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Synovus Financial Group (NYSE:SNV)

Q3 2012 Earnings Call

October 23, 2012 8:30 a.m. ET

Executives

Patrick A. Reynolds - Director, Investor Relations

Kessel D. Stelling, Jr - Chairman, CEO

Thomas J. Prescott - EVP, CFO

Kevin J. Howard - Chief Credit Officer

R. Dallis (D.) Copeland, Jr - Chief Banking Officer

Analysts

Steven Alexopoulos - JP Morgan Chase & Co.

Kenneth Zerbe - Morgan Stanley & Co.

Kevin Fitzsimmons – Sandler O'Neill & Partners

Christopher Marinac – FIG Partners LLC

Emlen Harmon - Jefferies & Company

John Pancari - Evercore Partners

Nancy Bush – NAB Research

Operator

Good morning ladies and gentlemen, and welcome to the Synovus third-quarter earnings conference call. (Operator Instructions).

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

Patrick A. Reynolds - Director, Investor Relations

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

Kessel Stelling, Chairman and Chief Executive Officer will be our primary presenter today with our executive management group available to answer all of your questions.

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

During the call, we will discuss non-GAAP financial measures in reference to the company's performance. And you can see reconciliation of these measures to the GAAP financial measures in the appendix to our presentation.

Finally, Synovus is not responsible for and does not edit or guarantee the adversary of earnings teleconference transcripts provided by third parties. The only authorized webcast is located on our website.

We do respect the time available this morning and desire to answer everyone's questions. We ask that you initially, you will limit your time to two questions. If we have more time available after everyone's initial two questions, we will be open the queue for follow-up questions.

And now I'll turn it over to Kessel Stelling.

Kessel Stelling – Chairman, CEO

Thank you Pat, and good morning everyone, and I want to add my thanks to all of you for joining and participating in our third-quarter earnings call. And again Pat said, I will handle the prepared presentation and our team is ready and able to answer any questions any of you might have at the conclusion of the formal presentation.

Well, story of the quarter, again, is our fifth consecutive quarter of profitability. And we're pleased to report that. Our net income available to common shareholders was $16 million for the third quarter of 2012 compared to net income available to common shareholders of $24.8 million for the second quarter of this year. And $15.7 million in the third quarter of 2011.

Net income available to common shareholders was $62.2 million for the first nine months of 2012 compared to a net loss attributable to common shareholders of $131.5 million for the first nine months of 2011. As we said in our press release, earnings driven by growth in pre-tax credit cost income. As you see on page four of the deck, we are pleased to report an increase in pre-tax pre-credit cost income of $4.9 million sequentially. We are also pleased to report net interest margin expansion of three basis points to 3.51%. I'll talk a little bit more about that later in the deck. And again, a reported sequential quarter total un-growth of $51.7 million. Net loan growth of $239.6 million; a major milestone for our company as we have been talking about reaching stabilization for many, many quarters and certainly pleased to see both reported and net loan growth for the quarter. And we'll talk about the mix and where a lot of that came from later in the slides.

On page five, as I just mentioned, our fifth consecutive quarter profitability. It's our fourth quarter where pre-tax pre-credit cost income have exceeded credit cost. If you'll look to the right, you'll see pre-tax pre-credit cost income of $112 million for the quarter compared to just $107 million the quarter before. And again, we'll talk about some of the components as we go along.

An increase in credit cost, $86 million compared to $70 million a quarter ago. As Kevin Howard mentioned on the last call, we do a semi-annual adjustment of our reserve factors. Those factors were $18 million less than last quarter. Other factors go into certainly the provision line, market-to-market cost, retail charge-offs, loan growth, providing for loan growth, which is a good pressure to have certainly as well as OREO costs, in-flow costs, disposition, and other. And again, Kevin Howard will be happy to take your questions on that as we go through the deck.

On page six, again graphically illustrating the expansion and our net interest margin, 3.51% compared to 3.48% last quarter, and 3.47% a year ago. Our yield on earning assets was down five basis points. The effective cost of core deposits down approximately seven basis points to 0.34%. So again, pleased to see the expansion in our margin. A lot of pressure there. Our team has done a great job to hold the line and actually provide a little lift there.

On page seven, great story about loan growth and a great story about loan mix. And I'll take them both. As you'll see at the bottom of the page, we had reported sequential quarter loan growth of $51.7 million. Again as I referred to earlier, a major milestone. That compares to a decline of $163.6 million a quarter ago. A decline of $402.7 million in the third quarter of 2011, so major movement there.

On a net loan growth basis, again that excludes the impact of loan sales, transfers to loan sale-for sale, charge-offs, and foreclosures. That net number was a positive $239.6 million for the quarter compared to a positive $29.2 million last quarter. And a negative $132.1 million in the third quarter a year ago.

As excited as we are about loan growth, I'm also pleased to report this continuing shift in mix that we have talked about and invested so heavily in. C&I and retail loans grew $212 million sequentially or 6.6% annualized. Commercial, our commercial loan pipeline continues to strengthen. And you'll now see that C&I and retail loans make up some 66% of our portfolio compared to 34% for the commercial real estate. And again, that was a target that we had set several years ago. We had set a target of 65%. We've now moved that mix north of 65% and pleased with the again growth and diversity of the portfolio.

We've had tremendous production around the system. But we've been talking a lot about our corporate banking groups. I'd like to highlight that on page eight. Continued growth out of that group, the group closed the third quarter with loans outstanding of over $1 billion at $1.11 billion. That's up $553 million from the third quarter a year ago. Just quarter-over-quarter, up $220 million, $222 million or 28%. Again, an area of our company where we have invested heavily. And that group has partnered with our line bankers throughout our footprint to generate some very positive results for our company.

On page nine, we talk a little bit about deposit mix, continued improvement in the mix there. Broker deposits declined $1.2 billion or 57.4% from the third quarter of 2011. And now represent only 4.4% of our total deposits compared to 9.3% a year ago. Our total deposits decreased $718 million versus the second quarter of '12 and $2.3 billion versus the third quarter of '11. That's primarily due to the plan reductions in brokered and time deposits. The sequential quarter decline also reflects a $212 million decline from a planned strategic reduction of a large demand deposit clearing account.

If you'll again look to the graphs, you'll see that the combinations of NOW/Savings money market non-interest bearing now represent about 78% of our total deposits compared to 69% third quarter a year ago. So again, improvement in the mix there. And we just got FDIC data out in the last week or two about market share. And we're really pleased that we continue to enjoy top five deposit market share in communities that represent about 80% of our banking franchise. So again, coming off several years of tough news and tough results, our depositors have been incredibly sticky and loyal to our company. And our teams have done a great job maintaining and actually growing market share in many of our communities.

On page ten, again, the continued decline in the affected cost of our core deposits, you'll see for the third quarter 34 basis points compared to 41 basis points a quarter ago. And 62 basis points just a year ago. So continued improvement again in our core deposit cost.

On page 11, I want to give a little color to our fee income initiatives that contributed to growth in core banking fees. And I'll try and break some of that out for you.

Number one, service charges on deposit accounts were up $1.7 million for the quarter or 9.2% from the second quarter of 2012. We continue to see great performance from our mortgage company. Mortgage banking income was up $1.3 million or 16% from the second quarter of 2012.

New fee income initiatives contributed approximately $3.6 million in additional core banking fees during the third quarter of this year.

I also want to highlight to help you reconcile the difference in the third quarter, we had a $944,000 loss from private equity investments, which are a part of our core operations. That compares to a $7.3 million gain in the second quarter of this year. So that will help you reconcile the variance in the reported number.

The third quarter of 2012 also includes a $6.7 million gain from investment securities sales compared to a $4.2 million gain in 2012. So that leads you to total reported non-interest income of $73.2 million in the third quarter compared to $76.5 million in the second quarter. But non-interest income excluding the investment securities gains that I just talked about and excluding the private equity investment gains, it was actually $67.5 million in the third quarter compared to $65 million in the second quarter of the year. So a lot of numbers there, but pleased with the components of our fee income that reflect the ongoing efforts of our management team and our bankers in the field to appropriately price our products and services. And while we continue to again, fill our loans and solidify our deposit base.

On page 12, I'd like to talk about expenses. We talk about it in great detail on every call. Very pleased that core expenses are down $11.6 million or 6.5% sequentially. Down $12.3 million or 6.9% versus the third quarter of 2011. You can see from the graph on the left, employment expense is down about $2 million. Head count is down 114 over the prior quarter.

Our total reported third quarter '12 non-interest expense is down $16.8 million or 8.1% sequentially. Down $31.1 million or 14% versus the third quarter of 2011. A lot of factors that go into this decline expenses, our team has been very diligent about continuing to take cost out of our organization through process improvement through efficiency of work groups. And we will continue to work diligently to drive the expense base down over the coming quarters as we have previously stated on these calls.

On page 13, we're pleased to report that NPL inflows declined for the sixth consecutive quarter, down 48.3% from the third quarter of 2011 and down 7.6% from the second quarter of 2012. The decline is in line with our expectations. And we anticipate this trend will continue. However as we've stated before, due to the elevated level of sub-standard credits and the composition of the accruing sub-standard portfolio, along with just our overall lower level of inflows, in any given quarter, the level of inflows could increase. But over the long term, again, we expect that this trend will continue downward.

On page 14, you'll see the continued steady decline of our non-performing assets. We ended the quarter, the third quarter with NPA's of $899 million compared to $961 million just a quarter ago. And compared to $1.164 billion in the third quarter of 2011. Our NPA and NPL ratios are illustrated in the top right. Our NPA ratio has declined from 5.71% in the third quarter of 2011 to 4.51% today. And our NPL ratio has declined from 4.34% in the third quarter of 2011 compared to 3.55% again at the end of the third quarter of 2012. So continued decline and we're pleased certainly to see that.

On page 15, our charge-offs are below 2% for the third consecutive quarter. Charge-offs of $96 million, 1.97%. I'll just point out that charge-offs are down 30.3% from the third quarter of 2011 and 38.6% year-to-date.

Our past dues on page 16 remain at low levels for any cycle. As we said last quarter, the .47% would be difficult to maintain. But we were pleased to see total past dues at .55%. Total past dues past 90 days, .05%. And again, we think this is a good sign, an indicator that our loan portfolio continues to heal.

On page 17, we've talked about improvement in loan growth. And we've certainly talked about improvement in loan mix. I want to talk a little bit about the improvement, continued improvement in our loan portfolio risk distribution. And that's graphically illustrated as you'll see on page 17. We ended the third quarter with total past credits of $16.573 billion. That compares to the same category of past credits last quarter of $16.2 billion. And the third quarter a year ago of $15.760 billion. That's an increase of almost 6% in the past credits of our portfolio. And while the past credits have increased, certainly the other categories I want to highlight the declines there. And special mention, the green part of our special mentions into the quarter, $1.494 billion, down from $1.642 billion a quarter ago. And down from $2.095 billion just a year ago.

Our accruing sub-standard loans ended the quarter at $965 million, down from $1.67 billion last quarter. And down from $1.375 billion the same quarter a year ago.

And then, our non-performing loans ended the quarter at $700 million, down from $755 million a quarter ago, down from $872 million just a year ago.

And I'll refer you to page 26 and beyond in our appendix for more detailed information on the overall improvement of my portfolio with later attention in detail on special mention loans, potential problems of commercial loans, TDR's, NPL inflows by geography, and much more data. And again, Kevin Howard will be happy to take questions about those slides or any other slides later.

On page 18, again, I call your attention to our capital position. Our capital ratios remain solid. I'll talk about the first three ratios as a group because they all three had a slight decline. Tier one capital ended the quarter at 13.23% compared to 13.35% in the second quarter. Tier one common equity ended the quarter at 8.73% compared to 8.80% in the second quarter of 2012. And total risk based capital ended the quarter at 16.17% compared to 16.31% in the second quarter of 2012. Those three ratios again, still strong , had slight declines. Primarily impacted by loan growth, which is again a good pressure to have as well as increases in unfunded commitments, which are not on our balance sheet.

We had increases in tangible common equity to tangible assets, 7.35% compared to 7.12% in the second quarter. And our tier one leverage ratio increased to 10.97% compared to 10.66% in the second quarter of 2012. So again, solid capital position and pleased there.

I now want to talk about our DTA evaluation and its effect on TARP repayment or its correlation to TARP repayment. And we've tried to be clearer than last quarter as we continue through this cycle. And so on page 19, you'll see that we evaluate the deferred tax asset valuation allowance position every quarter. And based on our analysis as of September the 30th, we continue to maintain a full valuation allowance against that deferred tax asset.

However, based on the improvement in core profitability, credit quality, and earnings projections, we now believe that substantially all of the DTA valuation allowance may be reversed as early as the end of fourth quarter of this year. And should be reversed no later than the end of the second quarter of 2013.

As we have said before, TARP repayment is likely to follow the DTA valuation allowance reversal. There are a number of factors as you know that could affect timing including our future performance and certainly, discussions with our regulators. But based on our view now of the deferred tax asset, the valuation, the timing, and our un-performance, we believe that TARP repayment will be as early as the second quarter of '13. But no later than the beginning of the fourth quarter of 2013.

As I've said before, that TARP repayment will come in the form of existing cash from our parent cash that we will dividend up from the bank to the parent with regulatory approval. And then any shortfall, again if there is a shortfall, we would access the capital markets to plug that gap. Again, the timing we believe is as early as the second quarter of '13, no later than the fourth quarter. The components of how we will deal with that will be clearer as we get further along in our discussions with our regulators and as we get clearer in our own performance over the next couple of quarters. And we will certainly update all of you as we can about our TARP plans.

So at that point, operator, I'll be happy to pause and we will open the floor to questions about any areas that I covered, or any areas in the appendix, or any areas that are not in our deck, but that are on the minds of our analyst community. So I'll pause now for questions.

Question-and-Answer Session

Operator

(Operator instructions). Our first question today is coming from Steven Alexopoulos. Please announce your affiliation then pose your question.

Steven Alexopoulos - JP Morgan Chase & Co.

JP Morgan. Good morning, guys.

Kessel D. Stelling, Jr. – Chairman, CEO

Good morning.

Steven Alexopoulos - JP Morgan Chase & Co.

If we look at the 220 million of loan growth and corporate banking on slide 8, how much of that growth was from participations and loan syndications?

R. Dallas (D.) Copeland, Jr. – Chief Banking Officer

[Break in audio] to other large corporate debt and the single-housing group.

Steven Alexopoulos - JP Morgan Chase & Co.

Okay, thanks. And secondly, Tommy, could you help us think about the tax rate after the DTA is ultimately reversed?

Thomas J. Prescott – EVP, CFO

Steven, it should look very much like the – a corporate statutory tax rate. It should be, you know, within a percentage point of that on a go-forward basis after DTA recovery.

Steven Alexopoulos - JP Morgan Chase & Co.

So around 35%, Tommy?

Thomas J. Prescott – EVP, CFO

Yeah, wherever the tax rates land, but that would be current.

Steven Alexopoulos - JP Morgan Chase & Co.

Okay. Thanks for taking my questions.

Operator

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

Kenneth Zerbe – Morgan Stanley & Co.

Yes, sure Ken Zerbe – Morgan Stanley. First question was, can you tell us how much the planned, I guess strategic reduction in the large demand deposit had in terms of the impact on [inaudible] this quarter?

Kessel D. Stelling, Jr. – Chairman, CEO

It actually had very little impact on them. This quarter it was a light quarter event and that alone will not have a big impact on the quarter going forward, because the [inaudible] were accounted. It isn’t something you could fund a long-term investment with or loans.

Kenneth Zerbe – Morgan Stanley & Co.

Okay, so negatives for this quarter and next.

Kessel D. Stelling, Jr. – Chairman, CEO

Right.

Kenneth Zerbe – Morgan Stanley & Co

And then second question, just in terms of expenses obviously you’re making good progress there, but is the level of core operating expenses this quarter something you can sustain, or is there anything unusual where we might see a pickup going into fourth quarter?

Kessel D. Stelling, Jr. – Chairman, CEO

Ken, I wouldn’t use the third quarter as run-rate, but I would say that the four quarters would be closer to the third quarter than the second. You know, we’re down $12 million dollars, so I’m [inaudible] onetime, one off situation that help that, but a lot of it is just from core and strategic activity on pushing the expenses down. So I would call it closer to where we are now than where we were a quarter ago, but really can’t guide it any further. We are just, you know, continuously pressing on that lever.

Kenneth Zerbe – Morgan Stanley & Co

Understood, that’s helpful, thank you.

Operator

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

Kevin Fitzsimmons – Sandler O’Neill & Partners

Sandler O’Neil. Good morning everyone.

Kessel D. Stelling, Jr. – Chairman, CEO

Good morning Kevin.

Kevin Fitzsimmons – Sandler O’Neill & Partners

Kessel, can you just dig a little deeper into how and why you feel comfortable giving a little more of a detailed timed horizon on the DTA evaluation reversal and the TARP repayment is?

You know, a big part of this is getting regulatory approval to be able to dividend up from the bank to the parent. Is some of this based on just conversations on that front, and you’re feeling more comfortable in getting some kind of sense that they are comfortable with it, a timeline, or is it just getting closer and this is really the timeframe that you expected a few quarters ago? Thanks.

Kessel D. Stelling, Jr. – Chairman, CEO

Yeah, Kevin thanks for the questions. Let me try and tackle all of that. I said to Tommy in the hallway before I left last night, the one thing about the timing – one thing that’s certain about the DTA timing is that it’s uncertain. But it’s been a continuing process for us, and it’s one that involves a lot of factors, as we’ve said. Continued credit improvement, continued confidence in our ability to forecast future earnings for sure, and a lot of modeling, and work with our accountants along the way. So, I would say our degree of confidence in the timing and our specificity about the timing would be based on just progress in that process. Progress in our modeling, and progress in our performance, and certainly conversations, detailed conversations with our accountants. At the end of the day it’s managements recommendation that would require the concurrence of our accounting firm, and they are with us along the way in this process, so our degree of confidence is certainly influenced by conversations with them.

Now, as that effects TARP repayment and our confidence that we can dividend cash-up, I know our regulators are on the ball. And so I would just say this, it’s always been a part of our plan that we would dividend cash from the bank to the parent ultimately repay TARP. One of what we knew was a key threshold for our company was that classified assets to capital would need to get below 50% to make that request and have reasonable assurance or reasonable probability of approval. We have made tremendous progress in that category as well, and have a high degree of confidence that that ratio will continue to trend down in the fourth quarter, and in quarters beyond allowing the capacity for the bank to dividend the cash-up to the parent.

So, it’s progress and it’s a lot of performance and a lot of conversations again with our auditors, and we again will – As I said on the TARP repayment, I want to be clear about that. It’s been a long journey and we are happy to be where we are today. But this next step will require certainly additional modeling and additional negotiations with all of our primary regulators to exit in a way that’s satisfactory to them, but it’s also efficient and satisfactory to all of our other constituencies.

Kevin Fitzsimmons – Sandler O’Neill & Partners

Great. Kessel, just on that topic, can you just remind us what level of cash you have at the holding company at this point, and of that amount how much do you view as really the portion that you’d want to keep on an ongoing basis to be able to handle any kind of servicing requirements you have?

Kessel D. Stelling, Jr. – Chairman, CEO

Yeah, we have about $371 billion cash at the parent right now, and we’ve historically maintained a two year operating coverage of cash. Of course as we repay TARP, that annual obligation goes down as well. So, I’m looking at Tommy, I don’t think we’ve been specific with guidance as how far down we’ll take that cash, but $371 today, and we can take that down further certainly as we exit the TARP program.

Kevin Fitzsimmons – Sandler O’Neill & Partners

Okay, thank you very much.

Operator

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

Christopher Marinac – FIG Partners LLC

Hi, FIG Partners of Atlanta. Kessel, I just want to ask about the balance sheet, would it grow at all in the next year? And also just your thoughts about getting any larger asset sales if those are available and if the pricing makes sense?

Kessel D. Stelling, Jr. – Chairman, CEO

Yes Chris. I mean we’re not going to declare a victory on the stabilization. Again, we were pleased to see the [inaudible] growth and certainly the large net growth. But as we continue to sell assets that will put pressure there and certainly we have the same concerns as many as our peers about the fiscal cleanup and just the economy in general. So, again we’ve said we think we had bottomed out this year, could there be a little more pressure, there could, but right now we’re cautiously optimistic that we can continue to see stabilization and long growth going forward.

As far as additional asset sales, as I’ve said before and really in every quarter, we’re in market with a number of assets and Kevin Howard, D. Copeland and team do a really good job of evaluating just market conditions and the economics of the offers that are out there. So, in any given quarter we certainly could accelerate, we’ve done it before, and again it would be based on just our thought on the economics of the transactions that were in front of us.

Christopher Marinac – FIG Partners LLC

Okay, so you’re opened to that if the pricing is there. I was more curious if the pricing has improved [inaudible] to change.

Kessel D. Stelling, Jr. – Chairman, CEO

We’re open, again any given quarter to that. I’ll look to Kevin about just his thoughts on pricing. Kevin maybe you could give a collar on what you’ve been seeing in the market there.

Kevin J. Howard – Chief Credit Officer

We’ve seen pricing at least stabilize on our disposition side. There’s a slide in the appendix there, I think its slide 32 that shows we’ve had some improvement on unpaid balance during the quarter. That can fluctuate, but at least have seen stabilization. There’s not hard process, there’s plenty of capital buyers out there. And as Kessel mentioned, we guided previous quarters $100 to $150 million. We’re already looking at avenues and opportunities to accelerate dispositions in effect of how efficient that would be. But we’re starting to see at least stabilization where our assets have been in places like Florida, Atlanta, and South Carolina, so that’s been helpful.

Operator

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

Emlen Harmon - Jefferies & Company

Good morning. Jefferies. So if we could just, Kevin, maybe touch on the direction, that provision going forward. I know last quarter you talked about just the reserves selling around – out around kind of 2% of loans over the near term. Does that still stand after you took a look at the reserve this quarter, and just post-review, just kind of any more comfort where that reserve goes longer term?

Kevin J. Howard - CCO

Yeah, a couple of things, as Kessel mentioned, you know, that bump we had in the total credit cost was the effect of the semi-annual factor update. But for that, we would have had a slight decrease, but going forward, you know, we do expect credit costs to continue to improve. That would be absent some acceleration in our disposition strategy, excluding that, we think they’re going to go forward.

We think the provision will improve. It’s good to see the ORE expenses move again in the right direction as it’s been working its way down. But we do expect, you know, we are getting near – me and Tommy have mentioned before on previous calls, that you know, we’re moving toward – as we move toward 2% and you know, there is a case, if we can continue to improve our special mention, our substandard assets and we make good progress again there this quarter that you know, you could see it move to 2% and it may be a touch below that right now. We want to obviously see our other credit metrics continue to improve and stay on that track. But you know, moving into next year, we are expecting, while charge offs, you can see, have been a little stubborn the last – we’re glad they got below 2% over the last two or three quarters. We do expect to see some positive direction there, again, excluding asset disposition acceleration, we except that to move more toward about 1 ½% in the middle of next year. So we’re going to see progress going forward in all of those columns, credit-cost columns.

Emlen Harmon - Jefferies & Company

Great. I think that addresses it. Thank you.

Operator

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

John Pancari - Evercore Partners

Pancari, John, at Evercore. A small question regarding the OCC guidance around the Chapter 7 bankruptcy. What was the impact this quarter on your reserves or any charge offs fiscally?

Kessel D. Stelling, Jr. – Chairman, CEO

Your question [inaudible]. We couldn’t hear you. Can you repeat it?

John Pancari - Evercore Partners

Yes. My question is around the OCC guidance around the Chapter 7 bankruptcy. What was the impact this quarter?

Kevin J. Howard - CCO

[Inaudible]. I think the question, I think, it was hard for us to hear. This is Kevin. It sounded like around the OCC and what affect that may have had. Is that correct?

John Pancari - Evercore Partners

Right.

Kevin J. Howard – CCO

Okay, good. You know, it came out fairly late in the quarter, the OCC guidance that we received. We’ve done [inaudible] over that in the last couple of weeks and based on our understanding of the guidance, there’d be very little impact, if any on new NPLs, provision or TDRs. And so that’s our study of the guidance we got.

John Pancari - Evercore Partners

Okay, and the separately on the deposit costs, this quarter it’s declined 10 dips to around 54. How low can that go going forward?

Kessel D. Stelling, Jr.

John, I say that the – we had a good run on moving core funding down. You know, it’s about a third of what it was two years ago, you know, based on the low level of landing in the third quarter, and really, the fact that loans are growing and we’ll be more interested in maybe adding some funding. I’d say that we’re fairly close to the end of being able to move the deposit costs down like we have.

John Pancari - Evercore Partners

All right, that’s it for me. Thank you.

Operator

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

Nancy Bush – NAB Research

All right, NAB Research. Good morning, guys.

Kessel D. Stelling, Jr. – Chairman, CEO

Good morning.

Nancy Bush – NAB Research

A question for Tommy. Tommy, could you just remind us now that we’re sort of looking at reversal of DTA within the next few quarters, how does sort of the mechanics – how it finds its way into the regulatory capital and you know, how quickly this would be recognized, would it be recognized over a number of quarters or all at once? How does this actually happen?

Thomas J. Prescott – EVP, CFO

Yeah, Nancy, great question. On day one it’s, you know, it blows through the income statement as a negative tax expense in a positive way through the tax line. That immediately falls into tangible common equity, you know, we’re 300 basis points, pick up, just round numbers in the improvement here, the out-of-the shoot regulatory ratio impact is more modest and takes more time and without being too prescriptive, just call it, you know, a little less than ½ a percentage point movement on the key regulatory ratios. As you progress, and you know, your balance sheet changes, your earnings and performance changes, then that would expand and it would literally, you know, tell you certainly, you know, we’ll just call it several years to gain the whole impact of it. And it really just depends on the earnings trajectory and then, you know, what’s going on with the balance sheet. But modest impact going forward but it grows every quarter.

Nancy Bush – NAB Research

So does it find its way into tangible book value immediately?

Thomas J. Prescott – EVP, CFO

Yes.

Nancy Bush – NAB Research

Okay. The second question, also for you, Tommy, the other expenses which came down, you know, were the big decrease this quarter, are there significant sort of consulting, you know, slash professional fees in there or are those going to be, you know, coming down over time?

Thomas J. Prescott – EVP, CFO

Well, we hope it’s all coming down over time in the quarter, I guess we had the movement in employment expense and some of that’s, you know, is sustainable as we continue to push on that lever. We had productions in travel, telecom expense and some of the discretionary spend. So some of it is sustainable, some of it, you know, is more events within the quarter, but – actually, you know, just about every line in the G&A category of any sort of meaning moved down and you know, we’ll continue to manage the professional expenses you’re asking out to the best of our ability.

Nancy Bush – NAB Research

Okay. I was just wondering about, you mentioned – Kessel mentioned modeling as being something, you know, that you’re getting better at and I’m wondering, is that an internal process or is that being done with external folks?

Kessel D. Stelling, Jr. – Chairman, CEO

It’s actually both. We, you know, we landed some internal talent and borrowed some external talent to rack that up and it made big improvements in it.

Nancy Bush – NAB Research

Okay, great. Thank you very much.

Kessel D. Stelling, Jr. – Chairman, CEO

Thank you.

Operator

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

Kessel D. Stelling, Jr. – Chairman, CEO

Okay. Well, thank you Kate, and I want to thank all of you for participating in the call. Just to maybe sum up our quarter results with the obvious, our fifth consecutive quarter of profitability with some significant reductions in expenses, some margin expansion, overall credit improvement, loan portfolio growth and growth in our pipeline. And again, strong market share in markets across our footprint. So I think the takeaway there is we’ve come through this cycle as a strong, healthy franchise and excited about the days ahead.

I want to thank, again, all of you for participating. I want to add a special thanks though to the many team members we have on this call who have persevered and stuck with this company through some very tough times and continued to serve our customers with a passion every day to our Board members and affiliate directors who again are strong supports and have been rock-solid supports of our company through the crisis; to all of our customers who continue to amaze us with their loyalty and their support of our company, and then to the many shareholders who are on this call, I’m just assuring all of you that our team is passionate as ever and as energized as ever to know take this company through the next couple of big events, which would include the recovery of our deferred tax asset, the repayment of our TARP obligations and growth and success in the future. So thank you all and I hope you all have a great day.

Operator

Thank you, ladies and gentlemen. This does conclude today’s conference call. You may now disconnect.

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