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Synovus Financial Corporation (NYSE:SNV)

Q2 2014 Earnings Conference Call

July 22, 2014 8:30 AM ET

Executives

Bob May - Director, IR

Kessel Stelling - Chairman and CEO

Kevin Howard - EVP and CCO

D Copeland - EVP and CBO

Tommy Prescott - EVP and CFO

Analysts

John Pancari - Evercore Partners

Ebrahim Poonawala - Merrill Lynch

Emlen Harmon - Jefferies

Jefferson Harralson - Keefe, Bruyette & Woods

Jennifer Demba - Robinson Humphrey

Ken Zerbe - Morgan Stanley

Keith Murray - ISI Group

David Bishop - Drexel Hamilton

Steven Alexopoulos - JPMorgan

Christopher Marinac - FIG Partners

Operator

Good morning, ladies and gentlemen. And welcome to the Synovus' Second Quarter 2014 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode and we will open the floor for your questions and comments after the presentation.

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

Bob May

Thank you and good morning everyone. During the call, we will be referencing the slides and press release that are available within the Investor Relations section of our Web site synovus.com. Kessel Stelling, Chairman and Chief Executive Officer will be our primary presenter today with the executive management team available to answer your questions.

Before we begin, I'll remind you that our comments may include forward-looking statements. These statements are subject to risks and uncertainties and actual results could vary materially. We list these factors that might cause results to differ materially in our press release and in our SEC filings, which are available on our Web site. We do not assume any obligation to update any forward-looking statements as a result of new information, early developments or otherwise, except as maybe required by law.

During the call, we will reference non-GAAP financial measures related to the Company's performance. You may see the reconciliation of these measures in the appendix to our presentation.

Finally, Synovus is not responsible for and does not edit or guarantee the accuracy of earnings teleconference transcripts provided by third parties. The only authorized webcast is located on our Web site. Due to the number of callers we ask that you initially limit your time to two questions, if we have more time available after everyone’s initial questions we will reopen the queue for follow-up. Thank you.

And now I will turn it over to Kessel Stelling.

Kessel Stelling

Thank you, Bob and good morning to everyone. I want to begin by congratulating Bob on his new assignment and wishing Pat Reynolds much success, enjoyment and retirement. Pat has served our Company well for many, many years and I know you all will join me in wishing Pat a happy and peaceful retirement. And Pat I am sure you’re listening out there. So hope we do you proud today.

I do want to apologize to some of our listeners who maybe did not get our release in as timely manner as you would normally get it today. We were posted on synovus.com at 7:30 this morning, but there was some difficulty causing Business Wire, so it is out now and it has been since 7:30, if you haven’t had your normal chance to review, hopefully our presentation today will fill any of those gaps we have.

So let me move right into the second quarter highlights. Net income available to common shareholders $44.3 million or $0.32 per diluted common share, excluding restructuring charges, our net income available to common shareholders was $49 million or $0.35 per diluted common share.

Adjusted revenues $268.4 million above $8 million or 3.1% versus the first quarter pleased with that increase. Total loans grew $296.8 million sequentially or 5.9% on annualize basis, again pleased with loan growth across the footprint we’ll give some color to that in just a moment.

Our adjusted pre-tax, pre-credit cost income was 98.9 million up 2.4 million or 2.5% versus the first quarter. And then we had significant improvement in credit quality. During the quarter our NPL ratio declined to 1.27% from 191 in the first quarter of '14 and 2.47 in the second quarter of '13. Our NPLs declined $125 million or almost 33% from the first quarter of ’14 and 224 million or 46% from the second quarter of ’13. So a tremendous improvement in overall credit quality and again our capital ratios closed the quarter very strong, I’ll go into those in a minute. The Tier 1 common equity increased 17 basis points versus the first quarter to 10.41%.

Let me give a little more color now on the loan growth as I mentioned total loans grew $297 million or 5.9% sequentially it was driven by strong growth both in C&I and retail loans, it was a fifth consecutive quarter of reported loan growth. We had strong second quarter growth across the footprint and in particular Nashville, Tampa, Atlanta, Athens, Greenville-Spartanburg, Charleston and Savannah just to name a few, so again strong performance across the footprint in all of our -- in most of our core markets.

On Slide 5 we will talk a little bit about where the growth occurred. C&I balances increased $182 million or 7.2% annualized. We had growth in local markets of $109 million or about 60% of the total C&I growth. And again to highlight just a few markets where we had strong C&I growth, Nashville, Columbus, Tampa, Athens, Statesboro, Jacksonville, Augusta, and Valdosta, so pleased with the mix of the growth and how it occurred again across the footprint. About $60 million of our C&I growth was in syndications, 33% of the total C&I growth, but in particular I would like to highlight that that growth includes wins from our local markets as our bankers partnered with our large corporate banking teams in a couple of three markets to highlight, some to South California, Rome, Georgia, Nashville and Birmingham, Alabama, all again good partnerships between our co-bankers and our syndicated team.

Our CRE balances declined 14.5 million reflecting targeted reductions in residential and our land portfolio of $130 million while growing the investment property portfolio about $115 million or 9.9%. Annualized investment property growth was driven primarily by the multi-family category with additional growth in office buildings and hotels. Residential C&D and land portfolio now represents only 4.5% of our total portfolio compared to a case of 28% in the fourth quarter of 2007.

Little more color on the loan growth. Retail loans grew 130 million or 14.3% annualized for the quarter. Atlanta and Tampa were primary support with heavy HELOC growth we had, meaningful mortgage growth at Nashville, Birmingham, Columbia, South Carolina, Atlanta and Tampa. Our HELOC portfolio was up about 63 million or 15.7% annualized and that’s a primarily result of a successful HELOC campaign and on the consumer mortgage side, strategic talent additions in key markets of growth and purchase originations, so really pleased with the performance on the retail side.

Substantially all of our retail loans are to in-market customers, no indirect lending products there. So we think that gives us increased opportunity certainly for cross-selling. So based on the quarter’s performance, based on our pipeline, based on our economic outlook and our footprint, we had previously guided 4% to 5% loan growth for the year we believe 4% to 6% is now a more appropriate range. So we’ve changed our guidance slightly again from 4% to 5% to 4% to 6% on annual basis.

Slide 6 on core deposits. A few bullets there, total average deposits were 20.86 billion increased 138 million or 2.7% versus the first quarter. Average core deposits decreased about $28 million or 0.6% versus the first quarter and average core deposits excluding average time deposits grew by $164 million or 4.1% versus the first quarter.

On Slide 7, take you to the margin. We were pleased to see the net interest margin increase to 3.41% we had guided pressure and there certainly is pressure but pleased to see the increase 2 basis points up from the first quarter. Due to the components the yield on earning assets was 3.86% unchanged from the first quarter of ’14. Our yield on loans decreased 2 basis points to 4.32%. Our effective cost of funds was 45 basis points, a 2 basis point improvement from the first quarter.

Net interest income increased $4.5 million versus the first quarter driven primarily by loan growth and a higher day count, and we do expect slight downward pressure on our net interest margin in the back half. And I will call your attention on to the net interest income sensitivity box on the right of that slide. We are positioned as we’ve said before to benefit from potential rate increases and you will see therefore illustrative purposes a 100 basis point change in short-term rates. We estimate over a 12 month period about a 3.8% increase in net interest income, a 200 basis point increase would yield about 5.9% increase in net interest income.

On Slide 8, again very pleased to see that mortgage revenue, core banking fees and our FMS revenues grew by 7.9%. 2Q14 adjusted non-interest income was 63.4 million, 326,000 or 25% increase from the first quarter, excluding the first quarter gain on branch property sale of 3.1 million, adjusted non-interest income increased $3.4 million sequentially. Core banking fees of 32.6 million, were up 1.5 million or 4.7% from the first quarter driven by higher bankcard fees.

Our mortgage banking income increased $1.8 million or 50.5% versus the first quarter driven by a 56% increase in production again over the first quarter. FMS revenues $19 million, increased 1 million or 5.3% sequentially, driven by increases in brokerage revenue and fees from trust services.

On Slide 9 again we continue our focus on expense management, adjusted second quarter ’14 non-interest expense 169.5 million, up 2.4 million versus the first quarter, driven by planned increases in advertising expense which we had previously discussed. Advertising expense was 6.3 million, up almost $4 million versus the first quarter. Our employment expense was 92.5 million, down almost a $1 million versus the first quarter of ’14.

We do plan to close 13 bank branches across the five-state footprint. Those closures are planned for the fourth quarter of ’14, so this quarter’s results include restructuring charges estimated approximately 13 -- total charges of approximately $13 million, 7.7 million recorded this quarter. The remaining charges of approximately $6 million relating to exit cost for leased properties are expected to be recorded during fourth quarter of ’14. A little color on those branches, again 13 branches closing in the fourth quarter, they have an aggregate of about $40 million in loans and $184 million in deposits which is less than 1% of our total deposits. So, we don’t expect meaningful financial impact there, specific locations that we will be closed, we made public on the respected customer notifications which will be taking place over the next few days.

And then finally on the expense front, as we have talked about the implementation of our new expense savings initiatives of about $30 million remain on-track. We continue to offset many of those investments with -- many of those savings with investments to talent, technology and marketing.

I talked previously about credit. I will take you to Slide 10 and talk more specifically about our credit results for the quarter. On the first graph, you will see credit cost were 17 million compared to 18 million in the first quarter, representing a 29% year-over-year improvement. We expect total credit cost to be fairly flat the remainder of the year in comparison to the past couple of quarters as we continue our strategy of working out remaining legacy problem loans and as we experience provision expense related to loan growth.

Graph to the right of that shows net charge-offs of second quarter of 35 million or 69 basis points, up from 15 million in the first quarter. The elevation there was directly related to the significant reduction in NPLs this quarter. As evidenced by our declining credit cost, you can see that expense for these charge-offs had been previously recognized.

As a reminder back in January, we guided that charge-offs for the year will be less than 50 basis points. We ended the first half of the year right at 50 basis points and do expect to end the year below 50 basis points on annualized basis. Kevin Howard will be happy to take questions on that subject later in the call. Bottom left graph shows a significant reduction in our non-performing loans, again very pleased that dropped over 32% during the quarter, ending the quarter at 1.27%.

Additionally our NPAs moved below 2% with the ratio again in the second quarter at 1.76%. Again, we guided earlier in the year the NPAs would move towards 1.5% by year-end 2014 and that NPLs would end near 1%. The reduction this quarter gives us confidence in reaffirming that guidance with the possibility that we will end the year below that guidance. Finally, the graph on the bottom right shows NPL inflows of 34 million down a 1 million from the first quarter, down 49% from the same quarter a year ago. We continue to see good progress, the overall volume of our loan portfolio as we continue to experience reduction at all of our problem asset metrics.

On the next couple of slides, I think we will show you a look back just at where we were two and a half years ago related to the quality and composition of our loan portfolio and highlight the results of some of the efforts we have made over that time that have led to a much stronger and much more balanced credit portfolio. On this page, I will call your attention to both accruing TDRs and past due. The graph on the left shows the meaningful reduction in experienced and accruing TDRs which was over a $100 million or 20% first half 2014.

Again I know Kevin has spoken to this often, 99% of our accruing TDRs are paid current, with almost no past dues over 90 days, approximately half of the TDRs are rated better than substandard. 70% of them are not residential or land related. We continue to experience very few subsequent defaults in our TDR portfolio. Again pleased to see the reduction there. And then another indicator of the improved quality of the portfolio is past due ratio, obviously if you review the defaults you can see from the graph that our past due is greater than 30 days, now only 30 basis points, the 90 day past dues are only 2 basis points, so, again very pleased there.

And then on Slide 12, you will just see more graphical evidence of the strength of the loan portfolio in both diversity and quality. The first graph on the left shows the much improved mix of the loan portfolio about type CRE is down to 32% from 36% 2011 down from a peak over 45%. Big , big driver of that shift in our mix which we have talked about and our confidence in maintaining the balance is our disciplined concentration policy, our investment in new talent in key areas that support our strategies and the implementation of these strategic business lines so the current portfolio of mix is in line with our stated goal of 50% to 55% C&I, 30% to 35% CRE and 20% retail and it really better positions us for the future as we continue to import our lending strategies to support a healthy growth of our Company as again as evidenced by this quarter’s results.

Now on the graph right shows the improvement in quality of loan portfolio of our risk rate again great to see that improvement substandard improving in non-performing loans now represent only about 3% of total loans down from 11% at the end of 2011 and we think this healthy momentum will continue to see that as we move throughout 2014 and beyond.

Slide 13, call your attention again to our strong capital ratios and we will talk about capital management I’m sure in the Q&A and we will leave that discussion to there, but just to give you some color on capital ratios all Tier 1 capital ratios increased versus prior quarter primarily due to earnings and DTA depletion with some offset in loan growth Tier 1 common equity I mentioned earlier 10.41, up 17 basis points from the prior quarter, Tier 1 capital 11.01 versus 10.85 in the first quarter of ’14.

Total risk-based capital a slight decline 13.03 versus 13.31 in the first quarter reflects a $90 million reduction related to the subordinated debt which matures in June of 2017. Our leverage ratio 9.69 versus 9.46, TCE 10.91 versus 10.78 and our Tier 1 common ratio for the second quarter under Basel III is estimated at 10.20 which will excess the minimum requirements. Again just to remind either, we sell the very significant deferred tax asset and will continue to generate regulatory capital in the future of these securities.

So I think the story of the quarter is, we continue to successfully execute our plan for improving financial performance as evidenced by another quarter of solid operating results really across all fronts. Our activities are continuing to be centered on enhancing the customer experience as we continue to emphasize strong local leadership as a key differentiator and a driver of our future success.

And I will talk a little bit before we go to Q&A about the path ahead and the path to improved earnings. First, I will just comment on our branding efforts which we are investing heavily in. We are pleased with the progress of those efforts. Those are designed to promote our comprehensive offerings and increased market share, we have moved into the capabilities phase of that campaign after piloting the awareness phase in Atlanta and Birmingham, we are rolling out television print visual ads at a broader base of markets. Beginning next month and again we believe that effort will pay dividends for our Company as we increase market share and drive traffic into our banks.

On the balance sheet growth again pleased with this quarter and quite frankly the last five quarter’s reported growth, but we continue to take steps to increase the pace of that growth. We are better aligning our commercial banking talent with our customer needs and targeted market opportunities and really trying to get the right bankers in front of the right customers and serving for the prospects, we do see an opportunity in the high opportunity middle market segment and we are taking some steps there both internally and through external investments in talents to better penetrate that market just as we have successfully done large corporate senior housing and equipment financing, we really do believe that as a Company we could differentiate ourselves in the middle market space and we will be excited to detail more of those efforts in the coming quarters.

From a retail standpoint, over the past several months we have engaged in a complete refresh of our retail banking strategy which will allow us to leverage our community banking model and deliver a much more focused approach to attracting and serving consumer and small business customers again a very much a sales focus there. We are excited about the opportunities that will give us and then also we are implementing new and enhanced technology that offers the -- adding convenience to customers in our demand, just a couple of examples, our virtual branch ATM rollout finishes up this month a very successful rollout as evidenced by customer behavior to-date and we are launching our enhanced online business banking center for commercial customers beginning in August, we are also offering enhanced mobile banking, person-to-person account-to-account payment options by year-end.

Net interest income we do see opportunities for net interest income growth driven by balance sheet growth and a continued focus on pricing as evidenced again by our margin behavior this month and certainly our path as illustrated in the table would be accelerated by an increase in short-term interest rates. So, we see increases there through normal activity certainly acceleration through short-term interest rates.

On a fee income standpoint again pleased to see the increases that we did this quarter but we will continue to -- our efforts to generate new fee income by expanding our team of retail brokerage financial consultants, mortgage originators and trust professionals, all playing highly specialized training and licensing to our private management retail bankings and really just through all of our core banking operations and through our -- on specialty areas better integrate the specialty bankers in with our core teams to grow the income and lots of examples of success is our travel around footprint there.

Couple of other items from an expense standpoint, credit related expenses we do expect further reductions in credit cost as legacy problems, loans steadily subside and we expect continued reductions to credit related environmental stock cost. And I think Kevin can talk about that later as well, so future reductions in credit related expenses. And then overall from an efficiency standpoint we will continue our relentless focus on efficiency, by managing the level and positioning of head account, reviewing and adjusting our branch network which never stops and all the operations associated to that, again making sure that we’re matching our behavior in our evolving customer behavior preferences.

And continuing to streamline, and enhancing our internal process as well ensuring onto customer experience. So again, solid quarter performance, the team is very energized about the quarter and the steps that we just outlined. We continue to position our Company as a leader for customers really across the South East. Again, we will be happy to take questions on anything we covered today or anything else that we didn’t cover.

And so operator at this time I’ll be happy to open the floor to any questions in the -- with our callers.

Question-and-Answer Session

Operator

Thank you. The floor is now open for questions. (Operator Instructions) Our first question is with John Pancari at Evercore. Please post your question.

John Pancari - Evercore Partners

Good morning guys.

Kessel Stelling

Good morning, John.

John Pancari - Evercore Partners

Just a question on the SNC front, what was the total sheerness for the credit balance as of the end of the quarter? And then what businesses saw the shared national credit growth was is it all the senior housing business. And then also if you have a comment what yields you are putting on this production? Thanks.

Kevin Howard

This is Kevin, John, good morning. The SNC grows about a 1.4 billion in that ballpark before the quarter started we’re about a 1.470 billion now, what’s the other part of the question…

D Copeland

The second part, this is D the second part was about the senior housing, and we actually had a slight reduction on the senior housing syndicated during the quarter.

Kevin Howard

But that the industry by the way, some of the industry that we did increase as Kevin, again I am sorry in manufacturing and in transportation, we increased in those segments within this indication portfolio during the quarter.

John Pancari - Evercore Partners

Okay. And then the yields that you are putting on that paper, the new money yields?

Kessel Stelling

I don’t know if we’ve disclosed in each of the different portfolios, I can talk to the overall, new and renewed, but we have not disclosed the rate on each of those.

John Pancari - Evercore Partners

Okay. Alright. And then separately on the capital front just I will hop to that topic real quick, Kessel I just want to -- if you could talk little bit about your thoughts around capital deployment, particularly given the solid 2Q results, the increase in your capital levels, they’re relatively sober, where they stand, where they stand right now. And then also the substantial benefit from a potential recapture of the DTA. So I wanted to get your thoughts on deployment and specifically a potential buyback?

Kessel Stelling

Yes, John. I thought that would be your first question, so I am glad it was question one b, but certainly would like to talk about that. We said over the last year, let us get a year past TARP and I think a year is up, we’re about away with later year is up and that was not a regulatory or even a self composed, it was just – we felt like, we needed a year of performance to really think about meaningful capital actions, but as I just said it year is up and I just make some general comments here. So we exit TARP with Tier 1 common of slightly less than 10% quickly got to 10, it’s 10.01 today, without given poor earnings guidance is pretty reasonable to see how that number approaches 11% by year-end, both through earnings and through DTA accretion.

And the point of exist [Audio Gap] again on solid operating results, but we’re totally different risk profile as a company. And so we certainly think again if 9.8% or 10% Tier 1 common was the appropriate exit for the risk profile that we had then it’s just totally different today. So all that said we do believe that we’ll continue to discuss internally, appropriate capital actions including share buyback. I think the timing and pace of those conversations is likely to increase and we’ll be giving more color about that. Hopefully, sooner rather than later it will require management and Board approval and of course regulatory approval as well, but we do think the Company has made a strong case for that.

And again share buyback I think certainly would be at the top of our list in terms of meaningful capital actions, it could also be a dividend increase in there. I’d just remind everybody that the reverse stock split certainly increased our flexibility or potential dividend increases, but from a share repurchase, we do think that’s an appropriate capital action and we hope to be able to give you more specificity about that in the weeks and months ahead.

John Pancari - Evercore Partners

Okay, great. Thanks Kessel.

Kessel Stelling

Thanks, John.

Operator

Thank you. Our next question is Ebrahim Poonawala with Merrill Lynch. Please pose your question.

Ebrahim Poonawala - Merrill Lynch

Good morning guys.

Kessel Stelling

Good morning.

Ebrahim Poonawala - Merrill Lynch

I guess Kessel if you can sort of, go through the expense outlook. You’ve laid out the $30 million in efficiency initiative which would offset some of the investments. But as we look out, what are the areas you mentioned in terms of some software environmental cost if we can talk through in terms of expectations around expenses relative to 2Q run rate going forward?

Kessel Stelling

Well, let me take a stab of that and Kevin you might want to speak to the credit environmental cost. We’ve stated and we always did expenses cuts wind up and going through the P&L in a very orderly fashion but you doesn’t have in that way, so we are making investments right now again and we’ve mentioned our advertising we talked about talent, we’ve talked about technology by the way, we do believe drives revenue in the company overtime. So short-term, again you might see quarter-to-quarter expenses up a little bit. But overtime again the $30 million were on track to implement, we are looking at additional expense cuts. I think I mean we’ve guided expense levels similar to 2013 levels on an annualized basis. And there are other opportunities that we continue to, tend to quantify. From a credit standpoint again, we’ve got direct credit cost, we also have a lot -- continue to have staff, devoted those legacy credits and as that goes down. You will see declines both in personnel costs and other costs such as ORE, legal and other categories there. Kevin, do you want to talk a little bit about just from a credit standpoint what you see there?

Kevin Howard

You’ve covered a little of it talking about the just all the things associated with it. It might be the travel to kind of look at properties, the taxes we pay on ORE, the appraisals we have to order on a very good basis. But we’ve got a lot left NPAs to cover. You’ve got a lot left expenses associated. And also turning some of that experience personnel to play an offence that lot of our focused management appear spend a lot less time on strategies to move -- a lot more time on how to grow deposit at how much feet. So it’s a little bit all and above associated along with the things you pointed out Kessel.

Ebrahim Poonawala - Merrill Lynch

Got it. And I guess if you could move to sort of margin guidance calling for slight pressure I guess in the back half of the year. When you look at the loan yields 2 basis points compression this quarter, is that kind of where we should expect loan yields to sort of move forward, is that sort of the reasonable assumption around decline in loan yields or if you can talk about where total new origination yields were this quarter relative to book yields, that would be helpful?

Tommy Prescott

This is Tommy, thanks for your question. The margin, we’re guiding that we do believe we can see some back half of ’14 first. We actually offered that same guidance early in the year talking about the whole year we were a little bit planned this yield on positive side, an uptick in the first quarter. Second quarter and the thought process around pressure on a go forward basis the pressure has not come and over net basis, because we’ve had offsets like we had in the second quarter about continuing to bring the funding expense stays down a couple of basis points, that’s kind of helped us in the second quarter but when you really think about the loan growth that we have out there and this targeted that’s out there, the highly competitive environment and you have some legacy loans we continue to look to a higher levels. We do believe that there will be some pressure that will come over the asset side. And we believe that as we are interested in wrapping up the funding side. So we really think there is much more room for bringing that cost base down. So really that’s the basis for reason that we could have some slightest pressure in the back half of the year. I hope that answers your question.

Ebrahim Poonawala - Merrill Lynch

It does, thank you. And do you have sort of the note, what the new origination yields were during the quarter?

Tommy Prescott

It was in the 4 to 4.10 range?

Ebrahim Poonawala - Merrill Lynch

Got it, thank you very much.

Operator

Thank you. Our next question is with Emlen Harmon with Jefferies. Please post your question.

Emlen Harmon - Jefferies

Hi. Good morning. Just looking at your asset sensitivity sits up a pretty good amount since the start of the year, in the 200 basis points now you guys provide, you are at kind of almost 6% improvement and that was around 5% at the start of the year. As you talk a bit about is kind of what the kind of most meaningful balance sheet shifts have been that have provided that lift off and where you see things trending from here?

Tommy Prescott

This is Tommy, I will be glad to do that but probably the biggest factor is the evolution of the fixed and variable rate loans. We have more variable rate loans now that we did earlier and that’s the biggest driver and the key component that cause the asset sensitivity to lift up some between the quarters.

Emlen Harmon - Jefferies

Got it and is that a function of some of the new businesses that you are putting on the balance sheet or is that just kind of how you are addressing the legacy relationships with those for now?

Tommy Prescott

It’s not all of that probably a really big factor although is the floors that are, we are coming out of the floors and so that has helped us support that cause.

Emlen Harmon - Jefferies

Got it, okay. And then you took the loan growth guide up just a bit, is that more environmental or something that you guys are doing internally?

Kessel Stelling

I think it’s both, I think our additions, investments in talent paid off. We have been talking about getting our bankers back at playing offence and as we have done that again just the growth we had across the footprint, in just our good core markets and team do a really good job of talking with our bankers not just about pipelines that just moves and customer sentiments. And so it’s a combination of environmental and then again existing behaviors and lot of conversation with bankers and review pipelines and so we thought it’s appropriate to just raise the upper end of that guidance.

Emlen Harmon - Jefferies

Got it, right. Thanks for taking my questions.

Operator

Thank you. Our next question is from Jefferson Harralson of KBW. Please place your question.

Jefferson Harralson - Keefe, Bruyette & Woods

Hi, thanks. I want to ask about the 30 million of cost savings and offset by the investment. How much of that $30 million of cost savings, do you think you have now and how much is still to come in the second half?

Tommy Prescott

Jefferson, this is Tommy. The 30 million that we talked about were about two-thirds of the way through in terms of initiating a cost reduction. We probably if you look at what’s the budget so far in the company it’s a pretty small portion of that but it’s somewhere in the $8 million range. So, in reality much more of the actual implementation will occur in the back half of the year along with completing the other elements that will be initiated in the back half of the year.

Jefferson Harralson - Keefe, Bruyette & Woods

Alright, thank you. Also I wanted to ask on your guidance for flat credit cost in the second half, shouldn’t that go down a little bit with the huge amount of that credit into this quarter or you are just keeping high, just in case you want to run through a similar amount of credit or you are expecting to run through the similar amount of credit, can you just talk about that kind of flat credit cost guidance on the back of the much improved credit that we saw this quarter?

Kevin Howard

Yes, Jefferson, this is Kevin. Well, this is what we call positive credit cost. We expect, you heard Kessel talk about picking up the guidance a little bit. We have loan growth, you will see little more provision there within the credit cost number and we will continue grinding at the problem loans. They are still 1.7% or so, 1.77 I think of NPA that’s not a satisfactory number around here that’s a much improved number we want to see that number go below 1.5% and you don’t get there without continuing to be aggressive in this positions and restructures. So, I think that’s safe place recipe probably with the rest of the year it’s in that guidance.

Jefferson Harralson - Keefe, Bruyette & Woods

Okay, thanks guys.

Kessel Stelling

Thanks.

Operator

Thank you. Our next question is coming from Jennifer Demba with Robinson Humphrey. Please place your question.

Jennifer Demba - Robinson Humphrey

Thank you. Good morning.

Kessel Stelling

Good morning.

Jennifer Demba - Robinson Humphrey

Advertising expense was elevated from your campaign, is that going to continue to be the case or will it come down to levels we have seen previously?

Kessel Stelling

Well, I mean it’s not the one in straight line, so at any given quarter based on media buys with the timing and we are really testing in market the effect of the AS, the awareness that it’s creating and adjust accordingly, now that I can go into specifically by core but we again had a major investment plan for the year and some of this quarter was really catch up. But on a quarter-to-quarter basis, it’s going to fluctuate, I don’t know if we can speak much more specifically.

Kevin Howard

Back of the year it’s probably little bigger than the first half but I don’t think you can see much anything that would go past where we are in the second quarter.

Jennifer Demba - Robinson Humphrey

Okay, that is helpful. Thank you.

Operator

Thank you. Our next question is from Ken Zerbe of Morgan Stanley. Please post your question.

Ken Zerbe - Morgan Stanley

Thank you. First question just in terms of the NIM looks like your large FHLB stock dividend can you just quantify how much that added to NIM this quarter?

Kessel Stelling

I believe it’s about 1 basis point.

Ken Zerbe - Morgan Stanley

Okay, I basis alright.

Kessel Stelling

1 basis point.

Ken Zerbe - Morgan Stanley

Okay, and then second question in terms of a loan growth, taking up from 4% to 5% to 4% to 6%, I mean I understand the positive direction but it seems that is a sort of a it’s a very minor difference between loan growth, is it that you have more confidence in the loan growth now or is that you are guiding towards truly the 6% versus the 4, I mean how should we I mean it seems like a small new launch so to speak. I was wondering what you’re really trying to message there or it seems you brought the change?

Kessel Stelling

Yes, I know it seems like small new launch but given that the first half in the year we have got 4% loan growth to move the annualized 4 to 6 really suggest that we are back half regarding 4 to 8 because it would take 8% growth, loan growth in the back half of the year to end up as 6% on an annualized basis. So it really is more than just a new launch for the back half of the year which is expressing in terms of annualized loan growth given that first half of the year is in the end of book at 4% and it is based on again the maturing of the investments we have made, the overall performance of our bankers, the attitudes and really the opportunities that we think we are seeing both through existing and new strategies that we are deploying it may again seems like a new launch, we discussed internally the proper way to signal that and again it could be expressed as 4% to 8% in the back half which I think it maybe appear as a stronger signal the math works out the same.

Ken Zerbe - Morgan Stanley

Got it, yes the growth in the second half I was trying to get at, so perfect. Alright, thank you so much.

Operator

Thank you, our next question is from Keith Murray with ISI. Please post your question.

Keith Murray - ISI Group

Thank you. Just going back on expenses one second, do you have assumptions in there around regulatory costs just escalating in the back half for this year or in ’15, or do you see them kind of at a level run rate?

Kessel Stelling

The regulatory cost kind of comes out of couple of categories one thing you would see we have fair -- and those are fairly modestly I guess if you put the FDIC in shirts in that bucket then you could see some continued improvement there the rest of the question is probably around the internal cost that we have and we certainly have changed direction of that from a couple of years ago and again and have but we still have meaningful infrastructure although it has been reduced to look after the regulatory all the issues but I think on a go forward basis we are probably at the current run rate for a while.

Keith Murray - ISI Group

Okay, and then just on fee income I know you get asked the question on bank M&A at last but just thinking about trying to grow fee income making it a bigger percentage of revenue overtime, would you look at purchasing some of that growth, is there any fee businesses in particular that you think are attractive long-term that you might look at?

Kessel Stelling

Well, I mean as one we are in certainly we are trying to expand there with additions of talent as we mentioned in trust and retail brokerage and mortgage, we added some talent on the insurance side, we hope to see some opportunities there in terms of buying a team of producers or a book of business you certainly, we are always in more if looking at change we have added actually well teams and cost of footprints over the last several years I wouldn’t want to get specific about any we mainly talking to right now. In terms of just acquisitions about the company I mean as we said related to just general M&A we believe our focus today needs to be on our internal performance that including returns on asset, improving returns on equity hopefully translating to a stronger currency, so that longer term, you certainly looked ruled that out but short term again core performance investment in talent and potentially some additions of teams throughout our footprint.

Keith Murray - ISI Group

Thank you.

Operator

Thank you, our next question is with David Bishop at Drexel Hamilton. Please post your question.

David Bishop - Drexel Hamilton

Hey, good morning gentlemen. Back to the credit cost and the elevated charge offs this quarter, and it was sort of quantify the impact of the acceleration of the credit clean up and what impact that would have in terms of reported net charge offs?

Kessel Stelling

I mean the charge offs which we were elevated were directly associated with our non-performing loans moving down as you saw substantially but we also did that at really not elevating credit costs were down about a $1 million this quarter but it was from reserve released in there it was that were reserves associated or with problem loans that we got problem loan type off the books, reserves converting to charge offs and so that elevated that but at the same time just I will mention on reserves with our coverage ratio went up substantially as well, which we were real pleased with up to 107% that’s our total loan loss reserve over our non-performing loans. If you exclude that loan that have been charged off up to 177 and I think we’ve got a into the appendix on Page 26 that demonstrates the reserved coverage improving dramatically during the quarter which we are pleased with.

David Bishop - Drexel Hamilton

Great, thank you.

Operator

Thank you. Our next question is Steven Alexopoulos with JPMorgan. Please post your question.

Steven Alexopoulos - JPMorgan

Hey, good morning everyone.

Kessel Stelling

Good morning.

Steven Alexopoulos - JPMorgan

Kessel I wanted to follow-up on Tommy’s comments first about regulatory costs staying at the current run rate. We’ve had quite a few midsized, anyway small banks this quarter, talk about more regulatory focus on compliance scenario such as BSA/AML, I look at the plan to improved earnings, a lot of a focus on efficiency not much commentary in terms of how much you might need to invest from a regulatory compliance view. So my question here is twofold, for banks your size, are you seeing more regulatory focus on this areas. And then secondly, how should we think about the required spend, the right systems, processes in place given this regulatory environment we have today?

Kessel Stelling

Yes, Steve that’s a great question. Let me try and contrast maybe our story some of the others. First of all, Tim ever said you spend all of you ever need to spin, we do believe our level of spend is appropriate and we believe our ongoing regulatory and validate those areas that you’re discussing. I think maybe a difference in our company in some of the others and this is a good news, bad news, I think the risk profile of our company over the last two, three, four, five years required maybe an extraordinary investment, historically to deal with regulatory issues we were based, just as I mentioned on the capital management as we come to the cycle in our risk profile decreases, we believe that those investments will be sufficient on a go forward basis. Though, I think that the regulatory burden is increasing, yes it is in many ways but for a company that had the risk profile without getting into other things associated with ever this profile, our investment was heavy two, three, four years ago and we think it is appropriate given what we see today and we see coming. So again, as our risk profile improves hopefully in some areas and to what our regulatory are listening, in some areas we believe we’ll actually have less oversight or less intrusion, but certainly it ramps up in some of the area you mentioned, but we’re comfortable with our level of spend and it’s something we continually evaluate.

Steven Alexopoulos - JPMorgan

Okay. And Kessel maybe to follow-up on some of the capital comments with banks such as Frost in bankruptcy having some trouble in closing deals, does it change the way you view M&A as a capital deployment tool and why would a company of your size be regulatory approval for buyback? Thanks.

Kessel Stelling

Well, when I say regulatory approval, you all want regulatory affirmation of all your capital actions, so I won’t get into the actual mechanics of what they need to do, it’s just certainly something you would not want to supply your regulator, but really the greater test on a capital buyback is management board if you only appropriate capital level. And then the timing and mechanics and amount of what you buyback so that’s the primary driver. So when I mentioned regulatory approval, it’s regulatory obviously input into those decisions, you don’t want to announce a level that the bank make others uncomfortable, but and you mentioned in a M&A standpoint, the other banks -- our purpose right now is on M&A, it’s on core performance but we do believe and get -- I don’t like to read about others trouble related to closing deals, but and will never say that we’re perfect by any means, but we’re comfortable that our investments in those processes and system are appropriate given the complexity of our company today. We continue to look the ways to strengthen that.

Steven Alexopoulos - JPMorgan

Okay. I appreciate the color.

Operator

Thank you. Our last question is from Christopher Marinac with FIG Partners. Please post your question.

Christopher Marinac - FIG Partners

Thanks. Kessel, D or Kevin just like a follow-up question about the shared national credit, so that’s a billion for and what was that number compared to last question a year ago?

Kevin Howard

I look that, I’ve got that in front of me, a year ago it was just under a $1 billion so it was about 28, 900 million about a year ago, it was a $1 million that would be right, about a $1 billion.

D Copeland

And then as Kessel stated in his comments earlier it was roughly $60 million growth number on the C&I side for the quarter, overall it was roughly about $74 million in total.

Kevin Howard

The syndication were about 7, little 7% of our balance sheet and we’ve stated publically that we take about somewhere, we’ll keep it in a single-digit probably 8%, 8.5% is what we said in the past. So we’ve got a little growth out there. But also I think we’re encouraged is we’re starting to get pick up in all our other segments, our consumer, our retail and even our investment real estate, so I don’t think it will grow as much as a percentage of the balance sheet it may be half over the last couple of years.

Christopher Marinac - FIG Partners

Ok, great, that’s helpful. And Kevin, just have the point of clarification, any time you do a loan that is originated by another potential institution, it falls in that shared national credit bucket right or are there any exceptions to that rule?

Kevin Howard

It’s going to be a three bank deal and I think the size of the deal is $20 million, $25 million, so it’s going to be, most of credits like that will be fall into that bucket, that’s correct.

Christopher Marinac - FIG Partners

Okay. I was just curious if there are times when you have the smaller relationships that are less than those thresholds that come into play?

Kevin Howard

There are some few things, we are partnering up with banks and some of the mid-sized credit from time-to-time that would not be in that syndication budget. There is not a lot of that. There are some examples in that.

Christopher Marinac - FIG Partners

Okay, great. That is helpful, thanks so much.

Kevin Howard

Thank you, Chris.

Operator

Thank you. That was our last question. I would now like to turn the floor back to management for any closing statements.

Kessel Stelling

Well, thank you very much and again thanks to all of you for going in today both the investor community that is on this call and to our team members, to our customers, to our retail and institutional shareholders who participated in this call. We thank you for your continued support for your continued interest. Again I will just close with what I said earlier, our team is certainly pleased with what’s happened over the last year and we talked just week earlier about what difference a year makes as last week a year ago we were making plans to exit TARP, do a capital raise. We have three ratings agency upgrades and then just a year later, again I think dramatic change in the risk profile of our company, our ability to attract and retain talent certainly and pleased for getting more looks at the customers again based on the strength of our company, the strength of our balance sheet. So, the team really energized about again the past year but more importantly about taking the next steps as we work to improve profitability across all business lines. So, thank you again for your time and we look forward to sharing more of our story with you on coming calls. 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.

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Source: Synovus Financial's (SNV) CEO Kessel Stelling on Q2 2014 Results - Earnings Call Transcript
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