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Executives

Richard Anthony - President and CEO

Tommy Prescott - CFO

Analysts

Steve Alexopoulos - JPMorgan

Tony Davis - Stifel Nicolaus & Company

Jennifer Demba - SunTrust Robinson Humphrey

Kevin Fitzsimmons - Sandler O'Neill & Partners

Christopher Marinac - Fig Partners

Scott Valentin - Friedman Billings Ramsey

Chris Foster

Adam Barkstrom - Sterne Agee & Leach

Ken Usdin

Wilson Yeaghley

Synovus Financial Corp. (SNV) Q2 2008 Earnings Call July 24, 2008 4:30 PM ET

Operator

Good afternoon ladies and gentlemen, and welcome to the Synovus second quarter earnings 2008 conference call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for your questions and comments following the presentation. It is now my pleasure to turn the floor over to your host, Mr. Richard Anthony. Sir, the floor is yours.

Richard Anthony

Thank you very much. I want to welcome each of you to our conference call this afternoon to discuss our second quarter performance. We released our earnings and related information just, literally a few minutes ago, so, many of you probably have not had your normal opportunity to study the results.

But, I'll point out that the net income for the second quarter was $12.1 million, $0.04 a share. That was impacted by a goodwill impairment charge, a non-cash charge of $27 million. And, Tommy can have more on that later, if you wish. Tommy Prescott, our CFO, will be adding some color to these high-level comments that I'm making right here in this introductory part of our call.

Credit, obviously was the story for the quarter, as it has been for the past few quarters. The pattern that we experienced was very similar to the pattern that you have seen earlier this year, and late last year. Our charge-off experience for the quarter was right in the range of 1%, 1.04%.

This compares to 95 basis points in the first quarter of 2008. Our nonperforming assets reached a level of 3% in this harsh credit environment. I would say that the primary story continues to be the Atlanta impact that we're feeling right now. 46% of our increase of $111 million in the quarter occurred in Atlanta.

That has to do with nonperforming loans. And the Atlanta market represents 58% of our total nonperforming loans in the residential, construction and development portfolios. So, we want to give you a little guidance on credit as we look out into the future. We would anticipate for the remainder of the year our charge-offs remaining in that 1% range. We see our nonperforming asset percentage going up some, but at a slowing pace for the remainder of this year. So we've got a few more quarters of this difficult credit environment to work through.

I do think that we are definitely doing the right things in credit. At the top of the list would be the importance of having a good disposition strategy. We have had an auction in the quarter that we felt pretty good about, so we will schedule other absolute auctions, primarily for Atlanta properties, over the remainder of 2008. Now, I don't know the number, but we could have any as three or four of those, as we continue to study the benefits and the experience that we're getting from that particular technique.

We've had some note sales. We'll continue to pursue that particular option to reduce NPAs. And certainly, our ongoing work with our builders to create incentives for them to move properties works, but it doesn't generate the volume and the numbers that we think are necessary to really work down our nonperforming asset totals. So, the disposition strategy would be at the top of our short-term list of priorities.

And secondly, I want to mention Project Optimus. You have heard us talk about this idea generating process that began about three months ago. We have completed the assessment phase of that. The ideas that have come from this ground-up process with our team members is complete, and has resulted, I think in some outstanding enhancements for this company in the areas of efficiency, as well as general productivity and revenue increases. We will have more to say about that by the end of August. We are finalizing the numbers, the impact on the company, which clearly will be positive. When we have completed that work, we will have something to say publicly about that. And as I say, we anticipate that date being right at the end of August.

So we thank you for your continued interest in Synovus, its performance. We are excited about the long-term potential while recognizing that this difficult residential housing environment is making an impact on our performance at this point in time. Tommy Prescott, as I said earlier, is here in the room with me, and I'll ask him now to give his color on the results for the quarter.

Tommy Prescott

Thank you, Richard. I want to offer a few high level comments before we go to Q&A. First of all, a few comments on the balance sheet. The loan growth did slowdown, $330 million, or 4.9% linked quarter growth on an annualized basis, about half of the pace of the last several quarters, really as we expected. And the loan growth occurred in the categories you would expect, with shrinkage of about 1% in the commercial real estate categories, with most of the dollar growth occurring in C&I, and also some growth in retail.

We were also in the quarter, encouraged to see some linked quarter traction in core deposits. Core deposits ended the quarter at $21.4 billion, up $219 million, reflecting a 4.1% annualized growth, the first really fundamental growth we've seen in core deposits in several quarters. The growth came in time deposits and in BDA accounts, and we did have some runoff in money market accounts. But we focused a lot of attention on growing core deposits through our incentives and pricing initiatives and products, and we are encouraged to see some forward movement in this area.

The margin was 3.57 for the quarter, reflecting a 14 basis point drop during the quarter. The factors that impacted the margin, I guess in the order of impact would be the digestion of 114 basis point average prime rate decline in the second quarter compared to the first quarter, and also the funding cost pressure that's there as the result of the competition in our marketplaces and the higher cost of also carrying nonperforming assets and interest charge-offs, which -- that element of the margin rose three basis points during the quarter to a total negative carrier related to credit of 23 basis points, from 20 basis points a quarter ago.

Another factor that is kind of impacting the margin is that the loans that tend to go into nonperforming assets, non-accrual status, tend to be the higher yielding loans that have some downward pressure from that mix change. Just to comment on the margin, while we'd assume that we're done with the rate moves for the foreseeable future, we would expect to see some potential ongoing pressure coming from this very competitive southeastern deposit marketplace, and also from the credit-related margin impact.

On fee income, service charges on deposits are down 8% on a sequential quarter basis, and flat on a year-to-date basis. Really, what's going on there, we're seeing some pressure, as you would expect, on general fee category, with tendency towards low-cost or free checking, but we're also seeing some downward pressure in the quarter on NSF fees, which were down $3 million, about 16% sequentially. That appears to be a function of just lower activity, and we would assume has something to do with the economic incentive credits that are out there during the quarter. The analysis fees, as you would also expect went up in this interest rate cycle.

On a year-to-date basis, we had some growth in our financial management service revenues, up $6 million or 13%, driven by brokerage and customer swap fees. Mortgage revenue declined some during the quarter, $2 million, and that's a function of really the drop in production and the one-time pickup that we had during the first quarter that was incident to the adoption of the SAB 109, which requires you accelerate the way that you treat the service rights, about a $1 million swing.

During the second quarter, we also sold a portion on MasterCard holdings, which resulted in about a $16 million pretax, about a $10 million after-tax gain. G&A expenses, the sequential quarter decrease in salaries and other personnel is due to a reduction in accruals for performance-based pay, primarily bonuses, and to a lesser extent, the seasonal decline in employment taxes, which tends to be front-end loaded during the first quarter. We're continuing to work hard on managing the headcount. During the quarter, our headcount declined 56, even though we had opened two new branches, so, we're pressing everywhere on managing the headcount. And compared to a year ago, we are down 26 over that period, in spite of the fact that we've added 12 branches during that period.

The increase in other operating expenses, compared to the previous quarter, is primarily due to a $4 million provision for unfunded commitments. And this is an item that is really a reserve against our letters of credit and our loan commitments, and this is something that has been assessed forever, and it's typically been immaterial up until this point. But really, we are now reflecting the view that we think shows the migration that occurs, not only in the loan book, but the appropriate reserve that should be there for the non-funded commitments. We also had a $2.4 million civil money penalty that we paid to the FDIC in connection with a settlement related to the CompuCredit Affinity Agreement. So, there are some highlights. And Richard, I'll turn it back to you.

Richard Anthony

Okay. Tommy, thank you. We have Mark Holladay and Fred Green, as well as others, here in the room to help with questions. We thought on credit, rather than having Mark give prepared remarks knowing we will get questions, he will just help us out with answers during this Q&A session. So, let me open the floor at this for questions from the audience.

Question-and-Answer Session

Operator

(Operator Instructions). And we will take the first question from Steven Alexopoulos. Your line is live.

Steve Alexopoulos - JPMorgan

Hi, everyone.

Tommy Prescott

Hey, Steve

Steve Alexopoulos - JPMorgan

Richard, regarding the expectation for the nonperforming asset growth to slow, is this based on your view that the Atlanta market will stabilize near-term? I'm curious what gives you confidence that that growth rate is going to slow here?

Richard Anthony

Well, the growth rate is going to slow, but obviously, that doesn't mean the NPAs won't continue to increase, because Atlanta still has more to come. I think; to go back to some conversations I've had with our Atlanta bankers over the past week, in general, we have been somewhat disappointed with the selling season. It's not getting any worse, but it's just not picking up.

And, we see things in Atlanta continuing to be slow, until we get to the spring selling season of 2009. So, we're going to be dealing with more of these NPAs in Atlanta. But the trend is for lower percentage increases, and some of this prediction that I've made will have to do with our disposition strategy.

As we turn these properties over, through the auction process and continue to work with builders on incentives. So, we've got to work hard. We know more is going to be coming in, and we've just got to work hard on getting these assets turned.

Steve Alexopoulos - JPMorgan

Are you just saying, it will slow from the 20% or so increase you saw this quarter?

Richard Anthony

Yes, that's the feeling that we have.

Steve Alexopoulos - JPMorgan

In terms of just providing over the next couple of quarters, do you plan on building the reserve further, given that should slow?

Richard Anthony

Alright. We continue to have discussions about the methodology that we use in reserving. As I think you probably know, when our loans hit the NPA status, any loan that is $1 million or more goes through an impairment test. And 70% of our NPAs have been through that test. So we take a charge at that time, and don't reserve for NPAs because they have been impaired if they've been through that test.

So, the point I like to make is that the reserve itself needs to be paired against the remaining portfolio, excluding NPAs, because NPAs are impaired and don't need a reserve. So, the traditional coverage ratio that banking has used is not as important in this era of impairment. Now, I'll ask Fred or Mark if they want to add anything to what I've attempted to cover.

Fred Green

Just add that the provision expense is really more of a function of the risk migration in the performing portfolio. Some of the categories, the migration has slowed down. I would suspect, we would see some modest increase in the provision associated with that going forward, but not to the extent that we've had in the past.

Steve Alexopoulos - JPMorgan

And may be just one final question. Richard, with the 1% net charge-off ratio, it seems it's going to be difficult to cover the dividend. How sustainable is that, and what would make you change your view on the current level of dividend here?

Richard Anthony

Well, the dividend question, we know is there. We certainly are aware of what's going on with others in our industry. We're proud of our capital. We do have a good level of capital, and really a good quality of capital, without the hybrid component. But what I would say about the dividend is, we will continue to evaluate it, the level of payout and the appropriateness of our dividend on an ongoing basis.

Steve Alexopoulos - JPMorgan

Okay. Thanks.

Richard Anthony

Thank you.

Operator

Thank you. We'll take the next question from Tony Davis. Your line is live.

Tony Davis - Stifel Nicolaus & Company

Good afternoon. Richard, I really hadn't a chance to read through all of this, but I'm wonder if you could tell us what dollar amount of loans were sold or moved, disposed of this past quarter? And if you have any range, I guess of expectations that these three or four additional transactions could get you by the end of the year, perhaps?

Richard Anthony

Okay. Tony, I'm going to like to ask Fred Green to answer that.

Fred Green

I'll jump in, and then maybe ask Mark to add on to it. Tony, during the quarter, we had three different tranches. Two have closed, one has not. The two that closed, one was in the Florida Panhandle. Roughly $25 million in nonperforming loans were sold on an individual basis. We received a price of around $20 million. We will have to say that the nonperforming loans, as Richard said earlier, had been impaired. The original loan balance prior to impairment was $43 million. Relative to book balance, we got around 80%. Relative to the original loan before going into this past quarter, it was a good bit less.

In Atlanta, a second approach was to have an online auction of individual, single-family homes. They ranged in quality, size, price point and location. The net effect was that we sold around $13 million in other real estate that we owned there. We received right at 80%, 5% selling costs, around 75% net. That particular $13 million had an original loan balance of $13.6 million, so, again, very little impairment there, roughly in the 80% of the balance we achieved. Naples, which for us is a market that we've been discussing now for a year. We packaged all number of the single-family homes that were under foreclosure, and auctioned those to investors on a bulk basis. We received an acceptable offer, but it has not closed. It should close. I expect it to close any day now.

That, of course, was our most significant loss. We got about $0.80, again on the dollar that we had marked it down to, but we had marked it down quite a bit. The net amount relative to the original balance was in the 20's. But relative to the marked balance was 75%, 80%. What that says to me, Tony, is that that 20% discount, relative to book balance at that point in time after impairment, was a pretty good indication of the method in which we sold it, just bulk sales, auctions with no reserves, absolute auctions, and kind of told me that the marks that we were taking earlier were appropriate. It's the method in which we sold it.

Going forward, primarily in Atlanta, Richard commented about that, we've looked at the houses that were sold in this last auction, compared houses that we own today that are similar to those that had the highest amount. We've got an auction underway now. We'll continue with that process throughout the remainder of the year and hope to get good results there.

Tony Davis - Stifel Nicolaus & Company

Fred, again, can you give some idea of the scale, perhaps we can look forward to on these next several transactions, or is that still not yet defined?

Mark Holladay

Yes, this Mark, I'll answer that. We've got two auctions underway. One is absolute. It's got about a $23 million portfolio in it, and one with reserves that's about $8 million. We would follow-up with that, most likely, with another one the following month at about a $20 million plus level. That's pretty much our anticipation. As we own the property, we'll be moving it.

Tony Davis - Stifel Nicolaus & Company

Got you. One final question. Considering Jimmy Blanchard's resignation from their Board and Bill Jones stepping down from yours, I wonder what details you could give us on the seeming conflict of interest here, I guess, with Sea Island Company, and if you could give us any detail on that credit relationship?

Richard Anthony

Tony, what I would say is; Sea Island Company has been a customer for a number of years and a good one. We have a large relationship that really is easier to manage without Bill being on our Board. He had offered to really move off a couple of quarters ago, and they are certainly a good customer with a good relationship, but for us to work on some of their needs, with his being an insider, would have just really slowed us down. So, we think that it was best for everybody to eliminate these potential conflicts.

Tony Davis - Stifel Nicolaus & Company

Richard, finally, we shouldn't infer that deteriorating credit was a major factor here?

Richard Anthony

No.

Tony Davis - Stifel Nicolaus & Company

Thank you.

Operator

Thank you. We'll take the next question from Jennifer Demba. Your line is live.

Jennifer Demba - Suntrust Robinson Humphrey

Thank you. Good afternoon.

Richard Anthony

Hi, Jennifer.

Jennifer Demba - Suntrust Robinson Humphrey

I was wondering, if I could get some comments and color from Mark on credit quality outside residential construction development. It looks like you had some deterioration in C&I?

Mark Holladay

Yes, Jennifer. I'll just kind of take you through the past dues ratios. The consumer past dues overall were at 1.07 versus 1.08 last quarter. The commercial past due's were at 1.36 versus 1.43 last quarter. If you, kind of look at it by state, Alabama past dues commercial were flat, Florida was down $10 million, Georgia was up $5 million, South Carolina was down $7.4, and Tennessee was down about $1.6. Those are, really our lowest ratios since December '07.

If you look at it by type, there are areas that people are getting a lot of questions. Our HELOC past dues are 0.65. We did see some increase in the nonperforming and the commercial sector. They were up a little over $19 million for the quarter. We didn't see anything systemic, but in Tampa we had some, in the Tampa region, we had a few issues, and then in Georgia a few issues as well. But primarily, what we've seen as far as weakness goes is the automotive sector, as you know is a little weak. And we've had some retail, like convenience stores, things like that that we've had some issues with.

But overall, we're still pretty happy with where we are with consumers. We are also, as we've talked to you in prior quarters, following the C&I sector that's most closely tied to housing, those nonperforming loans are above the NPL average for C&I, but they are not bad, they are running about 1.7%.

Jennifer Demba - Suntrust Robinson Humphrey

Okay. Thanks for your help.

Richard Anthony

Sure.

Operator

Thank you. We'll take the next question from Kevin Fitzsimmons. Your line is live.

Kevin Fitzsimmons - Sandler O'Neill & Partners

Good afternoon everyone. Richard, I heard your comments about the slowing of the NPA growth and based on what you're seeing in the market. And, one thing I want to ask about, another CEO who is in your region made this commentary on their call today about how they're concerned that the property values are going to really go down at an accelerating pace when a lot of the small banks in the region start putting a lot more properties onto the market, that you're going to have this influx of supply, and is that something you are concerned about? What I'm trying to get -- my point I'm trying to get to, is the optimism based on just what you're seeing today and not taking that into account? Thanks.

Richard Anthony

Kevin, that certainly is a key question, and it would really center probably for us more around our Atlanta exposure. There is a lot of inventory on the market, and certainly we all need to be aware of what else could come into lot as well as the finished house inventory. Mark tracks that pretty regularly, and he's got a little data on it. So I'm going to turn to him to address that question and give you his subjective comments as well.

Mark Holladay

We've got a little broader view on housing and where we are in the cycle. We really look at a couple of things, home ownership percentages, the long-term appreciation rates and the inventory supply, and we see equilibrium. If you track the long-term trends, and what they ought to be, equilibrium for ownership, we believe will be about 67%. We are at, I think we hit a high of the about 69.7%. If you look at first quarter, ownership has fallen to 67.8%, and we think, we don't have the second-quarter number, but we think the ownership rate is about 67.5%. We do think that 67% range will end up in 2008 at about that range.

We've also looked at the trend on appreciation rates, and if you look at Florida for instance, the prices have dropped to a level to where the five year appreciation rates now are running at about 34%. That's about a 7% five-year appreciation rate. The peak-to-trough in Atlanta has been running on 8% to 9%. We think that will hold. Obviously, pressure from inventory will affect that in terms of banks pushing out product. But if you look at just the homebuilder, the raw levels of inventory, they're down 10,000 units from second quarter of last year to second quarter of this year.

One optimistic point that we've seen on lots, as this is the first quarter we've seen lots level off. I think they were up maybe 300 lots for the quarter. That's a really good sign. And the early stage delinquencies in mortgages is, really, we've got a low rate -- a very high rate on delinquency, but the 30-plus days are down in the 2002 levels. We think that's a good indicator. We'll follow that trend to see if that holds. And we think we may be coming closer to the end of the high rate of foreclosures.

So all of that factored together, we think we'll have to work off inventories next year for the first two or three quarters. But we're looking for some relief and improvement into '09 based on all those factors.

Kevin Fitzsimmons - Sandler O'Neill & Partners

Okay, great. Thanks. Richard, if I could just follow up real quickly with, there has been a lot of small banks started up recently in the Atlanta area. If some of those run into problems, what's your appetite for Fed-assisted type deals? Do you see that as an opportunity, or is your plate just simply too full right now?

Richard Anthony

Kevin, I don't see it as a big opportunity, but I'm sure we will be presented with opportunities like that, perhaps in Atlanta, perhaps in Florida. Have not so far seen much activity or push from that direction. Our presence in Atlanta is -- we're still finishing it out, but we are positioned pretty well up there. So, I don't think we have a huge appetite for franchises in that market, possibly, but limited.

Kevin Fitzsimmons - Sandler O'Neill & Partners

Okay, great. Thank you.

Operator

Thank you. The next question is coming from Christopher Marinac. Your line is live.

Christopher Marinac - Fig Partners

Hi good afternoon. I was curious, if you have thought about, sort of a global process for resolving problem credits, not just within certain markets, or are you still going to look at the local route, in general?

Richard Anthony

Chris, Mark can talk a little about it, but we've centralized a lot of the work that we do, or at least regionalized it. We've added some talent in the special assets area. There's a lot more coordination going on. We've created regional credit officers that are relatively new to our system. Some of them have been with us, but in their current roles, relatively new. So we're strengthening credit and special assets constantly in these times. I'll let Mark talk about the exact method that we use to communicate and make decisions on a global basis.

Mark Holladay

Yeah. Strategically, we've chosen to take our one-to-four family houses, and exit those at a very rapid pace. We've also chosen to do some Panhandle and South Florida sales through nonperforming loans, but we also aggregate other assets throughout the company. We've got a phone call with our special assets folks that happen multiple times a month, where we are talking about exit strategies and particular asset types and what avenues we ought to take to exit those. So, we feel like we've got a pretty good machine that works pretty well right now.

Richard Anthony

Chris, we obviously have to work with the banks to make this effective. But the shots are being called increasingly at the corporate level in order to really manage this disposition strategy.

Christopher Marinac - Fig Partners

Okay. And, I imagine that this has applications on the commercial side as well, and what the appropriate time?

Richard Anthony

Well, it does. But right now, that would be more just in the underwriting support and the approval process since -- the problems are pretty limited there.

Christopher Marinac - Fig Partners

Great. Thanks very much. I appreciate it.

Richard Anthony

Thank you.

Operator

Thank you. We'll take the next question from Scott Valentin. Your line is live.

Scott Valentin - Friedman Billings Ramsey

Good evening. Thanks very much for taking my question. I'm just wondering if the performance in NPAs is being maybe supported by also decline in delinquencies, if you're seeing that as well?

Richard Anthony

We did mention that we had a decline in delinquencies in the quarter. Mark, add a little color to that.

Mark Holladay

Well, that certainly helps because we look at every loan on our past-due list to determine whether or not it needs to be in a non-accrual status. But our gross nonperforming asset, as Richard has said earlier, the inflow was down about $45 million for the month. So that's a pretty good indicator for us that not only we're more aggressive on the exit side, but we have seen some improvement there on the inflow.

Scott Valentin - Friedman Billings Ramsey

Some peers have commented, too on conference calls that, with regard to the homebuilders, there's some concern that as we exit the peak selling season that there will be more weakness in the back half of the year in the winter. Is there any concern there that maybe this is a lull in terms of performance, and it will get worse?

Richard Anthony

I would just say that I don't really see -- there are some seasons, seasonality in the sales, but I don't think so, based on the prices that we're seeing out there in the marketplace. I think that does have some attraction to buyers. I think they're beginning to see buying opportunities. Certainly, sales are very attractive, if you use the auction process. Atlanta, we are seeing really end users coming into acquire those properties. We like the fact that it's not investor related, and it does demonstrate that there's some pent-up demand for homes.

Scott Valentin - Friedman Billings Ramsey

Okay. And one final question. On the portfolio growth, in the investment property category, I guess at page seven of the supplement, it looks like hotels and shopping centers are seeing, it's a small percent of the portfolio, still, but seeing rapid growth. Is that a reflection of the opportunity that competitors maybe have pulled back from those segments?

Richard Anthony

That's some of it, but about 60% of that growth draws on existing commitments. Maybe 40% of that is other growth following through on existing commitments that we've made to our customer base. We do expect that to continue to grow, not at the rate that you have seen probably over the last two quarters, because we're not out there soliciting those loans. Again, the CMBS market is not there, so what you normally would see would be a more flat growth because of the velocity of the exit, but we're not seeing that right now. But the portfolio looks good, it's holding up well, rates remain low and we think we've got a good portfolio.

Scott Valentin - Friedman Billings Ramsey

Thank you very much.

Richard Anthony

Thank you.

Operator

Thank you. We'll take the next question from Chris Foster. Your line is live.

Chris Foster

Thanks, Guys. Just a quick question or a couple of questions, can you give us some input on the delinquency on your second [liens], currently?

Richard Anthony

Yes. Well, our HELOC delinquencies are 65 basis points. If you break our portfolio down, 30% of those are first mortgage HELOCs, and about 70 are second. I don't have the data in terms of the breakout of those two, but we feel like that portfolio is doing well. I will tell you, we looked at last quarter's originations in the HELOC sector. We tightened credit requirements back in January. And we still saw some pretty good growth. So what we saw were the very highest loans, credit possibility that we could make, that we originated in the portfolio. We're very pleased with what was put on the books. Some of our competitors, I notice have had major problems with HELOCs in Florida. We have a very modest percentage. I don't know, Mark, if you have that percentage?

Mark Holladay

It runs at about the same rate as our portfolio size. It's about 16% of our portfolio. The originations we're putting on, though, are not in the coastal areas of the company.

Chris Foster

Do you track one-time delinquency rates within that portfolio? 65 basis points running, but in fact it's actually 3%, are kind of, always kind of delinquent, just not at the same time?

Richard Anthony

Hey, what we do is revalidate that portfolio two times a year. We did a revalidation on it in January. We are doing another one in August, that it looks that all those factors. It looks at any migration in credit scores, anything that would cause us any kind of concern. Our January validation looked excellent. We were very, very happy with it.

Chris Foster

January was a long time ago, unfortunately.

Richard Anthony

Well, we've got one more coming up here, and I think we'll be able to give you some color on that in the third quarter.

Chris Foster

Okay. On the construction side, you hear a lot about construction guys paying or continuing to pay, and being extended or being given lines of credits, kind of interest reserves to continue to pay, so it doesn't have to go to non-accrual status. Any breakout on the percentage of that right now? And do you have an internal watch list of guys who you think could potentially become a major issue? And what percentage of that is versus that portfolio?

Fred Green

Chris, this is Fred Green. Just a quick answer to that question. We, as a policy that is strictly enforced do not issue additional interest reserves for the purpose of keeping a loan current. I would not be opposed, though if some of our borrowers were to receive a line like that from one of the competitors. But we do not do that. If we have done it, it would be a result of receiving additional collateral with separate sources of repayment, and I could count them on one hand when that has happened, again, with separate sources of repayment and additional collateral.

Chris Foster

Alright. And then, do you have an internal watch list of guys on a percentage basis who -- we always hear its basis points, its basis points. But your concern - the worry is that, suddenly you'll wake up one day and you were actually concerned about 50% of the portfolio. What do you think the end charge-off will be I guess, on that portfolio?

Richard Anthony

That will ultimately depend on the migration that takes place in the portfolio. I'll tell you what we do every month, is we take every loan over $500,000 and look at it to determine if it's got the possibility of future migration, what the weaknesses are in it and track those loans on a very consistent basis. As far as accumulative loss in that portfolio, we are, I think right now looking at about a 1% run rate for the rest of the year, and most of that is in that sector of the portfolio.

Chris Foster

Alright. Just two quick questions. We keep hearing from, I guess, across the industry that the early stage or the front-end delinquencies have dipped down. However, spring tends to be -- or actually spring or early summer tends to be a period of higher liquidity for borrowers. And we did just give checks from the Federal government. Are you seeing that being -- is that the reason? Do you expect it to actually stick, or do you think it's real, I guess?

Fred Green

Chris, Fred Green. I'll just jump in and ask Mark maybe to add on. I think it will stick. I think the composition of our portfolio and the delinquencies would have very little to do with the government incentives. I think the impact we received on the government incentives probably was less overdraft fees associated with retail checking accounts. Again, we have very little permanent mortgages, on our balance sheet and a very small credit card portfolio. You can see on the breakdown and also from earlier questions and answers, you've got the detail on our home equity portfolio, all of which would be impacted by that.

Chris Foster

And this is the last question. Post IndyMac, sort of after the quarter ended, any material change in deposits? Are guys taking their plus $100,000 and taking some out?

Richard Anthony

I think, I would say, one thing that has benefited us regarding that particular issue, and let me just say, first of all, we do get a lot of questions about the industry and about competitors and strength of capital in our organization. And I think we do a pretty good job of answering those. But in our multiple charter system, we have three shared products that can spread the FDIC coverage out over our 35 affiliate banks. So we can offer a shared CD with full insurance up to $3.5 million, the shared money market account up to $3.5 million or a shared IRA appropriate high coverage.

So, we have really benefited from this product feature that probably nobody else in the country has because we would be the largest multi-bank holding company with the highest number of different charters in our system, and we're using that to our advantage.

Chris Foster

Perfect. Thanks guys. Tough questions, good answers.

Richard Anthony

Thank you.

Operator

Thank you. We'll take the next question from Adam Barkstrom. Your line is live.

Adam Barkstrom - Sterne, Agee & Leach

Hi, everybody. Good afternoon.

Richard Anthony

Hi, Adam.

Richard Anthony

Hey, Fred, just wanted to circle back. I missed something on the Naples sale specifically. You said from the original value of the loan, what was the discount? Or, what was the cents on the dollar for that?

Fred Green

This is --

Adam Barkstrom - Sterne, Agee & Leach

The Naples one.

Fred Green

Yes, I've said, I think 30%, I guess to be a little more specific, it was 29%.

Adam Barkstrom - Sterne, Agee & Leach

29% discount?

Fred Green

29% off of original note balance, 80% off of marked balance after we had taken earlier charge-offs.

Adam Barkstrom - Sterne, Agee & Leach

Okay. All right. Thank you.

Fred Green

And these, again, I'll just elaborate, these were notes that we sold as opposed to real estate.

Adam Barkstrom - Sterne, Agee & Leach

Okay, the notes that you sold, okay, which typically and generally have larger discount?

Fred Green

And sold in bulk instead of --

Adam Barkstrom - Sterne, Agee & Leach

Right, okay. Hey Tommy, we haven't touched on this, but I was curious, if you could give us just sort of the quick explanation of the goodwill write-off, kind of what the trigger points were for the quarter? And can we assume that that applied to the -- primarily to the Florida banks? Or, where did that goodwill emanate from?

Tommy Prescott

Adam thanks for the question. We conducted our, for our policy, our annual goodwill impairment testing, which we do in the second quarter. And of course, the impairment testing as of the end of June resulted in the $27 million estimated impairment of one reporting unit. The driver of the impairment was a decrease in market-based training and transaction multiples, and the reporting unit for which we recognized the impairment was more susceptible to goodwill impairment charge because of its relative level of goodwill compared to our other reporting units.

It's really not reflective of our feelings about that business or that unit, and we have not disclosed the actual acquisition that it was tied to, because we don't think it's actually tied to that outlook. I don't mind telling you that it's really not a direct -- it was not a Florida situation.

Adam Barkstrom - Sterne, Agee & Leach

Okay. Walk through one more time, sort of the trigger points for it. You said market-based --?

Tommy Prescott

Yes, I think everybody is, at a high-level aware of the process you go through here, but the drivers in the model that triggered this impairment were the decrease in, in really public data, trading data and the transaction multiples that are a part of valuing goodwill. And those were the things that specifically triggered the impairment in this case.

Adam Barkstrom - Sterne, Agee & Leach

Okay. Back to the Atlanta portfolio, I'm just curious, and I think you guys touched on this. But, certainly, within the outskirts of Atlanta, everybody is well aware of the residential construction problems. But curious as to why we're not seeing, or apparently we haven't seen yet or we haven't heard it reported, but along with that, these small retail strips that surround these things, many of them 20%, 30% occupancy rates. Why are we not seeing that stuff hit the problem loan categories yet in your opinion?

Richard Anthony

We are not a huge retail lender in Atlanta. It would be probably the -- we've done some big box stuff there with customers. The retail that we do have with some of the customers are extremely liquid and very high net worth in those sectors. Atlanta has been more of a -- I hate to say it, but more of a residential lender than they have been an income property lender. And, we continue to follow cap rates and occupancies all across the Southeast in all of our markets.

They're holding up well. Cap rates are up some from the quarter-to-quarter. I think we saw about a -- from a 0 to about a 0.5 point increase in cap rates based on property types. You know, overall occupancies have crept up a little, but they are not severe in our portfolio at all.

Mark Holladay

Adam, I would also add to that, the majority of our retail properties we've financed are credit-anchored as opposed to full of local tenants.

Adam Barkstrom - Sterne, Agee & Leach

Okay. And just lastly, one follow-up Mark. I know you guys have fairly minimal exposure to the coastal South Carolina market, particularly the Myrtle Beach market. I was just wondering if you could give us an update on your insight into that market.

Mark Holladay

Yes, we saw median prices for houses go up a little bit in Myrtle Beach. If you look at land sales in Myrtle Beach, I think, January through June, they're about 48%. They're cut by about 48%. Residential sales are down 30% and condo sales are down 36%. There's still weakness in the Myrtle Beach area. We do think that it still has some moderate overpricing, although we don't think it's severe at this point. We did take some losses in the second quarter on those condos that we discussed in the first quarter, and have written them down to what we believe will be a liquidation type value to be able to exit them pretty quickly.

Adam Barkstrom - Sterne, Agee & Leach

What kind of hair cuts do you take on those, specifically? Can you disclose that?

Mark Holladay

I don't have the exact data, but I can tell you that, in the charge-off category for South Carolina, if you'll give me just a second, I'll tell you what it was.

Tommy Prescott

Adam, while he's looking that up, just for clarification, the NPAs in the South Carolina market quarter-to-quarter went up $3 million, so very little movement. And it's also a fairly low level of NPAs relative to their portfolio.

Mark Holladay

Our losses on those condos ranged between 30% and 40%. If you look at South Carolina, our total net charge-offs for the quarter were $17 million. It made up a decent chunk of the charge-offs, so we think we've dealt with those.

Adam Barkstrom

Okay, thank you gentlemen.

Mark Holladay

Thank you, Adam.

Operator

Thank you. We will take the next question from Ken Usdin. Your line is live.

Ken Usdin

Thanks guys. Two questions, please. First question is, can you just give us an update to your point about taking partial charge-offs at the time you put larger loans on NPAs? Can you give us an idea of what the current partial mark is on your current book of NPAs and how that compares to last quarter?

Richard Anthony

We just had extensive discussion this week about that. Mark, you've got that answer. I don't want to quote it for you.

Mark Holladay

If you go back and look and at 2007, our impairments against our nonperforming loans for the year were around 20%. If you look aggregately into '08 and include the portfolio sales, those kinds of things, they have been running about 17.%, this year 17.1. If you look at what's on our books, primarily the Atlanta book, the houses, they are running, I would say around 10% right now.

Ken Usdin

But do you have an overall all-in number just against like the $820 million of NPAs plus OREO, about what percentage of that is already, what's charged off against that bucket already?

Richard Anthony

While they are digging for that, I believe, Mark that of the NPAs, the $800 million, 70% have been impaired.

Mark Holladay

That sounds right.

Richard Anthony

But, we have to include the entire $800 I guess in the denominator. We have $47 million charged off against the June '08 current NPAs. And those run - what are those 400 -- it's about 10%.

Ken Usdin

Okay, all right. Thank you. So, 47 against like the 500 something before OREO, you mean?

Richard Anthony

Well, the total impaired balance is 479.

Ken Usdin

Okay, all right. That's not the NPL number? You're talking about impaired loans, right?

Richard Anthony

Yes, that's the impaired amount. If you look at the reserves on non-impaired, it depends on the property type, but a one-to-four family on a substandard or non-accrual gets 26%.

Ken Usdin

Okay. My second question is about the margin -- the rate of decline, if at least in basis points of the margins are pretty consistent, and kind of like 10 to 15 basis points for the last few quarters. I'm just wondering at what point would you anticipate that rate of decline slowing, given all the factors that you had mentioned earlier?

Tommy Prescott

Ken, this is Tommy. I guess when you look at the factors that have made it happen in the second quarter over the first, the biggest one was the interest rate cuts, and I did mention earlier the additional factors, which include the cost of credit that shows up in the margin in the competitive marketplace.

We would assume that we're done with the rate moves for the moment. We would assume that we do have some potential margin compression issues that will continue to come from this very, very competitive deposit marketplace. And, additionally, you could see some more impact from the NPA book against the margin. We would expect in the next couple of quarters that you could have some continued compression, but at a lesser rate, certainly, than you saw in the second quarter.

Ken Usdin

Can you quantify at least how much the impact was from the rate cuts moving through, of the 14 basis point compression?

Tommy Prescott

Well, you take the three related to credit out of the 14 that leaves the 11, and out of that, the rate cut piece was the biggest portion of it. I'd estimate it to be about 7 basis points.

Ken Usdin

Got it. Okay, great. Thanks very much.

Mark Holladay

Thank you Ken.

Operator

Thank you. We will take the next question from Wilson Yeaghley. Your line is live.

Wilson Yeaghley

Thank you. A clarification on a couple of things. First of all, did I understand you to say you took a MasterCard gain here in the quarter of $16 million pretax, Tom after-tax?

Tommy Prescott

That's correct.

Wilson Yeaghley

Okay, and all the Visa transactions occurred in the first quarter?

Tommy Prescott

That was in the first quarter.

Wilson Yeaghley

The Visa was?

Tommy Prescott

The Visa was in the first quarter, MasterCard in the second. The good and the bad on Visa all happened in the first quarter.

Wilson Yeaghley

Okay. And, there was no bad, in a sense, associated with the MasterCard gain, right?

Tommy Prescott

No, there wasn't.

Wilson Yeaghley

That was just good old profits?

Tommy Prescott

Yeah, that’s right. And actually, when I mentioned the bad, there was actually a reversal of some of the litigation reserve in the first quarter that was booked in the fourth. So there was a net positive on Visa.

Wilson Yeaghley

Okay, good. You have mentioned building incentives, or incentives given to the builders, particularly, I guess in the Atlanta market. I didn't particularly understand it. I guess you were talking about some of them working properly, or could you help us with that a little bit? What are you doing there with incentives?

Richard Anthony

These would be the short sales, where we allow them to sell below the carrying value of the loan, and we don't access recourse to them as guarantors, to create an incentive for them to go ahead and sell below the loan amount.

Wilson Yeaghley

So no recourse to the builder or to the -- okay, to the builder, because obviously he is the only one. Okay.

Richard Anthony

We would waive it on an individual transaction.

Wilson Yeaghley

Okay. Help me here with a little of the auctions. You went to the auctions in Florida, Atlanta market and Naples. The bottom line on Naples was, it looks like it was about 20% of the original loan value was recovered. Did I understand it correctly?

Tommy Prescott

29%.

Wilson Yeaghley

Good, 29%. And on the Atlanta, all in, on those home sales, what was the percent recovery of the original amount?

Tommy Prescott

70%.

Wilson Yeaghley

70%, okay, good. And the Florida?

Mark Holladay

Florida, 47%.

Wilson Yeaghley

47% in Florida, okay, good there. The portion in NPLs of restructured loans -- what is that?

Tommy Prescott

It's almost zero. I don't have it with me, but it's a very, very low amount.

Wilson Yeaghley

It's a minimum amount?

Tommy Prescott

Yes.

Wilson Yeaghley

And the 30 to 89 days past due, do you have that number?

Tommy Prescott

Yes. The 90 day was 14, the total was 133. So, that would be 119.

Wilson Yeaghley

119, 30 to 89 days?

Tommy Prescott

Yes.

Wilson Yeaghley

Thank you very much.

Tommy Prescott

You are welcome.

Operator

Thank you very much. Ladies and gentlemen, we appear to have no further questions in queue. Do you have any closing comments you'd like to finish with?

Richard Anthony

We thank you for dialing in this afternoon. We continue to work on the priorities that you heard us talk about over and over again, and we look forward to keeping you informed. Certainly, within this quarter, we'll have some Project Optimus news, the details surrounding it there. So look for that right at the end of August. Thank you very much.

Operator

Thank you very much, ladies and gentlemen. This concludes today's conference. You may disconnect your lines and have a wonderful day.

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Source: Synovus Financial Corp. Q2 2008 Earnings Call Transcript
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