ratio decline moderated this quarter, just wondering what your thoughts are there?

Kevin J. Howard

Steve, this is Kevin. Our thoughts, we did have a little bit of -- we're down a little bit, but we're -- we're down, but we think we'll watch trends and economic conditions and as we stated before, reserve reductions will follow, improve credit quality and we expect continued improved credit quality throughout the year. And in my opinion, we still have room for some meaningful reduction there. I don't want to put a number on that right now, but I can see the loan loss reserve having reductions through the year continue. We've still got room for that at a 180-ish type loan loss reserve as it is today.

Stephen M. Moss - Evercore Partners Inc., Research Division

Okay. And then the second thing, I missed part of your commentary earlier, Kessel, regarding loan pricing pressure. Just wondering if you could give a little color as to kind of when you saw that, and then where you're seeing the greatest pricing pressure?

Kessel D. Stelling

Yes, I said we'd see additional pressure certainly in the second quarter on the margin. I'll let D Copeland talk about specific areas of loan pricing and where we saw the pressure there. So D, I'll turn it to you.

Roy Dallis Copeland

Yes, a couple of things. I would say the biggest piece from the pressure would be on longer-term fixed, probably tied mostly to the owner-occupied section that we have been focused on. I think one thing that'd be a good point to put out, though, is Kessel made a comment earlier just trying to make sure we maintain the proper discipline moving forward. And then in the first quarter, if you actually look at our new and renewed rates for the first quarter versus the fourth quarter, they were constant. And so we have tried to hold in on this one as much as we could to not drop the rates. And so we're seeing it more on the long-term rates. We also are seeing some contraction in the large corporate market as well. Hopefully, that stabilized a little bit as we're moving into the second quarter, but we did see some contraction there as well.

Operator

Our next question today is coming from Craig Siegenthaler.

Nicholas Karzon - Crédit Suisse AG, Research Division

This is actually Nick Karzon standing in for Craig this morning from Credit Suisse. I guess first, I wanted to dig a little deeper into the MOUs and was wondering if that impacts your ability to consider potential acquisitions now that we have TARP repayment coming up in the third quarter, kind of post that, kind of how you're thinking about the M&A environment.

Kessel D. Stelling

Again, I wouldn't want to tie the MOU to any specific action or approval. It is just -- it's a sign of continued improvement in our company. And I wouldn't want to speak for our regulatory agencies and what that might allow us to do or not to do. But again, as I said earlier, I think the removal, from the company's standpoint, is certainly a very positive event as we move -- continue to move through this cycle.

Nicholas Karzon - Crédit Suisse AG, Research Division

Okay. And then second, I think you had about $11 million on OREO expense in the quarter, and I was wondering if part of that was driven by the $61 million in distressed asset disposition and kind of what a good core run rate is for that going forward.

Kessel D. Stelling

You're right. We have $60 million in dispositions, and we think adding $50 million to $75 million, we think that will be where we'll guide throughout the year. Our ORE, I think we've got a $10 million to $15 million on ORE expenses for the first half of the year. I think we landed in the middle there, and I think it'd be closer towards the lower part of that guidance next quarter. And I'm not going to guide a whole lot further than that. But I can see it getting below that guidance in the second half of the year. As our ORE works down and our NPA and our problem loans work down, that expense should naturally work down as well.

Operator

Our next question today is coming from Ken Zerbe.

Ken A. Zerbe - Morgan Stanley, Research Division

Ken Zerbe from morgan Stanley. The first question I had, just in terms of TARP repayments, your Tier 1 capital ratio at 13.5% is very strong, but I guess we mostly look at the Tier 1 common of 8.9%. Is that how you guys look at it or how regulators look at it when you're deciding what composition of the equity or capital raise to use to repay TARP? Do you guys focus more in Tier 1 common or regular capital?

Kessel D. Stelling

And Ken, I'll let Tommy help me here as well. But I guess the issue for us is -- we look at all of them. And certainly, Tier 1 common at 8.93%, but if you take the TARP component out of Tier 1 capital and don't replace it with some other Tier 1 component, then your Tier 1 capital ratio and your Tier 1 common will be largely the same because that buffer goes away. So that's why we believe there'll be a Tier 1 capital component to replace, again, the TARP instrument, which is included today in the Tier 1 capital. Tommy, do you have any color or anything else to say?

Thomas J. Prescott

Kessel, you said it well, and I think there is an expectation that there probably should, over time, at least be a difference between Tier 1 and Tier 1 common. So let's take it into consideration as we look at the mix, but it's still under development.

Ken A. Zerbe - Morgan Stanley, Research Division

Understood. I guess I was just thinking, do regulators or would regulators allow you to repay TARP and maintain an 8.9% Tier 1 common or if it needs to be a little bit higher? That's kind of the gist of the question.

Kessel D. Stelling

Yes, and again, I don't think the answer to that is that clear. It's not that prescriptive. We'll, at the end of the day, after a lot of discussion modeling, try and land on what we think is the right amount of Tier 1 common, what's the appropriate ratio, what's the appropriate Tier 1 capital and submit that for approval. And to be more specific than that today, I think, would not be fair to the process in terms of how the Tier 1 capital component might play out. We certainly believe it's there, and again, it's going to be a combination of common and/or preferred.

Ken A. Zerbe - Morgan Stanley, Research Division

Understood, okay. And then just the second question, in terms of your loan growth outlook that you would have positive net growth in second quarter, where does that growth come from? Because we did see the comment in the press release that it's a challenging lending environment, so I'm just wondering what drives the improvement versus kind of where we were at this quarter.

Roy Dallis Copeland

Yes, Ken this is D. I'll take that. Really, if we go in and look at where does it come from, I'll go a little bit in geography and then maybe talk about a couple of other things. We've had -- and to give you one point is our pipeline really continues to move forward. We see positive results in the first quarter pipeline but also what we're seeing quarter-to-date in the pipeline as well. Specifically, I think it will continue to come. We'll have growth in the large corporate area. But then from a geography standpoint, we see strength in the pipeline for portions of Atlanta and Florida. I think Jacksonville and Tampa has good opportunities as well. We've seen strength in parts of South Carolina as well from a Charleston and Greenville standpoint. We have had some stabilization in Myrtle Beach. I don't know that we'll have a ton of growth there, but we have had stabilization there. And also, opportunity in Nashville to grow. And so we feel like, from what we see in the pipeline, we will have opportunities in those different areas. One other comment I would like to make would be from a first quarter standpoint, we do feel like we had some seasonal pay-downs, which we will not have in the second quarter to help offset that as well on the consumer book, as well as pay-downs on lines of credit that we had that we do not think will repeat themselves in the second quarter.

Operator

Our next question today is coming from Steven Alexopoulos.

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

JPMorgan. I just wanted to follow up on the question on TARP, just looking at Slide 21, where you say the largest single component will be cash. Tommy, can you give us maybe a ballpark of how much cash you expect to have on hand in the holding company level when we come to the third quarter?

Thomas J. Prescott

Yes, Steven, the cash that we're referring to is primarily and really mostly the dividend from the bank. And we believe that we have the appropriate level of cash in the parent company but really wouldn't want to, at this point, consider a meaningful piece of that as being a part of TARP repayment. It's more from the dividend from the bank.

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

So Tommy, what's the cash on hand today? And what was the dividend, say, in 1Q that you were able to pay up?

Thomas J. Prescott

Well, we got $1.4 billion-ish sitting at the Fed. We've got plenty of opportunities -- we've been adding some liquidity. We've got lots of room -- on the wholesale side, we've got lots of room to be more aggressive on the positive we need. But we've been positioning to repay TARP and really don't feel like that the liquidity and even the capital will be an impediment. It will just be whatever was agreed upon with us and our regulators.

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

Okay. And then just as a follow-up, I guess I didn't understand your answer to the question on M&A. Do you think you are in a position today to pursue an acquisition, and is this even something on your radar?

Kessel D. Stelling

I'd say today, no. I think we said in order, we needed certain things to happen. DTA, we needed that to happen. I think we've not discussed, again, publicly the MOU as much, but I think that's certainly another step in our recovery. I think the TARP repayment is another step, and I post that, certainly, as something that we believe will be a part of our strategy. It's not the driver of our growth opportunities, but I do believe that historically, Synovus has been a great acquirer of companies. I think there are a lot of banks in our footprint in the Southeast that, for whatever reason, will be looking for exit strategies, many of them we know today, over the next year or so. So I think today's a little premature, but let us get up a couple more quarters. We've said all along, we need to take care of our own problems first. And I think this quarter is another step in showing that we're taking care of our own problems first. And then I do believe there will be opportunities for Synovus. Whether that's later this year or early next year, unfortunately, for our industry, I think those opportunities will be with us for some time. So yes, I do think that's part of our future. I wouldn't want to be too time period-specific other than to say we're a lot closer today as another quarter of, again, solid performance.

Operator

Our next question today is coming from Erika Penala.

Erika Penala - BofA Merrill Lynch, Research Division

Bank of America. Did I -- my first question, at the bank level, given that the MOU had required an 8% Tier 1 leverage ratio, is that a more normal floor going forward? Or as we think about how much excess cash there could be at the bank to dividend up to the Holdco, we should think about the Tier 1 leverage floor to be higher from that 8%?

Thomas J. Prescott

Erika, this is Tommy. We don't think that the capital ratios, including the leverage ratio, at the bank level will be an impediment. We think there's a big runway between -- certainly between that 8% and where we are today, and we certainly wouldn't even approach the 8%. But we can't be more specific at this point on the exact mix, but we think we can get a meaningful piece of cash dividend from the banks, and we can do it without impairing liquidity or capital.

Erika Penala - BofA Merrill Lynch, Research Division

Okay. And I guess as a follow-up to that, I know that you're restricted in what you have to say, but as investors think about what the replacement capital will to redeem TARP, should we think about the Holdco level Tier 1 capital exit ratio as the benchmark upon which we'll do our analysis and then, perhaps, the Tier 1 leverage at the bank as a component that would suggest how much debt you would have to raise as it implies how much cash you could have on hand?

Thomas J. Prescott

Erika, we kind of listed the stack in order in Kessel's presentation. You're talking about the dividend from the bank and then the Tier 1 add, and then the rest will being debt. But we really aren't prepared today to be more specific than that. We're being mindful of all of those hurdles that you have to cross. We don't see any of them as impediments, but at the end of the day, the actual mix will be forthcoming a little ways out.

Operator

Our next question today is coming from Jennifer Demba.

Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division

SunTrust Robinson Humphrey. Question -- 2 questions. First, I think for Kevin. Kevin, I guess your loan loss reserve is now around 1.80%. How much more loan loss provision improvement could you see the first quarter run rate given your NPAs are still above 3%? And then I have a question about M&A. Kessel, you said that it's something that could be a possibility later this year, early next year. Geographically or size-wise, what's your interest there?

Kevin J. Howard

Jennifer, this is Kevin. I'll go first. As I've mentioned, I think, again, good credit quality improvement will see some -- that reserve go down. We're not going to put a number on that right now. I just think at our level, there's opportunity. We're in the 2s on the NPLs. We think the NPLs will have a 1 in front of everybody in the year and NPA of 2 in front of it. So is there room to move that reserve down? I think so, with the level of problem assets continuing to work down, as well as TDRs. And so I do think there's some room there. I think it's fairly meaningful, but obviously, we got to watch other factors. I think the formula is going to take us there, but one thing we're always conscious of is what's going on in the economy. There's always some look into it other than just the factors. But the factors favor more reserve reductions throughout the rest of the year. We're just not ready quite yet to put a number on it.

Kessel D. Stelling

Jennifer, I want to take your second part. I want to be really clear to here to everyone. This discussion of M&A, because I know it concerns some, is no diversions of strategy here for us. We've said throughout the cycle that when we heal and as we heal, we felt like we can return to more normal banking activities, which will include filling in around our footprint. And so I don't want our listener to think that anything today means we're going on a different payout. But as I've said before, as we heal, as we get our own house in order, and if that's later this year or if it's early next year or the second half of next year, I think there are opportunities throughout the Southeast. I don't criticize any of the deals that have taken place before us, but I think we would be a better acquirer than some who have -- whether it's been loss share or just other M&A activity, I think it'd be largely, it'd be in our footprint. It would be smaller transactions. It would be opportunities where -- and there have been many just like this, where our company probably could have absorbed the institution with no disruption in service to the community and could have increased scale so that our existing infrastructure could have worked through those problems. And I think longer term, we'll have to make that case to regulators and others that we'd be a good vehicle to help the consolidation process. I think the end market, it would be certainly smaller-size, and we want to move slowly there. But again, if you look at -- just look at -- as you do, I know, as you look at the condition of the banks throughout the Southeast, and certainly, Georgia still has a ways to go, and look at the markets in which we operate, I think our company could help the consolidation process, add scale to our infrastructure and serve communities very well in the process. And so I hope that answers your question.

Operator

Our next question today is coming from Rick Kraemer.

Rick Kraemer

Weiss MultiStrategy Advisors. Can you guys -- I mean, we're talking -- we're putting the circumstances, you guys being a potential acquirer. But the way I see it, at the end of the day, you still have a real earnings power problem. Can you -- and without earnings power, you won't have a multiple. Without a multiple, you can't do M&A. So before we jump that far ahead, can you maybe lay out a clearer plan of how you dramatically improve the earnings outlook? And with all that being said, at what point do you think shareholders may be better served by you exploring other options such as a sale of the company?

Kessel D. Stelling

Well, we've said throughout the cycle that all of the actions we were taking were to just make this company stronger, and that, I think, makes all of your options better longer term, whether you operate independently, whether you partner with someone else, whether you are an acquirer or whether you're an acquiree. I think everything we've done to date has been consistent with that approach. I think we get earnings power through continued reduction in credit cost, which we've outlined today, with a very focused effort on expense management. I think our entire industry is facing a revenue problem. I think we've taken out $120 million in cost over the last few years. I think that's reflective of very disciplined expense management program, and we will continue to do that until revenue line heals, and quite frankly, when that heals, we'll still be very disciplined on the expense side. And then I think today, we talked about how we believe the balance sheet is at or near trough, and we will see reported loan growth in the back half of the year. And so you'll have credit cost coming down. You'll have expenses going down. You'll have revenue going up, and I believe that's what leads you to the kind of multiple that allows you to justify your independence. We never said this was a quick process for our company. I think I laid out a slide that took you from 2009 to 2012, and it's been slow but steady, and I think everything we've done has been consistent. We have that approach, and we're just making this company stronger, which will make all of our options stronger. But we understand the issue of earnings, and we understand the issue of multiples. And again, we believe that the path we've laid out gets us there, and if it doesn't get us there, then we deal with that.

Rick Kraemer

I guess the question really is, can you lay out a much more specific plan of attack? Because I can -- the provision for loan losses is $36 million for the quarter. I mean, even if we go to 0 every quarter on $900 million of shares plus dilution from the TARP, you're looking at maybe $0.10? I don't -- I guess it doesn't seem that the earnings power on the current balance sheet, without expanding it dramatically, is going to be enough to justify a significantly higher stock price. And I'm looking -- I'm hoping you can prove me wrong, but I'm looking for evidence of that.

Kessel D. Stelling

Well, again, I think we'll just have to prove you wrong because we're not -- we haven't given the board earnings color. We've said we will take more credit costs out. We will take more expenses out. We've said that, and we will grow the balance sheet to increase scale, and that's where that growth in earnings will come from. We believe a lot of our big areas are doing well. We've talked about brokers. We've talked about our FMS companies. We've talked about other lines of business there. Our mortgage company has been strong. But to lay out specific pieces of the income statement today or give forward earnings guidance today, we're not prepared to do that. But I think just as we weren't prepared to do that through the cycle, but yet we executed in line with expectations. So I know I'm falling short to what you want today, but we just aren't in a position to give specific forward earnings guidance other than to say you're right, it's got to come in credit, it's got to come in expense. We've got to then increase the size of the balance sheet to allow more revenue there. We believe that is the recipe and the formula that gets us there.

Operator

Our next question today is coming from Emlen Harmon.

Emlen B. Harmon - Jefferies & Company, Inc., Research Division

Jefferies. Specifically on the expenses, I was hoping you could just kind of give us maybe a little bit of color on what the progress was there. We obviously saw the headcount reduction from the fourth quarter, but it seemed like a lot of the expense improvement this quarter came in the kind of the professional services line. So was that professional services decline kind of built into your $30 million expense save program and just kind of -- should we expect some further legs down as we get out into second, third, fourth quarter here?

Thomas J. Prescott

This is Tommy. I'll be glad to take that question. What you saw in the first quarter, really, is a big reduction from the fourth quarter, $8 million. It's $11 million below same quarter a year ago, and so what you're really seeing is a mix of strategic tactical and maybe even a little bit of timing. I think maybe a good way to get to the bottom of your question would be the -- we see the level we hit to be fairly indicative of the run rate this year. It'll be in this neighborhood but maybe an opportunity to take it down a little more. We are probably 2/3 of the way through installing our $30 million solve -- got a little bit of that started last year, a big piece of it installed in the first quarter but not all showing up in the income statement yet because some of it was late first quarter. But what you'll see going forward is some of that continuing to blossom, but also, you'll see some -- as we've said before, we continue to invest in [indiscernible] technology, whatever it takes to strengthen the company, so really require this remaining completion of the mission on the $30 million to keep this at this new low level. So I hope that answers your question.

Emlen B. Harmon - Jefferies & Company, Inc., Research Division

That does. And then one other area noted in your prepared remarks was just making progress on the consumer fee income. So could you give us a sense of, I guess, where you're finding some of those revenues and just kind of if there's more to come there as well?

Roy Dallis Copeland

This is D. I'll take that. One of the comments we've made is positive improvement on fee income on a year-over-year basis. I will say that the positive for that came in as we did away with the free checking accounts that we had. Our collection rate with our bankers has been strong there. We are collecting those fees. There is pressure, as you can imagine, on the NSF side, as well as there will be pressure on card as well. And so those are really all volume and activity that has happened. We look at, really, on a daily and weekly basis, opportunities to make sure we're appropriately charging for the fees and services that we have, and we'll continue to look at each of those as we move forward.

Operator

Our next question today is coming from Mike Turner.

Michael Turner - Compass Point Research & Trading, LLC, Research Division

Compass Point. Just if you could comment, I don't know if you have it, what your weighted average origination yield was or yield on new loans in the first quarter.

Thomas J. Prescott

Yes, it was in the low 4s would be the average, and it would've been consistent with the fourth quarter as well.

Michael Turner - Compass Point Research & Trading, LLC, Research Division

Okay. And given your sort of outlook for a turn in loan growth later this year, is it possible for NII to grow given the low rate environment and really just the yield dilution of new loans coming on the books?

Thomas J. Prescott

Is it possible for net interest income...

Michael Turner - Compass Point Research & Trading, LLC, Research Division

Well, I guess it's about $200 million or so this quarter. Do you see NII actually growing later this year, or is it kind of going to be stable given loan growth will offset some of the NIM compression?

Thomas J. Prescott

I mean, it's really all -- the biggest driver is the loan book. The margin is really important, but it's the second tier in the growth that we create, growth in net interest income. But we think an appropriate mix of -- a little bit of compromise on the margin to grow the balance sheet will enable a NII growth scenario.

Operator

Our final question today is coming from Christopher Marinac.

Christopher W. Marinac - FIG Partners, LLC, Research Division

FIG Partners in Atlanta. Kessel, you mentioned M&A activity earlier and possibility. Have you thought through kind of what tolerance you have for tangible book dilution at this point and sort of, I guess, what's the frame of kind of boundary you want to stick to there?

Kessel D. Stelling

Yes, well, Chris, I appreciate your question. I'll remind everybody again that I didn't bring up M&A acquisition. I think someone else did. But again, it's not a big part of our core growth opportunity. We're not going to do something we believe that is dilutive to earnings. We would do transactions that were accretive to our earnings that we felt would be very similar to the culture of our company, where we could absorb business, absorb customers into the existing footprint that we could serve those well. And so I just don't want to create the impression that we're changing payouts and going to go on an aggressive M&A binge. I think -- and you know our company so well. Historically, we've done transactions in markets similar to those in which we were already operating in in our footprint, where we could do exactly what I just talked about. And so we're not looking to do transactions that are dilutive to our current shareholders. We want to do things that will allow us to take advantage of this infrastructure that we've built up. I'll remind the group, we cut $120 million in expense, but while we've done that, we've built up a lot of infrastructure in risk and compliance and quite frankly, in the workout and management of problem loans. So taking on a couple hundred million dollars in problems loans would be a good weekend's work for some of our chains in terms of their ability to absorb and assimilate this portfolio. So again, I don't want to think in terms of dilution. I'd like to think we would only do those that, a, fit in with our system, fit in with our culture that were clearly also transactions that our regulators thought were healthy for our company. And that's just down the road. So as we get that first opportunity, we'll be sure to talk more about it and what we look at to do that deal. I think, again, as I said, unfortunately for our industry, those opportunities aren't going to go away anytime soon as we talk to lots of our friends in the community banking industry, who, in some cases, need capital, in other cases, just want liquidity or want a way out. And hopefully, we'll be there to provide that for them at a benefit to Synovus shareholders.

Christopher W. Marinac - FIG Partners, LLC, Research Division

Okay, great. That's helpful. And then just a quick follow-up on the change in debit card fees this quarter, is there any future change on how those play out other than seasonality? I know you have some legal matters that are still evolving for future discussion, but just curious on this if we should expect some of those fees to have some further change in the future.

Thomas J. Prescott

I think it would just be volume and seasonality would be the forward look.

Operator

We have no further questions in the queue.

Kessel D. Stelling

All right. Well, thank you, Kay. And I want to again thank all of you for joining our call today. Again, as I said to our team yesterday when we prepared for this call, it was just another quarter of steady progress for our company, certainly, as evidenced by ratings agency upgrades, certainly by improvement in credit, by improvement in expense, by level of pretax income. It's the highest in 5 years. And then again, we were also very pleased today to announce in our filings, the MOU between the Federal Reserve Bank of Atlanta and state banking department and our holding company have been lifted. None of those actions changed a thing we're doing. Our team is extremely focused on execution of our strategies for short and long-term growth, very motivated to show the kind of growth that we know we're capable of and very focused on our customers who have been so loyal to this company through the cycle and who continue to stick with our company. So this company has long been known for its customer focus, and it will continue to be. And our team is anxious to get out there in the second quarter and third quarter and fourth quarter and show the results of the efforts that we've all spent so much time over the last 4 years, seeing those efforts come to fruition. So I thank you for joining us again. I look forward to further updates later this year on earnings, on execution, on TARP repayment and again, appreciate the support and interest of the investment community. So thank you very much.

Operator

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone 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!

Synovus (SNV): Q1 EPS of $0.02 in-line. (PR)