Good morning, ladies and gentlemen and welcome to Synovus' Fourth Quarter 2011 Earnings Conference Call. [Operator Instructions]. It is now my pleasure to turn the floor over to your host, Pat Reynolds, Director of Investor Relations. Sir, the floor is yours.
I thank all of you for joining us today on the call. During this call, we will be referencing the slides and the press release that are available within the Investor Relations section of our website at synovus.com. Our presenters today will be Kessel Stelling, Chairman and Chief Executive Officer; Tommy Prescott, Chief Financial Officer; and Kevin Howard, 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 the website. Further, we do not intend to update any forward-looking statements to reflect circumstances or events that occur after the date these statements are made. We disclaim any responsibility to do so.
During the call, we will discuss non-GAAP financial measures in reference to the company's performance, and you can find a reconciliation of these measures to GAAP financial measures in the appendix through 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 webcast is located on our website.
We respect the time available this morning and desire to answer everyone's questions. We ask you to initially limit your time to two questions. If we have more time available after everyone's initial two questions, we will reopen the queue for follow-up questions. And now I'll turn it over to Kessel.
I want to thank all of you for joining us on our call this morning. As always, I will go through a high level of performance and then it over to Tommy Prescott and Kevin Howard, who will get more detail in to both financial and credit performance.
So I will begin on page four of our deck. And again, you will see from our press release and deck and headlined, that we again reported profitability for the quarter; our second consecutive quarter of profitability. We are delighted to do that.
Highlights of the quarter; net income available to common share holders was 12.8 million, compared to net income of 15.7 million in the third quarter, and a net loss of a $180 million in the fourth quarter of 2010. Our net income for diluted common share was $0.014, compared to $0.017 in the third quarter, and a net loss of $0.229 in the fourth quarter of 2010.
Credit, a big of the story in this quarter; total credit cost were $90.5 million, down 52 million or 36.5% from the third quarter of 2011, and down a 191 million or almost 68% from the fourth quarter of 2010.
We are also pleased to report expansion in our margin this quarter. The fourth quarter net interest margin was 3.52%, up 5 basis points from the third quarter of 2011, and up 15 basis points from the fourth quarter of 2010.
As I said earlier, Tommy will go in to more detail. But I want to point in our fourth quarter numbers, included in that were net investment securities gains of $10.3 million, compared to approximately $63 million in the third quarter, as well as a $5.9 million charge related to our company’s indemnification obligation, as a member of the Visa USA network.
If you’ll follow it to page five in the deck. Again graphically illustrating what we talked about on the page before the story of the quarter is, credit cost. Credit cost decline for the 10th consecutive quarter.
Call your attention to the graph on the left there, where you will see the 36.5% decline from the third quarter, and again almost 68% decline from the fourth quarter of 2010. A very nice trend line continuing to develop in terms of overall credit cost there.
Our net charge-offs; again you will see graphically illustrated decline from a 138 million to a 113.5 million. The 113.5 million in charge-offs represents 2.26% annualized, compared to a 138 million or 2.72% annualized in the third quarter of 2011. And 385 million or almost 7% annualized in the fourth quarter of 2010. Again you will see fairly a dramatic improvement there, and I think in line with guidance previously provided by Kevin Howard.
On page 6, a little color on the inflows. Again, you saw a fairly substantial decline in inflows in the back half of last year, and again pleased to see in the fourth quarter further decline from 222 million in the third quarter to a $189.2 million in the fourth quarter. That’s a 15% decrease from the third quarter and almost 36% decrease from the fourth quarter of 2010.
NPAs ended the quarter at 1.12 billion, a $47 million decrease from the third quarter, and again a $163 million decrease from the fourth quarter of 2010. We are also pleased to report on our total delinquencies. They ended the quarter at 0.74%, really a good number in normal times, down from 0.99% the previous quarter.
Our past dues, over 90 days in to the quarter at 0.07%, down from 0.13% the previous quarter.
Also would like to point out again in the graph at the bottom left. A fairly substantial decline in potential problem commercial loans declined at the bottom. But you will see the decline from $942 million in the third quarter of 2011, to approximately $780 million in the fourth quarter. Again, we are very pleased to see the decline in that category of problems.
Another highlight of the quarter is certainly the stabilization of our loan balances, and we’ll talk a little more about that later. We had net sequential quarter loan growth, and excludes the impact of loan sales, transfers to loans held for sale, charge-offs and foreclosures. But that was approximately $167 million in the fourth quarter of 2011.
So, net sequential quarter loan growth of $167 million compared to a net sequential quarter decline of approximately $132 million in the third quarter of 2011. That’s about a $300 million swing. Our new loan funding was up approximately $70 million, and that’s across our footprint. 9% annualized in the third quarter of 2011.
Our total loans ended the quarter at 20.08 billion. Again stable but actually a slight decline, $22.3 million from the third quarter, as compared to a 402.7 million decline in the previous quarter. So very pleased there.
We continue to see a positive momentum in the loan pipeline and that certainly has contributed to the stabilization of our loan balances. We do still expect challenges in 2012 as this economy slowly recovers, and we could still see some modest decline in loan balances during the year. But we were very encouraged and pleased with the performance, not just of our portfolio, but of our bankers and business units across the footprint during the fourth quarter.
We also saw continued improvement in the deposit mix. Core deposits decreased 323 million of 6.1% annualized for the quarter, reflecting the impact of planned reductions in time deposits.
Again, our non-interest bearing deposits grew a 117.5 million, almost 9% annualized linked quarter, and play out again that we grew 1.07 billion or 25% from a year ago. Again not just in dollars, but in number of accounts. The number of accounts grew by 1,458; 1.7% annualized for the fourth quarter, up 7240 accounts or 2.1% in 2011.
On page 8, talk a little bit about expense management. It continues to remain a primary focus of ours, and again the team here remains focused both on the implementation and execution of previously announced initiatives as well as just an ongoing effort or to look for ways to operate our company more efficiently.
I think the numbers speak for themselves. We had previously and identified 75 million in reductions for 2010. We realized $95.3 million or 11.7% reduction in core expenses for the year. Our headcount decreased 885 or 14.5% since December of last year. Again we achieved substantial progress aligning our cost structure of this smaller bank with the operating realities of today.
We’ll continue to look for efforts to identify additional efficiencies; those efforts are ongoing. We’ll make sure that we maintain a structure that supports growth, and absolutely allows for our passionate commitment to excellence in customer services. But again, in the graph at the bottom you will see the reduction in core expenses; $812.7 million, 2010; $717.4 million in 2011.
That’s a brief summary of our results. I’d now like to turn it over Tommy. He will be followed by Kevin Howard, and then we’ll do a brief transition and open it up for questions.
I am going to walk you through the financial results starting on slide 10. Slide 10 illustrates the fourth quarter key income statement drivers against the third quarter and I am just going to walk you through the line items and give you the highlights pretty quickly.
The net interest income for the quarter $227 million, down a little bit, $1.4 million from the third quarter, and that’s basically a decline in average earning assets during the quarter. Even though we had at the end of the quarter, the averages that drive the net interest income were lower during the quarter.
Non-interest income 63 million; down 7.3 million from a quarter ago. The two biggest drivers were the Durbin kick in or locked over won $4.5 million takeaway from fee income and SBA gains of 3 million in the third quarter that was non-recurring the fourth.
Investment securities gains $10 million in the quarter compared to 63 million a quarter ago, where we took a significant repositioning of the portfolio. Non-interest expense a 176.5 million down 3.2 million from one quarter ago, and the biggest driven in the expense reduction that stands out is the FDIC insurance decline that occurred during the quarter.
We had modest restructuring charges in the fourth quarter as we completed the wrap up of installing all the restructuring that was announced earlier in the year, and successfully completed as Kessel mentioned a moment ago.
Kevin Howard will give you the explanation of the big reduction in credit cost in just a little while. Kessel mentioned the just under $6 million Visa indemnification charge. Taxes really weren’t an issue in the fourth quarter, and all that drove us down to net income before the TARP cost of 2.3 million or bottom line of 12.8 million.
Taking the loan picture on slide 11; Kessel mentioned the growth that occurred in the loans which was quite a story for the company. You can see the trend line. We ended the quarter 20.08 million in loans, reported number down actually 22 million. We are going to call that stable when you compare it against the hundreds of millions of dollars of declines that have occurred in previous quarters.
When you isolate the activity of core lending from take out the loan sales charge-offs and so forth, the core activity up to $167 million, you have to look back to the first quarter of 2009 to find reported loan growth at Synovus. So we are very encouraged to see the direction of loan balances. We know that sustaining that in the current competitive loan environment is tough, but we are taking that head on in 2011.
The deposit story is on slide 12; we’ve continued to improve the mix by taking down the higher cost categories with core time deposits going down 323 million. Broker deposits; we have not rolled or brokered account in at least six months, as we continue to improve the mix and certainly have had the funding pressure and have had the ability to bring brokered down and improve the mix and bring time deposits from the core category down to improve the cost of funding.
Brokered deposits now represent about 8% of funding or of deposits, so we’ve taken that down from north of 20% and feel like we are at a very healthy place of brokered CDs. Non-interest bearing deposits as Kessel mentioned grew over $1 billion in 2011 and grew nicely a 117 million.
In the fourth quarter we also had growth in NOW accounts during the quarter. The deposit mix continues to push down the cost of core funding down to 53 basis points; a 9 basis points reduction over the fourth quarter.
The margin slide is number 14. The net interest margin 3.52 was up 5 basis points. It’s really a function of having some pressure on earning asset yields from the repositioning of the securities portfolio and from [pressure] on loan pricing.
But that was more that offset. That 5 basis point decline was more than offset on the funding side, with a 10 basis point decline in effective cost of funds from improvement in the deposit mix and the downward repricing on maturing core CDs and also reduction in money market rates.
Core expenses continued to move down 176.5 million in the quarter. Again, if you see the stair step move down the biggest driver in the fourth quarter as I mentioned was FDIC insurance. You have to go back to slide 8 to get the real picture on what’s going on with the expenses, and it graphically shows and illustrates the big reduction, the $95 million in 2011, compared to 2010, a huge drive in the company.
Pre-tax, pre-credit cost income end of the quarter were $114 million. The down tick was driven by a little pressure on net interest income, as I mentioned earlier. Fee income being down 7.4 million, with Durbin being the main impacted there. Those things were partially offset by the core expense reduction of $3.2 million.
Capital ratio is illustrated on slide 17. What remained at a good level basically moved a little bit side ways. During the quarter the first three ratios down just ever so slightly. As we had profitability, we also had an increase in risk point of assets.
The last ratio is up slightly as the denominator of those worked a little bit differently than the risk weighted asset. So basically capital in a good place, but just moving sideways for the quarter.
I am going to stop there and turn it over to Kevin Howard our Chief Credit Officer.
If you go to slide 19 I will review our credit trends for the fourth quarter. As Kessel mentioned we are pleased with a continued improvement in our overall credit quality. We continue to diligently work down our problem assets and barn a negative turn in the economy. We expect to further improve credit trends going forward.
The upper left corner on slide 19 shows our credit cost improved by 52 million or 36% on a linked quarter basis. The overall improvement in credit quality allowed for further reductions in provision expense during the quarter, with the primary drivers being declines in disposition costs, mark-to-market expenses and lower NPL inflow cost, led by lower defaults.
Our ORE expense was down as well, with primary drivers being there lower disposition cost despite more ORE sales volume during the quarter, versus last quarter and lower mark-to-market cost as well on our ORE.
Charge-offs were down 18% or 25 million from the third quarter to 2.26, which is consistent with our guidance. Our expectations for charge-off trends going forward are continued improvement eventually moving below 2% during the year and that’s based on our confidence of a better positioned balance sheet as we move through 2012.
Also due to our overall improved credit performance, our loan lost reserve decreased 29 basis points to 2.67. This decrease was due to a number of factors, primarily loan sold with reserves attached, changes in the expected loss factors as a result of improved credit quality, and the positive shift in the quality of the balance sheet, meaning less potential problem loans and watch list credits that carry our reserves and an increase in pass rated credits that carry less reserves.
So we were pleased with the quality of the shift of the balance sheet during the quarter. As shown in the bottom right corner, past dues are 0.74%, that’s the lowest level in this credit cycle.
Slide 20 reflects an overall view of our non-performing assets in the fourth quarter. Our total non-performing assets were down 47 million during the quarter, which is the seventh consecutive quarter of declines. NPAs are now down 39% from the peak and down 13% year-over-year during 2011.
Our fourth quarter non-performing inflows were a 189 million down 15% from the third quarter inflow number. A little color in the bottom right graph shows the mix of the new inflows. As you can see our inflows in investment real estate were at the lowest levels in this cycle, down to just 19 million, and we continue to show significant improvement in our residential and land related inflows, which have been the primary driver of our NPAs. C&I retail loans were flat compared to the last quarter.
As noted on this slide, our NPAs now have a carrying value of approximately 57%, which reflects our continuing effort to aggressively mark trouble assets.
Slide 21 shows our disposition of problem assets. We sold a 147 million this past quarter, with a realization rate of $0.39 on unpaid balances. The makeup for these dispositions were, we sold 35% of the dispositions or NPLs, 39% ORE, Loans held-for-sale about 9% and performing loans 17% of that makeup.
The mix of our asset [type] were 32%, land acquisition, residential related 30% investment real estate and 33% C&I and 5% retail. Our disposition strategy may be adjusted due to changes in market conditions as we go through 2012. But at this point we continue to target sales of a 100 million to 150 million in dispositions a quarter.
We are confident this is the right pace for both capital efficiency and a steady reduction in overall NPAs throughout the year.
Slide 22, probably our best chart that demonstrates our improving credit quality trends, shows our potential problem, commercial loans which are substandard accruing loans not included TDRs and 90 day past dues which reported separately.
As shown our potential problem loan is down 17% linked quarter and down over $1 billion just five quarter. So we are happy with the effort there, and moving our potential problems down significantly.
By the way, our special mention balance as shown in the appendix also decreased during the quarter and are now down 17% year-over-year, which was encouraging considering the upgrade flow from substandard loans to special mentions we’ve had in the past couple of quarters.
Slide 23 takes a look at our PDRs and their mix. Overall there was a slight increase in accruing TDRs. I’d point out a couple of things. There were less than 2% of accruing TDRs of past due and 46%, almost half of these accruing TDRs are in past or special mentioned [grades], and that’s an improvement from just last quarter at 39%. More importantly our substandard accruing TDRs decreased during this past quarter.
If you’ll go to slide 24, I will give you a brief overview of our loan portfolios. Slide 24 again shows the details of our investment property portfolio. Once again as I mentioned, we are seeing improvement in all credit metrics in the portfolio led by non-performing loan inflows, again down 41% from the third quarter.
Charge-off ratio here was just 1.19, as compared to almost 3.9 the quarter before. Past dues are almost non-existent at 0.24 of 1% in [disinvestment] and real estate portfolio, and again we continue to monitor this portfolio closely with quarterly reviews on our loans greater than $1 million, which represents about 83% of the performing loans, which continues and it continues through that review to reflect positive trends in both debt service covered ratios and loans with debt service coverages less than one-to-one.
Slide 25 takes a look at our residential, C&D and land portfolio. As we’ve mentioned many times before, these three troubled categories makeup 46% of our total NPAs. It not only represents 7% of our performing loans and with ones representing close to 2% of our performing loans.
So again we reposition in the balance sheet there and we are confident that these weaker segments and this definitely the weaker segment of the balance sheet will continue to have less impact on credit cost going forward, as evidenced by the fact that there are only 28% of substandard loans, represent only 12% of our special mention loans.
Slide 26 details our C&I loan portfolio. NPL inflows remained flat this quarter. The inflows we did have do come from the construction real estate related loans and continue to be the main driver of the defaults. There we saw an improvement in the past dues of 0.61% from last quarters’ 1% and as has been mentioned already, it’s great to see the solid net C&I loan growth.
Charge-offs were up this quarter to 2% and that’s mainly due to [resold] of higher mix of C&I loans in our dispositions. Again a well diversified portfolio, well positioned for growth, showing stable credit fundamentals.
Our last credit slide, slide 27, which reflects our retail loan portfolio. Charge-offs declined again for the eight consecutive quarters to 1.6%, while other credit metrics remained stable. This portfolio has performed relatively well during the credit cycle, due to the fact that it’s almost exclusively credit scored and in market lending.
Now that concludes my comments, and I will turn it back to our CEO, Kessel Stelling.
Before we take questions, I just want to again reiterate that we are very pleased to report our second consecutive quarter profitability and really pleased to see positive traction in almost all key areas necessary to sustain long term profitability and growth.
A couple of topics that I know are on your mind which I usually try and address now is both the DTA and TARP. The DTA, there is a slide on page 29 speaks to that. Certainly the timing of our DTA recovery is important to us and it’s important to you as shareholders and analyst. It could be a 2012 event, but the timing is uncertain.
Our focus remains on those activities that will affect the timing, sustainable return to profitability. Again, now we are two quarters in to an improved credit quality and a forecast of sufficient continuing profitability.
We will continue to update you on that during the year, as events get more clear. The same with TARP; as we’ve said before, it should likely follow the recovery of our deferred tax assets. Doesn’t have to, but certainly the events that lead to one might lead to the other.
Repayment of TARP is not a near term event, but it’s certainly a part of our every day thinking and planning, as we model our earnings in capital structure going forward. Again we will update you through out the year as plans develop. Our goal is to exit TARP as prudently and efficiently as possible for all of our constituencies. Again, we will update you during the year, as those events become more clear.
At this time operator, I’d now like to open it up to questions from our callers.
(Operator Instruction). The first question of day is coming from John Pancari. Please announce your affiliation, then pose your question.
John Pancari - Evercore Partners
Evercore Partners. Can you talk a little bit more about the pricing you are seeing from loan sales in secondary markets. If that’s benefited at all from the some stabilization you are seeing in the southeast real estate markets.
John this is D. Copeland, and I will take that. I think the question was on the secondary market. The question, I guess I would say one is in a lot of the real estate types in the secondary markets, it is still tight. It’s been positive on the multi family, but I guess the rest of them are still tight in the southeast.
As far as our overall yield loan rates, there’s been some pressure that has been a part of it. But we generally are not doing secondary market financing inside of our portfolio. So I would say it’s had a little bit of effect, but most of it would be driven more by the increased fundings that we’ve had in the C&I book of business.
John Pancari - Evercore Partners
I was asking a little bit more about the pricing you’ve seen in some of your distressed asset sale, the loan (inaudible).
On the pricing it is a little bit better than it was in the previous quarter. I will say a lot of that is based on mix of assets that are in the sales, and also basically the vehicle used with which we sell those assets.
So the first book of those businesses was heavy in OREs as Kevin said which had better returns and then we did have some of those bulk sales so that it would have a little bit lower realization rates on those as well. But the activity is still there, there are still buyers there, but it continues to be a tough market, the higher the volume sales are.
John Pancari - Evercore Partners
Secondly, can you talk a little bit about the outlook around the OREO expanse, you saw a pretty good decline this quarter, although still elevated. Just talk to us how we should think about the trend there.
This is Kevin. I think you will see work it’s way down. Probably my guess the next couple of quarters in the 25 to 35 range we’ll continue to sell assets out of OREO. We probably sold a little more of the last couple of quarters than we normally do and we think we are pretty well marked there. But it will directionally continue to work down over the next couple of quarters.
The next question is coming from Jefferson Harralson. Please announce your affiliation and pose your question.
Jefferson Harralson - KBW
KBW. I was going to ask you about how the potential problem loans in the accruing TDR working combination. If I look at the PPLs, they are down by 770 over the last year, while the accruing TDRs are up by 200. Should I [cease] to look in to that that some of these potential problem loans are being restructured and there is less influence in that category, but not sure I am reading correctly in to the changes of those two numbers as they related to each other?
We expect to see potential problem loans continue to work down. There would certainly be some converted to TDRs as they come up and get renewed and restructured. We are continuing to work with our customers. My thoughts are that you will probably see TDRs level off in the next couple of quarters. We are going to continue to work those customers.
The healthy part of what I think of the TDRs despite the accruing TDRs moving up. We are seeing more paths in special mentioned credits as the make up. Those buckets of substandard loans went down. Substandard loans that were TDRs went down this quarter, and potential problem loans which are substandard loans excluding TDRs also went down. There is some flow in to both, but the encouraging thing is both buckets move down during the quarter.
Jefferson Harralson - KBW
Is there anything seasonal about the accruing TDR number? I seem to remember something from a year-to-year, sometimes there is a pickup in Q1.
That could be, and certainly as the calendar year expires TDRs that are TDRs during the year typically could expire at the end of the year as some of their status has been lifted. Say if we have actually taken it out of the restructure status, we normally keep those on us labeled as TDRs to the calendar year and then we do a relook in the first quarter.
So we could get some drop-off there from some of those expiring during the calendar year. But we do expect not to be too significant there a drop off, just may be slightly.
The next question is coming from Craig Siegenthaler. Please announce your affiliation and pose your question.
Craig Siegenthaler - Credit Suisse
Craig Siegenthaler, Credit Suisse. Just a two part question here on capital management. The first part is, why not really kind of shrink loan balances here in risk rated assets in the balance here a little quicker in preparation for a TARP free payment. The second part is, now that you have two quarters of profitability, what is the time line in terms of GAAP DTA recovery in your conversations with the auditors.
I will take that question. We’ve had a long run with shrinking loans, and it was good for a while, but we feel like its appropriate to turn the corner on the loan book and begin to think about normalized earnings, and we’ll be careful about the way we deploy risk rated and thoughtful about the categories and so forth.
As we see that growth we do think that the recovery of the revenue stream has to strike a balance with capital management and the loan book has shrunk many billions of dollars over the last two and half years and we just feel like we need to turn that around, and all the while being cognizant of capital management.
The question on the DTA, there isn’t a magic formula book on the number of quarter and so forth. To recover the DTA is certainly good facts to have a history of profitability. It’s good facts to have forecast and actual results that align one another. Those are good facts. As you reach a subjective judgmental point at some point in the future as Kessel mentioned; we believe that it’s the way that it’s disclosed in the DTA slide in the book is really the story that they are in the magic number of quarters there.
But it’s facts and circumstances based on the quality of profitability, some historical pattern of profitability, what does you forecast look like, what’s going on in the economy and those types of things. And it will be not something as cranked up with a formula, it will be some judgment or discussion with expert with our auditors and so forth, and we’ll keep posting updates on that as things evolve.
Craig I hope that answers your questions.
Craig Siegenthaler - Credit Suisse
That’s perfect Tom. If I can just ask one more, just a simple one. What percentage of the TDR portfolio is land? I know you disclosed both land and residential, but just land.
About 12% of accruing TDRs are in the land portfolio.
The next question is coming from Ken Zerbe. Please announce your affiliation and pose your question.
Ken Zerbe - Morgan Stanley
Ken Zerbe of Morgan Stanley. Tommy just give me your comments about being cautious or putting out risk rated assets. Are you guys turning down business right now that you might normally have otherwise taken on, if you weren’t subject to the current level of capital and credit scrutiny?
Simple answer to that’s a no. As I mentioned a while ago, the write down in risk rated asset was a good ride for a while. It needs to turn and as I mentioned we are being thoughtful about those categories. I am really talking about is we are bonds and that type of thing. We are carefully managing the asset side of the balance sheet, but loans are welcome at Synovus.
The next question is coming from Jennifer Demba. Please announce your affiliation and pose your question.
Jennifer Demba - SunTrust Robinson Humphrey
SunTrust Robinson Humphrey. Question for you Tommy on the net interest margin and what your outlook is for the next few quarters. And then I also have a question about Durbin. How you guys intend to offset your revenue loss there from Durbin.
Alright, I am going to do the margin question and D. is going to do the Durbin question. The margin 352 for the quarter, we believe it will stay in that range, probably has a slight downside risk, might be a little stronger than the upside opportunity. The same forces Jennifer will continue to impact, it will continue to have pressure on the earning side both in loans and security. And we’ll also think there’s a good bit of opportunities in effective cost of fund. Those two will play off each other.
Ironically one of the things that might put some downward pressure on the margin would be the velocity of loan growth. There could be a modest trade and margin for loan growth as you think about what you have to spend to fund the company and also willingness to put quality loans on a fair rates, but may be slightly margin diluted.
So that’s kind of where we are at the margin and I am going to turn the Durbin question to D.
Really from the Durbin standpoint there were multiple regulatory changes that reduced the fee income this year. I think one point to make is, they would all have been fully impacted in the fourth quarter. So as we look forward in to 2012, we spend a lot of time really looking mainly at retail, but also looking at commercial as well at what are the overall fee opportunities to make sure we are aligned with competition, but also make sure we are charging appropriately for the services that we offer.
To give you a little bit of a feel, we have identified an additional roughly $12 million that we will be able to implement during 2012 and it would have roughly $20 million annual run rate on a go-forward basis that we will be implementing through the first half of the year. It is really broad based across a lot of different areas and increments as we look at the overall strategy of how we go forward.
The next question is coming from Kevin . Please announce your affiliation and pose your question.
Kevin Fitzsimmons - Sandler O'Neill
Kevin this question is probably for you and I know you went through some of this. But can you go through and help feel a little more comfortable on why it was appropriate to release reserves. The thing that struck me was that non-accrual loans actually ticked up this quarter. And I don’t what’s the reason behind that, may be it was their slower migration in to OREO this quarter. I am looking back like non-accrual loans have contracted seven out of the past eight quarters and then they increased this quarter.
So, I know there are some leading indicators that gave you confidence in doing that, but just help us feel a little better about the future direction in non-accrual loans, thanks.
I’ll try to answer that but we don’t just release reserve. There is a pretty strict accounting methodology that we follow and certainly positive credit trends, credit quality such as lower mark-to-market cost, lower NPL inflows, and other charge-offs and other good positive trends. Certainly a tribute to some of the downward pressure on the reserve methodology.
As far as non-performing assets we have seen decreases several quarters here in a row, and we think within those non-performing assets it’s not just dispositions that will lower that. We had 21 basis points we did lower this past quarter, linked quarter. But we do expect there will be some upgrades in there, there will be some pay downs there, and also the disposition.
As our inflows continue to work their way down and we are down in the 180 range and that’s down from 200, 300, to 400; we should be able to work that [both] down pretty good during 2012 and we expect to do so. But directly also you mentioned credit cost.
About half of that by the way was of reserves. Of the credit cost decline, the 52 million, about half of that was attributed to the downward pressure on the reserve methodology and we expect in the future with assumed and continued credit positive trends that there will be more of that coming.
But we are pretty confident in the direction of potential problem loans, all of our credit quality indicators point toward us improving the quality of the balance sheet during the year.
Kevin Fitzsimmons - Sandler O'Neill
If you could just repeat, I know you gave the planned disposition pace through out the year. If you can just give that again?
We are guiding to a 100 to 150 million a quarter. We were a 149 I think this quarter. We make those decisions during the quarter, but we’ll stay somewhere in that guidance throughout the year, that’s our expectations. Certainly things can change, that’s a pretty healthy pace to be able to move down our non-performers during the year.
The next question is coming from Nancy Bush. Please announce your affiliation and pose your question.
Nancy Bush - NAB Research
NAB Research. Tommy a question for you. The non-interest bearing deposit growth during the year, could you just give us sort of the commercial versus the retail numbers in that or the rates or whatever.
This is D. I might take that. You said the non-interest bearing DDA and I thought I heard you say rate on the end.
Nancy Bush - NAB Research
I mean the rate of growth of commercial versus the rate of growth of retail.
If you go in we had, and let me pull the exact percentages, I am trying to look at what the differences in the two of those were. There were growth in both areas. As you would expect we have larger chunks and non-interest bearing DDAs on the commercial side. But I would say that, that’s going to be the majority of the growth. But there was also growth in the consumer side as well.
Nancy Bush - NAB Research
On the commercial DDA growth, is this coming about as a result of some sort of change in product mix or relationship requirement, or is this just the liquidity that’s out there in the Synovus.
As Tommy mentioned earlier, we did have a kind of growth in the areas, but I would say there is a big piece of is that is tied to liquidity that’s out there as well as the fact that they are insured.
Nancy Bush - NAB Research
Secondly D. you may speak to this as well. Could you just speak to the growth in the Atlanta Bank. We are reading a lot of negative stuff about continuing problems in the Atlanta market and how is growth there versus some of the pieces of the company.
Yes, if you take the Atlanta Bank for the fourth quarter, it actually showed net growth in Atlanta, the majority of that was in the C&I portfolio. Actually it was all in the C&I portfolio. There was actually a reduction in the real estate side for the overall Atlanta market. So it was positive. Our folks there have refocused, we’ve brought on additional talent in the Atlanta market as well and we’ve brought on C&I growth there as well.
Nancy let me go back and give you the exact numbers. I said the majority of the growth on the DDA was commercial. That was about a little over 800 million of the number, and then it was a little over 300 million in the retail side. So I just wanted to give you the specifics.
The next question of the day is coming from Christopher Marinac. Please announce your affiliation and pose your question.
Christopher Marinac - FIG Partners
Wanted to ask about the drop in the excess liquidity the Fed, the 1.2 billion or 1.1 billion that changed. Will that be continually declining this year or will that be a big move for now.
We’ve been trying for four, five quarters to meaningfully drop the balance so we made a little bit of progress along the way. We basically added to the securities portfolio. We are making some loans, we’ve pushed out some of the higher cost funding and the less desirable funding like brokered CDs, and we’ve done all that really over a number of quarters, but we’ve had things happen like in the third quarter where it [three quarters] of billion of core deposits came in to the company and offset it.
So this time we were able to push it down. Your question is will it keep going? And the answer would be modestly there is a limit that isn’t a hard limit that we have internally that we believe that there is room to pull it down some more. So we made huge progress in the fourth quarter and are very comfortable with the position we are in.
Christopher Marinac - FIG Partners
The follow-up just goes back to credit for either D. or whom ever is. How important with either (inaudible) or with your regulatory relationship is the classified and criticized ratio is the capital one reserves. And just thinking about the drop of reserves in the last quarter, your ratios have modestly improved but they haven’t improved as much as the dollar amount of the actual classifieds and criticized.
Chris this is Kessel. May I can take that for Kevin and for D. Certainly the overall level of the classified assets is important not just to regulators but as important to management and Board and really a part of the continuing trend. So we continue to work the overall levels of classified assets down. Kevin went in to a lot of detail about some of the categories, but again going back over the last year, year and a half tremendous improvement.
Certainly without getting in to specific discussions with the regulators, something we talked to them about frequently and I can’t speak for them, they are probably on this call, but I think they too would suggest that they are certainly pleased to see those levels of classified assets as a percentage of capital going down.
Christopher Marinac - FIG Partners
Do you ever give a goal internally that you would like to be at and not to announce it, but just sort of gauging your --
D. held up the zero sign, and that’s not realistic, but we do have targets that carry us throughout this year and beyond and again have certainly shared those with our regulatory partners, but hope to see continued significant decline there. I like the thought of zero probably not realistic but certainly a fairly substantial drop in 2012.
The next question is coming from Michael Rose. Please announce your affiliation and pose your question.
Michael Rose - Raymond James
Raymond James. Just a question on long yields and what are you booking your credits at. You said last quarter yields on new loan production was a little under 5%. Is that changed?
It would have been down just slightly. It would be between 4.5 and 5 for the quarter. We did have a couple of decent sized draws with some very strong customers that have lower rates over year-end. But overall, it’s down slightly but not significantly.
Michael Rose - Raymond James
Then just a question on expenses, if I could. Obviously you guys have gone through an expense program. Is there additional low hanging fruit or any other areas that you are targeting at this point; headcount etcetera.
Michael, I don’t know that I’d call it low hanging fruit, but it’s just a way of life around here now. We have an expense opportunity group that is co-chaired by Tommy and Al Gula, our Chief Operations Officer that are continuing to identify and drive cost out, and that is just an ongoing part of our business.
I think you will see that reflected in the 2012 results. We have not disclosed any exact target, but you will see that occurred during the year, and it’s on going.
There’s a follow-up question coming from Craig Siegenthaler. Your line is live.
Craig Siegenthaler - Crédit Suisse
Just on special mentioned loan improvement here on slide 32. Can you talk about what geographies and loan classes are keeping this balance quite elevated? I know they have improved a little bit, but I just wanted to kind of determine if there is an underlying mix shift going on here.
Special mention is kind of the cross roads of the flow of the credit quality. It didn’t decrease much although it’s showing a very good trend over the last three or four quarters. You are going to get some loans go from substandard, a special mention, and we have a less improved performance. But you talked about the mix of the special mention loan.
I think we mentioned earlier as I was going through the portfolios, I think we are talking may be 12% to 15% is in land and residential. So it’s not as much there, it’s more, it’s heavily weighted.
I think I don’t have the exact number but it may be more, closer to about 25% investment properties and closer to 50% C&I. So there’s some more retail as well in some other categories. But it’s probably close to 50% in the C&I category which is encouraging. Those that were attached to cash flow, those are loans that have suffered a little bit of weakness during this cycle three or four years, and we expect really a lot of the special mention credits to work back to past.
We just recently did about a month ago a review of the top 100 special mentioned credits in our portfolio, and we were very encouraged that the majority if not most of those, we expect to be improved during 2012 and upgraded.
Craig Siegenthaler - Crédit Suisse
Got it. So it sounds like a little bit a mix shift towards C&I and away from land, just modest.
Yes. 75 to 80% are investment real estate and C&I which has cash flow attached to that.
There’s another follow-up question coming from Nancy Bush. Your line is live.
Nancy Bush - NAB Research
Guys forgive me for asking this question, but I asked it for so many years. I’ve got to ask it for one more. Is there any ongoing exposure to C&I [loan], or any of these sort of ancillary properties around there.
No Nancy, not to that credit. That was dealt with really the year before last. Of course we do have a bank division in that market very successful bank, Coastal Bank. So its natural that that bank would have customers who are residence of Sea Island, who have some sort of ancillary business related to that. But in terms of any major exposure, no.
There’s another follow-up question coming from Jennifer Demba. Your line is live.
Jennifer Demba - SunTrust Robinson Humphrey
Follow-up question for Kevin. Can you just give us a sense of what the granularity of the NPLs is at this point, average size or the largest ones, what they are like?
We were looking at that this morning, as a matter of fact. We have three loans that are somewhere between 25 and 30 million that are in non-performing, and it averages 60 million or so. After that the next, they are all below 20. We were looking at the mean of those and they are typically somewhere between $1 million and $4 million, that is where 80% or so of those loans are. So we don’t have a lot of NPLs, only three over $20 million.
Sir there appear to be no further questions in queue. Do you have any closing comments you’d like to finish with?
Yes. Just very briefly again want to thank all of you for listening today. I am sure today like most days, we have analyst, member of the investment community, team members, customer, shareholders. And we really appreciate all of you showing your interest in our company by participating today. Again I think the story of the quarter, again two consecutive quarters of profitability.
Someone who follows our company very closely, had seen our early release this morning and sent me an email that said. Focus, determination and execution are paying dividends and I don’t think I could say it any better. So, I will just steal that email and call the author later today to thank him for that comment.
I think it’s a reflection on our team. I know a lot has been written about fatigues in companies such as Synovus; management fatigue and general team fatigue. I will just tell you that the team is energized from the moment we announced profitability last quarter.
As I have described the team hear an extra spring in their step. They are energized and excited about again closing out 2011 and certainly excited about the opportunities in 2012.
So I’ll look forward to continuing to update all of you about our company’s continued progress, and again thank you for participating and hope you all have a good day. Thank you.
Thank you ladies and gentlemen; this does conclude today’s conference call. You may disconnection your phones lines at this time and have a wonderful day. Thank you for your participation.
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