Synovus Financial Corp (SNV) 2007 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Synovus first quarter 2007 earnings conference call.

(OPERATOR INSTRUCTIONS).

It is now my pleasure to turn the floor over to your host, Richard Anthony.

Sir, the floor is yours.

Thank you very much.

And I want to welcome each of you to our first quarter earnings conference call.

We appreciate your continued interest in Synovus, and we want to take this opportunity to review our results which were released to the public this morning.

We feel that we had a good quarter in light of the industry challenges that we knew were there as we began the year.

Just to recite the obvious on the banking side, certainly credit quality is of some concern out there in all banks.

The ability to grow the balance sheet is an issue that many are contending with.

And certainly the margin itself with the flat to inverted yield curve, and competition on the deposit side of the balance sheet is an industry issue.

Within our business mix TSYS had its own challenges.

And I would like to say that if you add up the pluses and the minuses, I think we've got a big plus with TSYS.

They have shown a continued ability to compete for business and to compete for performance in a consolidating credit card issuing market.

They have managed their costs very effectively, and they have continued their expansion plan outside of this country with very impressive results.

As far as the banking challenges, the balance sheet growth that we were able to obtain really pleased us, both in loans and in deposits.

The negatives would include the margin.

We were down 10 basis points in the quarter, although we had good stabilization in the second two months of that quarter.

Tommy Prescott in a minute will talk about the margin and the tactics that we're using to maximize that source of earnings.

On the credit front, you did see an increase in NPAs.

You will hear from Mark Holladay later.

But we felt that -- we felt very good about our losses.

You notice our charge-offs were very modest during the quarter.

All in all we announced earnings up 9.1%, earnings per share up 4.7% at $0.45.

And our return on assets continue to be at levels that standout in our industry pretty much at the top of our peers.

That is the way we want to start out with the backdrop.

The way we've got this call organized is for Tommy Prescott, our CFO, to now take some time and go through the details of performance.

Phil Tomlinson, our TSYS CEO, will follow with a discussion of TSYS results.

And then I will come back with some concluding remarks before the Q&A.

Thank you, Richard.

And good afternoon to everyone.

We will remind you that we will be making forward-looking statements today that are subject to risks and uncertainties.

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

I'm going to cover the Financial Services highlights and really going to start with the three industry challenges that Richard mentioned, and then give you some other color on the quarter before I turn it over to Phil.

First of all I'm going to talk about the net interest margin.

For the quarter Richard mentioned it was 4.10, which it dropped 10 basis points from the fourth quarter of last year.

And of course that compared to the 4.32 margin we had in the first quarter of 2006.

We expected some margin compression during the first quarter; however, the actual pressure and the decline in the margin exceeded our own expectations.

I'm going to describe to you the key drivers of that decline.

The first one is the greater than expected and greater than normal decline that happens to DDA accounts in that first quarter.

We expected some of that.

The actual decline was greater than expected.

Also, the overall growth in core deposits that help backfill those missing DDA accounts that really helped fund our growth, all tended to be towards the highest end of the cost range, in the higher cost CDs and money market accounts.

The inverted yield curve that we're all living through right now has stimulated a high degree of customer preference for fixed-rate loans, which with the shape of the curve are at lower rates than if this loan had been made at -- or those loans at variable rates, which is as we would normally expect at this part of the cycle.

Then the growth in the non-performing assets triggered a higher than normal amount of interest reversals.

And a higher than expected level of secured deposits triggered a higher than planned level of investment securities, short-term securities.

And while those are marginally profitable, they create net interest income and a little bit of profitability.

They are dilutive to the margin.

All of those things I just mentioned are the kind of things that, along with a lot of other pieces that you model into the margin, but the actual negative influence of each one of those drivers was towards the most negative end of a range that we would have estimated.

And the combination of these factors exceeding those own internal expectations against the fourth quarter of last year created the compression.

We believe that the opportunities based on the activities that we're going through right now and the focuses on the margin, and then the maturities that are built into our balance sheet in both the asset side and the liability side, will results in improving the direction of our net interest margin.

Next I'm going to talk about credit.

The non-performing asset ratio increased during the quarter to 0.68.

It was 0.45 at the end of first quarter of '06, and 0.50 at the end of 2006.

The increase in non-performing assets was spread across a variety of loans of various sizes, really across our footprint in a variety of our banks.

The increase in non-performing assets was primarily in commercial real estate.

And we believe that the collateral values are well underwritten with ample loan-to-value ratios that should limit the risk of losses on these loans.

The net charge-off ratio remains at an excellent level, 0.13 for the quarter compared to 0.27 for the first quarter of 2006, and 0.26 for all of year 2006.

Past due loans, amended in good standing, they improved from year-end to 0.11 on past due loans greater than 90 days, and 0.60 for total past due loans.

And then the loan loss reserve ended the quarter at 1.30, up a couple of basis points from year end.

That really in response to a slight increase in the overall risk-weighted average grades.

We continue to feel confident about the overall quality of the loan portfolio.

Now I am going to talk about growth for a minute.

And we feel like we grew the Company at an appropriate level during the first quarter.

Total loans ended the quarter at $25.2 billion, up 12.5% from a year ago, and that is 11% excluding acquisitions.

On a sequential quarter basis loans grew 9.4%, which we view as a healthy level given the current environment.

We continue to better balance the mix of loan growth as commercial real estate loans grew 12.1% on a linked basis, and C&I grew 9%.

Retail loans were up 2%, and that was -- really home equity loans, one of our best growth categories there was up 11%.

But then that was offset largely by the seasonal decline in credit card loans and other commercial -- other consumer loans.

On the deposit side, core deposits grew 12.3% compared to a year ago.

That is 10.8% excluding acquisitions.

On a linked quarter basis average core deposits grew $237 million, or 5%.

As previously mentioned, the growth of core deposits was largely centered around the higher cost categories of CDs and money market accounts.

Moving on to some of the income statement highlights, net interest income was almost $283 million for the quarter, up a 8.4% from the first quarter of last year, and was driven by the good growth that we've had in the balance sheet.

The provision for loan losses at $20.5 million was up $966,000, or 4.9% over the first quarter of last year.

Noninterest income was $87.5 million, which is up 5.3% over first quarter of 2006.

That was driven -- service charges on deposit accounts were basically flat versus last year.

And really when you look inside the service charges NSF fees have increased 5%.

Analysis fees have changed little, but the offset of NSF fees is a decline in the fee income related to other service charges, primarily from the competitive forces of free checking.

Other highlights in the fee income category include mortgage revenue up 23%.

And I will mention there that we are not in the -- just will save your questions, we're not in the subprime Alt-A kind of exposure business.

But we did have a real good beginning of the year in mortgage revenue in spite of a pretty challenging environment there.

And then card fees were up 12.6%.

Also included in the fee income category was a negative item and that was a $1 million write-down related to a venture capital private equity investment.

On the expense side, G&A expenses were $194.8 million, or 8.9% over last year.

That is with employment expense growing 6% over prior year.

The two key factors in the employment expense line are the increased headcount when you look at the year-over-year basis to provide the manpower primarily for our growth and expansion that has happened over the last year.

Then those increases were partly offset by lower level of incentive accruals that occurred during the fourth -- during the first quarter of 2007.

Our occupancy expenses are up 16.1%, and that is largely reflective of the 22 branches that we have added since last year.

Other G&A expenses are 11.6%, up mainly due to higher data processing expenses.

Overall G&A expenses are up 5.9%, excluding acquisitions.

We continue to tighten expenses with a key focus on headcount.

Our total headcount during the first quarter of this year increased only 40 team members.

And those were primarily front-line team members to help cover the new branches that continued to open in 2007.

We have opened eight of them so far this year.

That growth rate in people at only 40 during the quarter was less than half the growth rate that was established in 2006.

We are really pushing as hard as we can on every front on expenses, and have gotten some successes there in changing the trends on headcount, in spite of the fact that we continue to grow the front-line of the Company.

We're pushing hard against all the challenges that Richard mentioned.

We're pushing on every front, including expenses in the margin and otherwise.

And we continue to expect a year that will cause Synovus Financial Services to stand out among our industry.

TSYS has had a great start to 2007, and I'm going to stop here and turn it over to Phil.

Thank you, Tony.

We are really excited about our first quarter.

Our net income was at an all-time high of $57.3 million, or up 13.7%.

Revenues before reimbursables increased 4.3% as compared to the first quarter of '06.

If you recall, in the first quarter of '06 we had Sears and Bank of America that were included in that quarter, and that was over $1 million in core revenues that went away on a comparative basis.

We have replaced that lost revenue with new business and strong internal growth.

Our organic growth exceeded 12% for the first quarter.

Operating income margins before reimbursables improved from 21.8% to 24.9% quarter-over-quarter.

We fully expect to close out 2007 with operating margins in the 25 to 26% range, which we think -- which is phenomenal improvement.

Our diluted earnings per share increased 13.9% to $0.29 in the first quarter of 2007 compared to $0.26 in the first quarter of '06.

From March 31, '06 through March 31 of '07 we added over 132 million new accounts internally and from new clients.

We also have a strong cash flow, generating an additional $67 million in new cash.

Our international revenues that you have heard us talk about a lot over last several years grew 47% quarter-over-quarter.

I think it is really impressive to note that on a non-GAAP basis, or pro forma basis, excluding the fourth quarter termination fee and other fees associated with the Bank of America departure, net income for the year should increase in the 20 to 22% range, up from negative 14 -- excuse me, up from 14 to 17%, which was our previous guidance.

On a GAAP basis we have improved net income guidance from a minus 3 to a minus 5 to new guidance of a flat year, or flat or up 2%.

Six to seven months ago I will tell you that conventional wisdom would have said that is impossible.

And I think we're there today.

These results are a result of our team working hard to generate new revenue and reduce expenses.

I think it really does show how resilient TSYS really is.

Some highlights for the quarter include the fact that we signed agreements to provide merchant processing solutions for Clearnet and National Processing Company, formally known as Iron Triangle Payment Systems.

We also renewed processing agreements with Sage Payment Solutions and Moneris Solutions for their U.S.

portfolio.

If you will recall, Moneris is a consortium of Canadian banks in the merchant processing business.

We're also really excited that we've signed Norway's largest Financial Services Group, DnB NOR Bank ASA.

And we're going to manage their card portfolio.

They have plans to really grow that portfolio.

And this is through our TSYS Card Tech acquisition.

And there will be -- this bank will be among the first to implement SEPA compliant technology along with the necessary flexibility needed to deliver cost effectively and leading-edge customer service.

We're really excited about that.

We also resigned a contract with -- our contract with Spira de Mexico to continue processing their consumer credit portfolio.

We have talked about them before.

They are one of the largest retailers in Mexico.

Last, but certainly not least, we have completed the final phase of the Cap One conversion.

You'll remember we told you there was a small portfolio in Canada that was the last piece of the Cap One conversion.

So all that is done now.

We're excited over the progress we have made.

We think we made significant improvement in our guidance.

If you will recall, last year on May 17 in New York at our Analyst Day we had given guidance of being down 17 to 15% for 2007.

So we really have made great strides and great progress.

With that I'll turn it back over to Richard.

Phil, thank you very much, and congratulations on an impressive quarter.

Tommy, thank you for your remarks.

I want to conclude before we turn to questions by making a few comments about our strategic priorities.

As you follow our Company on the Financial Services side, you hear us talk frequently about our top priority being the commercial banking strategy that was developed over the past year, is now in an implementation phase.

We are seeing good results.

We have good accountability.

We have appointed commercial leads in each of our banks.

Kevin Howard here with the parent company really manages a lot of those efforts.

And you heard about our loan growth -- actually the C&I portion of our loan growth was 9.6%.

If you take the owner occupied real estate loans out of that, the pure C&I was up 12% in the quarter.

This is creating a pretty good balance with commercial real estate for us at this time.

And we will expect our CRE volumes to decline some over the remainder of this year, and the C&I (technical difficulty) pick up the slack for us.

Our services per household for our commercial relationship continue to expand.

We're having good success with our remote Express Deposit products as we approach 1,000 of those machines now out in the hands of our customers.

And our Capital Markets group is increasingly working with our commercial customers to help them from an investment banking and a risk management standpoint with the derivatives that are placed to minimize our customers' interest rate risk.

Our retail strategy has been in operation now for about three years, and we are seeing very good consistent results there.

In the quarter our retail deposit growth was 13.6%.

We felt extremely good about that since it compares with a 10% goal that was established for 2007.

We opened almost 24,000 checking accounts.

Our goal for the year is 100,000.

This is in the retail category, so we are well on track to meet that goal.

Our services per household in this sector continued to expand.

We increased by 3 basis points in the quarter, in line with our 12 basis point goal for the year.

So retail is really a matter of optimizing the investment we have in approximately 300 branches.

We are continuing incidentally in the third strategic priority that I would like to mention, the expansion into new markets.

Many of our banks in some of the key markets have relatively low marketshares.

They perform well, but it is important for us to offer increased convenience and accessibility for our customers and prospects.

So we will open about 20 new branches for the year.

Of that 20, 8 were opened in the quarter.

This compares with 17 new branches that were opened in 2006, which was ramped up considerably from the 4 and 6 numbers of new branches that were opened in 2004 and 2005.

We're concentrating these new investments in the key markets, the growth markets.

In fact those that were opened in the quarter included locations in Tampa, Savannah, Birmingham and Memphis.

Now the next subject I would like to spend a minute on has to do with TSYS and the ownership structure there.

I know many of you are interested in that.

We read comments from the investment community about the pending decision that we will make.

We don't have anything new to report.

And I would say the reason for this is that we have a process that we understand very well.

There are reasons for the timing not to be as quick as some people would like.

But when this decision is announced, I'm confident that everyone will understand the process that we took and why it was done in that manner.

There obviously have been some new factors to consider, some new information to ponder having to do with the M&I Metavante spin transaction that was recently announced, as well as the FDC sale to a private equity group.

And we're taking the information that we have gathered from those two events into consideration.

Meanwhile we continue to work with our outside advisers.

We're working at the Board level.

We have a small team in the Company working on this opportunity or issue.

But I'm confident that there are no distractions on either side, whether it be TSYS or Financial Services, that will harm us by this work.

We're moving ahead, business as usual, concentrating on the fundamentals and growing the customer base in both lines of business.

We have no immanent large transactions either that are on the horizon at TSYS, so there is really no pressure at this point to speed up the work.

We will continue as events unfold to inform all of our constituency groups as they deserve to be informed.

That really concludes the formal reports that we wanted to make.

We know that there will be questions from the group.

And at this time I would like to open the floor for the question and answer session.

(OPERATOR INSTRUCTIONS).

Nancy Bush, NAB Research.

Just a couple of questions here.

First, if we could hear from Mark, what part of the rise in CRE NPAs was accounted for by Atlanta?

And if we could just get generally anymore information.

About 27% of our increase was from Atlanta.

We were up about $11.4 million there.

One of those was an A&D loan for roughly $7 million.

We had a borrower that died, and we're working with his estate to try and work through that loan.

And I will go ahead and mention Florida.

We are up -- 36% of our NPLs came from Florida, about $15.3 million.

And about half of that was land.

Really there are only -- there were two banks in that market, Pensacola, where a land loans -- we had three land loans that went into default there.

As you know, about 2.5 years ago we quit lending on vertical construction for condominiums.

These borrowers had been carrying that land for some time, and we decided we wanted to put those on nonaccrual.

And then about 37% of our other final increase came from outside the Atlanta and Florida region.

Really the largest is the state of Georgia, about $8.8 million, or another 21%.

Really not a lot in South Carolina, Tennessee or Alabama, so that basically is the breakdown.

Richard, just a question for you on the whole issue of TSYS.

And I know there is no answer for this, but as you know, I have a little bit different take on the whole subject.

This quarter seems to me to be a pretty good illustration of why it would be tough to spin TSYS off at this point.

Because as you mentioned in your introductory comments, they had a very good quarter.

We may be going into a part of the cycle when Financial is having a bit tougher time.

Could do just reflect on sort of the philosophical question of whether you would really have to restructure the Financial Services part of the Company if indeed you spun off TSYS?

I understand your point of view, and you are exactly right.

Not just this quarter but over the history of this Company, or at least since early '80s, having the TSYS component of our business mix has been very powerful from a growth engine standpoint and a countercyclical standpoint.

So we like the mix very much.

The obvious driver in this decision has to do with diversification at TSYS and the need to make acquisitions, and the possibility, or probability, that the capital structure at TSYS would need to be leveraged, which is somewhat hard within a bank holding company ownership framework.

And also the use of the TSYS currency, which today is not possible because the ownership would drop below 80%, and that could be punitive long-term from a tax standpoint.

So those are the issues.

But certainly from an emotional standpoint, I understand the other side of the argument.

What we have to do is to weigh both to consider what is right from a long-term strategic standpoint.

The unlocking of value enters into it, but for us the more important issue is long-term and strategic.

We are continuing the work.

And I think everybody understands the issues.

I think most people are probably frustrated with the timing, but that is just the way it is.

Could you just reflect, the TSYS ownership has enabled you to have a somewhat unusual balance sheet for the industry.

And has enabled you to have a higher level of CRE on the balance sheet than I think would otherwise be tolerated.

Do you think you would have to dramatically changed that loan book if you decided to spin off TSYS?

I don't completely share that opinion, although I acknowledge that our concentration in commercial real estate has eased up in recent years.

We can manage our capital on a post TSYS spend basis so that we don't have an issue there.

I do think the move that we're making to diversify and to balance the loan portfolio and stabilize it is more due to the -- it is more internal rather than external.

We have not felt any external pressures.

Now we might, if we let that percentage continue to go up, up and up.

But strategically we have determined to stop growing the bank in that manner, and to use the C&I opportunity as a way to provide replacement earning assets.

We also have been looking to a period that we're about to move into in, and that is when CRE volumes drop off and we need a way to replace those earning assets.

I don't think that we have viewed our concentration in CRE as having been made possible by the TSYS ownership.

Okay, a philosophical difference.

Thanks.

Jennifer Demba.

I was wondering, Richard, if you could talk about your loan growth that you experienced in the first quarter by geography?

And secondly could you talk about the management change at FMS and the plans in the future for that the operation?

I'm going to let Mark prepared to answer the first part, and I will go ahead and talk about FMS.

Drew Klepchick had headed up that Wealth Management Group for the past year and a half.

I'm going to say that we give him high marks for the impact that he has made on this Company.

Drew came with his own stated objectives to simplify the moving parts, to specialize in the areas that we can do the best competitively in, and to capitalize on the foundation that would result from some of the tough changes that come from this work.

And he spent the entire period of time working on two things.

Those three matters and really the development and really sort of the promotion of Paul Todd, who has now come in to head these areas up, plus a couple of new things that we've given him.

So we feel like that what we did with Drew's leadership paid dividends for us within the Company.

And he felt that he wanted to return to Atlanta full-time to work with clients, develop relationships and new business at Creative.

And incidentally he is very good in that particular area.

We're excited about this opportunity to have Paul's leadership here at the executive level in our Company.

He is excited about it.

He has spent the last month doing exactly what any other leader would expect him to do.

He has been out in the field listening, just trying to learn what is on the minds of our bankers, because we rely very heavily on the bank customer base to be successful in FMS.

We feel like things are headed in a good direction there.

We will have more information about the vision for that group.

But over this past year and a half period of time volumes -- I mean, margins have strengthened, our profit performance has improved, and we're in the right track.

Now I am going to ask Mark to answer the other question.

We break our growth down by regions.

And if you look at our Atlanta area, it grew about 6.92%.

The commercial real estate growth was roughly 9% of that 7%.

Our coastal region grew 7.8%.

We actually had negative growth there in the real estate sector.

Our annualized negative growth was 4.36.

What we were pleased with there was our C&I growth.

The coastal banks grew at almost 26% in the C&I area.

And then the banks outside of Atlanta and the coastal areas grew at about 12.5%.

And the C&I growth there was about 7.5%.

So we felt good about the growth.

If you look at the composition of our portfolio, about 53% of our loans are in Georgia, 13.8 are in Florida, 14% are in South Carolina, 14% in Alabama, and about 4.5% in Tennessee.

Mark, you had more sequential growth in residential development and land acquisition than I would have guessed.

Can you give us some color behind that?

Yes, I will be happy to.

Our land growth appears high.

It is showing a 33% annualized growth.

A really big chunk of that growth is tied to retail shopping centers, about half of the land growth, and it is really in nonresidential.

Then if you look at the land growth, if you back that out, it would have been an annualized rate of about 14%.

A lot of that is in South Carolina in some of our stronger markets.

We've got some really good strong borrowers there as well.

And then we did have some land growth in the Alpharetta area, also with some very strong borrowers.

And the residential growth, it is really -- a very significant amount of that also is tied to South Carolina.

We grew almost $90 million there in that area of geography.

Again, a very stable market for us.

And if you look like at Huntsville, we had about $5.5 million in growth in Huntsville.

We've only got two months of supply on the ground there.

It is very limited supply and very strong demand there.

Nashville, another market that we had some residential growth of $7 million.

We've got gross inventory there on the ground of about 2,369 units.

And we've been 12 month demand there of almost 3,900 units, and a very stable inventory -- spot inventory environment.

Beyond that our utilization on some of our lines has gone up.

And I can give you the utilization rates, if you would like those.

Sure.

Our commercial construction utilization rates are 68%.

They were more in the mid 60s last quarter.

Our residential A&D utilization rates are 71%.

And our [helock] utilization rates are 56.9%.

I also want to mention the loan-to-value ratios on our loan portfolio.

I think that is pretty significant.

As you know, we really didn't see any losses in our real estate sector.

I think that is a function of how conservative we are on our loan-to-values.

Our land loans overall portfolio loan to value is 39.2%.

Our A&D loan-to-value is 61.29.

Our commercial construction is 75.56, and our residential construction is 72.78.

That is the committed amount to the loan-to-value ratios on those properties.

[Stephen Alexclopholus, Warranty Life].

A couple of quick questions.

I'm curious, with the customer preference for CDs and money markets putting pressure on the margin, what is it that you see offsetting that that gives you comfort that you would hold the margin stable here?

This is Tommy.

I will take a shot at your question.

You go through that long list of issues, and one of them is the seasonality and the otherwise decline of the DDA accounts.

And we've have got a lot of lines in the water and a lot of efforts, including the C&I strategy, to bring the DDA balances on the books.

We have a belief that that will occur, and that is a very powerful remedy in this rate environment to bring that kind of money in.

We additionally have got this broad based efforts across the Company.

We primarily price at the frontline.

And I think one of the issues that has been facing us is achieving a balance between growth and pricing.

And I think that the Company has the message, and the frontline has all the message and the tools to reshape that balance a little bit.

And quite frankly be willing to bring on some additional wholesale funding if necessary to take some of the pressure off of the funding side of the Company.

We also have some structure of our balance sheet that is we believe fortunate a little later in the year.

Some in the second quarter and some in the second half of the year.

But I will give you an example.

We've got about $0.5 billion worth of CDs that are priced north of 5.75.

And we believe we've got the ability to bring all those back in, or to replace them with a much better rate.

Actually, about half of the amount I just ascribed is over 6%, so you can see immediately there could be some relief as we reprice those CDs.

We also have about $500 million worth of our security portfolio that rolls off during the last three quarters of 2007.

And like those are rolling off at 3.97 average yield, and we think we can replace those in the 5% neighborhood, So those are I guess two general answers.

And one is just behavioral and the other is just structure within the balance sheet.

We think with the right focus and pressure that we can advance because of the margin.

And I wouldn't want to tell you there's not any risk in it, because you know there is for the whole industry.

But we think we're doing what it takes to stabilize it.

We are encouraged by what we saw in the quarter.

Richard mentioned that it was -- that the drop we saw occurred mostly in January, and it was basically at the 4.10 level throughout the quarter.

But that is our thinking.

That is very helpful.

I'm curious, given the focus on expenses you talked about, what is the outlook for expense growth in '07, just at the bank level, not looking at TSYS?

We haven't guided with that specificity, but I will tell you pretty quickly, one of our internal goals is what we call positive productivity to have the expense number come in under the revenue number.

And with the pressure that is out there on the margin and otherwise then that will require us to keep pressing on expenses.

We would expect it to lower from the first quarter growth rate where I believe was 8.9%.

Keep in mind that the fundamental rate was 5.9% when you exclude the acquisitions, but we would like to continue to press and even lower that ratio also, or that comparison.

Just a technical question.

If you did announce a change in the ownership structure at TSYS would both sets of shareholders need to approve that change?

No.

No?

No.

Would the TSYS shareholders need to approve it?

No, neither would have to do that.

Neither would have to do that.

Okay, thank you.

Robert Patten.

A quick question.

Where are you guys in terms of your thinking around FAS 159 and 157 adoption?

Nobody else jumped up to answer that one, so I'm going to take a shot at it.

On FAS 159 we have studied it extensively.

We participated in industry conference calls with ABA and with our accountants and advisers.

And quite frankly we think there is a practical application for some companies for FAS 159, and that would be some that I guess have mortgage servicing rights where the economics and the accounting of hedging don't work together, and they can apply 159 and get there.

There may be some who have been faced with long-term balance sheet restructurings that feel that they can afford to go forward with FAS 159 on other parts of their balance sheet.

We don't fit into either one of those categories.

And then the other consideration in FAS 159 is the price of admission, and that is having to adopt FAS 157, which requires a greater level of sophistication and mark-to-market methodology.

And we don't think either are a current fit for us.

We will obviously adopt them as they become required, but not an early adopter.

Thanks, Tom, you did good with that one.

Also, could somebody give me an update on what the liability issues in terms of where you think it is right now with CompuCredit and the ongoing lawsuits?

I am going to turn to Sanders Griffith, our General Counsel, who probably follows that situation more closely than anybody else to give an answer there.

We've our involved right now in conversations with the FDIC as a result of this investigation.

We don't have that matter completely resolved yet.

And I think as we have indicated in our earlier filings, as we will indicate hopefully I guess in our filings later on next month, we don't think that should have a material financial impact on the Company because of our indemnity arrangements with CompuCredit and their performance of those indemnity obligations.

Tony Davis.

Tommy, you have been using in the past swaps to try to take away some of the asset sensitivity of the bank.

I wonder if you've got some room the other way, given this shift that we are seeing here back to a fixed-rate pricing prevalences by some of your customers?

We continue to have -- we were taking some of the asset sensitivity off the table, and come down to basically an almost neutral position.

Our loan portfolio, I guess the after derivatives number on that is about 58% variable.

But to hedge those fixed-rate --.

That's too quick.

What's that?

That's too cute, isn't it?

Yes.

To hedge the fixed-rate loans would really require us to do what we have been trying to stay away from, and would reverse the course of our move towards the backing away from the asset sensitivity.

And we have been unwilling to do that so far.

And quite frankly the spreads are not very attractive either.

Richard, the last number of I heard, I believe, was about $1 billion in targeted pick up in business from AmSouth regions.

I wonder if you could give us an update on where you stand there?

Let me just say that consolidation has continued around us.

I guess that was the biggest transaction really that created a competitive opportunity.

And we do compete with those too in many of our markets.

And certainly, our goal in every market is to become the go to bank in those situations where major regional competitors have the business.

We don't really release the numbers.

We do try to track where we're picking up business from in each of the five states in which we compete.

We have had some good success as a result of consolidation in general.

And we feel that more is coming.

I think that customers are uneasy when change like that is announced.

Sometimes they give it a wait-and-see attitude.

They are also are others like us out there trying to line up, to be in a position to pick up business that might come from this.

But we are having some good success.

We just prefer not to give any particulars on it.

Kevin Fitzsimmons.

Richard, I was wondering, your earlier comment about the Metavante and First Data situations being -- presenting some different things to think about.

Is this something you would describe as pushing the decision timeline out?

I think the last time publicly you mentioned a date was you said you would hope to have a decision sometime in 2007.

I didn't hear anything like that today.

Are these new options that maybe weren't necessarily thought of before that make this a moving scale?

And then secondly, if you could just address your M&A outlook.

I know you have talked about wanting to get into North Carolina at some point.

Does the M&A outlook hinge upon what happens with the TSYS ownership?

And how do you feel about that?

I think probably it would be accurate to say that our M&A activity, while work is going on, would not take a big leap forward until we get the spin pretty much out of the way.

I will say that our view on that continues to be, as we previously stated, and that is to have an interest in North Carolina and certain Florida markets is our top two priorities.

As far as the M&I and Metavante, and even the FDC transactions affecting dramatically the timeline, probably not dramatically, although it does take some additional time for us to absorb some of the things we have learned.

For example, it appears that M&I is coming out of this spin with quite a bit of capital.

And we are sort of intrigued and following that with interest to try and assess what they or anyone else like us would do with this excess capital, including a leveraged technology company out there as opposed to one like TSYS, which is pretty clean and unlevered.

So there are issues there, but we could probably figure that out within a reasonable period of time.

Just a quick follow-up.

I know you acknowledged the investor frustrations before, but do you feel some pressure by a certain time limit to give a decision?

I was looking today in the stocks -- Synovus' stock is up something to the degree of 29% since mid-July, where the peer group is about flat.

I would have to imagine some of that lift is this possibility, is this potential decision.

Do you feel that there does have to be a timeline, or at least a point where you would go from exploring the alternatives to starting to talk investors down from the possibility?

We do feel a responsibility to be decisive and to manage the process, which as I say, is more internally known then externally.

We feel the responsibility to manage this process well.

As far as the evaluation and the impact there, we certainly think that the strategic approach that we're taking should mean that any owner of our stock should look to the long term.

But we are going to act on this thing when we can within the definition of the process that we have.

It is just frustrating to us and to the investor community that we can't really describe everything that has to be considered on our end.

Michael Rogers.

More of I guess a blue sky question.

But I am wondering have there been any recent dialogue with the regulators on the CRE portfolio?

And how would you characterize their attitude in general towards the size and the composition of the portfolio?

Mark Holladay, what can we say about that question?

I can tell you, we had looked at the -- we have every regulator in the system, because we have separate charters and we have the OTC, the FDIC, the state of Georgia, state of Florida, state of Alabama regulators, along with the Federal Reserve, and they do come in and do targeted looks at our -- looks our portfolio.

As you know, there has been guidance -- CRE guidance that has come out in the last year or so to say, to talk about folks that have concentrations in their portfolio.

There is an outline of that guidance that says this is what we're looking for.

What I would like to tell you is that we do everything in that guidance.

And that our regulators have looked at our portfolios and continue to look at them.

Even though I can't really tell you our ratings, but I can tell you that we're not getting any kind of pressure to change the way we operate this Company.

If I could also come from a debt perspective, I just wanted to get a sense for as you go forward looking at what you might do with TSYS over longer term, what kind of philosophy do you have with respect to where your holding company debt ratings should or could fall out?

I'm going to probably ask for some help on this.

But I will say that the impact on our debt ratings is certainly one of the issues that has to be explored through our advisers when we consider the two companies being separated.

So we are studying that very carefully.

The use of debt for expansion purposes has been used some in the past within our Company, but basically TSYS has no debt, has a lot of capacity if it were to be used, and it probably would to some degree going forward.

Tommy and Sanders, is there anything you would like to add to that question?

I will be glad to add, over the long-haul the debt rating for Synovus will be better where the spin to happen, if you assume that TSYS would be an aggressive acquisition path.

In other words, if the leverage ended up on a stand-alone TSYS company, then the Synovus debt rating would be superior to that, no matter what happened immediately after a spin.

Those are just some of the conversations and part of the education curve that is going on.

But that is our belief, that for the long term that our debt rating would actually be superior.

You mean superior to the present rating of, I believe, low A or superior --?

No, it would be better than what it would be if we had to lever up to allow TSYS to acquire.

I guess I'm a little confused where that would put you philosophically.

Would that mean a single A, or even better than that, or not necessarily?

Not declaring a rate on that kind of pro forma basis.

We don't know how to do that on a pure speculative basis.

Nancy Bush.

(OPERATOR INSTRUCTIONS).

Tommy, just a question for you.

The guidance, the previous guidance on the margin which is I think that we would end the year at 4.20.

And as I recall that guidance had some Fed rate reductions, etc., in it.

I'm assuming that guidance is no longer active.

Is that correct?

We had -- I think one of our assumptions that was in the 10-K implied some possible modest rate reductions.

We always felt like that would be towards the end of the year, and never was a significant factor.

And quite frankly, don't feel like any potential rate move in a very modest range at this point would be as big a factor on the year or the margin as may be what happens to the overall curve, and then how we're able to execute on just a frontline pricing standpoint.

You're right, we have taken the assumption that rates might go down off the table and declared a stable rate environment assumption, but it really isn't a big difference than the previous guidance.

I'm a little confused.

Does that mean we're still looking at exiting the year at some level higher -- some level in the margin that is higher than it is today?

No, the margin guidance as in the release today says at or near the -- or says near the first quarter level of 4.10.

That is the new guidance.

I'm sorry, I (multiple speakers).

The 4.20 is now officially off the table.

Should we see just a quarterly stability or go up, go down?

How do we think about it in sequential terms?

We feel like some of the things that I mentioned earlier are a little bit towards the end of the second quarter and on out into the second half of the year.

When we say near that implies that we could need a little running room I guess downward early, and hope to have the -- at or near the 4.10 level for the remainder of the year.

But it is -- we don't expect a lot of volatility.

We would love to be able to actually hold on to the 4.10, and we would certainly be glad for it to go up a little bit.

David George.

A couple of quick questions.

Tommy, first for you.

Can you talk about, and I apologize if you covered this already, your expectations for the tax rate for this year?

It has been kind of jumping around a little bit.

And then maybe, Richard, on the asset management and fiduciary fee line, can you talk about from a top down perspective what is going on there?

It was down a little bit sequentially, and it was up only 4.7% it looks like on a day year-over-year basis.

Are you happy with that growth?

And what are your thoughts about that business philosophically?

Tommy will go first.

The tax rate, I think the best way to look at it is to take a -- on a before minority interest pretax basis assume about 36% for the remainder of the year.

We should get some relief there relative to Q1 it looks like?

That's correct.

We have from the Street items that were a little bit negative.

Okay.

On the asset management side, a couple of comments.

First of all, we had a non-recurring onetime fee that was earned in the fourth quarter of last year that sequentially caused the returns to look lower in the first quarter of year.

That was an impact there.

Our attitude about that business is really -- it is certainly bullish and optimistic.

But we're going to be building the wealth management area kind of one customer at a time for the foreseeable future.

I would say that the major strength that we have to build on would be first of all our Family Asset Management Group, the Family Office Group here in Columbus that already has a nice customer base, and has gained recognition in the industry for being innovative and sound.

I would say our Capital Markets Group going forward has a chance to make some significant contributions, and they are managed really out of FMS.

And so the uncertain pace expansion with Trust will be driven by successes in one market at a time.

But we will over time take Trust out into most of our key markets.

We have made a decision not to try and do too much at once there.

So we have slowed down some of the internal expansion on the Trust site.

We had a very successful move that took place in 2006, and that was the movement of the brokers.

I guess we have 55 or so brokers out of this stand-alone unit directly into the banks.

They receive training in compliance and clearing support from our securities company, but now our banks -- really our CEOs managed the brokers, therefore, creating much more accessibility and coordination with our bank customer base.

We saw volumes jump dramatically.

And in fact some of the profits now from our brokerage operation are recognized in the banks, not in the securities unit.

That was a positively we think over the past year.

Heather Wolf.

Just a couple of quick questions.

First of all on the total guidance, it looks to me, if I am not mistaken, that the guidance at TSYS has increased, which sort of de facto reduces the guidance from the Financial Services unit.

I'm curious if that is the right way to look at it.

If so, what prompted the reduced guidance?

Tommy will reconcile that for you.

The increase in the guidance thesis effectively adds about $7 million to our bottom line.

If you just kind of take it from a center point of old guidance to center point of new, and then apply the minority interest to it, it is about $7 million.

It took about half of that -- and that is a little over 1% of prior year's income.

And it took about half of that to overcome the fact that we have increased our own estimate of outstanding shares based upon two factors.

One is the stock price rise creates more shares in the methodology that is used to compute outstanding shares for EPS.

In addition to that, there has been a higher than expected and higher than normal level of option exercises.

And again you would assume that possibly to be linked to share price.

Those two things have consumed about a half of that increase.

And the other half is, we have talked about the challenges all day, and you can write it off to that and rounding, but there is really not a lot left over.

We know we've got a tougher three quarters of the year ahead of us, but we feel confident in sticking with the guidance.

That is helpful.

Then just lastly, are there any large recoveries in the quarter that drove the net charge-offs line down?

No.

Okay.

Great.

Thank you very much.

Hopefully this quarter we will.

Jeff Davis.

Mark, does the past due and Watchlist indicate that the NPAs are likely to continue up at this trend over the next quarter or two?

And if not the past due and the Watchlist, just the field -- out in the field -- from the field?

I can tell you that in some of the markets there are -- that it is slower than it has been obviously.

And we have talked about absorption rates some.

And if you look at our past dues they are in pretty darn good shape, really are still hovering at those historical lows that we have had.

We are at 60 basis points.

Our 90-day past dues were 11 basis points.

And I wish I could have reported it a little lower.

We had one $8 million loan at the end of quarter -- that was to close at quarter end.

It closed about three days after the end of the quarter.

And our 90 days we have been down to almost I guess 8 basis points, which again would have been at a historical low.

If you look at our risk grade migration, there has been some shift in our risk grades.

But as a percent of capital, we're not really far off from where we were last year in terms of classified substandard kind of assets.

We are hopeful that the market will pick up towards the end of the year.

If you (inaudible) our construction, residential construction side, the inventories are staying in check.

Our customers are very disciplined.

We are seeing some lengthening of the lot inventory.

That is probably the area we would focus on.

But if you look at our residential sector and A&D and construction, that makes up about 18% of our portfolio.

So we could see some increase there, but I'm not looking for a dramatic rise.

Somewhat tangential to the economy, Phil -- if Phil is still in the room -- Phil, did processing volumes that you all are running through TSYS daily in the U.S., does it tell you anything about the velocity of the U.S.

economy, whether there is a material slowdown or it is just more media chatter?

Our business has been really interesting over the past 25 years when it comes to slowdowns.

We just have never been in the same cycle with slowdowns.

It seems like during slowdowns our transaction growth continues to grow.

The amount of transactions decreases, but that is not what we get paid on.

We get paid by the transaction, not by the amount, so our transaction growth is continuing to grow.

But then you're not seeing any sort of material reduction in the amount per transaction that would indicate the economy is softening materially on the consumer side?

The honest to goodness truth is I don't have that with me right now, but it has not been reported to me.

I don't --.

And it is certainly not in your net income.

That's right.

You have a nice recovery over the last year.

Thank you.

(OPERATOR INSTRUCTIONS).

Michael Rogers.

I am just wondering what worries you gentlemen the most as you look out over the landscape over the next 12 months or so?

I would say just short term the two issues that we have to manage the most effectively would be the margin and credit quality.

And we certainly have our eye on the markets in which we compete, particularly the real estate and within real estate, the residential sector.

Longer term, I would just say that growth and our ability to continue to grow revenues at the upper levels of our industry are very important to us.

We have, I think, a remarkable long-term record of consistency and participation in the top two or three performers in our banking industry.

So that would be longer term.

But short-term margin and credit quality within real estate.

Ladies and gentlemen, there appear to be no further questions in queue.

Do you have any closing comments you would like to finish with?

Thank you very much.

I appreciate the questions that have come from this group.

They have been good ones, and we have enjoyed trying to answer them satisfactorily for you.

I can speak for the team and say we're excited about the remainder of the year.

We want to see what we can accomplish in this environment as we remain committed to high standards, so that we can distinguish ourselves in our industry.

We are determined to provide consistent and sustainable results, so we will be investing in the future, along with maximizing our short-term performance.

And we will look forward to communicating with you on a regular basis going forward.

Thanks.

Thank you, ladies and gentlemen, this does conclude today's teleconference call.

You may disconnect your phone lines at this time.

And have a wonderful day.

Thank you for your participation.