Synovus Financial Corp (SNV) 2007 Q2 法說會逐字稿

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

At this time, all participants have been placed on a listen-only mode and open the floor for your questions and comments following the presentation.

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 good afternoon to our audience.

We thank you for participating in this second quarter Synovus conference call.

I'm confident you have reviewed our press release which was distributed early this morning and you saw in there some of our financial highlights which included a 6.5% increase in earnings and 5% increase in earnings per share, and continued high return on assets for the company at 2% for the quarter, our subsidiary company TSYS announced as well its earnings over the last 24 hours with an EPS increase of 14.5%.

Without a doubt on the banking side, we continued to compete in a challenging environment.

We do feel that we gained control of our margin during the quarter, Tommy Prescott will talk more about that in a minute, our credit losses, we feel, are within a very acceptable range still, and you will hear later from Mark Holladay, our Chief Credit Officer, more on the subject of credit.

In the press release, we did announce a change in our guidance to the street.

We previously were at $1.96 to $1.98 range.

The new guidance that we have issued is $1.90 to $1.95 for the full year.

And Tommy will cover the assumptions and the drivers behind that particular change.

An item of interest certainly has to do with the TSYS spin process, which we announced in much clearer terms earlier today.

There is a paragraph in our press release that talks specifically about next steps, but I will just talk through the highlights of the work that is about to begin.

We will have this Thursday our quarterly board meeting at Synovus, and at that meeting, I will ask the board to formally consider whether a spinoff of the TSYS ownership to Synovus shareholders is the right decision to make in order for this work to continue, a special committee of independent directors, non-interlocking directors, meaning not having directorship in both TSYS and Synovus will comprise that group.

I'm very proud of the work that has been done at the Synovus management level on this subject, concerning a variety of issues, our analysis, our findings, conclusions, on certain issues will be delivered to the special committee in order to facilitate their work.

Obviously, the board will consider the special committee's recommendations and will assess the benefits and the risks.

Ample time will be given but our expectation and hope is that this work will be done in a manner to allow us to announce a final decision no later than the third quarter analyst call.

The decision will be based upon the creation or the opportunity to create long-term shareholder value.

It will not be overly weighted based upon short-term market conditions.

This really is all we intend to say publicly at this time about the TSYS spinoff possibility and the upcoming work.

We will not later in the call take questions on this subject, but we feel that our disclosure is complete and we felt that the paragraph in fact that was in the news release covered all the issues.

So I thank you again for being with us today.

I want to move on through our agenda.

Next will be Tommy Prescott our Chief Financial Officer, he will be followed by Mark Holladay, our Chief Credit Officer and Phil Tomlinson, our TSYS CEO is with us to give a TSYS report at the end.

We will return then to a question-and-answer session.

Tommy?

Thank you, Richard.

And good afternoon to everyone.

I want to remind you that we will be making forward-looking statements today that are subject to the risks and uncertainties, factors that could cause our results to differ materially from these forward-looking statements are set forth in our public reports as filed with the SEC.

Richard gave you a good snapshot of the consolidated highlights so I'm going to jump straight into the financial services side of the company and let you hear a little bit about that before I turn it over to Mark and then to Phil.

Financial services net income for the second quarter was $109.6 million, up 3.1% over the second quarter of 2006.

On a year to date basis, financial services net income was $210 million, up 5%, over the first half of last year.

Net interest income was $288.5 million, up 1.1% over the second quarter of last year, while net interest income for the year so far, $571 million, was up 4.6% over the first six months of '06.

The margin for the second quarter was 4.05% compared to 4.10% in the first quarter of this year, and compared to last year's high point of 4.39% in the second quarter.

At the end of the first quarter of this year, we expected that the margin for the remainder of '07 could remain as the or near the 4.10% level with some likely second quarter compression that would be followed by recovery of the margins slightly during the year.

The actual second quarter margin decline of 5 basis points slightly exceeded the expectations that we had of a decline due to slower DBA growth and a higher level of nonaccrual assets.

We were encouraged during the quarter by the direction of the cost of interest-bearing funds which begin to show improvement during the quarter, as reflected by a very modest 2 basis points increase from the first quarter.

The improvement in the direction of our funding costs helped provide stabilization of the margin within the quarter.

Loans ended the quarter at $25.5 billion,25.5 billion, up 7.9% from a year ago.

Net loan growth during the quarter slowed as sequential quarter loan growth was 318 million, or 5.1%.

Within the quarter, C&I loan growth led the way with annualized growth of 7.9%, while commercial real estate grew 2.3% and retail grew 5.5%.

Nonperforming asset ratio increased to 87 basis points, while the other credit metrics, charge-offs, and past dues and so forth have remained very favorable, and you will hear some more from Mark about the credit quality in just a few moments.

Year-over-year, core deposit growth was $1.79 billion, up 9% from June of last year.

The growth was led by money market accounts, which grew $1.2 billion, or 19%, and certificates of deposit, which grew $744 million, up 11.9%.

Demand deposit activity continued to be sluggish with ending balances down $211 million, over that period, or 5.5%, and also year to date average balances and DDA's were down $156 million, or 4.5% excluding the impact of the acquisitions.

Core deposits decreased slightly on a linked quarter basis, declining $46.2 million.

This decrease was primarily the result of $194 million reduction in CD balances, as we allowed some of those to roll off, particularly the -- some of the premium accounts that we had, and this was partly offset by an increase in money market accounts that occurred during the quarter on a linked quarter basis.

Non-interest income of $96 million for the quarter was up 7.7%.

It was 183.8 million for the year so far, up 6.6% over the first half of last year.

Service charges in that category are down 2.6% for the quarter, and 1% for the year to date.

We've had modest growth in the NSF categories and the analysis fee component of service charges but this component was offset by the decline in other service charges such as just the typical monthly fees on checking accounts, as well as some of the fees on online banking services, really driven by the competitive environment, and the propensity to have all of the growth in the low cost or free categories, within this component.

The FMS revenues are up 11.4% for the quarter, and up $3 million or 7.2% for the year.

Along with mortgage, we're really doing a better job of integrating these offerings through the banking system, and we even have some growth in the mortgage revenues, down a little built for the quarter but up 6.7% for the year, with 2.5% increase in production, in an area tough and challenging mortgage environment.

We had some gains from private equity and other miscellaneous investments, $5.3 million from Total Technology ventures, a couple of valuation write-ups in that category in the second quarter, and that compared to $2.5 million of our similar type write-ups, and gains during the second quarter of '06, representing a $2.8 million increase before tax for the quarter.

For the year so far, the increase in that category is $1.7 million compared to a year ago.

The results for the second quarter also included a $4.2 million after-tax gain from the sale of our mutual funds business, which is reflected as a gain from discontinued operations.

Keep in mind that that transaction was in our original plan and in our original target and guidance.

G&A expenses of $198 million for the quarter were up 3.8% over a year ago.

And at $393 million for the first six months, up 6.2% over the first six months of last year.

As expected, we expected a lower rate of increase during the -- this quarter, and that's the way it turned out.

The G&A growth continues to be driven by the branch expansion, as we continue to open new branches and pursue this long-term strategy, we've opened 23 branches since June of '06.

Lower level of performance based incentive pay is an offsetting factor within the G&A category.

I want to move into our earnings guidance and detail that Richard described, just taking you a back a little bit, as we started the year, we were expecting guidance for '07 in the range of $1.96 to $1.98.

We were basing this on assumptions that included a net interest margin for the year in the 4.20% range, a favorable credit environment, and loan growth of approximately 10%.

As we have seen the reality of the challenges and the performance and the industry issues through the first half of the year, we revised these assumptions to following mid to high single digit loan growth, net interest margin in the 4.05% to 4.10% range, and charge-off ratio, we went ahead and quantified that instead of just talking about the credit environment, and we're assuming a 25 basis points approximate charge-off ratio, and then TSYS net income growth within its stated range.

Based on these factors and our outlook for the remainder of the year, we believe that our earnings per share will be in the range of $1.90 to $1.95.

And keep in mind that this guidance does not include costs or expenses that may be associated with the potential of this spinout deliberation or ultimate transaction.

I'm going to now turn it over to Mark Holladay for his comments on credit.

Thank you, Tommy.

I really want to talk about two things with you today, take a look at the 4-E credit metrics that we have and give you some detail or color around that, that is the nonperforming charge-offs, past dues and loan loss reserve and then give you my current estimate of where we are in the housing cycle, since that is a driver that really is affecting these metrics.

If you look at our nonperforming loans, basically all of the increase in nonperforming loans for the quarter, roughly $42 million occurred in the one to four family residential development portfolio.

We've got roughly $92 million in that nonperforming loans in that sector and less than 5% of that $92 million, or about $4.6 million, resides in South Carolina, Alabama, and Tennessee.

So we've really seen little to no deterioration in those three states.

Of the remaining two states, Georgia and Florida, Georgia makes up about 52%, or $48.6 million of the nonperforming loans, and Florida makes up 43%, or $39.6 million.

In Georgia, 64% of that number, or about $31 million, are in the Atlanta region.

And in Florida, 94% of our nonperforming loans, around $37 million, reside in the west Florida region.

That's really the region that makes up Naples, Bradenton, and Sarasota.

Outside of that region we have seen little or no impact on the housing portfolio in Florida outside of that region.

If you look at these two region, and our housing portfolio, that represents about 8% of the Synovus portfolio and 7 of that 8% is in Atlanta.

The primary exposure where we have seen deterioration in Florida again is in that Naples, Sarasota Tampa area and it is really centered around about a $80 million construction loan portfolio to individuals for investment purposes.

And as we break that down, really what I wanted you to know is that we really got two regions that have impact in the entire Synovus portfolio.

One of those is west Florida.

The other is some exposure or an increase in Atlanta.

Moving to charge-offs, for the quarter, charge-offs were 25 basis points, for the year, charge-offs are 19 basis points.

You break down the quarter, or the 25 basis points, commercial real estate made up 24 basis points, C&I 20 basis points, and retail 43 basis points.

If you look at year to date, commercial real estate is 15 basis points, and C&I is 17 basis points, and retail is 34 basis points.

Retail looks a little higher but we are projecting much more, much lower losses for the remainder of the year, in the retail portfolio.

If you look at our [HELOC]s, we've only charged off 8 basis points against that portfolio for the year.

If you look at our consumer mortgages, we've only charged off 17 basis points against that portfolio.

We did have a write down in our other consumer category, located in one bank, and we don't expect a recurrence of losses there.

We also should see some recovery there, and we are not carrying any sub-prime mortgages in our -- in the consumer portfolio.

Of the $24 million in charge-offs, year to date, 35.6%, or about $8.6 million have been in the CRE category, as you know, and that represents 45% of our portfolio.

Breaking that down, the one to four family construction against that portfolio, we charged off 14 basis points.

The residential development portfolio, we charged off 26 basis points.

And in the one to four mini perm category, we've charged off 42 basis points.

And the loss there in that sector, the primary loss came out of two larger loans in the Bradenton area that we charged down in the second quarter.

Basically, you know, to conclude on the charge-offs, we believe the portfolio is well positioned from a loan to value standpoint, to keep losses moderate.

I think as I told you in prior meetings, our average loan to value in our one to four family portfolio is running about 73%.

And our residential A & D area is running about 62% on average.

If you go to past dues, 64 basis points were the total past dues and nine basis points of that was in the 90-day column.

That is very comparable to the prior two quarters.

I think at year end, our 90 days were 14 basis points.

If you break down those past dues, 45% are in commercial real estate, and 35% are in C&I, and 20% are in the consumer sector, which includes our credit card portfolio.

And then looking at CRE past dues, just to give you a feel for trends, going to the 30 to 89-day category, the one to four family past dues on the construction side are $39 million.

Again, 89% of those reside in the Atlanta and West Coast, west Florida region, 29% of those past dues are in Atlanta, which speaks well for the Atlanta past dues and about 60% of those past dues reside in the west Florida region.

To break that down, that is about $11.3 million in past dues in Atlanta and the 30 to 89, and $23 million in west Florida.

We do not see an issue at all in the rest of the portfolio with past dues, extremely minor past dues there.

If you look at the residential, A and B sector, we've got about $7 million in the 30 to 89-days, and about 84% of that again is in those two regions.

And 49% are about $3.4 million, or in Atlanta, and 35% are in the west Florida region.

Again there are no past due issues really to speak of outside of those two regions.

The loan loss reserve is very strong.

At 1.30%, it is very favorable to our peers.

As you know, at $331 million, that is up from $326 million in the first quarter, and our coverage ratio of NPLs is 183%.

We have 24 loans over $2 million that are on nonaccrual.

All of these loans have been currently tested.

We've done impairment tests on all of these loans.

In fact, we do impairment tests on all loans over $1 million that go on nonaccrual.

And any losses that may have been in those loans have already been taken.

We also have discounted those for selling costs, and the current appraisals have been performed on each and every one of those, where our real estate was the collateral.

Secondly, in our reserve, the heaviest allocation of reserves are embedded in our housing portfolio.

That has been true pretty much all along, because that is where the concentration of some of our loans are in the portfolio.

And just to give you a quick example, we did increase reserves in that Naples area, $4 million of this quarter simply because of the activity that is taking place there.

If you look at our average weighted risk rate in the portfolio, they increased 1 basis points for Synovus in the second quarter, they are still in the very healthy range and that tells me that we already recognize these nonaccruals as problems in prior quarters, just had not had reached a nonaccrual level at the time.

We believe that we are accurately reflecting the risk that is embedded in the portfolio, that we've certainly adequately provided for the risk.

And we are appropriately migrating risk in the portfolio.

The last thing that I want to talk about really is just the future, a look at how things -- we see progress under way in the housing front.

The demand is coming back, although slowly, it is coming back into the market.

Mortgage applications are up about 17%, on a national scale, since the low point of last August.

We see the same things in our own portfolio.

If you look at just our own mortgage company, and go back for last year, April, May and June, and compare that to applications in April, May, and June this year, our applications are up 40% over last year, so that is a good indicator.

And also, afford ability index, you know, although it is down nationally, the southeast is -- the affordability index is still good at 120.6% and it is not really down that much and still feel good about affordability.

That I think is a indicator in Atlanta and our southeastern states we are not seeing a lot of downward pricing pressure on homes, but in areas where the depreciation has been very high, we are seeing some downward pressure on housing.

On specifically looking in Atlanta, in the second quarter, new home sales, while they were down over last year, surpassed starts by nearly 8%, and total housing inventory in all phases of construction are down by nearly 5%.

These reductions of inventories I think are, you know, a compliment to the banks and the builders in the marketplace, and bear down and really started reducing inventories.

Atlanta, we see is still experiencing very good job growth, 41,000 in new employment this year.

They're forecasting 57,000 in '08.

And above 60,000 in '09.

So we are still seeing good job growth in Atlanta.

All of these factors lead me to believe that, you know, we are really at the bottom of the cycle.

I would expect to see -- continued to see inventories decline over the next few quarters.

And for Atlanta, we expect some getting close to equilibrium in the first quarter, no later than the second quarter of '08.

Also, I do want to mention for Georgia, the June foreclosure rates for Georgia are down 13.3% and that is about 6.5% down for the country overall.

If you look at west Georgia, we would expect to see a little longer recovery cycle.

We will probably get -- it will probably take us like that area, and the first part of '09 to see the recovery period.

We do expect to see some losses in the west Florida area.

But it is a very small piece of our portfolio.

Like I said, it is -- that total portfolio in the whole sector down there is running about $300 million.

The other key factor in terms of nonperforming assets is we have had little turnover, first and second quarter.

We've mainly been putting nonaccruals on the books but right now we've got roughly $20 million in current turnover anticipated for the next quarter.

Hopefully, we will see more than that, but that is what I've got in the pipeline right now.

And we believe that that is an indicator as well that we are nearing the peak in nonperforming assets as well.

That concludes my statements and I will turn it over to Phil.

Thank you, Mark.

I'm very happy to report that we had what I thought was really a great quarter.

As you hopefully saw in the earnings release yesterday, we continued to expect to achieve our previously announced net income growth guidance of 20 to 22% on a non-GAAP basis, and on a GAAP basis, flat to 2%.

And with the losses that we had last year, we think that is a fantastic place to be.

I can't overstate how pleased we are with our team's ability to manage these expenses, and continue to grow organically, and continue to build on our prospect pipeline.

It is picking up speed every day.

All of this has resulted in our operating margin, which -- expanding, which at the end of the first six months was at 25.7%.

Some highlights were net income increased 14.4%, revenues before reimbursables increased 6.2%, operating income increased 13.2%, and it was up 16% for the first six months.

So we are very excited about that.

Our EPS increased 14.5 cents to $0.33 a share as compared to $0.29 a share same time last quarter.

Our internal revenue growth or organic growth was at 12% for the second quarter which is really something that we're awfully proud of and really drives this machine a lot.

I think it is -- those are pretty amazing numbers when you consider the trauma that we've gone through over the past 18 months, and trying to get back on track.

Some other highlights were we did -- it was really the Walmart money card that was issued by GE, and is reloaded through the green dots national reloading network and that is processed by TSYS.

There has been a lot of speculation about who was processing that, and we are proud to announce that that is a -- it is a Visa-branded prepaid product.

It was piloted in November of 2006.

And it is going to roll out here very soon, really by the end of July, in 2600 Walmart stores around the country.

As you know, we have been very excited about the prepaid industry, and frankly we think this launch could change the face of this industry.

So we are very excited about the Walmart deal.

Another thing that was fun to do was we were awarded the 2007 Global Card Processor of the Year, which is a big award in our industry.

It is awarded annually by Cards International.

And we just -- we think it is a very positive acknowledgement of our continued progress, and quality efforts.

In China, we still continue to do well with [CUP] data.

We began processing for [Washaw] Bank, which is one of the top 10 banks in China.

We are providing processes -- we are now providing processing services, for three of the four largest issuing banks in China that use outsourced services for their card programs.

We continue to be very encouraged about the long-term future in China.

We also launched a deal with [Northis] union in the U.K.

It is a new prepaid awards program.

And our acquisition from last year, TSYS Card Tech, in London, launched a new card management program for Qatar National Bank and Commercial Bank of Qatar and that is the first and second largest banks in that country.

We are very positive about that acquisition and think that over the next two or three years, it is going to make a dramatic difference in what we can do.

Our international business continues to perform extremely well, up 42% for the quarter, and 44.3% for the first six months.

Value added continues to do well.

It increased 10.7% and we expect that to continue to improve, as we sell additional products into our customer base.

Richard, that is a really fast overview and I will turn it back to you.

Phil, thank you.

Just a few quick concluding thoughts concerning the positives before we go to the questions, our growth priorities are essentially embedded within our commercial and retail strategy, and I do want to point out that we believe we are gaining traction every month and every quarter in our commercial strategy, I think some of the indicators that you heard with the loan growth outpacing really the traditional CRE driver is an indication of that.

Our expansion plan has continued throughout the year on the retail side.

You heard Tommy say that we really during this period of 12 months have 23 more banking options than we had at this time a year ago.

I will point out that in 2008, this expansion pace will be under review.

Just because of the current conditions.

But we are pleased that we've been able to perform while continuing to spend money and invest in the future with our expansion plan.

The control and the management of the margin showed significant improvement, as you heard, in the quarter, and our credit cost, as I said earlier, are under good control and then finally, some of our lines of business, and the FMS area, in particular and also the mortgage banking group showed excellent stability and good profit performance with healthy margins particularly compared to prior periods, so we felt like that was a part of our success story during the recent period.

I'm going to now open the floor for questions, and we will take them one at a time.

I will point out that as I've said earlier, we would not entertain questions on the TSYS spin issue.

Thank you, ladies and gentlemen, the floor is now open for questions.

(OPERATOR INSTRUCTIONS) Our first question comes from Steven Alexopoulos.

Good afternoon, guys.

Hi, Steven.

Richard, I know you said on TSYS, could you address what they put out this morning?

I will let Phil speak to that.

Could you cover that, Phil?

Sure, I'm happy to.

I mean basically we put out a very short press release right after Synovus did, acknowledged that, Synovus had put out the previous press release.

We said as a result of that, we would be forming an independent committee of our board, the TSYS board, to review how this process happened.

I mean not how it happened, but to review the whole process, and anything that they need to be looking at.

It is basically two paragraphs.

Okay.

Really, the only news there was that we felt like we would go ahead and appoint our special independent committee to look at that.

Okay.

I don't know what I can ask and what I can't.

Maybe I will try a clarification question on what was released today, Richard and if you don't want to answer it, you can let me know.

Okay.

But I mean you're basically saying that on Thursday, you're going to ask the board to consider the spin.

The only thing I had already assumed that this was done already, so is this process just starting now, essentially?

A heck of a lot of work has been done, but the creation of the special board committee is the last step, and that's what counts today.

Okay.

That's actually helpful.

Okay.

Given, Mark, the outlook on credit, can you just confirm that you're expecting a level of nonperformers to improve in the second half of this year?

Is that what you're saying?

What I hope I said is I think we're at or near the peak, that we do see turnover taking place.

You know, the housing cycle, although I think it is recovering, I don't think we're completely through it.

So, you know, I would -- I guess what I would say is that I think we will stabilize on the NPA's but I wouldn't want to commit that we're going to see any significant reductions in the next quarter or so.

Okay.

And just a final question, for Tommy, how much of the reversal of the previously accrueded interest on the loans that move into nonperformers take away from the margin this quarter?

Steven, the reversals this quarter, and about the same number last quarter are about 2%.

I'm sorry, two basis points.

Okay.

I guess the other cost of the nonperforming loans though is the, you know, you add to that just the run rate costs, which is around 5 basis points now, where a year ago, that number was about 3 basis points, just a negative carry on those nonaccrual loans.

Great.

Okay.

Thanks, guys.

Thank you.

Our next question is coming from Nancy bush.

Your line is live.

Good afternoon, gentlemen.

Good afternoon, Nancy.

A question for Mark.

Mark, I don't know if you've seen the comments from Countrywide today but Mr.

Mozilo's view of the housing market seems to be a a lot more Draconian than yours.

I think he is looking for stabilization maybe in 2008 and a turn-around in 2009.

Can you just, you know, give --

I think I can, Nancy.

For one thing, Countrywide I think has a lot of their loans that are sub prime category, and they're also concentrated heavily in California.

If you look at our portfolio, outside of Florida, which again, like California, we've seen pretty high appreciation rates.

The other four states that we're in, again we're not really seeing any issues in three of those states, and I personally believe that Atlanta picture is kind of improved so it is a function of number one geography, and it is a function of number two, the type of loans that Countrywide has, and are generating compared to what we do.

Can you just comment on his -- the commentary that he had today that really seemed to have spooked everybody, about the bleed of sub prime issues into the prime sector, particularly in home equity?

And we've seen some of the other southeastern banks also give some warning signs on home equity as well.

Well, I can speak to our own portfolio, and I can tell you that it is performing extremely well, and I think, you know, for those that went out and made 100% loan to value loans, that got way down into the lower credit scores, yes, they're going to be some issues, speaking to our portfolio, I don't expect really a blip out of our HELOC portfolio and I would think that in the sectors we're in, we're in pretty good income sectors.

You know, there is some downward pricing pressure, but the affordability index remains strong in the southeast, and in the areas where there has not been significant appreciation, I don't really -- I don't really expect to see that.

Again, if you're in those other components of the housing sector, you probably are going to have some problems.

And again, I think in west Florida, we don't have a lot of HELOCs there, and we don't have a lot of one to four family, there, but where we do have it, there are some issues down there.

Just a quick question for Tommy.

Tommy, on the margin, you made some commentary, and I'm sorry I didn't write it all down, but it was about demand deposits or checking account, one or the other, and sort of the lack of growth thereof and you alluded to some competitive pressures.

How are you responding to those?

Or are you just choosing at this point not to respond to them?

Nancy, our quest for checking accounts is, you know, has been strong and is strong.

It is an ancillary part of the commercial strategy.

It is a part of the retail strategy.

I mean what we're seeing is the year-over-year growth is slack and actually down, most ways you edge are at -- we were encouraged by a little bit of a linked quarter growth, very modest both on average and from March to June, we had a slight amount of DDA growth.

We obviously have to deal with the annual cycle where we think the DDAs will be somewhat back-end loaded.

We also feel like we're competing against this continued leveling or equilibrium of -- and this higher rate environment of customers keeping money in the higher rate categories.

But our -- you know, we're fighting it as hard as we can.

I guess we're turning the burners up on that constantly, and focusing on it, and you know, we have had some known runoff from some pretty big condo type, you know, CRE escrow accounts and that type of thing which were natural in this part of the cycle but we're giving it to the good fight and in a very competitive environment.

All right.

Thank you very much.

Thank you, Nancy.

Our next question comes from Tony Davis.

Your line is live.

Hey, Richard, Tommy, just wanted to follow up really on the margin issue, too.

The loan yields here have been unchanged now for four consecutive quarters.

And I wondered how much of that is a reflection of the shift, Tommy, from variable to fixed rate borrow preference and how much of that is competitive pressure in your markets?

Well, Tony, it is both, but I would say that the yield curve and the propensity for our customers to be attracted to fixed rate loans, when typically, you know, at this part of the cycle, they might be going for variable rate loans, it is costing us with the shape of the yield curve.

You know, losing 75 basis points or so, on a loan that might be at a variable rate.

I would say that is the biggest factor.

The competition is all balled up in that.

It is hard to separate the two issues actually.

But that's where we are, actually, in the quarter.

We had a continuation of the shift, the fixed rate loans, and really all of the growth that we had was in fixed rate loans.

We actually had more fixed rate loans come on than the total loan growth which implies a slight pull back in the variable rate loans and we think that will remain.

It really, as long as the curve remains at its current shape.

Well, I guess it raises the question about your confidence in the 4.05%, 4.10% margin.

I know you've got a block of premium CDs running off.

As I remember, it was half a billion or something like that, wasn't it?

7%.

That's correct.

But what else makes you confident that you are not going to slide much from here?

We -- I mean the forces are still there in the margin, there is no doubt, the curve, the competition, the DDA sluggishness, and we do have some confidence that was really added to a little bit in the second quarter, with particularly with what we saw in the direction of the cost of funds.

That has been the biggest gap in our margin, the big increases on a quarter over quarter basis on the interest-bearing cost of funds.

That has been within the last year, each quarter, has grown anywhere between about 10% all the way up to over 30% in one quarter.

Or 30 basis points.

And we saw that mitigate down to a 2 basis points increase during the quarter, as a very conscious action, partly due to running off some of those higher cost promotional CDs or allow them to run off, partly due to this better price and discipline and really kind of a game of inches.

We also have some embedded opportunities in the investment portfolio.

We've got about $350 million worth of investments securities with a slightly less than 4% book yield that will run off in the second half, and we can get a, you know, a good pickup in those.

And we also have some fixed rate loans that are exposed to pricing in the second half, that even if they do come back into these fixed rate loan categories, will provide some lift in the margins.

So we have some good embedded opportunities, and we have some good traction in our strategies, inside our banks right now.

So we, you know, the risk is there, but we do have confidence in what we're seeing.

Final question.

You're still looking for mid to high single digit loan growth so your C&I, CRE backlogs still must look pretty good?

That's correct.

Okay.

Thank you, guys.

Thank you.

Our next question comes from Jefferson Harralson.

Your line is live.

I was going to ask a TSYS question, and feel free, I understand you don't want to answer a lot of these, but you seem to imply in your press release,the management team actually recommending the board to spin the company.

You say you're asking them to consider it but also in your verbiage it sounds like you're recommending the spin to the board.

Can you comment on that?

We didn't say that, Jefferson We turned over a lot of data, analysis, and conclusions on various issues to the special committee but no recommendation at this time.

Okay.

Thanks.

On the residential construction portfolio, can you talk about the growth and the loss rate, and how much of that is in your -- and how much of that portfolio is in the Atlanta market?

Yes, in the residential portfolio, I think I've cited previously, it makes up about 7% of our total portfolio.

There is about $1.8 billion in that portfolio.

The growth rate in Atlanta has been relatively flat for the second quarter, if you will hang on, I will pull those numbers.

Yes, the growth rate is 2.1% in Atlanta.

And we would expect something similar, 2 to 3%, in the Atlanta sector.

The good thing about Atlanta is we really have seen significant increase in their C&I growth rate.

Those are in the teens right now.

And we're expecting continued good production in that area.

So we will see, you know, slower growth in Atlanta -- for the next two quarters.

It is pretty much an indicator of what I have been talking about with the builders and the banks being very disciplined, the starts are below sales, we're seeing, you know, all levels of construction, inventories dropping, and we will see that for a couple more quarters, and then I would expect that to rebound in the springtime of '08.

Okay, and finally, just a question on your earnings guidance for this year, are you using $0.95 I would assume for the first half in your $1.90 to $1.95 guidance?

We are using the actual reported number, which is $0.94.

Thanks a lot.

Okay.

(OPERATOR INSTRUCTIONS).

Our next question is coming from Jennifer Demba.

Your line is live.

Thank you.

Could you remind me how many offices you plan on opening in the second half of the year?

Jennifer, we've opened 14.

I would say 8 more.

That would give us a total of 22 for the year.

Okay.

And this question is for Mark.

You mentioned relatively more weakness in Atlanta.

Can you be specific on geography in Atlanta?

Is it outer counties?

Yes, I mean basically what we're seeing is in the [Alforados], the [Key] areas, there is less issues than in the periphery of Atlanta, which south of Atlanta, is where we would be focused on.

Thank you.

I appreciate it.

Thanks, Jennifer.

Our next question is from Heather Wolf.

Your line is live.

Hi there.

Hey, Heather.

A quick question for you, Mark, on the loan to values that you referenced.

Can you talk about whether or not you've reappraised any of the performing loans in the portfolio?

Well, what we've basically asked our banks to do is if, you know, if there is changing in valuing in the marketplace, and we've asked them if their appraisals are over a year old, to go in and re-evaluate the appraisals.

All of that work has not been done.

Certainly, there is more work to do there.

But you know, we, again, even without doing that, we have got some pretty conservative loan to values, so we feel like there is certainly room for some change in values, where they might be taking place.

We're also seeing, you know -- we've looked at the appreciation rate in every one of our markets, and I would say 70% of those markets are seeing, still seeing appreciation, and then there may be 25 or 30% of the markets that are flat or seeing some depreciation in the market and we're tracking that on a quarterly basis as well.

I don't have that data in front of me.

But I will be glad to share some of that with you, if you would like to look at it.

Okay.

Great.

And then can you tell us, is the NTA guidance, I guess that is too strong of a word, that you referenced earlier, sort of flattish at current levels, is that the assumption that you factored into the margin guidance, the $4.05 to $4.10?

Yes, pretty much.

I mean we may see some increase or some decrease, but we're not anticipating the same run rate that we have seen in the prior two quarters.

And you know, a lot of that is the turnover capability, in the portfolio, that really wasn't there in the first and second quarter.

Okay.

All right.

Great.

Thanks so much.

Thank you.

There appear to be no further questions in queue.

Well, thank you for your interest and attention on this call.

I would just say what I said to the officers earlier today.

There has never been a time when the fundamentals and organic growth are more important, particularly in this environment, so we expect to continue to earn our performance by adding one customer at a time, and we're committed to a good strong sales and business development effort, going forward.

And we are confident that it will pay dividends on both the retail and the commercial sides of our business.

So thank you.

And stay tuned.

We will be in touch.

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.