Synovus Financial Corp.
Q2 2013 Earnings Call Transcript

Published: 19 Jul 2013

[Operator:]

Good afternoon, ladies and gentlemen, and welcome to the Synovus Second Quarter Earnings Conference Call. [Operator Instructions] Now I would like to turn the floor over to your host, Director of Investor Relations, Pat Reynolds. The floor is yours.

[Patrick A. Reynolds:]

Thank you, and thank you all for joining us on the short notice for our call today. During the 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 team 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 risk and uncertainties, and the actual results could vary materially. We list these factors that might cause results to differ materially in our press release and in our SEC filings, which are available on our website. We do not assume any obligation to update any forward-looking statements as a result of new information, or other developments, or otherwise, except as may be required by the law. During the call, we will discuss non-GAAP financial measures in reference to the company's performance, and you can see the reconciliation of these measures in our GAAP financial measures in the Appendix to our presentation. Finally, Synovus is not responsible for and does not edit or guarantee the accuracy of earnings teleconference transcripts provided by third parties. The only authorized webcast is located on our website. We do respect the time available this afternoon and desire to answer everyone's questions. [Operator Instructions] And now, I'll turn it over to Kessel Stelling.

[Kessel D. Stelling:]

Thank you, Pat, and good afternoon to all of you all. So I want to add my thanks to all of you for joining us on short notice. And by now, I hope you got a chance to review both our earnings announcement that we released after the market closed today and also the announcement concerning our plans for TARP redemption and the capital actions associated with that plan. I'll refer you to Pages 19 and 20 in your Appendix. As we consistently stated, we believed that the major component of our TARP redemption would be from internally available funds. And I think you'll see that's the case as we've received approval to dividend $680 million from Synovus Bank to the parent company as part of our plan to fully redeem the approximately $968 million of TARP preferred stock. Additionally, as part of this plan, we've announced an offering to issue a $185 million of common stock as well as a plan to $130 million preferred stock offering. While I'd like to spend our entire call today discussing our announced TARP redemption, the fact that we've launched a securities offering requires that I keep my remarks on that topic to a minimum. However, I do want to share just a few thoughts on this with you now. Today, the announcement of our planned TARP redemption represents the culmination of our journey to return Synovus to a position of strength that we have discussed for some time. Over the last several years we've laid out for our shareholders, our regulators, our customers and our team members a very clear, deliberate and aggressive plan to return Synovus to sustainable profitability. This plan includes taking significant actions to strengthen credit quality, to stabilize and remix the balance sheet and improve operating efficiency, while investing in the talent and technology that will enable us to support growth and enhance the customer experience. We've said that the execution of the plan would lead to confidence and sustainability of our company's future profitability, as well as continued improvement in credit quality, and that the reversal of our DTA valuation allowance and TARP redemption would follow from that. As you know, we announced the reversal of the DTA evaluation allowance in the fourth quarter of 2012, and in today's announcement, regarding TARP redemption in the third quarter as the next step in the execution of this plan. We've engaged in a continuing dialogue with our regulators about the necessary steps that will enable us to redeem TARP since the return of profitability in the third quarter of 2011, all of which have factored into the execution of our plan to improve credit, to decrease operating expense and strengthen our capital position. Over the past 18 months we have carefully considered the mix of fund we intend to use for TARP redemption in light of assessment of our capital needs, liquidity, regulatory expectations and growth in the future. The size of the offerings announced today is based on discussions with regulators and management assessment of the appropriate levels of Tier 1 common equity, Tier 1 leverage and other capital ratios. Our Tier 1 common equity and Tier 1 leverage ratios pro forma for the offerings and TARP redemption would be 9.74% and 8.72%, respectively. Following the offerings and the planned redemption of the TARP preferred stock, we believe that our solid capital position will provide us the flexibility to grow our balance sheet, as the economy continues to improve and capitalize on future strategic opportunities. Currently, the TARP preferred stock, including dividends and accretion of discount, reduces net income available to common shareholders by approximately $59 million per year. After TARP redemption, the annualized benefit from the elimination of this cost, net of the impact of the above transactions to be undertaken to facilitate the redemption of TARP is expected result and a net increase and diluted earnings per share of approximately $0.04 based on annualized 2Q'13 earnings. I'd also note that after we redeemed the TARP preferred stock, the warrants associated with the treasury TARP investment will remain outstanding. We intend to evaluate the potential repurchase of these warrants directly from the treasury or through anticipation in a subsequent auction process, which may or may not be successful. As I'm sure you understand, there are many questions you might want to ask us on this call that we will not be able to answer due to the pending securities offering, but we do want to give you a very clear picture about our second quarter performance. So with that, I'll take you to Page 4 in your deck and talk about the second quarter, before we open the floor for questions. I think you'll see, as evidenced by the slide, momentum continues during the second quarter. Pretax income of -- was $72.9 million, up $26.4 million or 57% versus first quarter pretax income of about $47 million. And up $35.6 million or 95.2% over the same quarter a year ago. Net income available to common shareholders was $30.7 million, $0.03 per diluted common share, compared to $15 million or $0.02 per diluted common share for the first quarter '13 and $24.8 million or $0.03 per diluted common share for -- for the second quarter of 2012. I'll remind you that the 2013 earnings are fully taxed at 37% while the second quarter '12 earnings reflected a $2.1 million tax benefit. Again, another big story of the quarter

[Operator:]

[Operator Instructions] We will take our first question from John Pancari with Evercore Partners.

[John G. Pancari:]

Can you help quantify the amount of excess cash you have on the balance sheet now post the $680 million that you're going to use for TARP? I guess by my math, looking at the unencumbered piece could be around -- about $900 million or so that you could redeploy. So I just want to help -- if you can help quantify that. And then if you could talk about the expected redeployment or reinvestment of that cash?

[Thomas J. Prescott:]

John, this is Tommy. You're certainly -- pro forma based on quarter end with the Fed balance approaching $1.5 billion is the main source of that test liquidity. I'll tell you your math is very close, it's obviously going forward on moving parts that will make that move around so that's a good target. I guess the other part of that question might be the parent company cash and the proceeds of this transaction will slightly bolster the little over $200 million that's sitting in the parent right now.

[John G. Pancari:]

Okay, all right, that's helpful. And then I guess if you could just talk about the timing of the expected redeployment of that cash. Are you going to look more opportunistically at the bond portfolio given the steeper curve or purely organic into the loan portfolio?

[Thomas J. Prescott:]

Well, we'll utilize excess cash as part of the TARP repayment. And over time, I think it's reasonable to take the rates moving on the bond portfolio. We'd love to pull that up somewhat out or dependent on the flow and the loan demand that's out there.

[John G. Pancari:]

Okay. And then just one other follow-up. Is the -- the amount of environmental cost in your P&L, can you just help quantify that again? The total amount of credit related cost excluding the provision that are in your operating expenses right now, that could eventually decline?

[Kevin J. Howard:]

This is Kevin, John. I'll take a shot at that. Our other credit cost that are not provision related, I guess, for around $11 million this quarter. About $7 million, $7.5 million of that was ORE related and the other was -- other credit cost related to problem loans. We do think both of those will work down in the second half, I think we got it $10 million to $15 million in that total number, the first half of the year, I think it was there. I'll look at that headed more toward -- on the lower side of that in the next couple of quarters. If that other cost is not ORE related or provision related, it was about $3.5 million, I think it will work down. So should the total there is probably $10 million or even better before the end of this year.

[Operator:]

We'll take our next question from Kevin Fitzsimmons with Sandler O'Neill.

[Kevin Fitzsimmons:]

Just a couple quick questions. Number one, the -- how did the rating agencies play in this, Kessel? I know that -- I would assume TARP has been something they've been waiting to be dealt with. And what do you think the timing is on -- that they could step in and take you guys back up to investment grade with this development?

[Kessel D. Stelling:]

Kevin, probably the best way I can answer that is I truly can't predict what the rating agencies will do. We have certainly done our best to bring the ratings agencies up to date on our performance and our plans, and we maintain a very close contact there. I think Tommy said it better than me before and I don't want to appear critical of any of them, but sometimes they're a little quicker to take you down than they are to take you up. I would not want to predict their timing, but we have, again, laid out our plans and our performance for them in a very clear way, and I'll just have to leave it up to them as for the timing.

[Kevin Fitzsimmons:]

Okay. And then just a quick follow-up. I just wanted to clarify. So your statement in the release that getting rid of the TARP dividend but also taking into account, I guess, this -- the common offering, and I'm assuming also the preferred offering, you're calculating a $0.04 per share increase to annualized EPS. Is that how to interpret that?

[Kessel D. Stelling:]

Yes. We've in that same calculation, calculated an opportunity cost of the $680 million that we'll give up. Not that it’s been earning a lot, but it's a combination of that number, again, plus the additional shares, plus the expected cost on the preferred offering.

[Kevin Fitzsimmons:]

And I'm sorry, what was the opportunity cost you mentioned?

[Thomas J. Prescott:]

The opportunity cost is the $680 million that's sitting, earning 25 basis points at the Fed. We ramped that opportunity cost up a little bit, but we considered it in the calculation of the $0.04.

[Kevin Fitzsimmons:]

I see. Okay, okay. And I was just going to ask if you've done something similar to -- with tangible book at period end? I see AOCI must've knocked that down a little, but have you kind of netted all these items together? And I'm sure we can all do that, but I just wondered if you've done something similar?

[Thomas J. Prescott:]

It's actually a pro forma on the capital ratios post-TARP that are shown in the Appendix of this document.

[Operator:]

We'll take our next question from Ken Zerbe with Morgan Stanley.

[Ken A. Zerbe:]

First question I have, just on credit costs. I know this is kind of a really tough question to answer. But when you think about credit costs going forward, was there anything unusual, say, in this quarter? Where do you see total credit costs over the, say, the back half of the year? And I just asked because obviously with the NPA sale, a couple of quarters ago, provision was still high. I thought it would have come down, but it didn't. But now, it came down a lot. Was it a lag issue? Are we at a kind of a sustainable level at this point or is there something that we need to consider?

[Kevin J. Howard:]

Ken, this is Kevin. Kessel mentioned, and we believe this, in the second half of the year will be less credit cost total. I think we're $73 million in the first half. We think that will work then -- I think in the second half of the year will be a little better than the first half. I think the first half of next year will be a little better than the second half. We won't -- it may not go exactly quarter-by-quarter. The number's a lot lower. There could be some bumpiness down there. In this particular quarter, we had -- Kessel mentioned that we had good recoveries. That's not always a given quarter-to-quarter, but we do believe we'll get our share of recoveries over the next 12 months. And so that's kind of where we we're at with credit cost. We think ORE expense and provision, again, second half of the year lower than the first half of the year.

[Ken A. Zerbe:]

Got it. Okay, that helps a lot. And then the other -- the last question I have. Just -- and now that you've repaid TARP, or will repay TARP, does it make you more likely or more interested in pursuing other small bank acquisitions?

[Kessel D. Stelling:]

Ken, I'm not going to get myself in that trap today. Again as I said before, the Sunrise was certainly not any kind of strategic departure. It was Synovus playing its role in the orderly liquidation of a bank that needed to, again, be dealt with. But I do think over time, as we've said, there will be opportunities like that. It is not what our focus is day to day. Our focus is on continued improvement in credit, continued improvement in efficiency and growing our balance sheet internally as evidenced by this quarter's performance of $240 million loan growth. But I think it would me wrong for me to say never, but I do think there will be opportunities down the road to do transactions that certainly have little to no risk for our company, but allow us to leverage the scale we have, and the expertise we have, that certainly has demonstrated a very long and successful record of resolving problem assets. So short answer is, again, not part of our core strategy, but certainly opportunities should present themselves down the road, and we'll be very cautious about pursuit of those.

[Operator:]

We'll take our next question from Erika Penala with Bank of America.

[Erika Penala:]

My first question is on what we should expect on the loss trajectory? I appreciate the guidance on the provision for the second half of the year, but what we've been seeing from your peers all year is that the losses continue to come in much lower than we're expecting. So I guess my real question here is what do you think a normal loss range for Synovus is going forward? And also, how long do you think Synovus could operate subnormal for as the recovery of the balance sheet continues?

[Kevin J. Howard:]

Yes, from a loss standpoint -- Erika, this is Kevin. Again, we think credit cost are working -- hard to get to a normalized cost right now. We still got some work to do. We're still at 3%, a little above that on NPAs. But we're going to still spend some money to work down those problem loans. We're doing that pretty efficient. You can see the credit cost are going in our direction. But at this time, and no more than right-guessing at it just based on historical and basically we believe, we'll model too. Can't really tell you when it will be. Our cash pay 35 to 45 basis points. Somewhere in there near is what I'm thinking. And so that's -- that's my best guess at this point, but we still got some work to do on getting to normalized credit cost.

[Erika Penala:]

Got it. And my follow-up question is to on the ratings agencies. Are there any potential opportunities once you finally get the upgrades in terms of balance sheet restructuring that could be accretive to your P&L that we're not thinking about currently?

[Thomas J. Prescott:]

All those things, I guess, I'm thinking into consideration with the rating agencies, but it's like Kessel said a while ago, we'll give them our full story and then their decision will be their decision.

[Kessel D. Stelling:]

And Erika, I'll just add to that. I think it certainly gives confidence both to our corporate bankers and the customers that they are doing business with and allows us potentially to participate in transactions that we would otherwise not be able to participate in with our current credit ratings. So again, I can't quantify that for you. But certainly, I think it gives us the opportunity for additional business based on potential actions by the agencies.

[Operator:]

We'll take our next question from Nancy Bush with NAB Research.

[Nancy A. Bush:]

Tommy, could you just talk about the balance sheet? I mean, you guys have historically been one of the most asset-sensitive banks in the industry. And sort of where you stand in an asset sensitivity position right now and what it's going to take to sort of shift that?

[Thomas J. Prescott:]

Yes, Nancy, we're slightly asset sensitive right now. It would -- I guess our best scenario would be to have modest uptick including the short term rates. We continue to manage it for straight risk fee and are very thoughtful about some of the longer term loans and our competitors out there. We certainly compete with that but strike the balance, I think, on how far we go with it. We'll continue to probably push out some liabilities a little longer, assuming there's even some modest late increase going forward. But again, we are still slightly asset sensitive and looking forward to the days when rates move up a little bit.

[Nancy A. Bush:]

Yes, as a part of that, if you could just update us like you used to, on what percentage of the assets are variable rate versus fixed rate?

[Thomas J. Prescott:]

Yes. We're about 50-50 on fixed/variable. But when you consider the floors that are out there, we're at about 70 on fixed.

[Nancy A. Bush:]

Okay. My second question would be, I know you guys are out from under the MOU, but I've got to believe that neither you nor the regulators want to go through this experience again, so I'm wondering if they're going to be any -- if you're under any kind of special examination regimen or do we just now go back to the regular exams that you're going through before?

[Kessel D. Stelling:]

Nancy, we're just on a -- we're on a continuous exam program with our regulatory agencies and they really take place throughout the year. And I don't see a big change there. I think that our target is always credit reviews, capital planning reviews and a product risk management reviews. I don't think we'll let our guard down at all or expect anything different than what we've always have. We have a very rigorous process. I think our team has developed a great relationship with our regulators. So -- and I'm sure they're on this call is so if they would like to get easier on us, they're certainly welcome to. But we don't expect much of a change there. And again, I think that what we're doing today will serve us well into the future.

[Operator:]

We'll take the next question from Christopher Marinac with FIG Partners.

[Christopher W. Marinac:]

I guess one for Kevin just about the new loan growth that we've seen this quarter. Is any of that coming from sort of purchased sources, or maybe some of your loan syndications that you've been involved with as you got into the C&I growth in the past several quarters?

[Kevin J. Howard:]

Yes, that's part of it. We -- what I like about the growth story this quarter? It was mixed. I mean, it was across the board, it's balanced. We had real estate. We had multi-family growth. That's a segment we like. We have a little office growth, warehouse growth. That's something that we've been targeting. So our investment real estate was up a little bit. Residential, it went as we wanted it to, it shrunk quite a bit. Our C&I growth, and that was part of that story, about $180 million of the $240 million growth was C&I. I think details maybe about half of that was syndicated related, and we also grew retail loans of about 7% or 8%. So I think the balance growth was probably the best part of the growth story. Syndications have been part of that story and we've been in that business a few years.

[Christopher W. Marinac:]

Very good. And Kevin, does it make sense to do any portfolio of arms going forward in future quarters? Is that at all attractive within the loan mix?

[Roy Dallis Copeland:]

Yes, this is D. we have been doing some of those portfolio and that contributed to some of the loan growth that we had that Kevin talked about on the consumer side. So yes, I think it does make sense to do that. It will be tough with -- especially with refinances with the loan rate jumping a little bit. But the shorter arm rates will probably be advantageous to us.

[Operator:]

We'll take our next question from Jefferson Harralson with KBW.

[Jefferson Harralson:]

Now with the DTA back and TARP repaid and a credit improvement is apparent, I guess what's the next 1 or 2 major projects or major things you're thinking about to increase that pre- pre-ROAS? Are you thinking more on the expense side, thinking more on the revenue side? Or can you just talk about how you're thinking about the pretax pre-provision earnings or pre-credit earnings and the best ways to move that higher?

[Kessel D. Stelling:]

Jeff, I'll let Tommy take your model question. But let me talk about, from a strategy standpoint. You hit them both. We think there's certainly still improvement in credit to come and not just from a direct credit cost, but still the amount of resources that we don't do a very good job because it's kind of hard to do with quantifying as to those resources allocated to continued resolution of credit. So there's direct credit cost to continue to come out, and certainly that will happen and then certainly, costs associated with the resolution, which we don't do, again, quantify. So that's #1. From an expense side, yes, we're on track with the $30 million, but those average have never slowed down. We will continue to push down expenses. You won't see them dollar for dollar, but you will see them as we continue to get more efficient throughout our footprint. We have a number of initiatives underway today and it will, again, continue to develop through the rest of the year. And then on the revenue said we talked about, I think, very diverse stable and in some cases, growing business lines through our FMS families. But just from a pure balance sheet standpoint, I think it's obvious now that our investments and talent and the technology to associate to support some of the efforts of our corporate bankers is paying off and $240 million in loan growth was certainly a strong number for us. But we've, again, added talent to business lines throughout the footprint. We've invested in some talent in some markets that you'll be hearing about in the coming days, weeks and months as we beef up again the really core strong team we have. And I think we'll have additional opportunities there on the revenue side. I don't know that we can get into a forward look at the pre-pre, but I think it's certainly a combination, again, of credit, of efficiency and the more fun side of that which is seeing the balance sheet and revenue associated with that and the other business lines grow, as these talent additions, primarily in major markets, but begin to pay dividends for us. Tommy, you may have something to add about that?

[Thomas J. Prescott:]

You covered it well.

[Kessel D. Stelling:]

Okay.

[Jefferson Harralson:]

I just may -- you probably already said this, but what type of loan growth are you expecting in the second half of the year?

[Thomas J. Prescott:]

I think what we would be willing to say at this point is that we would expect to have loan growth in the second half of the year. I would say the second quarter would be probably towards the high side of that expectation. But we would still expect to have loan growth for the second half.

[Kessel D. Stelling:]

And Jeff, so I'll just add. You said, again, what type and I'm not sure that, that might have been that what amount as well. But I think the key is we're seeing it in the right categories. We actually believe we have running in the CRE side to be very opportunistic and get some really strong earning assets, as that number has pushed down to 32% of our total balance sheet. And again, we see some good opportunity. We've been very selective, but we don't really want to see that number rundown much more. And I think -- so you'll see broad-based growth again in major markets, strong in the C&I side. But again, we'd like to might see some, certainly, stabilization to replace the runoff on the CRE side as well.

[Operator:]

And the last question we have today is coming from Joe Steven [ph] with Steven Capital [ph].

[Unknown Analyst:]

Actually, my question was on loan growth, which you just answered. So Kessel, congratulations to you guys and good luck.

[Kessel D. Stelling:]

Thank you, Joe. We appreciate your support and that's a great last question. So operator, if there are no other questions, we'll close the call. Again, we apologize for the short notice. I hope all of you understand the circumstances, which led to the short notice. And we were pleased to be able to release early and make the other announcements that accompany the earnings release. Again, we've got some work to do tonight and tomorrow. And I can assure all of you the work of our team will not slow down based on the execution of this step in the journey. So we appreciate your support. I want to, again, say to all of our team members that are listening in how much I appreciate what you have all done to help us reach this point and again appreciate in advance all that you're going to do to help us continue to deliver for our shareholders. So thank you all very much for joining in. We look forward to sharing additional news as news develops in the coming days, weeks and months. So thank you.

[Operator:]

Thank you very much. Ladies and gentlemen, this concludes today's presentation. You may disconnect your lines and have a wonderful day. Thank you for your participation.