Jul 24, 2012
Executives
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 Patrick A.
Reynolds - Director, Investor Relations
Analysts
Craig Siegenthaler – Credit Suisse Group Jefferson Harralson - Keefe, Bruyette & Woods, Inc. Kenneth Zerbe - Morgan Stanley & Co.
Jennifer Demba - SunTrust Robinson Humphrey Steven Alexopoulos - JP Morgan Chase & Co. Research Division John Pancari - Evercore Partners Nancy Bush - NAB Research LLC Emlen Harmon - Jefferies & Company Kevin Fitzsimmons – Sandler O'Neill & Partners Christopher Marinac – FIG Partners LLC Mike Turner - Compass Point Research & Trading, LLC
Operator
Good morning ladies and gentlemen and welcome to the Synovus Second Quarter Earnings Conference Call. At this time, all lines have been placed on a listen-only mode and we will open the floor for your questions and comments following the presentation.
It is now my pleasure to turn the floor over to your host, Mr. Pat Reynolds, Director of Investor Relations.
Sir, the floor is yours.
Patrick A. Reynolds
Thank you, Kate, and I thank all of you for joining us today on the call. During this call, we will be referencing the slides and press release that are available within the Investor Relations section of our website at www.synovus.com.
Kessell Stelling, our Chairman and Chief Executive Officer will be our primary presenter today with our entire executive management group to answer your questions. Before we begin, I need to remind you that our comments may include forward-looking statements.
These statements are subject to risks and uncertainties and the actual results could vary materially. We list these factors that might cause results to differ materially in our press release and in our SEC filings, which are available on the website.
Further, we do not intend to update any forward-looking statements to reflect circumstances or events that occur after the date these statements are made. We disclaim any responsibility to do so.
During the call, we will discuss non-GAAP financial measures in reference to the Company’s performance and you can find these reconciliation of these measures to 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 respect the time available this morning and desire to answer everyone’s questions.
We ask you to initially limit your time to two questions. If we have more time available after everyone’s initial two questions, we will reopen the queue for follow-up questions.
And now, I’ll turn the call over to Kessell.
Kessel D. Stelling, Jr
Thank you, Pat and thank you, Kate, and welcome everyone to our quarterly earnings call. We are going to try a little different format today.
I will walk us through the deck in somewhat more abbreviated fashion than in the past and save the members of our executive team for Q&A, hopefully to allow more time for the Q&A, which I know generates a lot of interest. So the usual crew, our CFO, Tommy Prescott, Chief Credit Officer, Kevin Howard and Chief Banking Officer, D.
Copeland and others are here to take questions following my presentation. So let’s start on page 4 of your slide presentation where we do are pleased to report our fourth consecutive quarter of profitability.
I think three takeaways for the quarter will be that certainly credit improvement drove profitability. We will talk about – lot about the continued stabilizing and improving of our balance sheet and our ongoing focus on core performance.
Again, but let’s start with earnings, we reported earnings of $24.8 million for the quarter compared to $21.4 million a quarter ago and compared to a net loss of $53.5 million in the second quarter of 2011. Again, quite pleased with that turn.
On earnings per share basis, diluted earnings per share for the second quarter $0.03 a share compared to $0.02 a share at last quarter and a net loss of $0.07 a share in the second quarter of 2011. Turning to slide 5, again as I said, credit costs drove the improvement.
Our credit costs declined 23% sequentially. If you look at our graph at the bottom you will see fairly significant decline in credit cost from $91 million last quarter to $70 million this quarter.
The same number the second quarter a year-ago was a $158 million. So, again steady significant declines in credit costs, primary drivers of performance.
The main factors in our credit costs decline, we had positive results in our semi-annual update to expected loss factors, driven by continued improvement in credit quality trends. We had lower inflow costs due to lower volume of NPL inflows and our negative migration costs improved as well.
So very pleased with the decline in overall credit costs. On slide 6, we will talk a little bit about inflows, NPL inflows decline for the fifth consecutive quarter inline with guidance as Kevin Howard had previously suggested directionally down, but certainly some quarters might have a little bump to them.
But you will see again a decline, we had a $124 million of inflows in the second quarter compared to a $140 million in the first quarter of 2012 and compared to $231 million in the second quarter of 2011. Again, an 11% improvement from the first quarter, a 46% improvement from the second quarter of ’11.
I will also add that we had a meaningful decline in inflows related to residential and land portfolios and Kevin will be happy to talk about that later in the Q&A, but again very pleased with the decline in NPL inflows. Our overall NPAs continue their steady decline.
We are still not proud of the overall level, but its nice to see a number that doesn’t start with a billion you will see in a second quarter, we ended with NPAs of $961 million compared to a $1,056 billion last quarter and compared to a $1,219 billion in the second quarter of 2011. That $961 is made up of $206 million in ORE, which declined from $220 million the previous quarter and $755 million in non-performing loans, which declined from $836 million in the previous quarter.
On slide 8, we will talk about charge-offs. Again, net charge-offs below 2% for the second consecutive quarter.
A very slight uptick from $95 million to $99 million and again Kevin can get into the component still below 2% at $199 million, down 41% from the second quarter of 2011. We believe the charge-off will continue to trend lower during the remainder of the year and Kevin will be happy to talk about the components of charge-offs, but again the low 2% relatively stable for the quarter, down significantly again looking at the second quarter of 2011 where we were at 3.22% or $167 million.
No surprises in the charge-offs and again we think that will continue to trend down. Slide 9 is a great slide, probably not sustainable.
Past dues at lowest levels since June of 2006. Past dues 30 to 89 days or at 0.47%.
Past dues over 90 days 0.03%. We have seen a steady decline and the last two quarters have been running 0.74% and 0.73%.
Again, I don’t know that this type of decline will be sustainable. We may see past due levels back at the 75 basis point level, which was also an acceptable level, but very pleased to see us end where we did, again as I’ve said lowest level since 2006.
The total past dues at the end of the quarter were $92 million, down about $53 million or 36% from the first quarter. Down $108 million or 54% from the second quarter of ’11 and I will point out that every portfolio category experienced a reduction in past due level.
So across the board good performance there. We talked about stabilizing our balance sheet and we will talk about may be stabilizing the loan portfolio.
We will talk about the stabilization and the improvement across asset classes and risk rates. On page 10, I think graphically a pretty good picture of how our loan portfolio was now behaving.
I will take you to the bottom of the page to begin and you will see second quarter a year-ago we had net loan decline of $167 million, last quarter a decline of $25 million. This quarter a loan – net loan growth of $29.2 million.
This number excludes the impact of loan sales, transfers to held to loans held for sale, charge-offs and foreclosures. Reported loans, as you’ll see down about $493 million a year-ago, down $236 million a quarter ago, down $164 million this quarter, but net loan growth of $29.2 million.
I think of even greater importance, on this page you can see that year-over-year C&I and retail loans were up $91 billion, up about $5 million. This past quarter our commercial loan pipeline continues to strengthen across our footprint and I will show some particular areas of performance later in the slide, but again a stable portfolio growth and stability in the areas where strategically we placed the emphasis and as you’ll see even this quarter $170 million run off in our commercial real estate portfolio.
You’ll also see in that graph that now commercial and real estate loans represents 65% of our portfolio, commercial real estate represents about 35%. For several years as we spoke to the analysts community, we talked about moving CRE from its peak of 45 down to 35, moving C&I from 40, up to 45 and retail from 15 to 20.
If you look in one of the appendix slides, you’ll see those exact numbers back in the late 2007 and we have now achieved that balance which we have again, strategically planned for. So very pleased with how our loan portfolio continues to shape up.
On page 11, I think we will speak to the strength of the portfolio. It’s a look at the risk distribution by pass and non-pass grade within our portfolio.
The big story there again for the quarter, you’ll see pass grade credits increased from $15,976 billion to over $16 billion and again compared to the $15,688 billion a year-ago. The pass grade credits now represent about 82% of the portfolio, that was 76% just a year-ago.
Pretty good decreases in our problem categories. Non-performing loans down $81 million or 10% accruing substandard is basically flat, up about $2 million and special mention, which are usually the feeders to those substandards down $314 million or 16%.
So, great improvement there in the special mention loans and as I said earlier pass loans are up $229 million or 1%. Those same percentages year-over-year, non-performing loans down $130 million or 15%, accruing substandard down $531 million or 33%, special mention down $632 million or 29% and our pass loans are up $517 million or 3%.
So again, improvement in asset classes and improvement in risk grade distribution across our portfolio. On page 12, I would like to talk about particular area of emphasis that we’ve been spending a lot of time investing in and talking about and that’s our large corporate banking, senior housing, and asset-based lending groups where we brought in some great talent to pair with our existing talent.
Those groups continue to demonstrate impressive growth in high quality assets that align strategically with how we’re trying to position our company. If you look at the bar graph, you’ll see just in the second quarter, a year-ago, $482 million, that has steadily grown.
Last quarter that number was $827 million and outstandings. And today, where at the end of the second quarter, stands at $968 million.
So again a $486 million from – increase from the second quarter a year-ago, a $141 million increase from the first quarter. We are real pleased with how that group – and groups throughout our footprint continue to generate high quality assets.
I’m going to give you a little break out on that portfolio of the $968 million, $575 million falls into what we classify as large corporate, $246 million senior housing, $147 million in asset-based lending, all of those components are growing. I have the breakout for prior years, I won’t go into those.
But again, all components of that group continue to bring on high quality customers for our company and allow us to sell deeper into some existing relationships with our company. On page 13, again part of our improving balance sheet, talk a little bit about deposits.
And the story here, again is the improvement in deposit mix. Brokered deposits have declined year-over-year $1.5 billion or 57.3%.
Brokered deposits now represent about 5% of our total deposits, that was down from a peak of over 30%. So, we’re very pleased to have decreased that reliance on brokered deposits.
Core deposits increased $231.8 million or 11% year-over-year. Core deposits excluding time deposits decreased $110 million from the first quarter and that was primarily due to an expected seasonal outflow in state, county, and municipal deposits.
I will also add that core deposits excluding time deposits increased $1.18 billion compared to the same period a year-ago. So again, pleased with both our mix and the behavior of our core deposits.
On page 14, a look at pre-tax, pre-credit costs income and its relation to credit costs we’re pleased to show that pre-tax, pre-credit costs income exceeding credit costs for the third consecutive quarter. If I take you back to the third quarter of 2011, when we did report profitability, many of you remember that we did have a fair amount of securities gains in that quarter.
But as we now go forward, fourth quarter, first quarter, and second quarter, you can see how we’re widening the gap where pre-tax, pre-credit costs income exceeds credit costs. I will talk about it later.
This is one of many factors that will affect the decision as to the timing of the DTA reversal, but we’re very pleased to have now these three quarters behind us. Talk a little bit about the margin, on page 15, our margin was stable before the incremental impact of first quarter debt issuance.
Tommy guided that way. You will see it was 3.55% in the first quarter of ’12, 3.48% reported in the second quarter of 2012, but we highlight there the six basis incremental impact of the debt offering.
So the apples-to-apples comparison would have been 3.55% to 3.54%, which we will call stable. That’s six basis impact was again consistent with the guidance.
A little breakout of how the margin happened, the sequential quarter changes. The yield on earning assets is down seven basis points.
The yield on loans down 9 basis points, core deposit cost down six basis points. And I’ll just remind you again the impact on the margin, excluding the negative impact of the non-performing loans was about 19 basis points in both the second quarter and the first quarter of this year and that compares to about 25 basis points drag in the second quarter of 2011.
On page 16, I’ll talk about non-interest income, if you exclude securities gains non-interest income is up $8.3 million sequentially. I’ll talk about the primary drivers, mortgage revenue is up $2 million, we’re very pleased with the performance of our mortgage company is up primarily a result of increased production in secondary mortgage gains.
The production itself was up $29 million or 9% on a sequential quarter basis. I’ll talk a little bit about mortgage repurchase activity.
It continues for our company to be minimal as primarily limited to mortgage loans originated during the 2005-2008 period. Our second quarter 2012 expenses related to repurchase activity was approximately $2.6 million.
We’ve an accrual for mortgage repurchase claims as of quarter-end of about $3.4 million. Year-to-date, we’ve received only 48 repurchase claims, just down 9% from the prior-year.
We’ve won -- of those 48 we’ve won over 20 of those claims on appeal. And so, again, we don’t think the repurchase activity will significantly affect our go-forward business.
Bankcard fees, up about almost a million dollars, $914,000 due to transaction volume, that’s somewhat seasonal. We did launch in the second quarter our pre-paid card products, somewhat of a soft launch, but we’re pleased with the early reception by customers and we’ll do a more formal announcement and product – for product launch in the coming weeks and months, but again, pleased with the early reception there.
Our service charges were up about $450,000. In June, we initiated our product re-launch where we try to more properly align our customers into products that were appropriate.
I mean we expect that in the second half, we’ll continue to see positive results here even with the pressure on NSF fees that I believe we and another banks continue to see, so we’re pleased with that. We also reported an increase in the fair value of private equity investments of $7.3 million for the quarter.
I’ll remind many of you about that investment that is in the TTV fund, that’s an investment of inter capital fund that was made over 10 years ago. We do consider it a part of our quarterly income.
We recognized gains and losses in prior years consistent with that funds reporting. The carrying value of the fund is now about $30 million.
It’s towards the end of its cycle. We’ve no further capital calls.
Again, the second quarter gain lies primarily to unrealized gains on just one investment; again as I said earlier, we’ve had gains and losses from this investment in prior quarters. So we do view it as part of our core fee income.
On slide 17, I’ll talk just briefly about expenses. Our focus remains very intense.
In the second quarter, core expenses were up slightly 2.6%, still down 1.3% year-over-year. That was due to some employment expense annual, merit increases and incentive comp and some attorney fees related to problem loan workouts and related litigation expense.
We do expect that core expenses will trend down in the second half of the year. Again, as I’ve said previously we’ve ongoing efforts to enforce that discipline.
We’ve numerous initiatives that we believe will produce savings in the back half of the year such as procurement where we’ve ongoing contracts, and better negotiations, spent improvements from the launch of a new system, corporate real estate facility where we’re reducing operating costs from surplus property disposition and again, continued rationalization of our brand structure and of those areas supporting that structure. So, still very intense focused.
Headcount continues to trend down, again a little blip this quarter that we think will trend down in the back half of the year. Our capital position remains solid.
Tier 1 capital, 13.36%, up from 13.19% in the first quarter. Tier 1 common, 8.81%, up from 8.67%.
Our risk-based capital ratio is the only one that went down, 16.32%, down from 16.57% in the first quarter and that’s related to reaching the five-year maturity of our 2017 sub-debt, Tommy can talk more about that if you all have questions, but still healthy ratio there. TCE, 7.12%, up from 6.81% and Tier 1 leverage of 10.66%, up from 10.41%.
So, again capital position remains solid. And we’ll answer any questions on that later as well.
I’d like to now – just before I go to questions talk about two subjects that I know would generate lot of the questions, and that’s our deferred tax assets and our plans for TARP repayment. If you’ll go to page 24, in the appendix there is a slide on the deferred tax asset and our valuation, you’ll see valuation allowance now stands at about $800 million or $0.99 for common share.
And I’ll just call your attention to the tax, we do expect to reverse substantially all of that allowance once we’ve demonstrated a sustainable return to profitability, perhaps at the point where we’ve significantly improved credit quality and experience consecutive profitable quarters coupled with the forecast of sufficient continuing profitability. It’s subject to considerable judgment and the timing is uncertain.
But as I said earlier, we now have four quarters of profitability under our belt. We’ve three quarters where PP&R exceeded credit cost.
We’ve had declines in all key credit metrics such as NPA levels, inflows, declines in higher risk categories, declines in past dues. But also key to the DTA reversal is our full review on earnings and that includes the revenue side of the equation, and so our view on sustained profitability and our ability to model those go-forward earnings are key to the reversal.
So, I’m not going to be anymore specific other than I’ve been in prior calls, other than to say that the discussions with our accountants continue. We know how important that advantage is for our company.
It is likely a 2013 event. We haven’t given it up on 2012, but given that we’re now in the back half of the year, it’s likely a 2013 event.
Switching to TARP, we’ve said it clearly that we plan to pay our TARP obligation in a time and a manner that’s prudent and acceptable to all of our constituencies, including shareholders and regulators. We still believe that the TARP repayment is going to be linked to the timing of our DTA recovery, although not necessarily so.
But given in my prior comments about DTA recovery would likely be a 2013 event for TARP repayment, again not certain, but likely. We remain on active conversation with treasury and our other primary regulators.
We continue to update and stress our capital plan for various scenarios regarding our longer term capital plan, which certainly includes TARP repayment. Ultimately, as I’ve said earlier we plan to make this payment through a combination of cash at the parent, which stands at right at $400 million.
I think $396 million, today. And then, cash that we expect will dividend from the bank up to the parent, that will be subject to regulatory approval and then we’ll cut that off with some other form of capital market activity whether that would be debt or equity.
Again, at this point I think it would be unfair and unwise for me to speculate on that. But at the point that, again, we’re down the road and are clearer on DTA and staying profitability and get further with our capital and stress testing, we’ll certainly be more clear with our regulators and certainly with the analyst community, and we’ll be happy to take questions about that as well.
So this time, operator I think it will be great time to open the floor for questions for anything I covered or any of the items in the appendix that the rest of our extended team will be happy to take questions on as well.
Operator
Thank you. (Operator Instructions) Our first question today is coming from Craig Siegenthaler.
Please announce your affiliation, and then pose your question.
Craig Siegenthaler – Credit Suisse Group
Thanks, guys. It’s Craig Siegenthaler from Credit Suisse.
So I see the details on slide 24 and I hear commentary that the DTA recovery is likely a 2013 event, but they’re not totally given up in the second half, now that even profitable for four quarters, I’m just wondering what’s really holding you back, is it the auditor, maybe you can give us some color on why it’s taking you longer than some of your competitors that actually have recovered the DTA remove the valuation allowance much faster?
Thomas J. Prescott
Craig, this is Tommy. The sequential quarters of profitability is very important, it’s a great foundation to stand on.
It’s probably over-rated though as a true measure of DTA exit. It’s more about the vision of the future.
And so, we’re in the process of building our case, using the facts that are out there, using the improvement in credit and operating performance and use them to the four quarters now of profitability as part of that equation. But the way the exit will really work, it will – management will come to a point where we believe that it’s appropriate to take our ongoing conversations with all constituencies, include the auditors.
We take that to a level of believing that it’s time to release it, and auditors will work with us have their view of it and we’ll work through that. So, we’re on that path, on that journey, but just got little ways to go and as Kessel said, we don’t we think that based on where we’re from a time standpoint that’s likely a ‘13 event now, but it certainly – we’re not closing the door on ’12.
Craig Siegenthaler – Credit Suisse Group
And Tommy, two of the issues potentially the risk of a loss is still too high, given the volatility around provisions or the fact that pre-provision net revenue is still quite low and I guess they’re both related, but are they factors, so should we monitor kind of improvement in those two metrics?
Thomas J. Prescott
Yeah, it’s – at the end of the day it’s all about taking where we’re now in the great trend of improvement and then extend that into the future in a manner that meaningfully bites off the pre-tax income that’s required, so, over the DTA or in part of it potentially. And so, the improvement that we’ve shown in credit cost, the improvement we’ve shown in profitability is again a good place to plant your feet.
So it’s just – it’s a little bit in the future to lay out a forecast that has enough grounding and seasoning, I guess of the profitability trend. So it’s really all of the things you mentioned and some others, but we’re on the path and getting closer, but just got little ways to go.
Craig Siegenthaler – Credit Suisse Group
All right, great. Thanks for taking my questions.
Operator
Thank you. Our next question today is coming from Jefferson Harralson.
Please announce your affiliation, and then pose your question.
Jefferson Harralson - Keefe, Bruyette & Woods, Inc.
Hi, thanks. My question is on the ability to upstream from the sub to the bank, do you’ve the estimate for what your leverage ratio is at the sub this quarter and what do you think about the timing and ability to upstream from the sub to the bank – to the holding company, I mean?
Thomas J. Prescott
Jefferson, this is Tommy. The leverage ratio at the bank at the end of the quarter is 1.5%.
The rules being a Georgia bank got limitation of 50% of prior year’s net income, so far the bank has made $106 million this year. There is workaround available, we’ve done it number of times, obviously – even the 50% of prior year’s income has to be qualified with performance and regulatory approval.
But the point is it could be at that level or it could be a higher number based on the very good capital ratios of the bank. Tier 1 is 14.5, almost at the bank level.
Total risk-based capital is at 15.7. So we’ve got good ratios of the bank and some room there at least something that we’ll work through as we talk with regulators and work through that and there is a good bit of capacity and the numbers, and we’ll just have to continue to show performance and play this out with the regulators before we could be more specific on the range of outcome.
Jefferson Harralson - Keefe, Bruyette & Woods, Inc.
All right, that’s helpful. Do you think that, you guys – I don’t know if you get to talk a lot about the Basel III or the NPR that kind of thing, but do you think whatever that number turns out to be would be a factor and how much money, how much common or debt you raise or what has to happen to repay TARP or do you think that this calculation will be done mostly on a Basel I standard?
Thomas J. Prescott
Well I think that, looks like Basel III will be a data point, it will be looked at by all but maybe it’s a little bit out in the future and quite frankly early modeling does not show a big impact on our company. Its early stage by definition, it’s a proposed rule with a lot of clarity to come.
We’ve attended the webinars and we’ll be in person at some other learning sessions with the regulators on how to interpret some of the things, some of the components of it. Our early stage estimate would be an impact on our capital loan.
A 100 basis points likely inside that based on when we understand the rule right now certainly could change some but unlike some banks we don’t really have a hit on the capital side of any magnitude because we don’t have meaningful Tier 1, I mean, meaningful trust preferred securities like a lot of banks do and that will have to come out of their equation. So we don’t have much movement on the capital side.
We do have a good bit of movement on the risk related assets side. We've done our best to apply the rules as we understand them to the loan book and to the commitment book and we’ve estimated a range of -- call it 75 to 100 basis points depending on which ratio you’re looking at.
So in a way Basel III brings some – that keeps us above all the buffers even without any mitigation that can happen between now and installation of Basel III. So, in a way it kind of maybe brings some of the subjectivity of capital requirements to a more formula late method and I think we’ll be okay in it.
So we’re kind of looking at that way as a data point on a TARP exit, but maybe not one that’s more prominent than the others.
Jefferson Harralson - Keefe, Bruyette & Woods, Inc.
All right. Thanks, guys.
Thomas J. Prescott
Thank you.
Operator
Thank you. Our next question today is coming from Ken Zerbe.
Please announce your affiliation then post your question.
Kenneth Zerbe - Morgan Stanley & Co.
Yeah, sure. Ken Zerbe, Morgan Stanley.
First question I have was just, you mentioned on the compensation line there was a small blip up this quarter. Could you give little more exact; what caused that small blip up, naturally I probably would have assumed it comes down after the first quarter seasonality.
Thomas J. Prescott
Yeah, there’s a couple of components in there Ken, and one of them is not going to go away because its reflective of merit increases that are current and in a meaningful way in the second quarter. But the other one is some – primarily some performance based compensation that’s going to prove that it won't go away in the future but it probably is a more catch-up elevated kind of level based on what we saw as we sacked towards yearend in the second quarter, that maybe – it will be in the third and the fourth.
So part of it is run rate, part of it is not. With that, and this is beyond your question, but I am going to keep answering here.
Kenneth Zerbe - Morgan Stanley & Co.
Sure.
Thomas J. Prescott
The overall elevated level in the second quarter of the G&A cost up about $4 million of where it was before, where it was a quarter ago. It’s because of what I’ve just described and it’s also elevated attorney fees and elevated litigation costs.
And we think a good bit of that will mitigate in the future quarters and we believe that we could see the more normalized G&A cost reducing – that’s something more closely resembles first quarters then second quarter. And we’re obviously continuing to push on all the G&A buttons to manage a number the best we can.
Kenneth Zerbe - Morgan Stanley & Co.
All right, that helps. The second question I had was; can you just comment on C&I growth.
Its -- I know you made an effort in the slide deck to comment on how you’re growing a certain loan categories, but we’re still seeing it’s called flat to down total or overall commercial growth or commercial balances. Maybe just qualify the types of loans that you’re writing, the new loans that you’re writing and it think eventually like large corporate versus what is running off.
Is there a difference in the loan types?
R. Dallis (D.) Copeland, Jr
Yeah, this is – Ken, this is D. Copeland.
I’ll take that on. What I would end up saying is on the new fundings that we have out there we're taking on both a large number of lands as well owner occupied from C&I standpoint from that overall running off what we would see some as deleveraging with existing customer base when we have – we have had customers just paying down on existing loans.
They still remain out there with us. There’s a small factor in there from disposition of some older C&I credits as well.
I would guess – I guess, to give you – I may give you some clarity or some comments around what we saw this quarter, the new originations. We're still strong in C&I and the ongoing pipeline is still 60% more from a C&I basis.
Kenneth Zerbe - Morgan Stanley & Co.
Okay, great. Thank you.
Operator
Thank you. Our next question today is coming from Jennifer Demba.
Please announce your affiliation and then post your question.
Jennifer Demba - SunTrust Robinson Humphrey
Jennifer Demba, SunTrust Robinson Humphrey. Just a question for Kevin; with the housing market seeming to stabilize here and then maybe improve; are you likely to accelerate your [prop net] sales and what kind of pricing trends have you seen recently?
Kevin J. Howard
We are pleased to see a little more stabilization in the housing market. We sold all the way through houses and lots and lands.
We did accelerate this last quarter. We sold about 60% of our dispositions was land or residential related.
So we’ll continue that pace. Hopefully we do get a lift in there.
We don’t have that necessarily budgeted, but it’d be a nice lift to get better prices going forward. But we’ll probably continue our pace somewhere in that 100% to 150% range, that seems to be an efficient pace and a meaningful pace to reduce our NPAs along the way.
But our hope is – and to answer your question we’ll continue to add and maybe we get a lift in there on surprise.
Jennifer Demba - SunTrust Robinson Humphrey
Okay. Thank you.
Operator
Thank you. Our next question today is coming from Steven Alexopoulos.
Please announce your affiliation and then post your question.
Steven Alexopoulos - JP Morgan Chase & Co. Research Division
Hey, good morning everyone, JP Morgan. Well I am not to be the dead horse on DTA and TARP.
But if I look at your operating performance and credit improvement over the past few quarters, it seems to be pretty much right in line with the expectations you laid out for us. I guess I am a little bit confused in terms of what really changed from last quarter now that’s pushing this out to 2013?
Kessel D. Stelling, Jr
Steve, I really don’t think anything changed since last quarter. I think in prior calls we've said it could be a 2012 event, it could be a 2013 event and not to mince words I could still say the exact same way it could be a 2012 event, it could be a 2013.
I think what Tommy said with DTA is, you want to see a widening of that gap on the pre-tax, pre-credit cost income versus overall credit cost, and you want to see continued reduction in those factors that caused the issues in the first place. So as non-performing assets come down, as non-performing loans come down it just gives a greater clarity and greater ability to model that level of sustained earnings necessary to recapture that $800 million asset.
So as I said and Tommy said we haven’t given up on 2012. We’re just again -- we are not in the third quarter.
So if – and I'll just give you a hypothetical and there’s nothing but that if we made the case based on the next two quarters of performance, then the DTA would fall into the first quarter and again we’ve said all along we expected TARP would likely be following that so in 2013. So there is, I guess, to be clear there’s been nothing negative that’s changed our thought other than it’s just a passage of time and as we continue to work through this economy we want more revenue growth.
We won't tell the question on loan stabilization. We won't clear again growth as opposed to flat to moderate.
We need a little help in the economy there. But there has really been no changes and certainly not meant to signal a significant change other than the passage of time to me now it makes this more likely a 2013 event, but 2012 is still a possibility and again TARP repayment follows that, that’s something just by following the calendar that gets you into maybe early 2013.
Steven Alexopoulos - JP Morgan Chase & Co. Research Division
Okay. I appreciate that color.
And maybe for my second question; on the margin, are you guys expecting a relatively stable margin that, given that you still have decent room to lower your cost of deposits?
Thomas J. Prescott
Steven, this is Tommy. The answer to your question is, yes.
That would be our guidance for the third quarter to have a large image, stable reported margin in the second quarter. And really the, the foundation of that is the ability to, I mean, we know we’ve got some weight to bear on the earning asset side, on pricing of both securities book and the loan book.
But we do have some room that remains on the reduction of funding cost and that’s largely from a significant amount of CDs that will mature in the second half of the year. And on the timing of amount (indiscernible).
Kessel D. Stelling, Jr
About $1 million or so.
Thomas J. Prescott
$
Steven Alexopoulos - JP Morgan Chase & Co. Research Division
Okay, thanks for that. Thanks Tommy.
Thanks for all that color.
Operator
Thank you. Our next question today is coming from John Pancari.
Please announce your affiliation and then post your question.
John Pancari - Evercore Partners
Evercore Partners. Good morning.
Can you give us a little bit more color around the timing and the -- maybe the amount as well if you’re meaning real estate related loan run off or at least what you have identified as what its likely to run off the books over the next year or so?
Kessel D. Stelling, Jr
I think just, I mean, we’re going to continue to move the lower quality, the land, the residential development. We move that at a pretty significant pace, probably close to 10% or so a quarter over the last – averaged over the last few quarters.
We’ll continue to move that. The investment real estate part, which is the larger part of the real estate, we plan on – we’re at a – so that we’ve right sized our portfolios, a good slide I think in there page 35 on concentrations.
But we thought we’ve gotten our portfolio like we committed to get it from a balance perspective. And we do feel like the investment real estate will be a little more stabilized.
We’re lending in those places, multi-family and distribution, warehouse type lending in that area. So we feel like that one will – most of the work to that is behind us and in fact that will be more stabilized and continued a pretty steady pace of the residential and land design over the next year or so.
John Pancari - Evercore Partners
Since really just the revenue land book that you’re going to see the steady declines in …
Kessel D. Stelling, Jr
That’s where more of our elevated problems and higher risk areas are. So they’ll be -- continue to be a significant run off in those books.
John Pancari - Evercore Partners
Okay, all right. And then lastly, can you give us an updated view of your, what would be a normalized reserve level going forward as we continue to see reserve leases coming out of the quarters for the next few quarters?
Kessel D. Stelling, Jr
I think, I mean, nobody is – I think the pace of reserve reduction will slowdown, something we talk about a lot up here. I think you probably see it stay at least while NPSs are somewhat elevated, we are pleased with the reduction we've had overall there, probably move, probably not below 2% and then in the near couple of quarters coming up.
So I think basically you’ll see a slower pace, a slower reduction there. But you’ll see some -- you’ll see that move down, just following good credit trends and our overall credit trends, credit metrics are all moving in the right direction.
John Pancari - Evercore Partners
Okay. Thank you.
Operator
Thank you. Our next question today is coming from Nancy Bush.
Please announce your affiliation and then post your question.
Nancy Bush - NAB Research LLC
Hi, NAB Research. Good morning guys.
Kessel D. Stelling, Jr
Good morning Nancy.
Nancy Bush - NAB Research LLC
Tommy you said in discussing the recognition of a DTA that there would be input from various constituencies and I am wondering whether one of those constituencies has to be the regulatory constituency or are they sort of outside of the process and if they’re in the process would the natural time be CCAR submission that this might be part of it?
Thomas J. Prescott
Nancy, the regulators are on this line today and hello everybody. They’re very interested in this topic, just like all of us.
So when I said multiple constituencies it maybe advisors, that help us with tax work and that type of thing, but just you think about the way that we got to where we are was primarily our auditors and management and that will be the lead in getting out of it. And so the regulators will be very interested in it and I think probably see the connections the TARP repayment they’ll speak to that on their own terms, but they’re interested in it and have a voice quite frankly in anytime, but I think this will be led by us and with proper accounting being confirmed by the auditors.
Nancy Bush - NAB Research LLC
Okay. And my second question has to do with the large corporate strategy.
Are there any targets for size of that book or percentage of loans and where are you finding opportunities in what has traditionally been a pretty crowded space in the south-east?
R. Dallis (D.) Copeland, Jr
Nancy, this is D. Copeland.
I’ll let Kevin maybe touch on the size of the book and then I’ll touch on opportunities if that’s okay.
Kevin J. Howard
Yeah, well just from a concentration within our seer, we manage concentrations within each loan type. And we’re not looking for that to – in the next year or two to be anymore than probably 10% of our overall portfolio.
It could be as much as 20% of our C&I strategy obviously C&I is about half our book. We’re keeping it low sizes.
We’re not really exceeding. We’re probably $15 million to $25 million in that space.
So from a concentration standpoint that’s about where we’re at on the C&I and D. Copeland can touch on some more color.
R. Dallis (D.) Copeland, Jr
Yeah and some of the opportunities we've through Curtis Perry and his team have been able to bring in a good group of talent. One of those successes that we have had has been ongoing relationships with that talent and as well as existing relationships that we’ve had in our footprint, and so we’re able to team up with the local bankers on some of the larger credits because we have brought in the expertise to be able – to be able to manage those and some of those will be directly managed, large corporate credits.
Some of them will be partnered with other banks. We had not had a ton of that in the past, but we’ve bought all talent to be able to do that and its given us an opportunity to bank those type customers.
The majority of those customers really are folks we have relationships with that we are able to do other personal business with, that we’re able to do other company business with and so we’re leveraging long-term relationships with new relationships as well as existing and new talent.
Nancy Bush - NAB Research LLC
Okay. Thank you.
Operator
Thank you. Our next question today is coming from Emlen Harmon.
Please announce your affiliation and then post your question.
Emlen Harmon - Jefferies & Company
Good morning, calling from Jefferies. The first question would be just, it seemed that the trades in the loan portfolio was slowing some, it sounds like you’re feeling a little bit better about the run off in the investor real estate portfolio.
How are you thinking about loan growth in the second half and is it possible we start to see some positive growth here in the next few quarters?
Kessel D. Stelling, Jr
Well, it might take a combination to answer there. We could, we had hoped to see stabilization in growth in the back half.
We were glad to report net growth in the second quarter and we certainly think that measure where it’ll be positive for the back half of the year; from a total reported loan we believe we get closer to stabilization over the next few quarters and have the opportunity for a growth in that line as well. We will need a little help from the economy.
There’s still some, as you all know a high degree of uncertainty among business borrowers out there. Some political, some financial.
So again we do see on a net basis growth and on a reported basis hopefully a lot closer to stabilization and still possible reported growth there.
Emlen Harmon - Jefferies & Company
Got you, thanks. And then just as a follow-up; with the government starting to auction off TARP in some banks here, any thoughts on just how that could affect either of your eventual, just the timing of your exit eventually or any sense whether that would look to -- or you guys would look to repay maybe quicker as a result of seeing those auctions happen in the market?
Kessel D. Stelling, Jr
Well as of today, no. Based on our most current conversations with treasury, which I won't get into the specifics, we don’t believe we would be part of an auction and we believe that treasury expects us to pay off our TARP obligation at par in a manner of timing that is consistent with what I have laid out for you all now.
We all know things can change, but we meet quarterly. We don’t expect to be part of any auction.
We expect to pay the obligation at par and again don’t expect any of the current auctions to impact that based on what we've been told to date.
Emlen Harmon - Jefferies & Company
Got it, all right. Thanks.
Operator
Our next question today is coming from Kevin Fitzsimmons. Please announce your affiliation and then post your question.
Kevin Fitzsimmons – Sandler O'Neill & Partners
Sandler O'Neill. Good morning, everyone.
Kessel D. Stelling, Jr
Hi, Kevin.
Kevin Fitzsimmons – Sandler O'Neill & Partners
Just, few quick question’s, most have been asked and answered. Can you give us just a little comfort on accruing TDRs?
I know you mentioned that your NPA ratios now dip below 5%, but the accruing TDR balance continues to get larger and if you do some of us do lump those in, whether that’s right or wrong in that ratio and that still puts you over 8%. So just trying to get a little more comfort on how you guys look at that balance?
Thank you.
Kevin J. Howard
Hey Kevin. This is Kevin.
Kevin Fitzsimmons – Sandler O'Neill & Partners
Yes.
Kevin J. Howard
We’re lumping those in, how that bothers us, lumping those in, for NPAs we’ve got $71 million our past credits $235 million or special mentioned credits that we think will be or moved in the right direction that actually go to pass themselves so, but we understand that, but the TDRs if you look at them, we've mentioned this before. I think this number has actually moved even more positive from last quarters, 72% of them are C&I investment, real estate, cash flow attached.
So that’s actually an improvement from last quarter. Less than 1% of past dues and again 44% of them are better than substandard.
So our story there is, we only had – I think the number was around $30 million of loans that were TDR last quarter that defaulted into the inflow, so it’s not the higher percentage of loans that defaulted. Again our TDRs are not – early in the cycle there were more relief on credit terms.
I would say over the last year or two – I would say at least over the last year it’s been interest rate concessions and its – and again it’s hard to make that number come down when a loan that is substandard or special mentioned comes up for a renewal regardless if its paid on time or where or how it looks it is –if you don’t give them a pretty high interest rate, that’s going to be – we’re going to have to label that as a concession because it may not be where our market rate is for that type of loan. I know you know that, but something that’s worth repeating.
But we do think the TDRs will level off here, maybe next quarter or the quarter after. I do think our substandard loans will continue to pace down, they pace down last three quarters pretty well.
They were about level this quarter. We think that will continue to improve, but the percentage of TDRs that are in substandard will probably continue to increase a little bit because we’re going to continue to work with those customers, give them – they paid us all the way through the cycle, now some four years and we’ve structured agreements with them and we think by not raising the rate helps to get them out of this a little bit faster, and certainly manage this long through it.
So, long answer, but we think that portfolio is continuing to probably stay at the same pace.
Kevin Fitzsimmons – Sandler O'Neill & Partners
Okay, all right, thank you.
Kevin J. Howard
That’s all I say about it.
Kevin Fitzsimmons – Sandler O'Neill & Partners
Great. And just one quick follow-up, Tommy had mentioned earlier that he thought on the DTA that the consecutive quarter requirement gets a little overplayed, little over weighted, just wondering if you guys were to have the opportunity to bulk sale and to get rid of more of the NPAs, which would be a positive indicator I’d think for your review of getting the DTA allowance reversed, but it could – if it did jeopardize your consecutive quarters of profitability, how would that be viewed do you think by the powers that decide?
I mean if you came out and had a big bulk sale and secured NPAs down by significant amount, but you took a quarterly loss as a result, would that put you back to score zero or do you think the powers would view the big picture that that’s the smart thing? Thanks.
Thomas J. Prescott
We think it’s possible that would be viewed as a smart thing. I can’t be conclusive there, we’ve had conversations.
There is a tunnel of moving parts to DTA exit, backs and circumstances from a lot of angles. We think it’s possible that you could get pass that one and it could be viewed in a positive view, but again it’s conclusive.
Kevin Fitzsimmons – Sandler O'Neill & Partners
Okay, all right, thank you.
Operator
Thank you. Our next question today is coming from Christopher Marinac.
Please announce your affiliation, and then pose your question.
Christopher Marinac – FIG Partners LLC
Hi, FIG Partners LLC in Atlanta. Kessel, I wanted to see if you could just give us a quick walkthrough of your markets from the perspective of which are stronger, which are weaker and maybe customer behavior and sort of thoughts heading into the next couple of quarters?
Kessel D. Stelling Jr.
Yeah. Well, I’ll start maybe here in Columbus, Chris, where we -- as you know, enjoyed number one market share and Columbus economy is strong both with activity at Fort Benning and NCR and Kia off the road, so again performing very well here.
Atlanta, showing some signs of stability, you’re there, so you know it, but we saw a presentation just last week from smart numbers, which gives us some comfort in overall real estate value, loan prices, home prices and Atlanta will still take some healing in the real estate sector, but from a customer behavior standpoint I think we’re seeing some good opportunities both through, again the groups we talked about and then our core business banking we’ve seen some great activity, some big wins in treasury management across our footprint. And I won’t touch on every Georgia market, let me jump over to South Carolina where we’re operating in some markets over there, with unemployment that starts with a six.
So in markets like Charleston and Columbia and Greenville, a lot of optimism. Charleston with Boeing and some of the ancillary business there, I was in Charleston just a few weeks ago and a lot of good activity there, Columbia as well.
And Greenville, Spartanburg where we don’t have quite as much market share, but a lot of good looks there. So we’re pleased there.
The coast of South Carolina, maybe that Myrtle Beach area is still pretty tough, but we’ve taken most of our pain, our pain there. Tennessee, again, saw a big treasury win there this past Friday.
Our large corporate group is doing a great job blending with our bankers in Nashville and Memphis and Chattanooga to open some doors for us there that we haven’t, still low market share in Tennessee. And then swinging down to Alabama, as I’ve said before, Alabama let us through the toughest times, they never had the big, big boon that others do have, they didn’t have the declines, so still just again very stable markets in Alabama and having some good success stories there.
Struggle little bit still on the coast, down in Pensacola, but certainly stabilization there. That bank is not the size it used to be because it was certainly a heavily concentrated real estate bank.
But we’ve got some great leadership there and we’re seeing signs of stability there. Our Tampa bank continues to do well in our overall internal sales contest.
Dom DiMaio took over there as President and CEO, and he and his team again getting some good looks. So we feel good there.
And I guess just swinging back up through Georgia, there are some real markets in Georgia that, as they reminded me yesterday the recession isn’t over there in some of those markets, they don’t have certainly the growth opportunities as some of our larger markets do, but again I mentioned Columbus, I mentioned Atlanta, Rome is doing well, Athens is doing well, Augusta, we’re seeing some good opportunities over there, you’ve been looking at about at opportunities to potentially add a location over there. So in general I think the feeling upon our chain is stability and some good opportunities, I’d still say from a customer behavior standpoint there is a great deal of caution out there, which I think other banks are seeing as well as people, whether it’s healthcare, whether it’s political environment or whether it’s Spain or other areas of Europe just overall concerned to keeping people from making these big robust investments.
Christopher Marinac – FIG Partners LLC
Great, that’s good color. I really appreciate it.
Just a really quick follow-up for Tommy, just has to deal with the loan yield and I guess your ability to kind of manage that in the next couple of quarters and as far this quarter kind of indicative of what may happen on yields?
Thomas J. Prescott
Yeah, Chris, the loan yields have been under pressure and we’re quite frankly willing to trade a little bit on yield to generate high quality loans and to turn to – to sustain the stability and moving forward to growth. So that will continue to be pressure on the loan front just like on the securities book.
Christopher Marinac – FIG Partners LLC
Okay.
Thomas J. Prescott
I mentioned earlier, we do feel like we’ve some buffer left on the funding side to take care of.
Christopher Marinac – FIG Partners LLC
Right. Great, thanks so much guys.
Kessel D. Stelling Jr.
Thanks, Chris.
Thomas J. Prescott
Thanks, Chris.
Operator
Thank you. Our final question today is coming from Mike Turner.
Please announce your affiliation, and then pose your question.
Mike Turner - Compass Point Research & Trading, LLC
Hi. Compass Point, good morning, just really kind of follow-on to your earlier questions, maybe not so much on the NIMs, sounding like it will be stable, but on NII you’ll have yield pressure and definitely some legal room on the liability side.
What’s your confidence really in the ability to be able to grow net interest income over, you look out over the next year and a half or so, is that rate environment too much of a headwind?
Thomas J. Prescott
We talked earlier, Mike, about the – where we’re heading with the loan book, that’s a huge component obviously, I guess the volume factor of loans, we talked about the ability to stabilize and then move forward from there. The margin we got it for the third quarter, we didn’t really go beyond that.
But I’ll say that the CD maturities do roll robustly into the fourth quarter, so you will continue to have some cushion there. We really hadn’t got it any specifics in the next year, but I mean, I guess like the rest of the industry and so forth the rate environment makes it tougher to keep the spread and the margin that’s out there and so we look forward to an uptick at some point and we will just have to continue to manage forward in the meantime – through it in the meantime.
Mike Turner - Compass Point Research & Trading, LLC
Okay. Thanks a lot.
Thomas J. Prescott
Thanks, Mike.
Operator
We have no further questions in the queue at this time.
Kessel D. Stelling, Jr
All right, operator. I will close by just thanking everyone for joining our call.
Again, we were very pleased to report our fourth consecutive quarter of profitability. Steady progress in most areas, significant progress in some other areas, but all again I think further position our Company for sustained profitability and long-term growth, which are so key to some of the main topics we talked about today.
So I thank you for your interest and we will continue to push ahead on all fronts that we cover today to make sure that we achieve these expected results sooner or rather than later. I also want to thank another big constituency or two that I know is on this call.
Number one, our employee base, our leadership team, our affiliate directors and directors throughout our footprint who have been remarkably supportive and loyal to our Company and make it happen everyday more so than the team in this room. So, to those of you on our team that are out there listening, thank you and I look forward to the opportunity to talking to many of you later today.
And then finally we have a lot of customers that call in and again I was asked last week in an interview what was I most proud of and I said our customers because they have stuck with this Company through some very tough times and now as we deepen those relationships and acquire new customer relationships through this operating model, it just gives me a lot of pleasure. So I want to thank those groups on the call as well.
Hope you all have a great rest of the week, great rest of the summer. We look forward to talking to all of you on our next update call.
Thank you.
Operator
Thank you ladies and gentlemen. This does conclude today’s conference call.
You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.