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Executives

Kessell Stelling – Chairman, Chief Executive Officer

Thomas Prescott – Executive Vice President, Chief Financial Officer

Kevin Howard – Chief Credit Officer

D. Copeland – Chief Banking Officer

Pat Reynolds – Director, Investor Relations

Analysts

Todd Hagerman – Sterne Agee

Craig Siegenthaler – Credit Suisse

Jefferson Harralson – KBW

Emlen Harmon - Jefferies

Kevin Fitzsimmons – Sandler O’Neill

Nancy Bush – NAB Research

Stephen Alexopoulos – JP Morgan

Christopher Marinac – FIG Partners

Jennifer Demba – SunTrust Robinson Humphrey

Ken Zerbe – Morgan Stanley

Mike Turner – Compass Point

Erika Penala – Bank of America Merrill Lynch

Synovus Financial Corp. (SNV) Q1 2012 Earnings Call April 24, 2012 8:30 AM ET

Operator

Good morning ladies and gentlemen and welcome to the Synovus First Quarter Earnings conference call. At this time, all lines have been placed on a listen-only mode and we will open the floor for your questions and comments following the presentation.

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

Pat Reynolds

Thank you, Kate, and I thank all of you for joining us today on the call. During this call, we will be referencing the slides and press release that are available within the Investor Relations section of our website at www.synovus.com. Our presenters today will be Kessell 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 risks 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 to 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.

With respect to 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 the call over to Kessell.

Kessell Stelling

Thank you, Pat, and thanks to all of you for joining our first quarter earnings call this morning. As we said in the release this morning, we are very pleased to report a profit for the third consecutive quarter. The quarter was highlighted by a significant reduction in non-performing loan inflows, lower net charge-offs, and a reduction in all key problem loan categories. I’m going to walk you through the first part of the deck and then turn it over to Tommy Prescott. He’ll be followed by Kevin Howard, and then we’ll come back and certainly answer questions.

So if you’ll begin on Slide 4 of the deck, again you’ll see our earnings results. Net income available to common shareholders was 21.4 million compared to net income of 12.8 million in the fourth quarter of 2011 and a net loss of 93.7 million in the first quarter of 2011. Net income per diluted common share was $0.024 compared to net income of $0.014 in the first quarter and a net loss of $0.119 in the first quarter of 2011.

Turning to Page 5, again as was the case with last quarter, credit was certainly the story of the quarter. I’ll walk you through several of those categories. Non-performing loan inflows continued to improve, you’ll see, declining from 189 million in the fourth quarter to 140 million in the first quarter of 2012, down 49 million or 26% from the fourth quarter, and down 167 million or 54% from the first quarter of 2011. Our net charge-off ratio was 1.90% annualized compared to 2.26% in the fourth quarter of ’11 and 3.12% in the first quarter of ’11; in dollars, down 18 million or 16% from the fourth quarter, down 72 million or 43% from the first quarter of 2011 – again, a tremendous improvement in the charge-off results there.

Turning to Page 6, as I said earlier, every key problem loan category decreased during the quarter. Our non-performing loans declined 47 million or 5% from the fourth quarter of 2011. As illustrated on the graph on the top left, potential problem commercial loans decreased 95 million or 12% from the fourth quarter of 2011, and again at the bottom left you’ll see a graph reflecting our past dues. Past dues over 90 days ended the quarter hit 0.04%, down from 0.07% the previous quarter, and total past dues ended the quarter at 0.73%, certainly acceptable levels in these times.

Turning to Page 7, some commentary on the loan and deposit behavior. The first quarter of ’12 results reflected expected downward pressures on loan balances. As we guided on the call last time, we felt that the first half of this year we’d still experience some downward pressure, and the results do reflect that. The sequential quarter net loan decline was approximately 25 million in the first quarter compared to an increase of approximately 167 million in the fourth quarter of 2011, and a decline of approximately 238 million in the first quarter of 2011.

Total loans reported a sequential quarter decline of 236.1 million compared to $22.3 million decline the previous quarter and a $588.3 million decrease in the first quarter of 2011. We do expect our loan balances to stabilize and grow during the second half of 2012, and delighted to report that our specialty lending group, which we’ve talked a good deal about, grew net loan balances by more than 15% during the quarter, and we’re encouraged by significant growth in our loan pipeline across our footprint. The loan portfolio mix continued to improve during the quarter. Kevin will talk about that later, but C&I and retail combined now represent approximately 65% of our total loans.

The deposit story again was a strong one. Core deposits increased 102.4 million or 2% annualized from the fourth quarter. Core deposits excluding time deposits increased almost $400 million or 9.8% annualized from the fourth quarter of 2011. The quarter reflected a continued improvement in deposit mix and also in number of accounts as the number of non-interest bearing deposit accounts grew by 3,501 accounts or 4% annualized from the fourth quarter of 2011.

On Page 8, we were pleased to see margin expansion. Our first quarter net interest margin expanded three basis points from the fourth quarter to 3.55%. Again, the margin benefited from a continuing decline in funding costs and lower negative impact of non-performing loans. You’ll see the cost of core deposits – again, the graph on the left, a decline from 53 basis points to 47 basis points.

On Slide 9, we continue to remain very focused and disciplined as it relates to core expenses. You’ll see a continuing decline during the quarter. The first quarter reflected a continued downward trend following the achievement of about 95 million or a 12% reduction in core expenses in 2011. As we’ve said often, our focus on efficiency continues to be an imperative. We continue to look for ways to drive cost out of our operating model while continuing to invest in new technology, such as our ATM upgrade recently announced, and certainly in people who can make an impact in our company going forward.

Then on Slide 10, just a look at our capital position. It remains solid. Our Tier 1 capital ratio ended the quarter at 13.19%, up from 12.94% in the fourth quarter. Our Tier 1 common equity ratio ended the quarter at 8.67%, up from 8.49% in the fourth quarter. Risk-based capital, 16.5% up from 16.49% in the fourth quarter. Tangible common equity – tangible assets, 6.81%, unchanged versus the fourth quarter and Tier 1 leverage ratio grew to 10.41%, up from 10.08% in the fourth quarter.

Now I’ll turn it over to Tommy Prescott for further commentary on our financial results.

Thomas Prescott

Thank you, Kessell. I’m going to walk through the financials and start on Slide 12 with just a little more detail. The Slide 12 illustrates the first quarter of ’12 against the fourth quarter of 2011. I’m going to walk you through each line item with a little bit of color, starting with net interest income, which was $221 million, down $6.2 million on a linked quarter basis. That was the result of the shorter quarter, the decline in average loan balances, the impact of lower reinvestment yields on earning assets, and then the impact of the debt raise—had some impact on that line.

Non-interest income - $64 million, up $922,000 for the quarter, and that reflected a decline in service charges, some of that seasonal, but that was offset by stronger mortgage revenues, bank card fees, and we also had some interest on a tax refund. A little bit of noise in the quarter, but we had noise in the quarter before also.

Security gains were $20 million during the quarter. These transactions allowed Synovus to capture market premium and reduce prepayment risk going forward. We anticipate fewer sales going forward as the portfolio repositioning is largely complete.

Non-interest expense at $174.5 million, down 2.1 million and almost every category in that line is moving in a positive fashion, a downward fashion as we continue to press hard on expense base. Restructuring charges - $858,000 consists primarily of additional fair value write-downs on corporate real estate that was identified in last year’s restructuring, and as some of the properties had to move as the appraisals were refreshed, there were some additional markdowns.

You’ll hear from Kevin in a little bit on the credit cost line, so I’m going to move past that; and the Visa indemnification charge of $3 million is the result of an adjustment to the Visa litigation reserve that’s based primarily upon a measurement period of Visa’s stock price during the first quarter. We, like many I’m sure, will be glad when that journey comes to an end on the Visa litigation.

Then carrying on down through the income statement, really negligible tax impact here in the quarter and then the normal TARP expense brings you to the $21.4 million or $0.024 a share.

Slide 13 is a picture of loan trends. Kessell mentioned the direction in the quarter. This just illustrates a little longer trend in loan balances and includes the fourth quarter stabilization and growth of net loans that we saw and then also the decline in the first quarter, as we expected, and we look forward to turning the loan balance trends around later this year.

Slide 14 is the deposit story. The deposit story remains good. We’ve taken the opportunity in this environment to continue to shift the mix away from broker and also to improve the components of the core base also. Broker deposits declined as planned – $376 million. Brokered CDs now represent about 6.3% of total deposits, so we’ve moved that down dramatically over the last couple of years. Core deposits increased $102 million and core deposits excluding time deposits increased 391 million or almost 10% compared to a quarter ago.

Slide 15 shows the impact of the improvement in the deposit mix on the cost of funding – 47 basis points core funding costs now, down six basis points from one quarter ago, 25 basis points from a year ago. Slide 16 is the picture of the net interest margins. Margin, as Kessell mentioned, went up three basis points, was 355 for the quarter. We did in the quarter have some beginning of the impact of the debt issuance for a little over a million dollars in the quarter and had about a two basis point negative impact on the quarter. Otherwise, we had a decline overall in the effective cost of funds with downward re-pricing of time deposits, reduction in core money market rates, and the improvement in the mix. We had a slight offset on the earning asset side – one basis point decline, pretty modest decline; and that decline was mitigated by—if you look to the right on this slide, the negative impact of the NPL carry on this continues to diminish. It was 22 basis points a quarter ago, 19 basis points this quarter, so a little bit of help on the margin from the improvement in credit.

Core expenses illustrated on Slide 17 continued downward trend – about $2 million, as I mentioned, better than a quarter ago, in really almost all the categories. All the key categories here are illustrated as moving down during the quarter, and we continue to press hard on that line. Pre-tax, pre-credit cost income of $110.6 million illustrated on Slide 18 – a $3.2 million decline from the fourth quarter, and that’s the impact of the lower net interest income offset by higher fee income and lower G&A expenses. We look forward to the turn in the loan growth to support the key piece of the top line here, the net interest income; and in the meantime, we’ll continue to manage expenses in a way that is carefully measured against our revenue trends and keep pushing as hard as we need to on the expense side.

Slide 19, as Kessell mentioned, is capital ratios – this just shows the longer term trend and shows all the regulatory ratios moving in a positive fashion.

I’m going to stop here and turn it over to Kevin Howard, our Chief Credit Officer.

Kevin Howard

Thank you, Tom. If you’ll go to Slide 21, I’ll begin covering the credit quality trends for the first quarter. As Kessell mentioned, we saw continued progress in our credit quality trends and that was consistent with our guidance, led by 26% drop in NPL inflows, a reduction to less than 2% in the charge-off ratio, and meaningful lower balances than our more troubled asset categories. The chart in the upper left corner shows credit costs at 91 million, which is equal to last quarter and consistent with our guidance. Credit costs including provision improved during the first quarter when you exclude the impact of the fourth quarter expected loss factor update, which is performed on a semi-annual basis. As we mentioned last quarter during the fourth quarter, we had a $52 million decline in credit cost and we attributed about half of that to that update, so excluding that, we did continue a positive trend in our credit cost. All of the key credit drivers during the quarter such as mark-to-market expenses, disposition costs, and migration costs improved again during the quarter. Additionally, ROE expenses improved by 11 million or 31%. We expect ROE expenses along with total credit costs to continue to decrease throughout 2012.

Charge-offs were down again this quarter to 1.9%. As I mentioned, the primary drivers here – improvement in costs associated with lower disposition costs, less charge-offs due to a lower amount of defaults that we had this quarter in our inflows, and improved retail charge-offs. Our loan loss reserve declined 11 basis points to 2.56 during the quarter, and past dues again were low at 0.73 of 1%. Ninety-day past dues improved to just four basis points.

Slide 22 reflects an overall view of non-performing assets which were down 61 million or 6% linked quarter. This represents eight consecutive quarters of declines in NPAs and we expect that trend to continue going forward. The NPL inflows, as Kessell mentioned and seen here, experienced a significant decline of 26%, down around $50 million on a linked quarter basis. Noted on this slide also was our NPAs, which now have a carrying value of 57%, which demonstrates our continued effort to aggressively mark troubled assets.

Follow me to the bottom right corner of this slide which shows our disposition trends. We sold 135 million this quarter with an improved realization rate of $0.42 on unpaid balance. Again, this is within our guidance of sales of 100 to 150 million per quarter, which we still believe is the right pace for both capital efficiency while continuing to appropriately reduce the level of NPAs. Let me cover just real quick the breakdown of the sales by property type we sold. Thirty-two percent of it was C&I related, 27% investment properties, 21% residential properties, 14% land and 6% retail.

Go to Slide 23, just a quick little color on the NPL inflows. We’re encouraged by the improvement across the board in all our portfolio segments. As you can see, the improvement was led by C&I that had a significant drop in inflows this quarter, which we expected due to less and less exposure to the real estate-related C&I and some improvement in some of the other industries within the C&I space.

Slide 24 shows another good example of how our overall credit quality continues to improve as it demonstrates the positive trends in our potential problem commercial loans. The level of these loans have continued to trend downward for seven consecutive quarters, down 12% from last quarter and down 1.2 billion, 63% from the peak in the third quarter of 2010. Special mention loans, by the way, are shown in a chart in the appendix and also declined during the quarter by 123 million, now down 22% from their peak.

Slide 25 takes a look at our TDRs and their breakdown by quality. Both our overall TDRs and accruing TDRs declined this quarter, and as demonstrated here, 46% of the accruing TDRs are rated better than substandard. Along with this improving trend, more than 97% of the accruing TDRs are current and there are no 90-day past dues within the TDR bucket. Also, close to 70% of the accruing TDRs are either C&I or investment real estate-related, which are typically tied to cash flow oriented type loans, and we believe are loans that have the best opportunity to be upgraded in an improving economic environment, which we are cautiously optimistic for the year.

Page 26 demonstrates a look at our substandard accruing loans, which include substandard TDRs and potential problem loans. I wanted to put the two together in a slide to demonstrate that our substandard TDRs, loans that would probably be the most concern to you, have actually reduced for three consecutive quarters and now down 22% within that period. Despite accounting guidance within the past year, they’ve broadened that definition of what constitutes a TDR. The pie chart on the right shows the property type mix of the total substandard loans, and worth pointing out is there’s only about a third are in our more stressed property types, such as land and residential related.

Let’s go to Slide 27. We’ll have a brief look at the loan portfolios, beginning there. This shows the details of our investment real estate portfolio. We were pleased to see another quarter of improvement in NPL inflows, down to 14 million, the lowest we’ve seen in the credit cycle in this category. The NPL ratio improved to 1.78% within investment properties, and if you exclude the commercial development, which is more land related and the smallest portion of this portfolio, we would be down to 1.08%; so the investment property is certainly performing better and improving across the board. Charge-offs in investment real estate were 1.55% and past dues remain low at 0.5 of 1%.

Slide 28 shows our residential, C&D and land portfolios. While these three categories still make up about half our NPAs, they now only represent about 7% of our total performing loans as we continue to work down our more troubled assets. Balances have decreased 78% from their peak, and as we have mentioned before, these now only represent—these categories only represent 28% of our substandard loans and 12% of our special mention loans.

Slide 29 details our C&I portfolio. This portfolio reflected improvement in all credit metrics, led by NPL inflows being down 51% from the fourth quarter of 2011 to 38 million. The charge-off ratio was also down to 1.5% in comparison to last quarter’s 2%, 2.03, and past dues were only 0.52 of 1%. Again, a well diversified portfolio, and we’re also pleased to see linked quarter growth in our non-owner occupied C&I for the second consecutive quarter.

Slide 30, the last slide I’ll cover on credit, is a look at our retail portfolio. On our retail portfolio as a whole, net charge-offs declined for the ninth consecutive quarter to 1.35%. Defaults were down 20% to just 21 million. The NPL ratio was down 16 basis points this quarter to 2.11%, and past dues also improved in these segments during the quarter from 139 to 132. All of the individual loan types improved on defaults.

We know there has been some analyst attention on HELOC lending due to the recent interagency guidance, and at this point we don’t see the new guidance having any negative impact on credit cost. I also want to point out that our HELOCs had positive trends during the quarter with declines in past dues, charge-offs, and defaults during the quarter. This portfolio, like our entire retail portfolio, is credit scored in-market relationship lending and has performed relatively well throughout the credit cycle.

With that, I’ll turn it back over to our CEO, Kessell Stelling.

Kessell Stelling

Thank you, Kevin and Tommy. Before we go to questions, I’ll just take you to Slide 32 and talk briefly about both current and future capital actions. As most of you know, we did complete in the first quarter a $300 million senior debt offering. We were very pleased with the execution of that offering. We retired 146.1 million of our 2013 sub-debt through our tender offer, leaving a remaining balance of approximately $61 million. As we stated at the time, we dealt with two issues there, both the near-term maturities of the 2013 sub-debt and the replenishment of cash at the parent. So very pleased with that first quarter event.

Our focus remains on the DTA, and I know many of you may have questions there. There’s a Slide 34 that talks about DTA recovery. As we have said in the past, the timing is uncertain but the fact patterns are working in our favor – three consecutive quarters of profitability, improving credit trends, and a clearer outlook on the future. But there is certainly still much work to be done and progress to be demonstrated, so we’ll keep you posted during the year as we get clearer on when we believe that asset might be recovered. As we’ve again said in the past, it could be a 2012 event, it could be a 2013 event.

And then I’d also like to touch on TARP. The two can go hand-in-hand, certainly don’t have to, but we remain in conversation with treasury and our regulators and continue to model and plan for our TARP exit. I’ll remind our audience, to date we’ve paid over $152 million in dividends related to our TARP obligation, and the program’s certainly been beneficial for our industry, for our company, and for the treasury; but we do want to get out, and we’ll get out in a manner and in a timeframe that’s prudent, efficient and acceptable for all of our constituencies, and that certainly includes the treasury. It includes our primary regulators, it includes our equity holders, and it includes our debt holders. We need continued core profitability, continued improvement in credit, a continued positive view of our future earnings capacity for sure, and we believe that these trends lead to DTA recovery and ultimately position us for TARP repayment.

At the appropriate time, we believe it will be a combination of existing cash at the parent, which as we just stated, we have replenished through this debt offering. We believe we’ll be able to with regulatory approval dividend cash up from the bank to the parent to further supplement parent company cash; and then a shortfall, if there is any, would be covered through a combination of debt and equity. But at this point we don’t have clearer direction than that, but again can assure the audience that our plan is to exit when it makes sense for this company and its constituencies, and we’ll continue to update you during the year as our views become clearer on that.

So with that, Operator, I’ll pause now and we’ll open the line for questions.

Question and Answer Session

Operator

Thank you. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press the numbers one, four on your touchtone phone now. Pressing one, four a second time will remove you from the queue should your question be answered. Lastly, we do ask if you are listening on a speakerphone to please pick up your handset for optimum sound quality. Please hold for just a moment while we poll for questions.

Our first question today is coming from Todd Hagerman. Please announce your affiliation and then pose your question.

Todd Hagerman – Sterne Agee

Good morning everybody. Kessell, if I refer back to Slide 18 in your pre-credit costs chart there, I’m just kind of curious – as I listened to Tommy in terms of restructuring the balance sheet, restructuring the loan mix, you’re pressing hard on expenses, and you have a more positive outlook for loan growth in the back half of the year. I was wondering if you could just give some perspective or your thoughts in terms of how we should think about PP&R going forward from here, as we think about—you know, you largely have captured a lot of the cost savings that you planned to. You’re still pressing hard; but again, if I put together kind of your loan outlook, earning asset, and kind of the remix there, how should we think about PP&R expenses and so forth going forward?

Kessell Stelling

Yeah thanks, Todd, for the question. Let me try and cover that for you. Certainly our focus is on the top line in core revenue, and to stabilize that we do need not only continued production from our specialty lending group but from our entire footprint; and as we said, the pipeline is stronger going into this quarter than it was going into the past quarters, so we’re encouraged by that. We haven’t guided a number there, but we do think the loan balances stabilize and grow and give us some lift there in overall earnings capacity.

From an expense standpoint, we believe expenses will remain stable, and if we need to take them down further, we will. It is a, as I’ve said, way of life around the company now and we’ve taken a lot out – 95 million last year, and a continued decline this quarter. But if the revenue line doesn’t behave the way we believe it will, then we will get even more aggressive on the expense side; and again, I think that’s common in our industry.

But we’re a lot more excited about revenue opportunities than we are cutting further expenses. We’ll do what we need to do, but again, we’ve added some great talent to the team. We’ve made some investments in technology that we think will pay big dividends for our customers. We, just in the last couple of months, received a couple of national awards for excellence in customer service. This brand of banking is paying off and will result in a stable PP&R line over time; but there still could be a little pressure, again, from the earning asset side.

Todd Hagerman – Sterne, Agee

Okay. And then just—again, the FTE count again went down this quarter. Again, you’re pressing hard on expenses. Can you give just a little bit more color in terms of—I know you’ve been adding teams selectively. Can you just talk about in terms of revenue producers, how that’s changed, how we should think about—again, with all the restructuring that the company has gone through over the last several years and pressing hard on expenses, could you just give us a little bit more perspective in terms of, again, on the revenue side, how that’s changed particularly from kind of a personnel standpoint, where the focus is today, where you’ve kind of really cut back, if you will?

Kessell Stelling

Yeah well, I have to take you back, I guess, to the process redesign where we looked at everything we were doing that touched the customer or that supported those that touched the customer, and took a lot of cost out of the organization. That followed, I guess, the costs that came out via charter consolidation in some of the early on wins related to the ability to take out some of the duplicative backups we had in the company, again related to all those charters. But I’ll just remind you that the headcount number that we’re talking about is a net number, so that is a significant reduction after all of the investment in talent, both in larger corporate banking, in senior housing and asset-based lending, in syndications, and talent in our core banking franchise around the footprint. So I think you’ll continue to see revenue lift as we remix the balance of our teams there, and then—I know we talked about it last quarter, we’ve also really largely completed the shift of all of our problem loan work out to a centralized group, and it’s freed our existing bankers up to get back to the day-to-day business of creating revenue. And as we continue through this credit cycle, we’ll have the ability to leverage that very talented group that is now working out of credits into more revenue-focused opportunities.

So certainly the investment in people has been more on the revenue side, but we’ve also kept pace as it relates to risk and other areas that are certainly key to our long-term success and key to our credibility with our regulators as well.

Todd Hagerman – Sterne Agee

Great, that’s very helpful. Thank you, Kessell.

Operator

Thank you. Our next question today is coming from Craig Siegenthaler. Please announce your affiliation the pose your question.

Craig Siegenthaler – Credit Suisse

Thanks, good morning everyone. It’s Craig Siegenthaler from Credit Suisse. First just on the NPL inflows and also the potential problem loans, what trends are you really seeing in April – so kind of Q2 to date – and should we expect additional improvement in NPL inflows and potential problem loans from these levels, or more stabilization over the next few quarters just given the kind of dramatic improvement we’ve seen in the last few quarters?

Kevin Howard

Craig, this is Kevin. We think probably—you know, we did have a good improvement this quarter. We expect improvement throughout the year. I can’t tell you there won’t be some bumpiness along the way – there could be. We’re dealing with lower levels, but directionally we believe NPL inflows will continue the positive trend as well as potential problem loans.

Craig Siegenthaler – Credit Suisse

Got it. And then just as a follow-up, I didn’t hear this so I apologize if you already covered it in the prepared remarks, but do you continue to expect to be profitable going forward even without the ability to harvest securities gains? And then also, in terms of DTA recovery, just looking at the slide you references on 34, is it more likely an event in 2012 or 2013, given your view of profitability here?

Kessell Stelling

Craig, let me try those both. The answer to your question – yes, we do expect to continue to be profitable. The repositioning of the bond portfolio is largely behind us. There could be some additional actions there, and Tommy could talk more about that; but we do expect to be profitable throughout the remainder of this year and beyond.

As far as timing of the DTA, I don’t know that we can be any more specific; and we’re not trying to play games here, it’s just we’re in constant discussion with our auditors. We enjoy seeing others recover their deferred tax asset because it certainly allows us to compare our facts and circumstances to theirs, and so today we do believe it could be a 2012 event. But our focus really is—even though timing is certainly important to us, our focus is more on those events that will lead us there, so I don’t think we can be any more specific than that.

Craig Siegenthaler – Credit Suisse

Okay. Thanks for taking my questions.

Operator

Thank you. Our next question today is coming from Jefferson Harralson. Please announce your affiliation and then pose your question.

Jefferson Harralson – KBW

Hi, thank you – KBW. I wanted to ask about the potential to upstream. Do you have actual capacity now to upstream, or do you need to have another year kind of clip by to be able to upstream officially next year? And is the most concerning ratio at the sub, the leverage ratio, and what is that ratio currently?

Kessell Stelling

Jefferson, let me start with that and I’ll get Tommy to help on the back end of your question. There is no hard and fast line for the ability to upstream. It’s a conversation you have with your regulators at the appropriate time, and we do believe as we continue our progress from a credit and earnings front, those discussions get more appropriate. So we certainly believe at the end of this year, potentially sooner, but at the end of this year it would certainly be an appropriate time to request the upstream of dividends. We’ve done it before many times. We’ve downstreamed a lot of cash to the sub to support it when it wasn’t earning money, and we again believe it to be appropriate to upstream as part of our ultimate TARP exit, and that’s part of our current discussions with regulators. What they’ll want to see is classified assets, potential problems continue to decline, as do we; and so we do think that will be an appropriate discussion later this year.

I think you had a question on a ratio, and I’m looking at Tommy to see if he can help you there.

Thomas Prescott

Yeah, Jefferson, consolidated Tier 1 leverage ratio’s 10.4%. I don’t have the bank number in front of me, but it tracks slightly higher – call it just slightly over 11%.

Jefferson Harralson – KBW

Okay, and that can be—that can run at 9, or where do you think that can run at over a long period of time?

Thomas Prescott

We think the capital ratios do have some room to move like that, but we haven’t declared a target that’s that specific.

Jefferson Harralson – KBW

Okay. Thanks guys.

Operator

Thank you. Our next question today is coming from Emlen Harmon. Please announce your affiliation and then pose your question.

Emlen Harmon – Jefferies

Good morning, calling from Jefferies. You guys noted in your prepared remarks a better balance of C&I and retail at this point. As you look at the loan growth in the second half of the year, could you give us a sense of whether you expect additional runoff in investor property, and just generally speaking what the runoff in the remainder of the portfolio would be kind of offsetting that C&I growth.

D. Copeland

Yeah, this is D. Copeland. Let me touch a couple of things with that. One is absolutely, the trend has been the continued reduction in the balances in the investor property. I think we would expect that to be there. I don’t know that we would comment as far as to the different levels, but I think we would continue to work through credits there. But I would say what would be the growth and how we move forward, maybe let me just touch a little bit on our current pipeline and where that is.

From a current pipeline standpoint as well as new fundings, about two-thirds of that pipeline has been in the C&I space as well as that was the current new fundings for the first quarter as well. So I think the main driver would be C&I. We are making loans in investment property, but there will still be paydowns in that category.

Emlen Harmon – Jefferies

Okay, thanks. That’s helpful. And then just a second follow-up – you talk about the building liquidity at the holding company to eventually look for TARP repay. How does that affect just asset mix over the next few quarters here? I mean, should we expect the securities portfolio to grow kind of in line with the loan book as well?

Thomas Prescott

Yeah, this is Tommy. You ask, I guess, a couple of questions there. The parent company liquidity has moved forward. Obviously the debt raise added 300 incremental. We spent 146 million of that on the tender offer, and fortunately took out the biggest piece of the 2013 maturities. I guess from an overall liquidity standpoint, the Fed balance at a consolidated level did drove at period-end as we tended to have a surge in deposits. While the average was down for the quarter, we did see that continue to trend up a little bit during the quarter. But the loan activity is really the key in the future mix. We’ll have to watch that carefully. We’ll continue to push liabilities out on the brokerage side to manage the liquidity at the appropriate level. We’ll watch to see the turn in the new loan on-boarding that will lead us to stabilization and growth, and any decision about the bond portfolio will really be a byproduct of that moving part. So I hope that answers your question.

Emlen Harmon – Jefferies

That’s helpful. Thanks for taking my questions.

Operator

Thank you. Our next question today is coming from Kevin Fitzsimmons. Please announce your affiliation then pose your question.

Kevin Fitzsimmons – Sandler O’Neill

Sandler O’Neill. Good morning everyone. Just a couple quick follow-ups – Tommy, you’d discussed the margin. Just net-net, is the takeaway from that that the margin could see some modest compression here going forward, just on balance what your expectations are? And then secondly for Kevin, just on the subject of credit, you guys are seeing good movement in your credit trends. Your reserve is still pretty healthy at this point, but the reserve release seemed like it was less this quarter than the prior quarter. I’m just curious what your thoughts are about reserve releasing, whether you have kind of a targeted reserve to loan ratio, if you’re looking out a few quarters so that we can kind of try to gauge what kind of pace that reserve releasing might be at. Thanks.

Thomas Prescott

Kevin, I’ll take the margin question and then let Kevin answer the credit question. The margin outlook, I’d say that the core margin activity would remain in a stable range. We’ve got obviously some pressure on earning asset yields going forward, and we’ve got a lot of CDs that are rolling off at some pretty high prices over the rest of the year - $734 million in brokered CDs at 192, and those will either go out the door or come back on the books at a fraction of that rate. Core CDs, $2.6 million going off at 103, and similar strategy there – we’ll hang onto more of that than we will brokered but at much lower rates. So we do have some buffer there, but we will have the full traction – the negative traction, I guess – of the debt offering this time that had a modest impact in the first quarter but it will have full impact in the second quarter, representing about a $5 million net interest income burden of about six basis points incremental to the first quarter numbers. So I guess you’d put all that together with the debt offering, I’d say core relatively stable, add the debt offering, you’ll have a slight downward bias in the margin going forward.

Kevin Fitzsimmons – Sandler O’Neill

So Tommy, six basis points the impact to first quarter, or six basis points on top of what you had in first quarter in next quarter?

Thomas Prescott

Kevin, all-in, the debt cost is about eight basis points, about two of that caught in the first quarter. The other six will kick in in the second.

Kevin Fitzsimmons – Sandler O’Neill

Got it, thank you.

Thomas Prescott

All right? So I’ll turn the credit question to Kevin.

Kevin Howard

Okay. Hey Kevin, this is Kevin. We do expect to see continued reduction opportunities in the loan loss reserve going forward. Obviously it follows improved credit, and we’re having improving credit obviously and we expect that going forward. So we do think there will be a positive pace there. I don’t know that we see that number getting really below 2% any time soon. Me and Tommy have talked that a lot – until we get these NPA levels down more significantly, and we are working towards getting those NPA levels – we do think they’ve been a little stubborn. We’ve moved them in the right direction, talking about the NPAs, but we do believe going forward second half of the year, early next year, you’ll see a more significant pace, therefore you may see a more significant pace there assuming the credit quality stays in check, this economy stays in check, and that opportunity will follow.

Kevin Fitzsimmons – Sandler O’Neill

Got it. Thank you very much.

Operator

Thank you. Our next question today is coming from Nancy Bush. Please announce your affiliation and then pose your question.

Nancy Bush – NAB Research

Hi – NAB Research. Good morning, guys. I’m a little fuzzy on the loan decline during the quarter. Could you just tell us how much of that was planned versus not planned, and why you’re confident of second half growth?

D. Copeland

Yeah Nancy, this is D. I guess the planned is an interesting comment, the call that I would end up saying—I think Kessell’s word may have been, or what we had expected. As you can look, the difference between your net loans and your actual loans would end up being a differential that we know we have to overcome because of the disposition level that we have. What I would say is we had an expectation based on a pipeline we had when we left the fourth quarter coming into the first quarter which made us feel like there was some softness in the first quarter. What I would say is Kessell made a comment earlier is as we are moving into the second—or have moved into the second quarter, the pipeline has been more robust and gives us a feel that there is at least positive momentum in that direction.

Nancy Bush – NAB Research

Okay. Secondly, I guess this would be a question for Tommy – can you tell me where most of your expense reductions are coming right now? I mean, is there any one business within the different lines of business that is particularly fruitful for expense saves right now, and what you guys are looking for in terms of expense reductions in the next couple quarters?

Thomas Prescott

Yeah, I’ll be glad to do that, Nancy. Really the run rate on expenses right now has most of the key strategic—the restructuring impact in it. What you’re seeing now is just the incremental impact of—I’ll just describe it as kind of tactically managing an expense base that we know needs to be under a good bit of pressure. What that means is, and if you look at the results for the quarter, you’ll see almost every single controllable line item moved in a positive direction. Obviously headcount at a banking company is always a key driver, and we saw some continued movement there. As I mentioned and as Kessell had mentioned earlier, we know we have to sync the trajectory of expense base with the revenue base and keep a balance there, so we’ll continue to watch that closely and act accordingly. We do not have a planned restructuring like we’ve done in previous periods, but we know that on an everyday basis, we just have to keep that topic out in front of every single person that can control it in this company. And believe me, it is a topic that’s right up there behind loan growth, so we’re just pressing hard on every lever.

Nancy Bush – NAB Research

Thank you.

Operator

Thank you. Our next question today is coming from Stephen Alexopoulos. Please announce your affiliation and then pose your question.

Stephen Alexopoulos – JP Morgan

Hey guys – JP Morgan. I wanted to follow up, Tommy, on your comments you just had on the expenses. I know the foreclosed real estate cost is volatile quarter to quarter. How are you feeling about the big drop this quarter, down to around 23 million, and what’s the likelihood that’s stable to improving moving forward?

Thomas Prescott

Yeah, it was really based on a couple of things. It was greater realization rates on sales and then lower pain that comes from fair value updates. That’s a number that – I’ll use Kevin Howard’s word – that’s pretty lumpy depending on the activity that occurs during the quarter, but I guess it, like all other credit trends, we would expect to follow credit overall on a downward fashion over the year.

Stephen Alexopoulos – JP Morgan

Got you, that’s helpful. And just quickly, I know a lot of questions on TARP, but Kessell, when you see other banks like Zion’s getting permission to exit TARP without raising any additional common, do you feel better about your ability to exit without issuing any stock? And is it even an option to exit TARP before the DTA is recovered? Thanks.

Kessell Stelling

Sure, Stephen. Yeah, we love to see people get out in an efficient manner. If you go back to what I call the early days, it seemed like there was almost a 50% common equity exit tax, and we saw that early on. Of course, we’ve had a couple of common raises during this cycle. So yeah, when we see others, and we’ve looked and talked to both the banks and the investment bankers of many of our peers and competitors who have exited to see how they got out, the way they did; and so we’re encouraged by every efficient exit we see. I think in fairness, every case is going to be based on the individual facts and circumstances around the bank, but we did enjoy seeing that. And again, I think as we model this exit, I think it will be appropriate at the time that we’re ready to get out that we demonstrate current capital levels, current cash levels, current levels of problems. Hopefully by then, you have your DTA recovery.

You know, the question, I think, was are they—do they have to follow in that sequence? And they don’t. The DTA doesn’t have much immediate impact on our regulatory capital ratios. Our thought all along, though, has just been that the facts and circumstances which lead you to DTA recovery also position you well to have that TARP discussion. So they don’t have to follow that way. I still believe it’s likely they will. They could happen almost simultaneously, but we’ll just have to let that play out and update you all as we go there.

Stephen Alexopoulos – JP Morgan

Thanks for that color. Appreciate it.

Operator

Thank you. Our next question today is coming from Christopher Marinac. Please announce your affiliation and then pose your question.

Christopher Marinac – FIG Partners

Hi, good morning, it’s FIG Partners in Atlanta. Kevin, wanted to ask you about Slide 26 and the additional disclosure there. Is there a way to tie back a non-accrual substandard number?

Kevin Howard

We separate—these are just the accruing substandard loans. The non-accrual loans will be back on Page 22. That would be in the NPA chart. That’s the 836 million – that’s the non-accrual substandard loans.

Christopher Marinac – FIG Partners

Got it, okay. Perfect. And then is there anything double counted when you look at what’s on Page 24? I guess to some extent, 24 and 26 kind of correspond with each other, right?

Kevin Howard

Yeah, they do. We threw 26, that slide in there this time because it is hard to follow the pace of the TDRs, the potential problem loans, the substandard TDRs. So it was meaning to be helpful for you to just look at the total substandard loans that include a chart with substandard TDRs, and our point of that chart was really to show while TDRs with—certainly the wider net of identification of TDRs have gone up over the last few quarters, but our point here was to show that the substandard TDRs, the ones that we think people put in the non-accrual bucket anyway, here are the ones. And that pace has come down some 20, 25% over the last three quarters, so it is a combination of the substandard TDRs and the potential problem loans, and actually there is a little sliver – maybe 15 or $20 million – of loans that would be in the 90-day over list, and that’s only four basis points. So that also makes the math work. So if your math—if you add up TDRs, substandard and potential problem loans, and then you also have to add that other little column to get to the 1.65 billion.

Christopher Marinac – FIG Partners

Okay, I follow. Thanks for that. And I guess it looks like reserves are still consistent relative to that total, that larger pool that you’re talking about too, which I guess is worth paying attention to over time.

Kevin Howard

Right.

Christopher Marinac – FIG Partners

Very well. Thanks guys. Appreciate it.

Operator

Thank you. Our next question today is coming from Jennifer Demba. Please announce your affiliation and then pose your question.

Jennifer Demba – SunTrust Robinson Humphrey

Thanks – Jennifer Demba, SunTrust Robinson Humphrey. Good morning. Revenue growth is still obviously a big struggle for you guys and the rest of the industry. Assuming you do have to push harder on core expenses, Kessell, where do you think the most opportunity is for Synovus? Is it further branch rationalization, or some other area?

Kessell Stelling

Well, it’s a big combination. I mean, certainly branch rationalization is key, and that is ongoing. D. and his team continue to look at the footprint for proper positioning for all of our branches. As you all know, we closed over 30 last year, and the effort to make sure that they’re not only positioned right but staffed right is ongoing, so that would certainly be part. But I don’t think that would be unusual to this year. That would be part of our ongoing strategy. I think Tommy might have touched earlier on opportunities in corporate real estate, procurement, and others. As the problem loans decline, we’d certainly have an opportunity to either reduce the amount of resources that are allocated to that effort, or turn those resources, which in many cases are our most talented bankers, back into revenue-producing opportunity.

But at the end of the day, you usually get your biggest impact through headcount. This company has been through a very, very rigorous exercise and taken a lot of pain as we’ve reduced the headcount, but all of our leaders know and all of our team members know that if we don’t grow the revenue line – which we believe we will – but if we don’t, we’ll have to adjust the expense line accordingly. So again, in that effort, Tommy, Al Gula and others on our team have an ongoing effort to look at all areas of expense here; and as we can provide more color on that during the year, we will. But it’s a big combination of many of the things I just talked about.

Jennifer Demba – SunTrust Robinson Humphrey

Okay. Just a follow-up question – I know you have hired a bunch of new producers in the last year or so. You mentioned them earlier. Are you still recruiting in that?

Kessell Stelling

Absolutely, not just in specialty areas but across the footprint. Without stepping out too far, I know D. was involved in discussions yesterday about a team of bankers in a very core part of our franchise that I think are attracted to our way of banking and our way of treating customers and our way of doing business. So we tend to get more headline on the positions that we reduce, but we are continuing to recruit across our entire footprint, again, and not just in those specialty areas. Good solid core C&I bankers in markets that we have traditionally been very successful where we have no additional increase in support expense to add them, and certainly will impact the revenue line; and again, those are efforts that I know in one case, D. was working on last night as we were preparing for this call.

Jennifer Demba – SunTrust Robinson Humphrey

Thank you.

Operator

Thank you. Our next question today is coming from Ken Zerbe. Please announce your affiliation and then pose your question.

Ken Zerbe – Morgan Stanley

Sure – Ken Zerbe at Morgan Stanley. Just a quick question on the security gains – it looks like your AOCI has finally turned negative. I know you said that your balance sheet, or the bond portfolio repositioning is largely done at this point. How much unrealized gains are still embedded within the negative AOCI? I guess I’m just trying to figure out, is it possible to still see security gains going forward?

Thomas Prescott

Yeah, it’s a little over $50 million left in the portfolio, and obviously with the market moving around like it has, that’s a pretty volatile number. What we did in the quarter is took an opportunity to harvest a little of it while it was in a good place, but there’s a little over 50 million left.

Ken Zerbe – Morgan Stanley

Okay, and with that mentality, I guess we may possibly see some additional security gains, given where rates have moved recently?

Thomas Prescott

You know, as we’ve said, we’ve been through a lot of the portfolio and that activity is a part of ongoing, and has been in our history and so forth. But we believe that the majority of the repositioning is behind us. Don’t rule out some in the future, but the trend would be very much downward.

Ken Zerbe – Morgan Stanley

Okay. And then the other question I had just on the cash balances, I did—obviously they went down a fair amount this quarter. I know you said they rebounded a little bit since the end of the quarter, I think it was; but if we kind of map out the lower cash balances versus the runoff of your jumbo CDs, how much further are you going to be comfortable bringing down cash balances as the large CDs run off versus starting to take it out of securities?

Thomas Prescott

The actual dollars at the Fed went up during the quarter, although on average they were lower.

Ken Zerbe – Morgan Stanley

It’s probably average that I was looking at.

Thomas Prescott

But at period end they were higher, kind of following the deposit inflow. And we can manage the broker deposits and either turn them away as they mature or possibly begin at some point to reload some of them. But on the customer core deposits, we’re interested in them being our customer and us being their bank, so we have less control over that. So you do get some volatility there. I’ve said that the projected trend would be to continue to bring that Fed balance down. That was really our intention in the first quarter. A fortunate problem, I guess – having a lot of core deposit inflow – kept us from doing that. We’ve got about in the neighborhood of 300 million each quarter the next couple of quarter on brokered CDs that are running off. It’s likely that we’ll let many of those go out the door and manage it that way, and keep an eye again on loan growth to see what kind of liquidity need there might be in the near future. Just have to keep an eye on all the moving parts, but there is some room from where we are to bring that cash balance down. We haven’t externally put a target out there, but we have talked about directionally we were comfortable with moving it down.

Ken Zerbe – Morgan Stanley

Okay. All right, thanks very much.

Operator

Thank you. Our next question today is coming from Mike Turner. Please announce your affiliation and then pose your question.

Mike Turner – Compass Point

Hi, good morning – Compass Point. Just some follow-ups to earlier questions – it sounds like due to lumpiness in the excess liquidity, it’s hard to predict really what earning assets are going to do. But it sounds like with excess liquidity drifting down and some pressure on the NIM, is it kind of the expectation too that NII will drift down as well and then recover in the second half of the year as loan growth picks up?

Thomas Prescott

I think it’s reasonable that the net interest income—you know, the key component of it is the loan book, and so it will follow—net interest income will largely—you know, there’s other moving parts, but it will largely follow the loan trends and will recover as that recovers.

Mike Turner – Compass Point

Okay, thanks. And then also just to beat the dead horse on the DTA, if you could remind us, what’s kind of the expectation for the recapture from a regulatory standpoint? Is that quarters or years, and then also is there anything in a merger that would keep that from potentially being recaptured? I know a lot of it will depend on the composition of the acquirer and their profitability, but is there anything there that would keep that from potentially being unlocked?

Thomas Prescott

We believe on the Section 382 issue that you’re asking about that it is facts and circumstances on any deal; but in general, we think that there’s opportunity for that DTA to be enjoyed hopefully by us, but it could be enjoyed by others theoretically. On the other question, the regulatory side of the DTA, if we got the whole load of DTA back today, there would be a modest improvement – less than 50 basis point improvement in the regulatory ratios, and then that would have to play out over a period of time that we haven’t disclosed. But it would sort of amortize its way into the regulatory capital base over a period of time, really which would depend totally on the earnings forecast that’s out there that would be renewed over each period. So you get movement currently and a nice beginning, and then the rest of it will play out over a reasonable earnings period.

Mike Turner – Compass Point

Okay, great. Thanks a lot.

Operator

Thank you. Our final question today will be coming from Erika Penala. Please announce your affiliation and then pose your question.

Erika Penala – Bank of America Merrill Lynch

Good morning –BofA Merrill Lynch. I just had one quick follow-up question to Jefferson and Emlen’s line of questioning. If you had to redeem TARP today, how much liquidity at the parent is available to help with that redemption or repayment?

Thomas Prescott

Erika, this is Tommy. The parent company liquidity was obviously boosted by the debt raise. That really was not intended to singularly be the footprint of TARP repayment, but it is a way to plant your feet more solidly for your next move that would occur. There’s about $400 million in the parent company at the end of the first quarter, and a good bit of that for now is intended to be used to keep the coverage proper on the operating cash flow of the parent company. So for the most part, that strengthens the parent company, which is very important for TARP repayment, but there would be layers – meaningful layers – that would be on top of that, hopefully in the form of upstream dividends and whatever other access that we might open to add to it.

Erika Penala – Bank of America Merrill Lynch

And just as a follow-up, how much cash do you need to keep at the parent to keep two years’ worth of liquidity for funding commitments?

Thomas Prescott

Well, it’s roughly in the 260 range.

Erika Penala – Bank of America Merrill Lynch

Got it. Thank you so much.

Operator

Thank you. We have no further questions in queue at this time.

Kessell Stelling

All right, well thank you, Operator, and thanks to all of you for listening and participating today, especially to the analysts and all the members of the investment community who follow our company, to our shareholders who routinely call in to this call to follow our progress, to our customers and to our directors, officers and team members whose support has just been, as I’ve said before, inspirational to many of us here in Columbus through this cycle. That support is just so critical to our long-term success, so I thank you all.

This is a big week for our company. I was just going to mention to you all, certainly today’s earnings call is a big event, reporting on our third consecutive quarter of profitability. We have a Board meeting tomorrow. It’s a very special one for our company. It will mark the retirement of three directors from our company – Jimmy Blanchard, long-time Chairman and CEO and probably the man whose vision got many of us here and was responsible for so much success; Richard Anthony, my predecessor, mentor and good friend, who guided the company through some very, very tough times; and then Bo Bradley, who’s chaired our governance committee I believe since inception and has been a very steady guiding hand on many of the Board changes that we have experienced over the last couple years. So to all three – they may not be listening – I just want to say to that group, thank you for your service and we’ll certainly miss you. We’ll have a shareholder meeting on Thursday where we’ll welcome two new directors – Steve Butler and Jerry Nix – and we’re excited about what they will bring to our company.

So we’ll enjoy the next couple days, but I just want to assure all of you that we won’t take our eye off the ball. We’ll remain laser-focused on everything we’ve talked about today – credit, efficiency, growth, and taking care of our customers. I think it’s obvious to us and hopefully to you all that our customer focus relationship-based brand of banking is working, as evidenced by growth in total accounts, core deposit growth, and by strong market share throughout our franchise, and further evidenced by recent national awards for excellence in customer service. So as I say often, after three years of pretty tough times, our franchise has come out of this cycle very strong, and on behalf of the entire team, just want to assure everyone that we are committed to and excited about the continued opportunities for success for Synovus.

So thank you all very much for participating, and hope you have a good day and good rest of the week.

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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