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Executives

Roy Copeland - Chief Banking Officer and Executive Vice President

Curtis Perry - Chief Commercial Officer and Executive Vice President

Thomas Prescott - Chief Financial Officer and Executive Vice President

Patrick Reynolds - Director of Investor Relations

Kevin Howard - Chief Credit Officer and Executive Vice President

Kessel Stelling - Chief Executive Officer, President, Director and Chairman of Executive Committee

Analysts

Emlen Harmon - Jefferies & Company, Inc.

Craig Siegenthaler - Crédit Suisse AG

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

Ken Zerbe - Morgan Stanley

Christopher Nolan - CRT Capital Group LLC

Jennifer Demba - SunTrust Robinson Humphrey, Inc.

John Pancari - Evercore Partners Inc.

Erika Penala - Merrill Lynch

Kevin St. Pierre - Sanford C. Bernstein & Co., Inc.

Robert Patten - Morgan Keegan & Company, Inc.

Christopher Marinac - FIG Partners, LLC

Nancy Bush - NAB Research

Steven Alexopoulos - JP Morgan Chase & Co

Synovus Financial (SNV) Q2 2011 Earnings Call July 28, 2011 8:00 AM ET

Operator

Good morning, ladies and gentlemen, and welcome to the Synovus Second Quarter Earnings 2011 Conference Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Mr. Pat Reynolds, Director of Investor Relations. Sir, the floor is yours.

Patrick Reynolds

Thank you, Kate. And I thank you all for joining us today on the call about our second quarter results. You can review the slides and also access the press release on our website at www.synovus.com. Our presenters today will be Kessel Stelling, our President and Chief Executive Officer; Tommy Prescott, our Chief Financial Officer; and Kevin Howard, our Chief Credit Officer.

Before we begin, I need to remind you that our comments may include forward-looking statements. These statements are subject to risk and uncertainties, and the actual results could vary materially. We list these factors that might cause results to differ materially in our press release and in our SEC filings, which are available on our website. Further, we do not intend to update any forward-looking statements to reflect circumstances or events that occur after the date that the statements are made. We disclaim any responsibility to do so.

During the call, we will discuss non-GAAP financial measures in talking about the company's performance. You can find the reconciliation of these measures to GAAP financial measures in the appendix of the 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 webcasts are located on our website. And now we'll turn it over to Kessel.

Kessel Stelling

Thank you, Pat. And good morning to all of you, and thank you for joining us on this earnings call as we continue to share the story of our progress. You have seen the press release by now and the earnings deck. I'll do a brief summary and then turn it over to Tommy Prescott and Kevin Howard for more detail.

But I think, as you'll see, the story for the quarter for us, in addition to improvement in our earnings, is the significant improvement in credit, which we'll talk about in great detail; the continued execution on key efficiency initiatives, including the customer experience; the building of significant pipelines and loan fundings through existing and new additions to talent, the majority of these fundings occurring in the C&I category; and then the continued improvement in our total deposit mix. And as you'll see growth in noninterest-bearing deposits of 14.7% year-over-year, 15.3% linked quarter.

But let me turn you to Page 4 of the deck, the financial results summary. And I will begin there. For the second quarter, the net loss attributable to common shareholders was $53.5 million, a 42.9% improvement from the first quarter and a 77.9% improvement from the second quarter of 2010. The net loss per common share was $0.07 compared to $0.12 the previous quarter. Net loss per common share excluding restructuring charges was $0.06 compared to $0.09 the previous quarter.

If you'll turn to Page 5, I think, again, the driver of the performance, as we said, primarily on the credit side. I'll walk you through the improvement in some of our key credit metrics. Mostly, if not all, showed significant improvement.

The credit costs -- total credit costs declined for the eighth consecutive quarter. You'll see total credit cost of $157.9 million, down 10.8% over the first quarter, down 55.2% over the second quarter of 2010. NPL inflows totaled approximately $231 million, the lowest level in 11 quarters. As you will remember, we had guided to levels at or slightly lower than our first quarter inflows, which were in excess of $300 million, and we were pleased with this component of our performance, certainly this quarter.

Distressed asset sales totaled $195 million in the second quarter. NPAs ended the quarter at $1.22 billion, a $56.8 million decrease from the first quarter of 2011 and a $354 million decrease year-over-year. In addition, potential problem commercial loans declined for the third consecutive quarter. Again, all great indicators of future performance.

If you turn to Page 6, I'll talk about some of the balance sheet trends. Net paydowns moderated during the second quarter, $167.6 million, down significantly from the previous quarter. And out of $167 million, over $100 million of debt paydown was related to our very focused strategy to reduce our large borrower concentration. We did not expect that type of decline in the quarters ahead as we had continued to execute on that concentration strategy.

We're very encouraged by our recent core lending activity. New originations steadily increased every month during the second quarter. Most of those originations, as stated previously, are occurring in the C&I space. We built meaningful pipelines, with momentum from the corporate banking initiatives that we have previously discussed, and we've seen great early success both in pipeline growth and fundings from our corporate banking team, including our recently announced Senior Housing Group.

I touched on deposits earlier. We're very pleased with the overall performance of our deposit portfolio. Let me walk you through some of those components. Core deposits, excluding time deposits, increased approximately $115 million from the first quarter of 2011. Demand deposits were up almost $179 million or 15.3% annualized from the prior quarter and almost $627 million or 14.7% from the prior year. We also saw an increase in the net number of demand deposit accounts, over 1,000 account unit growth in the quarter.

On Page 7, I'll comment briefly on our efficiency initiatives. We are on track to generate $75 million in savings in 2011. As we have said previously, that would rise to $100 million in 2012, and we're on track to reduce our staff by 850 positions or eliminate 850 positions in 2011. The headcount has decreased 709 since December of 2010. And again, we continue to look for ways to make our company more efficient in headcount utilization and to invest in key talent to help us grow revenue.

We had said that we would close the majority of our branches in the second quarter, that we have previous announced. We did, in fact, close 31 branches during the second quarter. I'd like to remind you that as we had guided, there will be minimal impact on total revenue and on total deposits. And the runoff we have expected on those branches, since our closing, has been minimal because in most, if not all cases, we provided our customers alternative banking locations within reasonable proximity of their current location.

And finally, before I turn it over to Tommy, I'll talk about the implementation of our enhanced loan and deposit processes. And put very simply, it is a very strong focus on the customer experience. As stated in the press release, it ranges from the time expected to open a deposit account, from the time expected to obtain a loan. We have spent a great deal of time, again, looking for ways to make those processes more efficient. But even more importantly, making them better for the customer, and we've now begun implementation.

You also saw announcement previously this quarter that we had hired Allen Gula as our Chief Operations Officer. Allen has a tremendous background in operations in technology and e-banking and efficiency but all with a lean towards making our banking experience better for our customers. I'm excited about what he'll bring to our team, and what our customers will continue to experience as we make this company easier to do business with.

Now I'd like to turn it over to Tommy Prescott, who will walk you in detail through our second quarter financial results.

Thomas Prescott

Thank you, Kessel, and good morning to all. I'm going to start on Slide 9 and give you some more of the details, as Kessel described. Slide 9 compares the second quarter of 2011 to the first quarter, and then also kind of recaps the key drivers. I'll just kind of walk you down from the top.

Net interest income, down approximately $6 million due to the lowering of the loan balances, primarily as the margins stayed essentially stable. Noninterest income up $3.6 million, as we had expected, primarily driven by increase in mortgage revenues for the quarter. Noninterest expense was up $1.5 million, and we've got some portions that are pushing expenses down but we had some that partially offset it. Some of that, this time, is the professional fees and FDIC insurance expenses being some of the key ones there.

Restructuring charges this quarter, $3.1 million. It was $24 million a quarter ago, and credit costs, as Kessel mentioned, declining $20 million to $157 million, and that gives you total of $53 million for the quarter compared to almost $94 million a quarter ago, $0.07 a share. And as Kessel mentioned, $0.06 a share, compared to $0.09 a share excluding restructuring in both the first quarter and the second quarter.

Page 10 illustrates the loan trends that Kessel discussed in a little more detail. What you can see here if you look at a longer period of time, the sequential quarter declines on a gross basis continue to decline and also, the sequential quarter net paydowns continue to decline. And what you can really make out of this trend line is with $167 million fundamental decline this time, excluding the strategic reductions related to concentrations, we are approaching-- approached, during the quarter, becoming stable from a fundamental loan standpoint.

Slide 11 illustrates the deposit story. And Kessel was talking about the mix improvements. You can see clearly, as you look back a year and you look at how the core deposit niche is carved up, the good increase had been transaction accounts, while the time deposits, certainly more expensive, continue to decline. We had good DDA growth during the quarter, $178 million year-over-year, up $626 million. And that category now represents 24% of total core deposits.

Total deposits, ended the quarter of $22.88 billion, down $331 million. That's really the result of our continued efforts to push down brokered balances. And we also had $130 million of exits related to the wind-down of the Shared Deposits Program, the remaining $278 million in the Shared CD balances. And most of that will amortize off during the remaining months of 2011.

The change in deposit mix continues to drive down the cost core deposits as illustrated on Page 12. The cost for the quarter is 67 basis points, a 5 basis points improvement over the last quarter, 35 basis points improvement over same quarter a year ago.

And then Slide 13, illustrates the net interest margin. Basically the net interest income, as I mentioned, was down almost totally due to the decline in loan balances. Net interest margin basically stabled down 1 basis point. Earning asset yields had some pressure on because of them -- the lower loan balances and how that changes the mix of earning assets.

We also are seeing some more competitive pressure, I guess, on new and renewed loans. And also, as we grow the securities portfolio through the maturity cycles, we had some downward pressure there. That was mostly offset by the effect of cost of funds declined and with the net 1 basis points decline in margins. The income, almost $68 million, up $3.6 million, I mentioned a while ago. The mortgage have helped. We got $3.1 million. Bankcard fees were another factor [ph] of richer transaction volumes, up $1.5 million. Some of that was partially offset by lower service charges on deposits, which was largely driven by lower analysis fees that is connected to some of the higher DDA balances.

Fundamental noninterest expense, as illustrated on Slide 15, $181.5 million for the quarter, up $1.9 million. Key drivers there, as I mentioned, being professional fees, higher $1.7 million; FDIC insurance, up $1.6 million. If you look at the employment expense, the bottom category there, you could see that $91.9 million for the quarter, down $1.4 million.

You need to keep in mind that there are -- we're getting more benefit in that from the restructuring that was done. Some of that was partially offset, this time, by things like higher levels of employment insurance. It tends to be kind of volatile from quarter-to-quarter because of the self-funded plan. And then also, we had one more work day during the quarter, which had a negative impact and consumed part of the benefit from the restructuring.

Pretax, pre-credit cost income, illustrated on Slide 16, $117 million for the quarter, down $4.7 million. And what you have in pretax, pre-credit cost income for the quarter is really the negative changes in net interest income and expenses being partially offset by the positive change in noninterest income for the quarter.

Capital ratios, illustrated on Slide 17, basically stable for the quarter compared to one quarter ago, 3 up, 2 slightly down. And what we have is moderating losses that are capital mixed ratios. From applying at the rate that they were previously and that was, in some cases, totally offset by the balance of the lowering that happened here in the quarter. I'm going to stop there and turn it over to Kevin Howard, our Chief Credit Officer.

Kevin Howard

Thank you, Tommy. If you'll go to Slide 19. I'll begin the credit presentation. Covering credit quality on that slide, for the second quarter starting with provision expense. As we expected, the provision declined again for the eighth consecutive quarter, down 15% on a linked quarter basis and down over 50% from the 4Q 2010. We do expect to continue positive trend in provision costs going forward, led by expected lower migration costs, market-to-market expenses and improved disposition results.

Charge-offs were flat compared to the last quarter, in line with our guidance. The primary drivers of the charge-offs were dispositions and mark-to-market cost, which made up almost half of the charge-offs. Other drivers were costs associated with NPL inflows, A-B notes and consumer charge-offs. We previously guided 3% to 4% in charge-offs for the year. We expect the second half of the year to be closer to the 3% or potentially better range.

Our loan loss reserve decreased 15 basis points to 3.08%. This decrease was due to a number of factors, primarily loans sold with reserves attached, loans with reserves that were impaired, basically new inflow cost. Our potential problem loans and watch list credit balances are now lower, and those are loans that carry higher reserves. And changes in the expected loss factors and some shrinkage of the loan balances. Past dues were just 0.97 of 1%, down $3 million since the last quarter.

Slide 20 reflects an overall view of our NPAs, which include inflows where we've written down those assets in disposition trends. As you can see in the top left chart, our NPA levels have continued to trend down for the past 5 quarters, now 34% down from March 2010. I do want to point out that approximately 27% of the NPAs are categorized as ORE or held-for-sale assets that typically carry much less loss.

As Kessel mentioned, our NPL inflows were down 25% since last quarter and are at the lowest level since the credit cycle began over 3 years ago. We expect to see inflows continue to improve over the second half of the year. I'll cover the mix of inflows later in the presentation.

The bottom 2 charts show our continued efforts to be aggressive in dealing with our defaulted loans by having written down or specifically reserved against those by 45%. And also continue to maintain our disposition pace, disposing of, as was mentioned, $195 million of troubled assets, achieving, once again, $0.45 of unpaid balances.

During the quarter, the makeup of the dispositions were $66 million ORE, $51 million non-performing loans and $20 million out of the assets held for sale, $58 million was performing loans. So about 70% of the assets sold were NPAs. The mix sold by assets is high, where we sold 42% residential and land-related, 36% investment real estate, 17% C&I, and 5% consumer.

If you turn to Slide 21, it gives some color on the NPL inflow mix. As you can see, we are very encouraged by our investment property portfolio performance, inflows down significantly to just $27 million. Clearly, the lowest we've seen since the cycle began. The residential-related and land portfolios, viewed as a whole, saw a slight improvement in inflows, at $110 million down $9 million in those categories combined for the previous quarter. Both C&I and the retail portfolio also showed improvement this quarter as well.

Slide 22 shows another good example of how credit quality has improved. And Our potential problem loans declined again in this quarter and now down 35% from just 3 quarters ago. We defined potential problem loans as commercial substandard occurring loans excluding the 90-day past dues in TDRs, which are reported separately. It should be noted that we also declined 8% in our Special Mention/Criticized Asset portfolio during the quarter as well.

Slide 23 takes a look at our TDRs and their mix. Our overall TDRs increased slightly for the quarter in both accruing and non-accruing categories. Currently, less than 2% of our accruing TDRs are past due. And also, it should be noted that 69% of TDRs, come from investment property C&I portfolio, as you can see, generally supported by cash flows and have the most potential to be upgraded.

I'm going to comment on the new guidance. Based on new guidance, we're the bar. We'll be higher on what constitutes a TDR. We believe that there could be an increase in TDR balances. However, we do not expect any material impact to our loan loss reserve, charge-off or provision expense upon implementation of the new TDR guidance.

Slide 24 details our investment properties portfolio. Again, the story in this portfolio was the NPL inflows were down 66% from last quarter. The NPL ratio improved to 2.3%. However, if you excluded commercial development, which is the more land-related and smallest part of this portfolio, the NPLs ratio would be 1.7%. So again it's performing better and much improved.

Charge-offs improved as well during the quarter. Past dues remained a very low 0.36 of 1%. We just finished our preliminary review of our quarterly investment -- of our investment real estate portfolio during the quarter. And it continued to show positive trends in the overall debt service coverage.

Slide 25 shows our residential C&D and land portfolios. As we pointed out, these 3 portfolios still make up about half of our NPAs, of which Atlanta comprises 37% of these. It is worth noting that these troubled portfolios are now down 73% from their peak and Atlanta's portfolio down 84% of its peak. In Atlanta, which was once a big part of our inflow story out of these categories, the residential and land categories were only $8 million of inflows during the quarter.

Our residential and land portfolios, despite dismal results over the last 2 years, reflect that the defaults are slowing down. Year-over-year these, defaults are down by 43%. We also continue to believe that loans in the land residential portfolios that have made it this far through this challenging cycle would have less loss content should they default, and the defaults that occur a bit more of it so than the defaults that occurred in the earlier stages of the cycle.

Slide 26, just a quick look at our C&I portfolio. The inflows in the second quarter, as you saw previously, we're down 16% the first quarter of 2011. Charge-offs did increase by $20 million in the quarter, $58 million primarily due to 2 large A-B note restructures done during the quarter. We expect to see this charge-off ratio improve in the second half of 2011 in C&I. Again, a well-diversified portfolio that continues to exhibit stable credit fundamentals.

Finally, our last slide on credit, Slide 27, reviews our retail portfolio. Charge-offs in the second quarter were down 11% from the first quarter 2011 to 1.87%, [ph] represents 6 consecutive quarters of declining charge-offs in the retail portfolio. Nonperforming inflows declined as well during the quarter. Past dues remained at 1.27%. And as always, we point out this portfolio is a credit-scored portfolio and almost exclusively in market lending and has performed relatively well during this credit cycle. With that, I will turn it back over to our CEO, Kessel Stelling.

Kessel Stelling

Thank you, Kevin and Tommy both. And before we open it up for questions, I'd like to just touch on a couple of other topics that I know you will be interested in and we'll have questions on. So I thought I would hit them before the Q&A.

First would be TARP and any plans we might have in the timing to repay. As we have said previously, we're accruing on all of our TARP dividend payments. We believe TARP repayment follows profitability. And most likely follows DTA recapture, although it doesn't have to.

But if you just sequence those events and we'll come back to profitability, we still believe today that TARP repayment is likely a 2012 event for Synovus. Of course, circumstances that are within our control and outside our control could affect the timing, but that's our belief today. If that time frame -- or I believe, changes, we would certainly update you as to that.

And then to profitability. This economy has been uncertain, including current events around the world, particularly in the United States. But these events aren't unique to Synovus. They are clearly affecting our entire industry. Our current forecast still shows profitability in 2011. And we're doing everything we can to make that happen sooner rather than later. We'll take more questions on both of those, I'm sure, in the Q&A.

Now, operator, I'd like to open it up for questions for any of our team.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question today is coming from Steven Alexopoulos.

Steven Alexopoulos - JP Morgan Chase & Co

JPMorgan. Maybe I'll start on the OREO. Could you first talk about where the OREO is being held relative to the original loan amount?

Kessel Stelling

Yes, it's marked down about 60% from the original loan amount.

Steven Alexopoulos - JP Morgan Chase & Co

Okay. Can you talk why the work-up costs were so high this quarter and should we expect this higher work-up costs to continue in the rest of the year?

Kessel Stelling

You mentioned the OREO expense?

Steven Alexopoulos - JP Morgan Chase & Co

Yes.

Kessel Stelling

Okay. It was -- It's up just slightly this quarter. We sold more OREO. I think, we sold last quarter, and it's just the mix that what we sell is different each quarter. But I think last quarter, we sold about $44 million in OREO. This quarter, we sold around $65 million, $66 million. So it's just a little bit more of a mix of OREOs that we did the previous quarter's pretty much the difference.

Steven Alexopoulos - JP Morgan Chase & Co

Okay. I got some look at the foreclosed real estate, expenses are pretty high this quarter.

Kessel Stelling

Foreclosed, they...

Steven Alexopoulos - JP Morgan Chase & Co

Okay, maybe we could circle back. Just a question on...

Kevin Howard

What amount are you looking at? We can address it, Steven.

Steven Alexopoulos - JP Morgan Chase & Co

I'm looking at the foreclosed real estate, up quite a bit this quarter.

Kessel Stelling

In our ORE, total ORE expenses are up about -- from $35 million to about $37 million, I believe, in that ballpark.

Steven Alexopoulos - JP Morgan Chase & Co

Some additional mark-to-market changes in there, too.

Kessel Stelling

Yes.

Steven Alexopoulos - JP Morgan Chase & Co

Okay. Just on the deposits, looking in the, I guess, this $3 billion in CDs over $100 billion, $2.5 billion of the brokered time. Why are you not able to work those down more quickly given how much it's costing each quarter?

Thomas Prescott

Steve, this is Tommy. We've called the -- the fed balance was higher this time. That's kind of the back-end of your question. It was up about $300 million, and it's really a function of ability to roll off the wholesale funding. We're really interested in keeping our deposit -- core deposit book stable and attractive. But during the quarter, we had a slight reduction of -- a temporary reduction in the securities balances and the combination of all those things and the fact that we did not have a big quarter of maturity on the brokerage CDs like we will have in the back half of the year. Kind of added to the phenomena that created that uptick. I know I've answered more than you asked, and I hope I answered what you did ask.

Steven Alexopoulos - JP Morgan Chase & Co

Tommy, could you just tell us what's maturing in the second half?

Thomas Prescott

You've got about $600 million in the third quarter and additional $200 million in the fourth quarter. And our current intention -- you have to balance this, all things, speaking with how loan balances react and how the new activity is, as we believe, it will continue to require some of the liquidity. But it's our intention right now to aggressively take down the wholesale funding in the third quarter. And even with positive trends in loans, we'll have plenty of liquidity to absorb that. We would also attempt to -- I mentioned the temporary reduction in the securities book. We intend to add back to stable plus maybe a little bit in the security book. So you'll see the reduction have been in a bigger way in the third quarter.

Operator

Our next question today is coming from Craig Siegenthaler.

Craig Siegenthaler - Crédit Suisse AG

Crédit Suisse. Just looking at the deposit costs here. They're starting to rise in a few buckets, specifically, in the national market broker time deposits and money market accounts. Has there been an increase in deposit competition here? And are you seeing any signs that regulators are starting to ask for higher liquidity levels?

Kessel Stelling

Well, the liquidity levels is not new. The threshold there has been pretty high, and we've had big runoffs that we have affected really in the broker CDs. And we also, over the last year and a half, have been very willing to not retain all the local markets CDs, particularly those that were more price-oriented and those that were non-relationship type CDs. We've been willing to do that. We have begun to retain or that we cycled through most than ones that we are -- we're less interested in keeping. and we have been a little more aggressive in CD price. And the marketplace is pretty competitive. We get competition from a lot of the community banks that often have some pricing that really stands out. We don't have to compete with them dollar-for-dollar, but we didn't have to be aware of, and it does affect pricing some. And then the regionals that we compete with, we see the specials that are out there that are really -- do put some impact on our pricing.

Craig Siegenthaler - Crédit Suisse AG

Got it. And then maybe, I can just follow-up to Steve's question here. In your income statement, your quarterly income statement, you identified foreclosed real estate expense went from $25 million to $40 million quarter-over-quarter, and I guess all that had to do with higher disposition activity in OREO. Was the second quarter a very high level of activity? And do you expect that to slow in the third quarter? I'm just trying to get an outlook for that line item in the second half.

Kessel Stelling

Yes, that is correct. That was a higher level of ORE. I tell you, the mix in there was a little more land -- of the ORE we sold, it was a little more land than residential-related. And again, as Tommy mentioned, the mark-to-market. We don't -- we see that number not being as high over the next quarter or 2.

Operator

Our next question today is coming from Jennifer Demba.

Jennifer Demba - SunTrust Robinson Humphrey, Inc.

SunTrust Robinson Humphrey. Your NPAs just kind of hovered between $1.2 billion, $1.3 billion for the last 3 quarters, inflows between $200 million to $300 million. And my question is, are you contemplating perhaps another larger problem asset disposal quarter or quarters in the future to kind of make more progress in reducing your nonperformers?

Roy Copeland

Jennifer, this is D. I would say we always kind of have to look a little bit at what's in the market. I would say, on a fundamental basis, we would actually bring down our dispositions as our plan for the third and the fourth quarter. Should market conditions be tremendous to give us the right opportunity to increase that number with the right economics, we would do it . But our current plan right now would be not to have a big quarter in the next couple of quarters.

Jennifer Demba - SunTrust Robinson Humphrey, Inc.

Can you give us a sense on what you're seeing in terms of bids? Are they stable or are you still seeing pressure?

Roy Copeland

Well, I guess as the volumes -- a lot of it is driven in volume and asset mix that we're selling. We have continued, as we've done all the way through the cycle, sold a large mix of land and other assets as well, we were north of -- I think, Kevin said we were north of 40% in land sales this quarter. And so there's always pressure on that right now. I would say the other sales have been fairly consistent. I would say we did not have as much pressure on closings this quarter as we have had in the previous quarter.

Jennifer Demba - SunTrust Robinson Humphrey, Inc.

I have more question, if I could. You said you were going to reduce larger borrower concentration. Can you give us some color there on what your goals are?

Roy Copeland

I guess I'll take that. We have moved down the number significantly. We have, I guess, we're down from a disclosure standpoint, we're down to 2 at this point, that we would considering the largest buckets of concentration. And so we will continue to move those down. We were able to move some down during the second quarter as well which would have had an impact on the fundamental $168 million that Kessel referred to earlier.

Jennifer Demba - SunTrust Robinson Humphrey, Inc.

And the largest bucket, what size credits would those be?

Roy Copeland

North of $100 million.

Operator

Our next question today is coming from Ken Zerbe.

Ken Zerbe - Morgan Stanley

I just want to ask a question again, related...

Kessel Stelling

Ken, we can't hear you could you maybe get closer.

Ken Zerbe - Morgan Stanley

What I was going to ask is, in terms of the other credit cost, it looks like the all other credit costs, including OREO were actually less than the OREO expense which, I guess, to me implies that there may have been some net recovery and the credit expenses outside of OREO, is that correct?

Kessel Stelling

That was actually $7 million recovery on a letter of credit.

Ken Zerbe - Morgan Stanley

Okay. So assuming that probably won't recur. That makes sense. And then in terms of the NPA reduction, obviously, you're getting the sales which is great. The inflows are coming down, but the NPAs, themselves, just remain sort of stubbornly high. When you think about the next 1 year forward or even the next several quarters, do you see an acceleration of NPA resolution there? Or should we expect NPA to remain high for some time?

Kessel Stelling

Ken, we certainly see inflows coming down in the back half of the year. And then more dramatically, next year, might actually give us even the opportunity to slow our disposition to make sure it's in sync with the market. Now the dollar amount, we do expect to see reductions, the percentage has stayed high as well just because of the decrease in the denominator. But it's high, we realize it. And continually balance the economics of a slower glide path down versus any accelerated strategy as Jennifer alluded to. But it will come down. And again, the key driver will be inflows continue to behave the way they did this quarter and as we expect them to behave in the third and fourth quarters the first half of next year.

Ken Zerbe - Morgan Stanley

Just 1 other question. You mentioned that TARP repayment is possibly dependent on DTA recovery. Does that imply that you believe that you could receive a full DTA recovery sometime in 2012?

Kessel Stelling

I'll let Tommy talk about the DTA recovery. I don't think it's dependent on full DTA recovery. I think what I said or what I meant to say was that the timing of it is likely to coincide with DTA recovery, which could be a full recovery at one time or it could be over time. This is probably as good a time as any to ask Tommy to comment on the DTA. I know there's a slide in the appendix, I believe it's Page 29 on the DTA. And Tommy, why don't you just address that now since I know it's going to come up in a follow-up question.

Thomas Prescott

I'll be glad to. You may recall, a year ago, we have some disclosure on the appendix on how the DTA recovery might work. And we continue to get a lot of questions, we decided to put it back in. It basically tells the same story that the requirement to recover the DTA is evidence of profitability that's likely to be a quarter or series of quarters of profitability that's driven by core results. And in that case, that means turning credit can't be from extraneous kind of item, or onetime gains. It has to be core. And then that has to be the foundation of a forecast that provides clarity about the future and allows you to essentially get the DTA back there. So a huge amount of a judgment that goes into this. There is no strict formula, there is a lot of debate about how much quarters. There's no playbook that says it's 1 quarter or 10. So it's really based on the clarity about making money. Keep in mind also that the DTA, when you get it, it's a good day and you get it back for flows to your income statement. It could be in several lumps. It's more likely to be a onetime event where you get it all. But also it does take you a while to get the full benefit of that into the regulatory ratios because of limitations that are there. So no direct linkage to TARP repayment other than the same conditions that might get you to TARP repayment on the same characteristics are very similar between that and DTA recovery.

Operator

Our next question today is coming from Emlen Harmon.

Emlen Harmon - Jefferies & Company, Inc.

I'm calling from Jefferies. Just a point of clarity I guess, on the DTA, if you wouldn't mind. Do you have a sense -- you talked about kind of reaching profitability and sustainable profitability. Do you have a sense if that needs to be on a core base or does reserve relief help you kind of get to profitability as far as the DTA is concerned?

Thomas Prescott

Well, the reserve release, as you described, is really -- I mean, the reserve, the loan-loss reserve has to follow credit quality. As you charge-off loans that are in the loan-loss that have reserves and you don't have to backfill it then that's, in our mind, fundamental earnings performance. So you essentially can't have reduction on loan loss reserve and claim core fundamental improvement at the same time. I hope that answers your question.

Emlen Harmon - Jefferies & Company, Inc.

Okay. That is helpful. And then -- I hope you have Curtis with you today or maybe somebody else can answer it. You did talk about kind of a pick up in new commercial borrowing. Could you help quantify just what you're seeing there and any color on new hires and just your ability to offset run-off would be helpful.

Kessel Stelling

Let me, this is Kessel Stelling. Let me talk about that. Curtis is with us and we've love to have him speak. So he has continued to assemble a very strong team, as we previously announced, both in large corporate, in syndications, in asset based. Most recently, in the last several weeks, the announcement of our senior housing team that's housed in Birmingham. I had the privilege of being with that group last week as we welcome them to our company, and they have momentum, they have a pipeline and fundings. Let me give you a little detail around that from that large corporate banking group. And this will maybe show the momentum I'm talking about. In the first quarter, as that team came together they had new commitments of $44 million and fundings of $25 million. In the second quarter, they had new commitments of $175 million. So that 4 times, it was new fundings of $102 million, also 4x the first quarter fundings. And then July month to date, they are on track to significantly exceed the second quarter. So we, like you, are interested in seeing that contribute more to the stabilization of our balance sheet. And I'm confident that, that will continue to occur. Again, Curtis is with us. Curtis, if you'd like to add any color to that, you're welcome to.

Curtis Perry

Thank you, Kessel. We see a continued improvement in the pipeline, both in our large corporate area and within the senior housing business. As it turns out, the network that our company has throughout its footprint has been a wonderful provider of new opportunities to senior housing. In addition to the core customer base that, that group has dealt with for over 25 years.

Emlen Harmon - Jefferies & Company, Inc.

Okay. So as we think about -- just overall, as we think about new originations, we're talking between large corporate and senior housing, we're talking in a couple of hundred million area or thereabouts on a quarterly basis?

Curtis Perry

That's correct.

Operator

Our next question today is coming from Nancy Bush.

Nancy Bush - NAB Research

NAB Research. Slide 36 which is the criticized assets. And I guess this question is sort of ancillary to the nonperformers as well. That number has kind of popped around since 4Q '09 but it's sort of been steadily above $2 billion. And I'm wondering if you could just elaborate a little bit on the inflows and outflows into those categories and whether there's a possibility of a big step down at some point in the near future or if you see the sort of above $2 billion level persisting here?

Kevin Howard

This is Kevin. I think a couple of things, Nancy. I think from an inflow and outflow, we do see that number bit stepping down. It's hard, I agree, it's where it was maybe 1 year or 1.5 years ago. But it's also, we feel like we've been a little more aggressive in identifying special assets. It's hard to not have any other residential land this long in the cycle and not of at least put it in your watchlist. I feel like it's a stronger special mention list. I think at one time, they were flowing right through during a diving credit cycle. I feel like at least this prices will stay. I'm not telling you it's going up or anything, but we've seen more stabilization in front of us. So we do not see the flow go through special mention as rapid as it has been. And therefore, we start to see decreases in that -- in more the special mention watchlist category.

Nancy Bush - NAB Research

But not sort of big lumps coming out? Just basically a more steady trending down from here?

Kevin Howard

I think it'll be more steady. Obviously, if we get a better economic environment I think you could see it proven more rapidly, obviously. That will probably dictate those type loans that are on the watchlist.

Kessel Stelling

And I'll just add. The key is not just a steady decline, but it's how it migrates. And our belief is it that will not -- if the decline will come through migration up more so than migration through the P&L as our Director of Loan Review says often, that is a transitional loan grade. That's a loan that has characteristics of a Class 5 credit, but is still performing. And again, as Kevin said, the idea is that those numbers would continue coming down and our belief is we'll see more now moving up as opposed to classified. Although we still do project, obviously, defaults and NPA inflows out of that bucket.

Nancy Bush - NAB Research

Kevin, just another question for you. Atlanta has been, since the crisis, a big part of your credit issues. And I was down there a couple of weeks ago and the housing market is still not great, and the economic news coming out of that area seems to be worsening a bit. Do you still see Atlanta staying stable or improving or is there a possibility that things kind of turn around there?

Kevin Howard

It's still a very challenging real estate market, challenge from an economic standpoint. But the good news is we have a lot less that you can see on our charts of exposures in those high-risk area. I mean we're not carrying -- we're carrying 10% of the balances, 10%, 15% of the balances we did. But from an economic standpoint, we saw prices slip down. They actually went up 2 quarters ago, back up average, new home sales slip down recently this last quarter a little bit. So we still see decline probably middle-, upper-single digits in prices. And that's how we are forecasting that. But again, we saw Atlanta improve over the last several quarters. They only had $40 million, I think, $43 million of inflows. That number is down quite a bit. So again, tough environment but we just have a lot less exposure. And I think we have identified those loans and we're dealing with them.

Operator

Our next question today is coming from Kevin Fitzsimmons.

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

Sandler O'Neill. Just taking a break from credit for 1 question here. When I look at the core noncredit expenses, they're running at a little below $180 million, $179 million or so right now. And I know you have the efficiency program that's still going. But are we at kind of what you guys view as a run rate here or are there -- I know a lot of the closings happen in second quarter. Just trying to get a sense for how much more if that kind of pace would gap down from here. And then secondly, on the fee revenue front, I was wondering if you can give us an update on your anticipated outlook from Durbin?

Thomas Prescott

Kevin, this is Tommy. We're partway there on our installation of all the efficiency initiatives. We got more to come in the second half of the year that some of the benefits that will occur from things implemented partway through the first half will continue to put some downward opportunity on the expense base. So we think that we'll continue to see some declines there. The Durbin slide is #30 and it gives you some idea. We believe now that impact of Durbin on an annual basis for full year situation would be about $14 million out of a $25 million base that we're working from in this category. We believe that the impact for 2011 with an October 1 installation will be about $3 million. I hope that answers your question.

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

So $14 million is the full year hit from it unmitigated?

Curtis Perry

That's an unmitigated $12 million of that, and we're working hard to mitigate.

Operator

Our next question today is coming from Erika Penala.

Erika Penala - Merrill Lynch

Bank of America Merrill Lynch. I just wanted to ask you, as you're thinking about your second half of 2011 budget in terms of your expectation for both the pace of new loan originations and the pace of credit improvement, have you thought about or factored in what the debt crisis in Washington could do in terms of eroding business confidence or what the spending cuts could do to shave GDP improvement from this point?

Kessel Stelling

Here, let me take a stab at that. I don't know that anybody, if there's a bank out there that can quantify the effect of certainly a default. That would be catastrophic, I think, in our country. But as it relates to our forecast. Our forecast are based on economic conditions staying reasonably consistent with the first half of the year. We are, as I'm sure you all are watching the negotiations, or lack thereof, in Washington every day and I think the default is unthinkable, the downgrade. I don't know, but have we adjusted our forecast based on that potential, no. We have not. We certainly would, as every institution would, probably rethink a lot of our forecast based on a negative outcome which we hope does not occur.

Operator

Our next question today is coming from Christopher Nolan.

Christopher Nolan - CRT Capital Group LLC

CRT Capital. Kessel, can you give us an update in terms of your outlook, in terms of capital sufficiency. Is the current capital base sufficient to carry you through to profitability?

Kessel Stelling

Yes, Chris, we believe it is. And as I've said on, I think, every call, we stress it and model it continuously, review it with our board. And as Tommy showed, the actual absolute ratios stayed relatively flat for the quarter even with the loss. But as we begin to stabilize our balance sheet and grow, we do model capital adequacy through the cycle. And again TARP will be another discussion. And I will just say that, that capital plan again is tested and stressed and reviewed continuously both of by our team and our board and certainly shared with our regulatory partners. But we do believe that.

Christopher Nolan - CRT Capital Group LLC

Great. And then a follow-up. Earlier, you mentioned that you still project to achieve profitability sometime in the second half of the year. What's going to be the major driver of that? Is it going to be lower provision, lower operating expense base? Can you give a little color on that, if possible.

Kessel Stelling

It's all of the above. It's certainly lower credit cost. So that's lower provision. It's lower mark-to-market adjustments to existing and new inflows. It's lower inflows. It's better behavior in our migration, although we still obviously, with the level of, as Nancy mentioned, special mention and accruing in classified loans. We still model inflows there, but we see better performance there. And that's not just a hope and a prayer, that's based on very intense scrubbing of that portfolio by our teams, by our regulatory teams, by our internal loan review teams. And so that's a belief that's bound in a lot of hard work. And as Kevin said, a lot of conservative scrubbing throughout the year. So all of those, we do believe will come down. And then we will continue to work on the reduction in operating expenses, the 31 branches closed this quarter. Those employees were still with us. But we have more to come from our process redesign and more efficiency to come from that. And so it will be a combination of everything you talked about.

Operator

Our next question today is coming from Kevin St. Pierre.

Kevin St. Pierre - Sanford C. Bernstein & Co., Inc.

Sanford Bernstein. Just a couple of quick follow-ups. Tommy, on Slide 29 on the DTA, you mentioned that there's an anticipated $20 million of the valuation allowance that will not reverse. Could you explain why that is?

Thomas Prescott

That's a primarily state credit or state carryforwards that would likely to expire. They have shorter time frames than the federal rules. And it's just an estimate. It will be fluid until the recovery. But I wanted to put that disclosure out there.

Kevin St. Pierre - Sanford C. Bernstein & Co., Inc.

So hypothetically, if losses persisted for a longer period of time then you anticipate that number could go up?

Curtis Perry

It could. Some slightly there's not a lot in that category.

Kevin St. Pierre - Sanford C. Bernstein & Co., Inc.

Okay. Great. And then Kessel, just a quick follow-up on the capital question. Is it fair to say that you're -- with the stock now below 190, that you're under no pressure right now to boost your capital ratios from the regulatory relationships that you have?

Kessel Stelling

No, I wouldn't get specific with discussions with regulators. But they have been very involved in our progress through this entire cycle. And the stock price doesn't necessarily affect their view, our view on capital level. Certainly you wouldn't want to raise capital in this environment if you didn't have to. But we've seen no change in our regulatory relationships. And again, they are part of our process, certainly to review and, again, we think that there are capital levels are sufficient to carry us through this cycle. We certainly watched the stock price and are concerned with that for a variety of reasons. But those are, in some cases, things we just can't control. Our focus needs be on all the things we talked about, credit, efficiency, stabilization. And we think that solves the stock price issue.

Operator

Our next question today is coming from John Pancari.

John Pancari - Evercore Partners Inc.

Evercore Partners. In terms of the outlook for the loan loss reserve. I know you indicated again you expect provision to be a big factor in return to profitability. Can you talk about your expected reserve-to-loan ratio? As you trend through the back half of the year here, just given the trends you're seeing on the early credit metrics?

Kevin Howard

I mean, we expect credit metrics to improve. We know the loan loss reserve will, again, as Tommy mentioned, that will be brought down further. The lag credit metrics. And I didn't get maybe the second part of that question.

John Pancari - Evercore Partners Inc.

What I was getting at, in terms of the early stage credit metrics, everything's pretty much trending in the right direction. So I'm trying to gauge how much in an incremental reserve, at least, we could see through the back half of the year in terms of where that reserve-to-loan ratio could end up?

Thomas Prescott

John, this is Tommy. Just another angle on that. Directionally, it will go down some. That will be a natural trend that happens as the forces that made it go up reverse. And as we charge down loans, we have reserves on them, and don't have to back fill it. It Will go down some. We do understand that loan loss reserve levels of history 5 years ago, probably you don't go there, but we're still of elevated level. And there is good bit of room to take it down before you get to any of those barriers. And that naturally happens as credit improves.

John Pancari - Evercore Partners Inc.

And then on the pace of future loan sales. I know you indicated that may level off a bit. But is that largely a market-driven decision? So is the secondary market appetite firms up a bit as we move through the back half here, could you actually see a greater demand and therefore a greater level of loan sales?

Kessel Stelling

I'd say there are probably several factors that go into it. One is, one of the reasons I think we're saying it would level off and go down. The look that we have on new NPA inflows. I think that's one of the reasons we look at it. If we get exceptional pricing, I think we would look to take advantage of that as that takes place. We have been pushing to try to maintain the level that we have. We're willing to let it drop some in the second half of the year. But we'll just have to continue and watch the economics as we move forward.

John Pancari - Evercore Partners Inc.

Okay, and then lastly, on the TDR balance. I know you acknowledged the role change could impact TDRs. Outside of the rule change, can you talk about your activity around restructuring and if we could still expect just organic increases in the TDR volumes here?

Kevin Howard

We're going -- all about restructuring, but we're working with customers that have a good plan, that is reasonable. These customers have become at the accruing TRs. They've been performing. We think they're again is potential to work with those customers during this short term period. And I'll say within a year, we've labeled those as TDRs with the potential to be upgraded. Our TDRs are typically are good performers with a good plan. We would not restructure a loan that didn't make sense so I bet it was underwater. We would call that a non-accruing TDR. So we are -- they'll continue to be some restructures and working with customers. It's possibly, it's basically with the new guidance that those TDR balances could increase during the second half of the year.

Operator

Our next question today is coming from Christopher Marinac.

Christopher Marinac - FIG Partners, LLC

I just want to ask about loss concept, Kevin or Kessel about the potential problem loans in commercial. Is there a way we could sort of level your experience the past year or 18 months? What we could expect going forward?

Kevin Howard

Well, those would be the loans that obviously have the highest potential to move into the nonperforming inflow bucket. And again, we feel like that will be less going forward. Our inflows are projected to be lower, and as Kessel mentioned, second half next year as well. So a typical loan that's in that bucket has about a 20%. It's going to the category but typically around 20-or-so percent reserve already against it. Sometimes more if it's more land related. And then if it were to, obviously, move to the cycle, it would get impaired and then sold. And we're seeing -- we end up around, at least during these days around 45% on unpaid balances. So maybe let you draw your own conclusions there. But we see that pace being less.

Christopher Marinac - FIG Partners, LLC

Do you have success stories of things that are migrating back to past that are, therefore, freeing up reserves and just being replace by something new or is it mostly just the same pool that you've had for the last couple of quarters?

Kevin Howard

It's hard. We're getting some back to the past level upgraded. It's a hard environment to do that in. We want to be very conservative if we move alone from the potential problem, less to say backup the chain to potentially to watchlist and then pass. We do have a lot of loans identified that have a high potential to be upgraded and just need a little more time especially in the investment real estate and C&I categories. So it's been somewhat slow in the upgrades. But again, any kind of stabilization in the economy and maybe some continued progress there, some customers are starting to have better financial statements coming in that we see that came in earlier or at the end of the year statements. And we want to see a little more performance. We want to be conservative with that call. We don't want to be having it go back and forth and so we do see that potential happening a little more in the second half of the year than the first half of the year.

Christopher Marinac - FIG Partners, LLC

Great. That's helpful. Then just one final point of clarification, when you mentioned in the financial statements the actual statements that the -- there's x dollars of past due but accruing. Those numbers are largely in the slides that you have on the commercial potential problem, correct?

Kevin Howard

That's right.

Operator

Our final question today is coming from Bob Patten.

Robert Patten - Morgan Keegan & Company, Inc.

Morgan Keegan. All my questions have been asked. But just sort of big picture, Kessel. We look at credit, Slides 19 and 20, obviously, it's improving but the pace of improvement appears to be slowing. When you look at pretax pre, it's going to continue to be under pressure because of excess liquidity in deposit growth and there's nothing you guys can do about that. Why wouldn't you strongly consider with your stock trading below tangible book, at shrinking the balance sheet and selling non-core areas of the bank like Florida. And the only reason I say that is because Synovus is going to be a C&I bank, changing mix shift as we go forward. And Florida is not a C&I market per se. Get down to a core franchise, help your capital ratios. Get rid of the excess liquidity. Why wouldn't you guys seriously think about doing that right now?

Kessel Stelling

Bob, I don't want to speak to Florida specifically. And I'll tell you, I was actually there in Tampa last week at a board meeting. And with their sales team where they were awarding prizes, certificates to team leaders in retail and C&I growth and really have had tremendous activity. And so our Tampa team is doing strong. Our Jacksonville team continues to make progress. Our Panhandle group is certainly strong, 1 and 2 market share in most markets. So we're proud of that team and their effort. But all that said, let me just say I understand your thoughts. We look at every opportunity to make sure we preserve and grow capital in the most shareholder friendly manner we can, including shrinking the balance sheet and Tommy continually looks at that. And as I've said before, we'd like to grow in strategic markets, not shrink. But there's nothing, again, not Florida-specific, but your theory is good and I can assure you we continue to look at ways to do shareholder-friendly boost either to capital or to long-term value. So we hear you loud and clear. Again we think there's a lot of progress in some of our key markets but over time, we want to be a significant player in every market in which we operate. And if we are not a significant player, that calls for a different discussion at that time. But right now, our focus is on letting those markets stabilize and grow.

Operator

We have no further question in the queue at this time.

Kessel Stelling

Well, thank you, operator, and thank you to all of you that participated, that listened, that asked questions. Just a closing comment or 2. We have made significant progress and I'm very proud of and thankful for the team here that's hung in here to help push this company through it. And I as they know, there is still much work to be done. We do believe that we will continue to see improving credit trends. We'll continue to execute on key efficiency initiatives and we will continue converting our growing pipeline to loan fundings as we move towards balance sheet stabilization and profitability. The team is very energized as we continue to add strong talent to the mix. Our focus on our customers is intense, and I really look forward to sharing the results of our continued progress throughout the rest of this year and beyond. Thank you all again very much, and have a great day.

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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