Welcome to first quarter earnings 2008 conference call for Synovus. (Operator Instructions) It is now my pleasure to turn the call over to your host, Richard Anthony, Chairman and CEO of Synovus.
I welcome each person who is participating in the call today. We have a different form of presentation than normal and that I’ll be making a presentation covering the financial highlights which Tommy Prescott normally does, but we want to save some time for two of our bankers who are in the room with us with responsibilities for the Atlanta market and basically the West Florida market.
Now, Howard, our regional CEO in Atlanta, in a few minutes will talk about his perspective concerning the housing market in and around Atlanta. David Dunbar, who is our CEO of Synovus Bank of Tampa Bay, will talk about the real estate market down in his part of Florida. So, we hope that you’ll find their involvement to be informative and interesting. Tommy Prescott is here and will be participating in the Question and Answer session. Fred Green, as well, and Mark Holladay. So, we have our resources available as questions come from the group.
I’ll first say that we will be making some forward-looking statements that are subject to risks and uncertainties and some factors could cause our results to differ from these statements but those are set forward in the public reports filed at the SEC.
This storyline for the quarter as results were released early this morning, of course, is dominated by credit and that’s why we have our two bankers helping the ride more respective from on the ground and the two areas that I mentioned. But as you noticed, our income from continuing operations was $81 million, down 19.3% from the prior year. Dilute EPS - $0.24 down 19.9% from the first quarter a year ago.
We were very pleased to be participating in the VISA IPO. At a significant level, we had a total of about $56 million pre-tax and contributions are $34 million after-tax from that IPO. Incidentally, we do hold still $1.4 million of VISA class B shares, which if they were converted today and restrictions were lifted allowing us to sell those shares, we would have been able to realize $70 million. So, as you evaluate our capital position for the future, it’s nice for us to be able to say that we have that holding. We also still hold MasterCard class B shares which today have an unrealized value of $24 million.
The loan growth, sequential quarter basis was 9.4% overall. If you distribute that through various components, CRE was up 8.1% but the 1-4 family property categories declined 3%, meaning that the remaining CRE categories increased about 18.9%. Some of that increase is impacted by the fact that we are holding some of our income producing properties in the portfolio longer in that the secondary markets are really not allowing exits from bank portfolios like would normally be the case.
Our CNI growth was 12.3% for the quarter and our consumer loan growth was 5.1%. If you look at loans outstandings on a year-over-year basis, we’re up 7.5% with CRE being up 6%, CNI 8.2% and the retail consumer portfolio were up 10.1%.
I’ll shift over to the deposit side of the balance sheet. We ended the quarter in total deposits at $25.7 billion, which is up 2.3% from the prior year. Our core deposits remain challenging in an alley competitive market although we have improved in some respects on mix but we’re basically flat compared to year end ’07 and down 2% versus a year ago in that core deposit category. The sequential quarter comparison has been impacted by a seasonal decline in public money market and NOW accounts which are off $200 million.
The year-over-year comparison is impacted by a run off in our premium CD’s. Actions that are being taken in the company would include a modification of our incentive programs at both the bank CEO level and the producer, or relationship manager, level. So, we believe behaviors will be impacted and great emphasis, without a doubt, will be placed upon core deposit gatherings throughout the remainder of the year.
We have just initiated a couple of company-wide sales campaigns. One in the small business BDA demand deposit category. The other in commercial demand deposits with rewards being available for those who rise to the top in those campaigns.
We’re targeting certain segments that are deposit generators—the small business, the component of our prospects and customer base, not-for-profits; private banking is an opportunity; and CNI overall as we continue to have our middle market strategy at the top of our priorities should prove to be an opportunity for deposit growth.
The margin—we held our own basically given our estimate as we entered the quarter. The margin for the first quarter was 3.71%, down 15 basis points from the fourth quarter of last year. If you exclude the impact of credit cost, we would have 12 basis points from that period. Fed fines, as you know, did decline by 200 basis points. We have an asset since the balance sheet that we have modified to a certain degree with the [inaudible] swap programs that are constantly in place under our alcove strategy.
The income--$140 million for the quarter, a splitting base of $101 million. Service charges on deposits showed signs of life from a contribution standpoint, up $2 million, a 7.7%. Analysis fees are up $1.6 million or 44%. NSF fees are up 4%.
Financial management services are an area with some success stories in it. Total revenues up 20% versus the previous year. The customer swaps that we are now able to place to manage risks for those customers has generated considerable income compared to the past through our capital markets group. And our brokerage business continues to be strong, on having done much better since we transferred the management and really the ownership segment of producers into the banks.
Mortgage revenues up 12.9%. Mortgage continues to a be a clean and profitable operation for us, not making a heck of a lot of money but we’re proud of the mortgage group because they have avoided some of the pitfalls that others had to navigate through.
On G&A, $201 million total, which was up 3.4% compared to the previous year. If you strip out the reduction and the VISA litigation accruals, G&A expenses were up 12%. I’ll give you a little color around that.
Other operating expenses increased $13 million, or 24%, due to the disposition of other real estate costing or creating a loss of $7 million. FDIC insurance, premium costs being up added $3.7 million to the expense base.
And then, the increase in both salary and occupancy expenses both had been affected by the addition of 15 branches since a year ago. Think if you look at our expenses on a sequential quarter basis, excluding VISA, the G&A expenses are up $8.4 million. Now, at first glance you see salaries and other personnel expenses are up 12%, $12.7 million, but $8 million of this is due to the fact that we reversed, in the fourth quarter, some incentive accruals that we were unable to justify pay. So it lowered that base.
And then $3 million is due to high employment taxes with our FICA seasonal increase. $2 million is due to a different mix of employees and [inaudible] been demographics have affected health insurance costs $2 million more there.
But overall, keep in mind as you look at sequential quarter comparisons, our headcount in the first quarter increased only by 17 members, even though we opened four new branches. So, we managed headcount pretty effectively.
I’ll comment on credit before I turn the program over to Don Howard and David Dunbar. The biggest mad freak that is creating a tension and we’re certainly aware of the need to work this done is our non-performing assets, a percentage which was at 2.49% up pretty sharply from the 1.67% at the end of last year.
MPA’s increased by $236 million with increases of $173 million in non-performing loans, $42 million in impaired loans held for sale which is an indicator of our proactive dance on that category, and then a $20 million increase in other real estate.
Atlanta is where the bulk of this occurred. $145 million increase in non-performing loans there. The only migration beyond the containment that we’ve been describing, which has to do with Atlanta and the West coast of Florida, is that we did have some weaknesses that we addressed in Myrtle Beach—in that market where non-performance were up $30 million. 73% of the increase in non-performing loans within the 1-4 family properties category.
Charge offs—95 basis points, up slightly from the 91 basis points for fourth quarter of ’07. The dollar amount was $64 million. The breakdown would be $28 million in West Florida including the $21 million in charge offs on loans that are in the process of being sold. Atlanta—$18 million, Myrtle Beach—$4.8 million.
The provision expense was $91 million, which exceeded net charge offs by $27 million. Our reserve ratio ended the quarter at 1.46%, up 7 basis points from the end of last year. Past dues, if you look at the 90-day and still accruing category, we were at 16 basis points compared to 13 at the end of the previous quarter. And total past dues were up from 1.02% at the end of last year to 1.39% at the end of the quarter.
So, in summary credit weakness is certainly our top priority to tackle. It is a major part of our story. It is largely concerned to the Atlanta market. To a certain degree, of course, to West coast of Florida and Myrtle Beach, as I said earlier. We are confident that we continue to be proactive. We have plans to dispose of these distress assets using techniques including options, [inaudible] portfolio sales, and [inaudible] engagement.
So I’m going to stop. I’ll come back after Don and David speak to the audience with a couple of other subjects before Q&A, but we do think you’ll be interested in hearing from these two gentlemen. First, Don Howard.
Thank you, Richard. The Atlanta is the largest market in Synovus’s footprint. The MSA area consists of 28 counties with more than 5 million in population. It is a diverse market with a lot of price points. There are pockets of weakness, as well as, pockets of strength within that total market.
As we’d mentioned before, our first sign of deterioration in the real estate portfolio are the Atlanta banks showed up in the south and the west areas of the city. In late ’07, we merged two of our banks that operate on the south side, and that being Pennington and Peach Tree City, in the Bank of North Georgia and that consolidation occurred in September of ’07.
We recently announced our intention to merge two of our banks on the west side of the city. Those being Carlton and Wesborough that have approximately $800 million of assets into the Bank of North Georgia. The application will be filed within the next 30 days and that’s pending regulatory approval. Once the approval is granted then we look to complete that consolidation in October of this year.
There were several reasons for moving toward a consolidation of the banks in Atlanta. Some of it was driven by credit; our model was driven by the depth of the resources and the skill set for the people in the credit administration area, the special assets area, and the risk management area back in North Georgia to assist these banks in the resolution of their credit problems. It also coincides with a business strategy that we’ve been looking at for a long time to the advantage of operating in Atlanta market under one franchise.
We at the Bank of North Georgia created a special assets area early this year just for residential real estate and has beefed that up with a number of skilled talented people that have operated back in North Georgia for a number of years, understand and have operated through previous plans in the housing market in Atlanta, and feel really good about their ability to bring about some results in short order.
One of the strategies that we’re using as an option, where we will dispose of most of the OREO that’s centered in the two banks on the west side of Atlanta. That option will take place in May of this year, which will help improve their MPA’s considerably prior to the consolidation into the Bank of North Georgia.
What we’re currently seeing in Atlanta is that for the past four quarters, sales has out paid starts, one of the trends that we were all looking to see. A total number of sales and starts though are significantly low a year ago as the volume continues to decline there. The velocity of sales continues to decline. The month’s supply of houses has increased marginally over the past year while the supply of lots has increased significantly. Our finished unsold inventory continues to increase and that is a trend that put more product on the market and competes with brief sales.
Generally speaking, the south and west parts of Atlanta continue to be the weakest areas, but there are pockets of weakness in all areas of the city to include the north side where we have our greatest exposure.
Looking ahead, we see an increase in foreclosures as our non-performing loans migrate to OREO, but we also see a decline in the pace of migration to non-performing loans that has started showing up as we entered the spring selling season. Prices have continued to hold steady with only marginal declines in the average sales price of the homes in Atlanta.
When builders sell their products, we are continued to get paid out in full on our construction loans. Now, the non-performing loans that are held by our builders are still working to help dispose of those, we in some cases, are asking them to bring in any offer to the table so that we can jointly decide whether to move out of those non-performing loans that keeps the builder whole and assist them in execution of sales.
Our builder group is reporting some slight increase in traffic as we enter the spring selling season. Our best assessment is that we’ll see marginal improvements in 2008 with more improvements in 2009. Our optimism is centered in the fundamentals that have been part of Atlanta for the last 20 years and that the expected continued population growth and job growth that Atlanta enjoyed.
The census bureau just released 2007 population growth estimates and showed Atlanta added 120,000 people in ’07, second only to Dallas. It’s the twentieth year in a row that Atlanta’s population has been in the top five cities in the country. Our local economists are forecasting 45,000 new jobs in 2008, which again keeps Atlanta among the top in the nation.
These fundamentals, we think, will help pull Atlanta out of the real estate crunch that we find ourselves in much faster than most parts of the country. That, coupled with the dedicated and skilled seasoned bankers that are dealing with our real estate problems, gives us reasons to think that we will be successful and address our non-performers as we move through the balance for the year.
The story in Florida is similar but a little different from what Mr. Howard referenced in Atlanta. Addressing the credit challenges, we will in fact merge in the Maples affiliate, which was first Florida bank, this weekend. We’ve been working on that for the last month or so and finally received regulatory approval from all agencies just this week. So we are merging that bank into Synovus’s Bank of Tampa Bay this weekend.
Primary reason for that is addressing the credit challenges that we had in that part of the world. With added strength of the talent of the resources—much like Don talked about in the Atlanta group—we got a credit administration; we got special assets folks; we got a couple dozens commercial bankers that can help provide the additional support that that team needs.
As Richard mentioned with that, we are packaging up a group of loans to try to expedite the reduction of MPA’s from that group. That package has been written down previously to a level that we think that the group that’s working on the disposition for us can have that back—earn that piece of our balance sheet back on it in June.
As to the rest of the west coast of Florida, it’s no secret. There’s a lot of press written about the overall market conditions of Florida real estate. Again, a little different from Atlanta, particularly in the lower part of Florida. You have a lot of folks that took advantage of investor-type properties. That’s what we saw in our Maples affiliate. We’re working through that with the sales of this pool of loans, but the investor-type properties create a little bit longer delay in terms of disposition of the assets.
In the Tampa Bay franchise, it’s a little different. Again, in that we have a couple of small finished lot subdivisions. We’ve got some land held for future residential development; a small golf course community project $15 million, which is probably the largest single asset we have in our portfolio. And those units are selling, albeit slowly and we’re getting 85 to 90% of the original asking price there, so we feel we’re in pretty good shape on that.
Our process for handling the sales, to handle the strategies to reduce the problems—we, again, like they did in Atlanta, first of the year established a special assets group, both locally and regionally in Florida, in anticipation of a need to address the reduction in MPA’s. Ours is staffed by a gentleman who has worked previously for me in another institution. He’s got twenty years of experience.
Interestingly aside to that is for the last five years, he’s worked on the other side of the desk, if you will, working for a national investment fund to buy pool loans from holding companies. He’s got the experience we feel that’ll be an additional help to us expedite reduction. The pool that I talked about earlier is currently being worked and we got 36 interested investors on that so we’re hoping that that’ll flow well for holding the price up on what we ultimately get.
The local activity in terms of sales and value—there’s been a lot of discussion on that—and a lot depends of the type of real estate that’s involved. The market is moving albeit slowly but again, it’s dependent on the type of property. I can give you one example where we actually foreclosed on a very nice golf front single family home in the Sarasota market. We had a $4 million loan and within ten days we got $4 million for it.
So that’s positive indication of values. At the other end of the spectrum, we got this abundance of investor-type properties and that lower southwest part of Florida. The supply is so great that housed in the $250,000 range may bring in $0.50 to the dollar. We’re, again, pooling those out.
Another interesting example in values—last week, the internationally in South Beach had a auction in the Sarasota market and they auctioned off $100 million worth of real estate, again, in southwest Florida. The type of properties that were being auctioned off and that venue ranged from very high-end golf front properties. One example where a lender put in a $9.9 million house and it sold at the auction for $8 million.
Again, at the other end of the spectrum, a small condo project in the lower southwest part of Florida was listed at $295,000, sold for $0.50 to the dollar. Again, it depends on the type of properties, but it is moving. In terms of what we think the future credit trends bold for our institution, we are tracking on a monthly basis. Have been for a while.
The condition of the portfolio—trying to monitor future deterioration, and I can say with confidence, we are seeing less new entering into that monitoring system, or new credit problems being reported by our frontline lenders. While we don’t think this is the end of the MPA cycle, I think the pipeline for future problems clearly slows. So, we’re feeling pretty positive about that.
David, thank you for the presentation. When you put it all together, I think anybody would acknowledge the difficulty that we have in predicting the credit outlook for the remainder of the year but we have put thought into that and certainly Mark Holladay and his team are running their models and doing their projections regularly.
Our best estimate today would be to take the charge off experience that we have for our ’07 and clear a range around that 46 basis points and say 91 to 95 basis points that we’ve incurred for the last two quarters, and to believe that we would be somewhere in the middle of that range but don’t hold me to that with a high degree of certainty because that clearly could change. It’s just our best estimate at this point in time.
And we are encouraged about some of the information that Don and David shared, even though they both have very challenging situations that we’ll continue to see for a while.
Before we open the call up for questions, I want to say something about two other subjects. One is a project, an initiative that we have undertaken here in this company that began three weeks ago. The name of this initiative is Project Optimus and it involves an idea generation process throughout our company’s 7,000-team member base that I am personally extremely excited about. We have a sense of urgency now that is unparallel with anything I can remember in the past.
To come out of this downturn in the cycle, stronger as a company than we entered it, which means we’ve got to be more efficient. We’ve got to identify every revenue-producing opportunity and we’ve got to improve the customer experience in every way possible.
We are using an outside advisor who has a proven process. Many of you would be familiar with that group, Harvest Earnings Group. I consulted with other companies before we selected them. The thing that we most liked was in the fact that this is our company process. These are our team members’ ideas. This is not an arbitrary top down benchmarking exercise that is predetermined as the work began. So, we’re optimistic.
We have right at 3,000 ideas that have already been generated. When the final stages of that front end idea generating process—we’re optimistic that significant bottom line improvements will come from this work. And the teamwork that we’re seeing as people from all parts of our company participate in this initiative is quite impressing. So, we wanted you to know about Project Optimus.
Quick reminder of one of our strengths and we think we have several that will serve us well through this difficult 2008, but capital. As a reminder, our Tier 1 ratio at the end of March was 9.05%, our risk-based capital ratio 12.43%, and our leverage ratio 8.96%. So, we are definitely determined to have the flexibility that comes from a strong capital position, not being placed in the position of having to raise capital and expensive or diluted costs.
That concludes the formal parts of the presentation. As I said, we have other executives in the room and I’m going to open the call for your questions at this time.
(Operator Instructions) Our first question today comes from Kevin Fitzsimmons - Sandler O'Neill.
Kevin Fitzsimmons - Sandler O'Neill
Was wondering if you could comment statement on statement in your press release about the Florida market becoming more stable over the last quarter relative to Atlanta. Now, just wondering if you could give a little more color on that. Is that more reflection of Florida improving or is it more reflection of Atlanta getting worse, or a little of both, and how you’re feeling in terms of what inning we’re in those two markets in terms of identifying the problems?
In a minute, I’m going to ask for help there, Kevin, but you’ve heard David’s statements. The world ‘stable’ or the term ‘more stable’ might not be the best choice of words because there’s still certainly in to be concerned about Florida, but the rate at which we are seeing huge problems emerge has definitely declined. And that is encouraging to us.
One compassion I would make is that if you look at the mix or real estate exposure that we have in Atlanta compared to the mix on the west coast of Florida, we just got a lot of builder subdivision activity in and around Atlanta. Much less though down the west coast. Although, a lot of loans, whether it be land loans or condominium projects that David mentioned or maybe a couple of subdivisions are still worthy of concern. It’s just not as concentrated in the same types of activities and volume that we see in Atlanta, but I think basically—David, you feel free to add to what I’m saying or Mark Holladay—but I think our statement has really to do with the fact that huge problems emerging are decelerated.
I think that the comment I made still hold true, Kevin, is that we still have some time to move through those things that we previously identified and previously [inaudible]. We got some time to get those off our books. As Richard indicated, I said earlier the pace of what we’re seeing is we look out to and definitely slowing and the other time is very true in our market. With this combined operation, we’re about $1.6 billion. We’re covering nine counties in the west coast of Florida, which represents about 4.5 million people, but we certainly don’t have the kind of construction activity and commitment to builder line. I think they do in Atlanta and that’s probably helping us both—those two types.
Kevin Fitzsimmons - Sandler O'Neill
I believe both Don and David both mentioned some pending sales or auctions. I think, Don, you mentioned in auctions suppose some OREO’s that’s coming in May but I think you were talking about the special assets has been working on a pool for that. Obviously the OREO’s within OREO but is the pool or loans—are that within the impaired loans for sale? If maybe you could just bring that all together for us. Like this quarter, what you see is teed up for potentially selling and getting out of the non-performing category.
Yes, Kevin, the pool of loans that we’re talking about is primarily Florida pools and it does show up as impairment loans held for sale. It’s MPA classification for us. It’s something that I think I mentioned in a previous discussion that we’ve been working on and we have put that together. We do expect about—I really hate to give you the exact number—we’re looking in the next quarter to move $50 or $60 million out of the OREO process. Some of that would be the Florida pool; some of that would be through the auction process that we’re working on in Atlanta, some additional activities that are taking place. We’re working obviously with our banks but we have special assets resources here at the holding company. We’ve got some really good strategies in place and believe we can execute on them.
Kevin Fitzsimmons - Sandler O'Neill
And should we expect more of these in the coming quarters or is this more of like a one shot deal out of what you have right now?
Well, we look very closely at the regions of our portfolios and put the strategies [inaudible]. We believe Florida is very manageable once we execute this strategy. We will be focusing on Atlanta a little more in subsequent quarters but we’re not anticipating anything this magnitude going forward.
Kevin Fitzsimmons - Sandler O'Neill
Could you comment on a little about looking ahead for the net interest margin? Obviously, we understand what contributes to the compression this quarter. Would we expect the continued pace over the next few quarters?
The net interest margin as Richard commented helped us relatively well given that the tremendous move made by the Fed during the quarter. We worked hard to position the balance sheet, not prepared for that day because we had anticipated the 200 basis points. But for rates declining in general, one of the factors in that decline that Richard mentioned was the credit cost that has built into the margin that’s now a full 20 basis points compared to 5 basis points a year ago.
We would expect that to get a little stronger as we cycle through the MPA’s and continue to have some migration in the interest reversals. But as far as the other parts of the margin, we still have a little bit of a rate decline occurring in mid-March. The very latest one occurred had not been totally absorbed. We would expect a little bit of [inaudible] in that and then obviously depends on goes on in the future with the rates.
Probably the biggest driver is somewhat unknown in the margin is really when is this marketplace going to rationalize on the comp to deposits. Even though when you see what’s going on with all the [inaudible] scurrying around on the same deposit dollar, the broker CE rates still turn in the local markets. And when and where that pressure begins to subside might be the key question, but all in all, we expect the base case to be a little bit more pressure from the latest round of [inaudible]. And then just working our way through the environment with all the other factors.
Our next question today comes from Kenneth Usdin - Bank of America Securities.
Kenneth M. Usdin - Bank of America
Could you just talk a little bit about the Myrtle Beach area? You mentioned that previously as an area where you’ve seen a little deterioration—there was obviously some incremental charge offs—but some type of color you’d give around the other two areas would be great.
Yes, the market data for Myrtle Beach is not that different from the Florida market, in terms of over pricing on condominiums. We were seeing about a 30% overpricing in that market. We ran and have assessed that portfolio. We have about $90 million in condominium exposure there. We believe that we have addressed their exposure issues that are problems for us. We’re not anticipating any more of that. A few other projects there with very strong bars and good traction. So we think that we got that pretty much addressed.
Kenneth M. Usdin - Bank of America
The company is obviously sitting on a very strong capital base and that’s obviously helping you in this tough environment. I just wanted you give us your update on capital management activity, if any at all, that we could expect either it be dividend activity, buybacks at all, and where you stand on acquisitions given the environment.
Buybacks are not something right now that would be in order for us. Acquisitions in 2008 are highly unlikely and I think that’s true throughout most of the industry. This capital being on our balance sheet is an expression of strength that we’re proud to point out, but it does help us bridge this abnormal period during which we’re paying, at this point in time, $0.68 per share annualized to what we believe—hopefully sooner rather than later—become a more normal earnings going rate for the company. So that the payout ratio can come back into our normal ranges. So, it’s being used to support the current dividend rate in a way.
Thomas J. Prescott
The multiple factors that go into that capital—precision earnings, growth, credit quality, current environments, the move to a market, rating agencies—we got to keep an eye on all of them, but as Richard said, we fortunately have a pass to weather through this cycle and keep watching it quarterly as we make any decisions about capital.
Our next question comes from Steven Alexopoulos - JP Morgan.
Steven Alexopoulos - JP Morgan
Can you size the exposure to Atlanta now for residential construction loans—maybe share LPV’s if you have them? And did you say the non-performing assets to decline in Atlanta from here?
Donald D. Howard
We don’t expect them to decline. What I said is that the rate of migration has slowed considerably from the first few months of this year. So, we’ll probably still see them rise a little bit but we hope our aggressive disposition strategies also start to kick in, but we’re taking it much out of the back side as it’s coming in the front side, and we can manage those.
To your other point, our total exposure in Atlanta for construction and A&D is approximately $1.4 billion, pretty much divided between 1-4 family construction and the other 50% being on lots held for builders and A&D loans.
Steven Alexopoulos - JP Morgan
Do you have average LTD’s in those by chance?
Donald D. Howard
Just out of normal underwriting and I don’t because on the performing normal underwriting—okay I do have it. 83.6% is the current loan-to-value on 1-4 family construction and 71.9% on residential development.
Steven Alexopoulos - JP Morgan
Can you guys talk about the big increases in CNI non-performers in the quarter and what markets or industries are really causing the problems there?
Our performing indicators are still good with CNI. Our non-performing loan ratio is 0.76 and our past due ratios 0.87, MPL ratio is 0.45. We did see an increase of approximately $29 million in that category for the quarter. About 40% of that increase is really in one model. It’s centered really in a performing leasing portfolio where the borrower that we have is having problems elsewhere outside of this particular loan. It’s well collateralized and we are expecting a very quick resolution to this and really are not anticipating a loan credit. That is a big piece of it.
Florida has seen some increase in their commercial past dues. Some of that is tied to housing but if you look at those relationships that are tied to housing in the CNI sector, our past due ratio’s running about 1.22%. So, we’re not seeing any kind of magnitude that causes us any concern.
Steven Alexopoulos - JP Morgan
For quite a few calls now, we’ve heard you talk about more focus on deposits. I’m curious what your expectations are of when we should start to see some improvements in deposit trends.
Well, I was somewhat surprised and disappointed that we didn’t have more deposit generations in the first quarter. And as you heard from our remarks, we have very quickly—even though the incentive program was in place—we have revamped it to depict more emphasis in the rewards that are available to deposits.
Starting last year, mid-year, the competition has been extremely intense and I think some might have heard me say that last fall in September or October, we decided in managing our margin to get out in front on deposit pricing and lead the way down in certain key markets.
But it became apparent after four to six weeks of that more conservative positioning that our competitors, regional and community banks, were not willing to follow. So, we had to adjust our approach and really become more competitive. We also, I think—Tommy you might speak to this—have adjusted to be more competitive in certain of these deposit categories.
Once again, as we look over our mix of products. Also, we have had single service and somewhat high cost CD’s roll of during the first quarter. Now, we’ve had to replace that somewhat with some wholesale funding. Some of that wholesale funding is in the money market category and I guess you could call it wholesale but it’s a pretty stable, fairly reasonable price source for us. But we clearly have got to push harder with deposits and you know the campaigns that are underway.
Fred L. Green, III
The key point would be the restructuring large incentive programs to not only the CEO of our banks but to the salespeople within the banks with heavy emphasis on core deposit growth and primarily the lower cost. That coupled with the intentional re-pricing of some of the single service CD’s we had built up last year running off kind of puts us in a position where we are now. But we do anticipate growth from there.
Our next question comes from Jefferson Harrelson - KBW.
Jefferson Harrelson - Keefe, Bruyette & Wood
I wanted to ask a question about the dividends. You comment a little bit but if you go to the higher end of your loss rate guidance if you will—hopefully we’re in the middle of that range—but at the higher end you are somewhere earning around your dividend for some period. You mentioned that the higher capital’s supporting the dividend. Could you just talk about your thought process on the dividend and the capital supporting? How you would go with earning at or about your dividend for some period of time, if we are on the upper range of the net charge off range?
Well, I don’t think we’re going to give you a definitive answer, Jefferson, but clearly you can appreciate that we will have an ongoing though process. This is a quarter-to-quarter evaluation. Tommy thinks about it a lot and sort of articulates his opinion to the board and the management team on a regular basis. We’ve got a number of variables that we’ll be looking at. Tommy, put it in your own words.
Thomas L. Prescott
Jefferson, as Richard said, there isn’t an exact time or an exact ratio we’re shooting for. We all know that overtime that a bank like ours would have a good payout ratio that would drop below 15% and it would continue to be a big loan generation in the future, maybe in the mid-40’s to low 40’s. We do have the luxury of some time to consider and to really see our way through the depth and the duration of this credit cycle. We’ll continue to evaluate it. We respect the capital account. Capital is king and it’s the key to shareholder value just like the dividend is for these decisions and to balance it out. It’s a dynamic process and we’ll keep updating you as we go.
Jefferson Harrelson - Keefe, Bruyette & Woods
Next time I’ll hope to get into your mindset there. One more question and then move on—as far as real estate goes, the [inaudible] properties, you’ve got some very strong growth there. Any comment on where that’s coming from and what strategies? Thanks a lot.
Thomas L. Prescott
We’ve done quite a bit of analysis. In fact, Mark and team have developed a top 5 in size [inaudible] of transactions that occurred in a quarter in each of the major categories. We couldn’t give you the names but that type of income in these properties are, in comment on what drove the growth—Yes, and I really do want to emphasize what Richard said before I get into the details.
There are really two dynamics occurring in the market. The first is the acquisitions in the past several years has going straight to the CMBS market if you look back at our growth over ’05, ’06 and the first half of ’07—we grew about 1.5% in that area and about 2% for the first half of ’07. As the CMBS market shut down some of that growth is accelerated. So, we’re seeing opportunities for our good customers who are acquiring properties and about 57% of our activity is tied to that kind of area.
The rest of the growth is tied to actual new construction. So we’re not out there generating a lot of new construction activities. It’s fairly normalized. Certainly, we’ve tightened underwriting requirements there. I just finished the review of the top 25 loans that we made in those income categories. I’m walking away feeling very good about it. Our capital requirements have ranged from 21% to 30% cash into projects. We’re stressing those properties to hold rates of about 7.5%. They all have good strong guarantors. The guarantors have good liquidity and we’re doing very careful global analysis on the customers.
The growth is really spread throughout those three, four or five sectors. We’ve seen some office warehouse, probably the largest area of activity; some hotels will probably follow second in line; and then some multi-family in retail. Our commercial development is down but those types of properties are really—that’s what’s causing the growth.
Our next question comes from Robert Patten - Morgan Keegan.
Robert Patten - Morgan Keegan
I just had a question regarding efficiency opportunities. You guys have combined some of the banks recently. What is your lookout for a couple years? How do you envision Synovus in terms of the structure of the banks? How many banks would there be and what kind of savings could you [inaudible]?
We’re emitting toward fewer charters since that we have made sense—the biggest opportunities have been in and around Atlanta and you know that story. Although, David Dunbar’s operations are down in Tampa. It really is a combination of four banks into one. There are some other opportunities we’re discussing internally.
We have had, I guess, recently 37 charters. We’ll be heading towards a number less than that but it won’t be 20. It’ll be something over 20 or 25. It’s an evolving situation with us. It’s not always driven by efficiencies but those do come. I can think of Don when the Riverside Bank and others have been combined into the Bank of North Georgia. We have typically enjoyed very dramatic improvements in headcount and efficiencies. But usually it’s based more on leadership, on market overlap and talent as much as anything.
So, we’re not departing from our model but we are moving towards a more efficient model. And we feel that we have to do that to retain the model. So, you can tell the rest where we’re headed. We’re not prepared to disclose all of the possibilities because some has not necessary been worked out but this is an ongoing discussion in our management leadership meetings.
Robert Patten - Morgan Keegan
You been running a few times in this cycle—would you say this cycle is worse than the ‘90, ‘91 cycle at this point in time?
I must speak to that personally and say yes, and for this company. Although there were some challenges in that timeframe in this company, we had some Florida bank problems that I can recall. But certainly, the residential part is definitely more painful as you can imagine. The rest of commercial real estate has not ended up at this stage as being a problem and we think because of examples like Mark just gave in underwriting, they got the cash flow covered the desk service coverage protection in those loans. But, yes, we would say for us it is worse, but admittedly we have a pretty high percentage of exposure out there in that residential sector. So, we’re being in that regard.
Our next question today comes from Kevin St. Pierre - Sanford Bernstein.
Kevin St. Pierre - Sanford C. Bernstein & Co., LLC
Richard, I expect there are some who are looking at your financial results and seeing a sequential increase in MPA’s on the order of 50% and are having a little bit of difficulty connecting that with an expected or likely range of charge offs that would appear to be implied sequential decline—if it’s going to be somewhere between ’07 and 95 basis points or so. What would be helpful, maybe Mark if you could explain to us or discuss with us which categories of the non-performing assets where you’ve already recognized losses through the income statement.
Yes, let me point out one thing, Mark. Some people fail—and you touched on it—so Kevin, you’re aware on it. But if you look at our MPA’s, most are in real estate. A very high percentage. Very high percentage of those loans has been impaired at the time they become MPA’s. So, if we’re doing a good job and we are conservative in our impairment process, the current MPA ratio should not be necessarily a drive for our future charge offs because those charge offs on those MPA’s have already occurred.
Yes, I would echo on what Richard said. We have a low scope for impairment in our company. It’s the relationship of the million or more. So a million dollar loan that goes on non-accrual gets immediate impairment treatment. What we do is our policy is to get that property fast immediately within the quarter and charge it off. So we charge it down to fair value less selling cost. We also go through that same process quarterly for that same MPL to determine if further impairment has occurred. So, 75% of our portfolio has had that treatment.
Kevin St. Pierre - Sanford C. Bernstein & Co., LLC
Okay, that would be the $334.5 million in note on the table?
I would think that’s $389 million is my number.
Kevin St. Pierre - Sanford C. Bernstein & Co., LLC
That’s adding a $334.5 and 42 points to impair loans held for sale, right?
Yes and in addition, our OREO gets the same treatment.
Your next question comes from Rob Rutschow - Deutsche Bank.
Rob Rutschow - Deutsche Bank
The first question I have related to Atlanta. I was wondering if you can tell us what the inventory growth and how things look like when you combine the foreclosures in the starts and less the sales, and if you can give us any idea of what the foreclosure pipeline looks like and what the monthly inventory are at this point?
I can tell you the studies that we look at include foreclosure inventories. So when we quote you numbers, we’re quoting bank sale properties, as well as, builder properties, as well as, homeowners. The housing inventory out in the market for Atlanta is 31,891 units. That’s about 11.2 months of supply; lots 148,000 units and that’s about a 68 month of supply. The foreclosure range—and I don’t know that I have that for Atlanta and those for Georgia—it’s running about 1 out of 351 houses. That’s actually probably improved a little bit, believe it or not, from where we’ve been in some months, but that’s one of the range of activity that we watch very closely. That’s going to be a trend in Atlanta. That’s one of the drivers of Atlanta’s recovery is some slowing in the foreclosure range.
Rob Rutschow - Deutsche Bank
So, I guess I’m also wondering if you could square for us. It seems like the month of inventory’s gone up and how that relates to the housing prices and then what have further declined in housing prices would mean in terms of MPA’s and charge offs?
Well, we continue to look at Atlanta. We haven’t seen excessive price declines and one of the reasons for that are the appreciation rates for years and years have been [inaudible]. If you look at the demographics for Atlanta and we do. We look at the dynamics of affordability, population growth—Right now, Atlanta is really underpriced for what it out to be selling for. So, our view on that is we’re not really expecting a significant price decline in Atlanta.
Rob Rutschow - Deutsche Bank
I was just wondering if you could give us an idea of what the OREO process were in the quarter and how that’s trended over the last couple?
The OREO cost was $8 million in the quarter and that compared to $12 million in the fourth quarter.
Your next question comes from Todd Hagerman - Credit Suisse.
Todd Hagerman - Credit Suisse
Richard, just one in terms of—you touched upon this earlier—just in terms of the balance sheet growth and the loan demand. Obviously, the loan pipeline, loan demand, has been pretty strong for the company a little over the last several quarters as balance sheet continues to grow on a pre-healthy cliff. You have the capital. How do you strike that balance, or that trade off, between the funding challenges you talked about, credit quality concerns you have in the company, and then just providing for that growth in terms of your loan officer policy?
The loan growth, Todd, was a little more than we expect and that’s why we have gone back and really studied and analyzed the mix of that growth and in particular the pricing of those transactions and where there’s the underwriting referred to this—mix of 25, I think that Mark mentioned. We’re keenly interested in the risk-based pricing that banks in our markets are taking and we’re watching closely what competition is doing.
There are some signs that it is not moved like the secondary market but there are some signs of more disciplined and more risks asserted into the pricing models that are being used. So, we’re becoming more disciplined both the CRE as well as the CNI on pricing. I wish it were moving faster but I can say that the first time in quite some time that pricing has firmed up. It also, as you point out, has brought into focus the funding side and the need there to keep our core deposits growth at pace.
We had a couple of excellent years in ’05 and ’06 and have had good success in keeping pace with our loan growth but clearly that there is no gap and has re-emerged over the last quarter. So we got to address that.
We also address it through the internal pricing that is charged for our wholesale funding allocations that are placed in the banks and are not able to generate funding on our own. And so, they have less incentive to price aggressively because their funding costs drop so the market forces internally would help, I think, correct some of this.
And we did adjust the incentives that we mentioned earlier for our producers, as well as, CEO’s but we need to get the growth slowed down on the loan side a bit and more closer to the mid single digits than the upper single digits and I think the incentives will have to copy some of that.
Todd Hagerman - Credit Suisse
In terms of the loan loss reserves, can you give us a sense of the provision this quarter and the reserves, maybe Mark, how much was tied to your impairment methodology, if you will, versus absolute growth within the portfolio and where do you stand at the end of the day in terms of unallocated?
About $57 million of the $63 million were tied to impairment. Part of that impairment was the portfolio held for sale at $21 million. The remainder was impairments of a new non-performing loan that came on the books. Our growth factor—we do have a growth factor of—and I believe the inquiries were about $2.5 million in funding for the reserves. And the remainder of the funding tied to migration in the portfolio.
There are no further questions.
I just wanted to thank each person who participated in the call for being with us. I thank each of your question and we’ll go back to work and stay in touch.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: email@example.com. Thank you!