Synovus Financial Corp (SNV) 2006 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to your Synovus first quarter earnings 2006 conference call. [OPERATOR INSTRUCTIONS] It is now my pleasure to turn the floor over to your host, Mr. Richard Anthony.

Sir, the floor is yours.

Thank you very much.

I want to welcome each of you on the line to our first quarter conference call.

We thank you for participating and we especially thank you for your interest in Synovus and the coverage that you provide for us.

We had what we considered to be an outstanding quarter.

You seen the numbers that were released this morning and you noticed 14.4% increase in earnings per share which we think should stand out in our industry.

We also commented in our press release on the 18.1% increase in our financial services net income and of course both of these measures or percentages were after the impact of expensing stock options.

If you look at the whole picture, and our assessment, we're driven by strong fundamentals, the basics.

We had good, consistent growth on both sides of our balance sheet and deposits the margin held steady.

And credit quality remained very good by all indicators.

One thing that stands out we think as a story that needs to be understood is the recent track record in financial services bottom line growth.

The last five years coming into 2006 would indicate a 13.5 % compounded growth rate in financial services net income and then of course we did have the strong first quarter there that I mentioned earlier.

Last summer, and earlier this year, I commented that we would begin retail segment reporting.

We're going to break our company down into primarily retail and commercial revenues, expenses, and profitability.

I mention that because we have received the first report.

We're pleased with what it tells us.

We, however, will not begin sharing this with the public until we have more trend data that makes the numbers more meaningful.

And we are tweaking some of the assumptions used but we're off to a good start, we think, with our segment reporting, and we think it will not only provide ultimately good transparency to the investment community but will make us a better company as we understand even in greater detail the drivers of our performance.

This afternoon, we're going to have three participants on the call.

Phil Tomlinson is with us our TSYS CEO.

He will speak after Tommy Prescott who will be next.

Tommy, of course, is our CFO here in Synovus.

After Tommy gives you his financial report and Phil covers TSYS, then I'll come back with some comments about our strategic plan and efforts underway to implement those ideas that have been generated from the planning process.

I'll then make closing comments and we'll open the floor for questions.

At this time, I'll turn the program over to Tommy Prescott.

Thank you, Richard.

Good afternoon to all.

Going to remind you we'll be making forward-looking statements today that are subject to risk and uncertainties.

Factors that could cause our results to differ materially from these forward-looking statements as set forth in our public reports that are filed with the SEC.

As Richard said, the first quarter was really good as a good, strong start to what we believe's going to be an excellent '06.

Just got to repeat the key drivers, the great growth on our balance sheet, the year-over-year margin increase, the sustained great credit quality and then TSYS coming out of the first quarter on its plan.

The quarter Richard mentioned the numbers but 134 .5 million, $0.43 a share up 14.4%, And do keep in mind that in January the 1st we adopted SFAS 123R and consequently expensed stock options beginning the first of this year which represents $0.012 per share in the quarter or a 3.3% reduction to our year-over-year EPS growth.

Just another couple of highlights.

The return on assets on a consolidated basis was 196 compared to 186 a year ago.

The return on equity was 17.88% compared to 17.52 a year ago.

Also during the quarter, we concluded a routine examination of our consolidated tax return for the years 2000 through 2003, and as a result of the completion of this exam, we reduced our first quarter tax expense by $3.7 million split among the TSYS side of the house and the Financial Services side, have had positive outcomes on both sides.

The adjustment was really small compared to the hundreds of millions of dollars of taxes paid there in those periods.

But it was meaningful to the quarter and we just wanted -- [ Inaudible ].

We would expect that the tax rate on a go-forward basis would inch back up closer to a 37% mark than compared to what you saw this quarter.

I'm going to give you some highlights from our Financial Services performance for the first quarter before I turn it over to Phil for the TSYS results.

The Financial Services segment show broad-based strength there in the quarter, net income of $93.8 million up 18.1% over the same period a year ago, and excluding the impact of stock options, the net income growth was 21.8%.

The turn on assets on the Financial Services side grew from 133 a year ago to 1.43 this year with return on equity for the year so far at 17.2%.

The loan growth continues to be a very important part of the story for the first quarter we ended the quarter with loans at 22.4 billion up 11.8% from last year.

Keep in mind that we concluded the acquisition completed it on March 24 so the Riverside bank acquisition loans and the balance sheet are in our year end -- in our period-end numbers even though there was very little impact on the impact statement since we only included them for a week.

But when you back the Riverside loans out of the balance sheet, the year-over-year loan growth is 9.4% and on the same basis excluding Riverside, the length quarter annualized growth rate is 10.3%.

The loans are really on track with our expectation.

They're right within the range that we 'd expect it in the first quarter and are really on track to help us deliver the year per our guidance.

The credit quality is another key driver.

We had a solid performance with all of the credit metrics.

The nonperforming asset ratio continues to improve.

It was 0.45 at the end of the quarter compared to.0.46 at the end of last year and was at 0.52 a year ago.

So continue improvement there.

The charge-off ratio for the quarter was 0.27 reflecting a charge-off dollar amount of $14.4 million dand the allowance for loan loss has ended the quarter at 134 compared to 135 at the end of the year.

Really supported by the improvement in credit quality and with very strong coverage ratios.

The past due numbers remain at excellent levels with total past dues at 0.51 and past dues over 90 days at 0.08%.

If you remember, the beginning of last year, we set out a goal to try to grow core deposits at a rate that would exceed the loan growth and we were successful with that in '05 and we got another good quarter under our belt on that front.

The first quarter shows reported year-over-year core deposits at 17.5% excluding Riverside the growth rate is 14.5%.

The growth consists of 13.5% increase and overall retail deposits and 15.5% increase in commercial deposits.

The growth in the first quarter was primarily in commercial money market accounts and retail C.D.s.

The sequential quarter comparison reflects the seasonality of D.D.A. accounts as they were weaker at period end and on average for the first quarter versus the fourth, which is further normal seasonal trends there.

The most significant factor in our year-over-year growth of income, of course, is the growth in net interest income of 15.7% on the Financial Services side of the house and that's really driven by this great growth in the balance sheet and a 21 basis-point expansion of the net interest margin.

It was 432 in the quarter compared to 411 a year ago.

On a sequential quarter basis, the margin held stable at a very strong 432.

We had growth in earning asset yields increasing 29 basis points, and this increase ,of course, was driven by the variable rate loan portfolio and continued to have some benefit there.

On the cost of funds, we also increased 29 basis points and that's really due to the factor I mentioned a while ago with the seasonal weakness in D.D.A. and our continued shift in customer preference towards C.D.s towards the more expensive deposit categories.

For the remainder of the year we expect to continue very strong margin that we have with potential for even modest improvement.

We anticipate one more prime rate increase before reaching a period of stable rates.

The fed funds futures market obviously imply that there's some chance of getting another one in June and that certainly could be the -- our strategy continues to be one of gradually reducing our asset sensitivity as we approach a more stable rate environment.

The story on none interest income was for the quarter was up 11.4% over last year and the big drivers there were the bank card fees both debit and credit card fees up by 28% and 15.6% growth in financial management services revenues.

The revenue growth, of course, includes the contribution from the capital markets group that we added last year primarily on the customer flops business.

Service charges on deposits were a distracter I guess down of none interest income growth down 1% compared to a year ago.

When you look inside that category, NFSs were up 5%.

This was the highest year-over-year increase in the last five years in this particular category.

But the NSF fee increase was offset by lower account analysis due to the higher earnings credits on commercial accounts as well as decreases in other service charges primarily related to the growth of free checking accounts.

On a sequential quarter basis service charges on deposits were down 6.4%, and that decrease was split fairly easily between a sequential quarter seasonal decline and NSF fees when you just compare the fourth quarter to the first quarter of this year.

And then the decline and the account analysis fee related to interest rates.

Mortgage revenues were 5.9 million for the quarter which was right on top of what it was a year ago and basically, the total mortgage production was 350 million which represented growth from a year ago.

The origination fees were up but they were offset by decline in the secondary marketing gains.

We continue to be optimistic about the mortgage unit.

We think it will be productive and profitable this year.

And we've really begun to very seriously increase the collaboration between these kind of specialty product units and our bankers, which we think will continue to improve the financial performance.

G&A expenses, for the quarter, our financial services expenses at $179 million, a reported 13.4% increase.

If you exclude the impact of stock options up about 10.4%, aside from the options, the majority of the increase and expenses was in the employment expense category.

The key drivers for the growth in employment expenses were the impact of the annual merit increases, the impact of salary and incentives structure adjustments that occurred during the last year and a head count increase of about 4% even excluding the Riverside acquisition.

All in all, the financial services segment had a real good start for '06 and give us reason to believe that we can expect strong performance for the year.

Richard mentioned the segment reporting just a little bit of color there.

We have delivered the first version of that, and really do think it requires a little bit of tweaking and seasoning and socializing with all the way down to the bank level within Synovus before we share it externally.

And also it needs to - just to make it meaningful as Richard describes, it is a trend line that will be developed over the next few quarters.

So that's where we are on the segment reporting.

I think what you will see over the next few quarters is us beginning to talk about some of the key drivers within segment reporting just like we did today when we talk about the breakout in deposits.

We want to reflect back to the guidance that we offered in January of '06 and this guidance calls for an EPS increase of 12 to 14% based on our results for the first quarter including the TSYS outlook which Phil is about to review with you.

We feel confident about the rest of the year that are in a position to reaffirm those six guidance as it was offered back earlier in the year.

I'm going to now turn it over to Phil Tomlinson who's going to give you a TSYS [inaudible] overview

Thank you, Tommy.

It was kind of somewhat of a quiet quarter at TSYS which after the fourth quarter of last year it's kind of nice to have a quiet quarter.

Revenues were up 17.5%.

We had a 9.3% increase in net income.

The drivers for that were -- was, you know, we had two months of vital, which I hope you saw has recently been rebranded to TSYS acquiring Solutions.

I think that occurred last Monday.

And of course the other drivers would have been the fifth third conversion, the [AB & AMNRO] conversion and, of course, the Chase conversion.

Total accounts on file, quarter over quarter grew 18.8%.

One of the big announcements that we did make was we signed a deal with Exante Bank which is a wholly owned sub of the UnitedHealth Group which, as you know,one of the largest medical care providers in the United States and we'll be providing a broad range of payment processing services to those folks.

And I think it will lead to other customers in the healthcare business.

We're very excited about that.

We continue to realize the enormity of the cup data JV in China and we're continuing to add to our staff in Shanghai.

We've really been sort of overwhelmed with the reception that we've had in China since the announcement.

And we did renew a long-term contract with CompuCredit in Atlanta, Georgia.

One thing I wanted to tell you is the analysts are looking at the BFA termination fee and amortization of accelerated conversion costs and adjusting our per share earnings for the year at around $0.20 a share, which we concur with and we believe is appropriate.

We do have the largest pipeline in the history of TSYS with over 75 million accounts in the pipeline which we believe will be converted by the end of October.

Our prospects continue to be good.

Of course as you'll recall, Capital One is the largest bank in that pipeline., Toronto Dominion and we have a large national retailer, also, in there plus several smaller ones.

We believe we're finally getting some traction in the prepaid business.

After we sort of, I guess for lack of a better word, re-engineered that company and I believe now we're ready for prime time and I think we've got some good deals or some deals coming down the road that will be good for our company.

We're finally seem to be getting a little traction in Japan, also.

We really have not had a lot of traction in Japan since we've been there primarily we think because of the economy and the economic issues associated with it.

But we believe that if we can sign an issuer in Japan it will be tantamount to getting the Good Housekeeping Seal of Approval and we'll be off to the races in Japan.

Our loyalty business is enjoying strong growth and our TLP platform, which is brand new.

We consider the gold standard of the industry.

We made good progress within the industry.

We're now have signed clients at ESC.

Not only that process with TSYS but process with our competitors and as well as in house.

So we're doing well there.

Obviously, the big topic of conversation continues to be the loss of Sears and Bank of America and we believe we're right on plan with Sears and feel good about where we're at there.

obviously, the Bank of America issue is a little more difficult there.

An anchor tenant and we've been working with them since 1985.

We have identified over 35 million in expenses on an annualized basis that will go away once they leave.

The problem that we have is with both of these accounts, you can't cut -- really cut any expenses until they actually go out the door.

You have to process them, you have to process them 100% until the day that they leave.

And so that's what we're dealing with and that was a major portion of these termination fees.

We did announce at our annual shareholder meeting last Thursday that our board had agreed to a stock buyback or stock repurchase plan for up to 2 million shares over a two-year period that we will use from time to time as we deem necessary.

Certainly it has not been business as usual at TSYS but we're committed to being the best in this industry.

We've felt a little battered over the past six months or so but we have kind of gained our balance back and we're ready to go.

The next 18 months will represent a time of transition, but our fundamental business is as healthy as it has ever been and continues to set a strong pace.

We've got a lot of irons in the fire and we like our prospects just like Tommy we wanted to reaffirm that we'll close out 2006 in the high end of our 21 to 23% earnings guidance range.

With that, I'm going to turn it back to Richard.

Phil, thank you for your comments.

I'm sure we'll all have some questions in a minute.

Before we get to that, I just have a few thoughts about our current strategic agenda that I would like to share with the group.

Before I do that, actually, I will comment on the recent Riverside and first Florida acquisitions, one of which Riverside occurred just prior to the end of the quarter and the other in Naples just a day or two after.

On the integration front and from a people standpoint, we couldn't be feeling any better.

The leadership in both banks is very enthusiastic about their new arrangement and opportunities to grow and perform under our Synovus structure.

So we're moving ahead and feeling optimistic about what they bring to the Company going forward.

I want to say something about retail.

We've been reporting to the investment community developments in retail since we began the initiative, I guess, since the beginning of 2005.

We continue to feel good about results now.

We felt that last year was more of an implementation or transition year but it actually ended up producing good performance.

This continued in the first quarter.

You've heard about the retail core deposit increase of 13.5%.

I want to pint out, also, that we had a net 12,000 gain in our checking account base.

We're developing more metrics in retail than ever before and this 12,000 net gain converged into 44 per branch per quarter.

The reason that is mentioned is because we've developed a bit of a comparison with some other banks that released data, and that 44 per branch for the quarter stacks up pretty well.

And we were pleased with what we saw there.

Our bankers made 27,000 business development calls in the quarter. 43% of those resulted in at least one product sold.

Our services per household ramped up a little more in the quarter than is normal, indicating success.

This needle doesn't move rapidly but we went from 3.10 to 3.14 in the quarter.

We're also monitoring and assessing our cross selling efforts on the front line.

This on-boarding calculation as they call it in the trade, is now being followed within our company.

This represents sales of products within 30 pays from an account opening.

When we started calculating this about a year ago we were at 175. 1.75 products but this has increased through training and through emphasis to 2.1 products sold for this period that just ended.

We still expect to open 15 to 18 branches during the full year.

Three actually opened in the quarter.

One of our high level conclusions in the planning process was that we have significant opportunity if we can improve performance in each line of business or each specialty product area within the Company.

We've invested the number of specialty areas, financial management services or wealth management.

One of those.

And I can't really say that we have yet a lot to report in the way of dramatically improved results, but I can say that we have started to manage the Company in this respect more intensely through greater emphasis on accountability, more visibility through our management reporting and collaboration that is expected to take place between our market leaders, the bank CEOs and the heads of these specialty areas.

So as we continue to work on the templates for each business unit that that were developed in the planning process, we expect to begin over the remainder of the year to start moving the needle and getting a greater contribution to the bottom line from these groups.

The biggest success story within the specialty areas would be capital markets.

We're starting to really see some traction there, these 35 new professionals that joined us about a year ago are really making a mark within the company with their capabilities and their communication efforts with the front line bankers, the commercial lenders, primarily that are in all of our markets.

Drew Klepchick has completed a number of changes in FMS.

You might remember his mantra, "Simplification, specialization, and capitalization."

I think we're now moving on to the capitalizing piece. ou'll hear us going forward talk more about growth about new customer successes, about profit margins and performance.

So our plan is being put in place to make FMS a significant part of this company.

Commercial is an area of emphasis that you've heard mentioned coming out of this planning process.

It began last June.

Just as we did in retail we have created a task force of 20 some odd bankers that are active in the commercial lending and commercial banking area.

Their study and recommendations for a comprehensive company-wide approach will be completed in mid-summer.

You might notice that we're still seeing sluggish activity in the commercial loan growth measure in the single digits.

We think that this will begin to improve as we continue to place more emphasis on the targeting of middle market prospects, small business prospects within our five-state footprint.

But there really are reasons other than just loan growth that this commercial banking or middle market emphasis is important.

There are plenty of relationship opportunities through services such as corporate cash management, asset based lending, leasing, international, capital markets that really can come from these expanded and new relationships.

So I'm excited about the work that's going on in the commercial area.

There's no reason given our model, which is so appealing to business owners in every community that we serve that the model that we have is really perfect for serving the private business.

And we just need to target more prospects and put more emphasis in this area, not take a path of least resistance over into the transactional opportunities that exist in partial real estate.

We'll continue to work on maintaining and capitalizing on our expertise in commercial real estate.

But we need and expect more diversification coming from CNI.

Final thought that I have is to express to those here in the audience our complete confidence in TSYS.

I know that there are questions about exactly what the sources of growth are going to be in a consolidated issuing business.

The TSYS team, Phil in particular, has shown what it can do over many years, their track record is unparalleled.

They are, obviously if you are close to them, adapting to this new world and have many ideas that are being evaluated some of which are being implemented.

They have shown that they can be flexible when a customer changes occur as has happened recently as has happened in the past.

Diversification in that area continues to move through the examples that Phil has given UnitedHealth contract.

We've got the profit work flow management move that is proving to be successful, the loyalty business is still another success story within the diversification plan.

You heard him comment on international and then finally the Vital platform which is now TSYS acquiring position should create a platform for growth possibly even into the acquiring business.

If that is decided to be an avenue to pursue.

So we thank you again.

We will now stop talking and open the floor for questions and we're ready to receive those.

Thank you, gentlemen. [OPERATOR INSTRUCTIONS].

Our first question is coming from Nancy Bush.

Nancy, state your affiliation and pose your question.

Yes, NAB Research.

Couple of question here.

First one is for Tommy.

Tommy if we can just, on a few of the fee income items on the other non-interest income, forgive me if you've already mentioned this, but could you just tell us what the increase from fourth quarter was?

Yes, Nancy, the biggest single component there is a $1.5 million equity method writeup on a insurance company that we own 21% of, basically a storm insurance company that we've got through an acquisition a few years ago and they are having positive results.

Took the writeup in the first quarter.

That really accounts for the single item that stands out in that catagory.

Okay.

Secondly on the seasonality in service charges, and you know, the decrease in charges from fourth quarter due you, you know, increased free checking, how should we look at that number going forward?

Are we going to get sort of part of that back as seasonality wanes but part of it continues to go away, you know, due to free checking?

I mean, that was a pretty good, pretty large sequential drop.

When you look at the three components to service charges, we think we've found the bottom with NSFs, and quarterly results at least year-over-year reflect that.

We have have experienced before the seasonality that you saw, we think we'll get the NSF income back on track similar to a rate that looking at that year-over-year comparison on the analysis charges, obviously, a function of interest rates.

And we're being pretty well paid on the other side for the rates going up.

And that's just a factor that we, you know, have to live with here in the rising rate environment.

On the free checking deal, I think that phenomena will continue and we just got to make sure we're getting properly compensated in terms of balances and other services on checking, but we're not looking to win the fee income battle with huge growth numbers and service charges.

We haven't given up on them but we're resigned to the reality that they're probably not going to keep up with deposit balances and that's just going to really accelerate the need for us to be looking at other measures on fee income.

Okay.

And I guess I might as well go ahead and get the big question out of the way with Richard and Phil.

Are we still thinking about, you know, possible changes and the ownership structure of TSYS if the deal presents itself?

And I guess I would ask why not go ahead and do that ahead of the deal?

And why are you confident that you can get this growth path back?

Thank you, Nancy.

Phil and I in various audiences either together or separately, of course, field this question on a regular basis.

I think probably the best place to start would be to ask for Phil to respond.

Nancy, as you've heard me say over the years, I think that every day that goes by we're probably closer to doing something like that.

But today, I mean just because the law of large numbers, but today we don't know of anything, and we have looked pretty hard but we haven't seen anything that would drive us to want to push Synovus to push that button.

Ultimately it's a Synovus decision.

I have full faith that if that day comes in any time during my tenure here in thereafter, I believe that they'll absolutely go forward with it.

I don't think that's the issue about -- I don't think there's any issue about not wanting to do it or hanging on.

We just have not run across anything that was -- that we frankly got that excited about.

Now, we've looked at every deal in America.

For a lot of different reasons we have just not come to that conclusion.

So will it happen?

You know, I 'd say, you know, it probably will one day.

Is it imminent?

I don't think so.

You know, our fundamental business is good, it's strong.

We've run some proformas without BFA and a and Sears in it, the fundamental business is as strong or stronger than ever.

We have some great initiatives going on and the merchant acquiring business.

We believe that China is going to be huge long term although as I've said before, we think that's a three to five-year issue, but, you know, I can tell you, we're not pushing Synovus to do that.

And Nancy, we of course would work as partners in this decision.

I know there's a school of thought that says separate the two and you'll unlock some value.

That can be a fleeting assumption and we have always looked at this decision more strategically from the standpoint of only being interested when the opportunity and the need to use TSYS currency arises.

And we're current as we all look at the acquisition possibilities that Phil is describing in general.

He came back from a meeting with his top executive group several weeks ago.

I think they kicked around this question quite a bit and asked each other if there were any constraints that they felt today by being a part of Synovus rather than an independent public company.

And to the person they concluded that they were not being held back in any regard by the current ownership structure.

Having said that, I agree with Phil.

We're willing to talk about this at every opportunity.

We're running both companies and doing our capital planning in a manner that gives us total flexibility to react quickly if the need arises.

But it's just not an imminent move today given the fact that we just don't think it's appropriate.

If it changes we'll be ready.

If I could just add or ask one add-on to this, you know, as somebody who recommends your stock and is kind of watching it go sideways here.

I think mainly as a result of the TSYS issues.

When Phil, do you think we'll be able to say these issues have been over come?

Well, I think we're making good progress with that every day.

I obviously, well, I've said earlier in my presentation that, you know, from now through the end of '07 is going to be a time of transition.

I mean, obviously at the end of '07 we'll reset the mark and anniversary those two companies, those two losses out.

When you move on without those two and they're anniversaried out, we look really good on paper.

Like I say, our fundamental business is good.

Our prospect list is strong.

We've got as many or more prospects domestically and internationally as we have ever had.

They're here every day.

They're here from all over the world.

And again we're trying pretty hard to diversify into some areas that we are comfortable with.

So I don't know that there's any specific date out there that I could give you, but obviously, if we don't get our wagon back on track and I think we're pretty close to being there, you know, Synovus may be trying to throw us out the front door at that point.

So anyway, it's a question that we talk about every month over here.

And Richard's right, we did go off-site.

I did ask our folks that question and they really came back and said, you know, there's really not been an opportunity that we felt like we've been short changed on.

Synovus has always been willing to step to the table in some form or fashion.

Okay.

Thank you very much.

Thank you.

Thank you.

Thank you.

Our next question is coming from Tony Davis.

Sir, please state your affiliation and then pose your question.

Ryan Beck.

I hate to come back to more mundane things but looking at your expansion opportunities Richard today, I wonder if you could sort of walk through where you are today versus where you'd like to be.

And of these Synovus branches that you've got scheduled for this year, where exactly do you plan on putting them?

I'm going to give a few thoughts.

Fred Green is in the room and he might well add to what I say.

He can probably give you a better description of the 15 to 18 without going down each single one.

But the priorities that we have, Tony, are I would say the west coast of Florida.

We've made these investments there.

There's still plenty of gaps.

As you go down the coast, we would like to fill those in.

Not all in one year but we certainly want to do that.

We've got some of these new markets like Jacksonville and Savannah require ongoing investments more of an accelerated branch expansion strategy than we would have in a more established market.

And then just from an acquisition standpoint, we continue to mention and really to look at North Carolina as a possible new state to enter.

But I'm going to look to Fred now to see if he can provide more details on this subject.

Thank you, Richard.

Tony, on the branches that are planned this year, they would be in the markets that you would expect.

Those markets that we've entered fairly recently and have good growth opportunities with limited coverage. specifically there the Naples, the Tampa, the Savannah;

Rock Hill, South Carolina, is a new Synovus market for us, Nashville, Memphis.

These markets that we're trying to build out.

We're seeing good growth and trying to support with more resources.

In terms of new markets, we're looking at those markets that are contiguous to where we are, so Richard's comments about the west coast of Florida and central Florida, we have one grant facility in Winter Park as a result of our acquisition of First Florida.

That's in the Orlando area, it gives s a toe hold there and opportunity to continue to grow.

Thanks.

If Mark is around, I wondered if he might just give us any color if he might on some of your key commercial real estate markets from inventory absorption, underwriting stand as what you are seeing there?

We're really not seeing a lot of deterioration in real estate underwriting.

It's been very sound and solid.

We have had a couple of banks that have come in and offered non-recourse situations to a few of our developers.

We've chosen not to do that.

But our market growth, where we're seeing the really strong growth, it's really good throughout the Company.

Our new markets are performing well, Savannah, Charleston our two excellent markets that we're seeing very good, sound growth.

We don't see any overbuilt situations there.

Atlanta is another market that continues to be really strong and very sound in terms of absorption rates.

Affordability, those types of things.

Then our Florida markets are good and South Carolina is another really strong market.

Our secondary markets like Columbus again we're seeing good growth there because we have economic activity that's occurring with military, those type things.

And housing is really strong there.

We're seeing a little slowdown in, you know, obviously the west coast of Panama City, we've seen a little slowdown in Naples.

What we're seeing there are the investors really moving out of the market.

We welcome it.

We think it's a wonderful thing to see that happen.

Overall, know there are projections.

The southeast is projected to probably slowdown by about 8% in housing this year.

Again, we welcome that and we think we've got a good, healthy fundamental market in the southeast.

We're really not seeing any deterioration and feel good about our growth prospects.

In the commercial sectors.

I think where we're being most cautious is in new product.

The cost has gone up.

We're really doing a lot of comparison with new costs of product versus existing products.

So a lot of our customers are acquiring versus building but overall, we're seeing hotel fundamentals are better.

Office fundamentals are better.

We're really seeing good strength in that sector.

And the CNI market Richard mentioned we really don't have good, strong growth yet.

But our pipeline looks very good.

We've approved about a quarter of a billion dollars in commercial loans during this second quarter.

We've got another $460 million that we're looking at and we feel like our activity is picking up there.

The competition is tough in CNI.

The pricing is tough but not the underwriting.

The underwriting is still sound and strong so we feel good about that sector.

We're just going to have to compete and be good at making those kind of loans as we are in the CRE sector.

No reason to expect much change in the 25 to 30 basis point charge-off.

No.

Our targets this year are under 30 basis points.

We still feel comfortable that we're going to meet those goals.

Thanks, Mark.

Thank you.

Our next question is coming from Rob Rutschow.

Please state your affiliation and pose your question.

Hi, Prudential Equity Group.

First question's on the expenses for the financial or for the bank itself.

Your personnel is up a fair amount.

I know some of that was due to options.

I was wondering if you might be able to segment what else kind of drove that be it new hires or -- and what portion of that was due to new hires versus say merit increases and so forth?

Rob this is Tommy.

You're looking at the year-over-year, primarily?

Link quarter.

Okay.

On a link quarter basis, Financial Services dna expense of course up 9 million.

Employment expenses actually up 12 so the other categories are slightly down on a link quarter.

But just trying to break that $12 million increase into its pieces.

Stock option expenses are about 5 of it.

The salary increases are up about $1.6 million quarter over quarter.

A good bit of that is just a reflection of increased incentive accrual that flow into the salary expenses as we attempt to align, you know, productive activity with pay.

And then another thing that's a pure seasonal issue is a $3.3 million increase in employment taxes.

That's obviously just a function of reloading the first of the year against all of the FICA base and unemployment tax and all that that is very much front end loaded into the first quarter.

So those are the primary components on the linked quarter basis.

We did have a few more people during the quarter than we did one quarter ago.

I think I'm in the neighborhood of 70 folks hired in the quarter excluding acquisition so that was a factor, also.

Okay.

And so it sounds like we're kind of more at a run rate for the rest of the year.

Well, what you'll see is a burn-off of employment taxes.

A good bit of that spike will go away because the thresholds are in that.

But otherwise I think it's a reasonable run rate.

Okay.

And then if I could ask just kind of follow up on the TSYS question.

It looks like your capital levels are as high as they've been in at least a few years.

Can you just remind us what the optimal capital levels are for you in terms of having the maximum flexibility and if we should read anything into you having higher capital levels at this point?

What you are really looking at there is the consolidated capital ratios.

And they bid [inaudible] of really all of them that are shown there grown significantly over last year and over year end.

And basically, the way we're trying to run the company, a good bit of that capital is influenced by TSYS, and we're targeting them to have each segment appropriately capitalized.

TSYS creates a huge amount of capital and has a limited amount of assets and creates an appearance of being overcapitalized when you just focus on the financial services side of the company.

We are better than we have to be from a regulatory standpoint.

And really getting pretty comfortable with the levels that we're add on the financial services side but we like this.

We're in a very capital intensive business model right now with this balance sheet growth and we 'd like to see the capital ratios on the financial services side continue to expand a little bit.

So you heard Phil talking about the buyback on the TSYS side.

That obviously has an impact on the consolidated ratios but there's certainly room for that but otherwise we'll continue to steer the capital ratios upward a little bit, particularly on the financial services side.

Okay, great.

Thank you.

Thank you.

Our next question is coming from Christopher Marinac.

Please state your affiliation and pose your question.

Hi.

Fig Partners in Atlanta.

Rich, I wanted to follow up on the comment of acquisitions and markets for Synovus, et cetera.

Given the Riverside side is now closed, would that have effectively built out Atlanta for you or do you still see further opportunities down the road in Atlanta?

Chris, they're further opportunities for either smaller community bank acquisitions or branching to fill in.

As a part of this planning work that we did, we decided to take a good, hard look at each region that is managed by the regional CEOs in our company to determine what they felt was in order to capitalize on these fill-in opportunities.

Atlanta is at the top of our list to be accelerated into a really more aggressive branching effort.

So I would say just over the last 60 days they've got more on their list.

Fred, I guess probably more for '07 than '06.

But Atlanta remains our top market in terms of potential.

We continue to invest in it.

We will invest in both FMS as well as banking up there consistently over the next several years and will continue to look at acquisition possibilities.

But we are not nearly as dependent upon acquisitions in the Atlanta metro area for expansion purposes as we were four, five years ago.

Great.

That's helpful.

I guess the follow-up is with Mark.

The statistics that were given on the loans outstanding by type included Riverside in the quarter for March but not for December.

I just wanted to back the envelope.

It looks like the commercial real estate growth was closer to the mid teens.

I was curious if Mark had any color on that?

Our investment real estate grew at about an 18% rate without Riverside.

We added about 415 million in loans and CNI and owner occupied grew about 130 million for the quarter.

And most of the growth is still centered in that wonderful family area, the housing area.

If you look at our other commercial real estate.

The growth is, you know, is in the 10% kind of range.

Okay.

Great, Mark.

Thank you very much, guys.

Thank you, Chris.

Thank you, our next question is coming from Heather Wolfe.

Please state your affiliation and pose your question.

Hi, good afternoon.

Merrill Lynch.

Hey, Heather.

How are you?

Good, thank you.

I'm wondering if you guys have any intentions to help the market out on 2007 estimates at all?

I noticed there's a pretty wide gap particularly on the TSYS numbers.

I'm wondering when we can expect some help on that.

We haven't really talked specifically about it but it has been asked typically well always in the past our guidance has come, I believe, in January for the current year.

Given the events at TSYS, there's obviously is interest in giving an earlier look.

And Phil, probably neither one of us are prepared to answer that.

I guess we can consider it.

But until we're really ready, it would not be appropriate to come out with guidance.

I know a heck of a lot of work is going on to get your arms around the 2007 numbers.

You got any thoughts?

I just would agree with exactly what you said.

We're just not prepared to do it at this point in time.

We're working hard on it.

A lot will depend on when these banks taxes, are being, if there happens to be a delay which we certainly don't expect but there can be delays.

As an example, excuse me, if the Bank of America conversion were delayed, it would probably be delayed into 2007.

I dout you could delay it a month into the holiday season and be successful.

And so I think we're just kind of waiting until we get a little closer and we've got an awful lot of work going on over in our finance area trying to figure out some of the options that we have.

Okay --

I can assure you it's a big issue with us.

It's a big issue trying to model as well.

I'm sure.

Then just a follow-up question, you know, on the ownership structure.

It seemed to me and I don't know if I'm reading this appropriately but it seems to me that you are, I guess, less optimistic or that there's a lower probability that there will be a change in the ownership structure than you were in the first quarter.

Is that an accurate read and what makes you sense that there's a lower probability for that?

I don't think that's really the case.

I think sometimes our willingness to be so open about the subject can create a misinterpretation.

And I think I came back personally from a round of visits having had that question at every turn and just was doing a lot of talking indicating that we're always open to the possibility but really I don't think anything has changed.

We have not at any point in recent times been on the verge of doing something.

We've just had it out for assessment and analysis.

We have a meeting coming up in two or three weeks just to relook at all of the issues to make sure we understand if we got ready to do something what would be required.

But that should not be interpreted as really just a change in attitude.

It really is good, prudent, I think, management and oversight of this company that we have.

Okay, great.

Thanks for the candor.

Appreciate it.

Yep.

Thank you.

Our next question is coming from Todd Hagerman.

Please state your affiliation and pose your question.

Good afternoon, everybody.

Hey, Todd.

Just a couple questions on the commercial loan production.

Mark, I was wondering if you could give us a better sense in terms the trends and the product mix.

I'm curious with 62% of the overall portfolio variable rate, just kind of curious kind of the breakout with term real estate, I think on the commercial and construction fees just how that's been trending over the last couple of quarters.

And as we continue to see higher rates how that's influencing the customer decision and how that's influencing your expectation for loan growth going forward?

Yeah, most of our customers are still electing a variable rate.

There are some who request a fixed rate scenarios.

Typically, what we've done is used our investment banking arm for that and used derivatives to help them, especially on the larger loans.

You know, our variable rate on commercial real estate.

Our average rate is running about 7.9% right now if you look at the end of the quarter, you know, on the CNI sector it's running about 7.822.

And our consumer rates are about 7.747.

So, you know, we're not really seeing a big shift or a big request.

Most of our management of our balance sheet is being done through our asset liability arm in terms of how we want to position the portfolio.

But I'll ask Jodie, I don't know if you want to respond to that.

This is [Jodie Lowery], treasurer.

How are you doing?

We selectively have been adding fee fixed paid prime interest rate swaps to the fixed loan, you know, larger pools of the loan to manage it that way other than pushing any particular type of loan pricing or product down in the marketplace.

Basically meeting the customer's needs and then fixing our position with our balance sheet type estimates.

Have you had to change that positioning at all just as you think forward in terms of your expectations in terms of rate environment and the curve?

Has that changed at all kind of in the last couple of months how you, you know, manage your hedge position in terms of taking some of that sensitivity out?

I wouldn't say it's changed dramatically.

I mean, our objectives for quite sometime now is to gradually reduce that asset sensitivity to the balance sheet and continues to be in the balance sheet.

You know, I 'd say maybe our expectations of where our [inaudible] is going to peak has maybe ratcheted up just a little bit just as the markets have ratcheted up as well.

But we're still following that same approach to gradually reduce that sensitivity we still have.

We're working it now.

Then just finally, Mark in terms of the mini firm, your appetite there, how has that been over the last quarter or so?

Is that something that you put less emphasis on given the inherent margin?

Yeah.

We, you know, we have asked our folks to slow down our growth and, like, the one to four family firm, mini firm, we're in the low single digits there.

Some of our commercial properties, we've encouraged our customers to take out and approve our securitization arm to the permanent market.

So we are, you know, we are tampering that down a little bit.

Okay, thanks.

That's helpful.

Thank you, gentlemen.

Our last question is coming from Nancy Bush.

Ma'am, please restate your affiliation and pose your question.

NAB Research.

Okay.

Here's the simplest question you'll get all day?

What is the book value per share?

$10 and something.

[ Laughter ] Look, after 14 earnings releases, I'm too lazy to figure it out.

Isn't it on the --

You have --

Oh, you did?

How about $10.02?

Works for me.

Thanks.

Thank you, Nancy.

We appreciate the question. [ Laughter ]

Gentlemen, there are no further questions.

Do you have any closing comments?

Thank you.

I just thank again the group for joining us in this call.

We are optimistic about the year and about our future.

Our Southeastern economy remains very healthy.

We have a good set of well understood priorities in this company as a result of a lot of work that's gone on in recent months.

They're still cite our good feeling about the results or our opportunities for improvement and we'll capitalize on those.

Look for more diversification to materialize within the financial services unit and really within TSYS over the next several years.

So thanks again and we'll sign off at this time.

Thank you, gentlemen.

Ladies and gentlemen, that does conclude today's conference call.

You may disconnect your phone lines at this time and enjoy the rest of your day.