Synovus Financial Corp (SNV) 2008 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the first-quarter earnings 2008 conference call for Synovus.

(OPERATOR INSTRUCTIONS).

It is now my pleasure to turn the floor over to your host, Richard Anthony, Chairman and CEO of Synovus.

Thank you very much.

Welcome to each person who is participating in the call today.

We have a different form of presentation than normal in that I will be making a presentation covering the financial highlights which Tommy Prescott normally does, but we want to save some time for two of our bankers who are in the room with us with responsibilities for the Atlanta market and basically the West Florida market.

Don Howard, our Regional CEO in Atlanta in a few minutes will talk about his perspective concerning the housing market in and around Atlanta.

And David Dunbar, who is our CEO of Synovus Bank of Tampa Bay, will talk about the real estate markets down in his part of Florida.

So we hope that you'll find their involvement to be informative and interesting.

Tommy Prescott is here and will be participating in the question-and-answer session, Fred Green as well, and Mark Holladay.

So we have our resources available as questions come from the group.

I'll first say that we will be making some forward-looking statements that are subject to risks and uncertainties, and some factors could cause our results to differ from these statements, but those are set forth in the public reports filed with the SEC.

The story line for the quarter as results were released early this morning, of course, is dominated by credit, and that's why we have our two bankers helping provide more perspective from on the ground in the two areas that I mentioned.

As you noticed, our income from continuing operations was $81 million, down 19.3% from the prior year.

Diluted EPS, $0.24, down 19.9% from the first quarter a year ago.

We were very pleased to be participating in the Visa IPO at a significant level.

We had a total of about $56 million pre-tax in contribution, or $34 million after-tax, from that IPO.

Incidentally, we do hold still 1.4 million of Visa Class B shares, which, if they were converted today and restrictions were lifted, allowing us to sell those shares, we would have been able to realize $70 million.

So, as you evaluate our capital position for the future, it's nice for us to be able to say that we have that holding.

We also still hold MasterCard Class B shares, which today have an unrealized value of $24 million.

Loan growth, sequential quarter basis, was 9.4% overall.

If you distribute that through various components, CRE was up 8.1%, but the one-to-four family property declined 3%, meaning that the remaining CRE categories increased by 18.9%.

Some of that increase is impacted by the fact that we are holding some of our income-producing properties in the portfolio longer, in that the secondary markets are really not allowing exits from bank portfolios like would normally be the case.

Our C&I growth was 12.3% for the quarter, and our consumer loan growth was 5.1%.

If you look at loan outstandings on a year-over-year basis, we're up 7.5%, with CRE being up 6%, C&I 8.2%, and the retail consumer portfolio up 10.1%.

I'll shift over to the deposit side of the balance sheet.

We ended the quarter in total deposits at 25.7 billion, which is up 2.3% from the prior year.

Our core deposits remain challenging in a highly-competitive market, although we have improved, in some respects, our mix.

But we're basically flat compared to year-end '07, and down 2% versus a year ago in that core deposit category.

The sequential-quarter comparison has been impacted by a seasonal decline in public money market and NOW accounts, which are off $200 million.

The year-over-year comparison is impacted by a runoff in our premium CDs.

Actions that are being taken in the Company would include a modification of our incentive programs at both the bank CEO level and the producer or relationship manager level.

So, we believe behaviors will be impacted and greater emphasis, without a doubt, will be placed on core deposit gathering throughout the remainder of the year.

We have just initiated a couple of companywide sales campaigns -- one in the small business DD&A demand deposit category, the other in commercial demand deposits, with rewards being available for those who rise to the top in those campaigns.

We're targeting certain segments that are deposit generators, the small business component of our prospect and customer base, not-for-profits, private banking is an opportunity, and C&I overall, as we continue to have our middle market strategy at the top of our priorities, should prove to be an opportunity for deposit growth.

The margin?

We held our own, basically, given our estimates as we entered the quarter.

The margin for the first quarter was 3.71%, down 15 basis points from the fourth quarter of last year.

If you exclude the impact of credit costs, we were down 12 basis points from that period.

Fed funds, as you know, did decline by 200 basis points.

We have an asset-sensitive balance sheet that we have modified to some degree with our derivative swap programs that are constantly in place under our ALCO strategy.

Fee income, 140 million for the quarter; excluding Visa, 101 million.

Service charges on deposits showed signs of life from a contribution standpoint, up 2 million, or 7.7%.

Analysis fees are up 1.6 million, or 44%.

NSF fees up 4%.

Financial management services is an area with some success stories in it.

Total revenues up 20% versus the previous year.

The customer swaps that we are now able to place to manage risk for those customers has generated considerable income compared to the past through our capital markets group.

And our brokerage business continues to be strong, having done much better since we transferred the management, and really, the ownership of that segment of producers, into the banks.

Mortgage revenues up 12.9%.

Mortgage continues to be a clean and profitable operation for us, not making a heck of a lot of money, but we're proud of the mortgage group because they have avoided some of the pitfalls that others have had to navigate through.

On G&A, 201 million total, which is up 3.4% compared to the previous year.

If you strip out the reduction in the Visa litigation accrual, G&A expenses were up 12%.

I'll give you a little color around that.

Other operating expenses increased $13 million, or 24%, due to the disposition of other real estate costing or creating a loss of 7 million.

FDIC insurance costs, premium costs, being up added 3.7 million to the expense base.

And then, the increase in both salaries and occupancy expenses has been affected by the addition of 15 branches since a year ago.

Then, if you look at our expenses on a sequential-quarter basis, excluding Visa, the G&A expenses are up 8.4 million.

At first glance, you see salaries and other personnel expenses are up 12%, 12.7 million.

But, 8 million of this is due to the fact that we reversed in the fourth quarter some incentive accruals that we were unable to justify paying.

So it lowered that base.

And then, 3 million is due to higher employment taxes with our FICA seasonal increase.

2 million is due to a different mix of employees as the TSYS spend demographics have affected health insurance cost; 2 million more there.

But overall, keep in mind as you look at sequential quarter comparisons, our headcount in the first quarter increased only by seven team members, even though we opened four branches.

So we managed headcount pretty effectively.

I'll comment on credit before I turn the program over to Don Howard and David Dunbar.

The biggest metric that is creating attention, and we're certainly aware of the need to work this down, is the nonperforming asset percentage, which was at 2.49%, up pretty sharply from the 1.67 at the end of last year.

NPAs increased by $236 million, with increases of 173 million in nonperforming loans, 42 million in impaired loans held for sale -- which is an indicator of our proactive stance on that category -- and then 20 million increased -- a 20 million increase in other real estate.

Atlanta is where the bulk of this occurred, a 145 million increase in nonperforming loans there.

The only migration beyond the containment that we've been describing, which has to do with Atlanta and the West Coast of Florida, is that we did have some weaknesses that we addressed in Myrtle Beach, in that market, where nonperformers were up $30 million.

73% of the increase in nonperforming loans within the one-to-four family properties category.

Charge-offs, 95 basis points, up slightly from the 91 basis points in the fourth quarter of '07.

The dollar amount was 64 million.

The breakdown would be 28 million in West Florida, including the 21 million in charge-offs on loans that are in the process of being sold.

Atlanta, 18 million.

Myrtle Beach, 4.8 million.

The provision expense was $91 million, which exceeded net charge-offs by 27 million.

Our reserve ratio ended the quarter at 1.46%, up 7 basis points from the end of last year.

Past dues, if you look at the 90-day and still accruing category, we were at 16 basis points, compared to 13 at the end of the previous quarter.

And total past dues were up from 1.02% at the end of last quarter to 1.39% at the end of the quarter.

So, in summary, credit weakness is certainly our top priority to tackle.

It is a major part of our story.

It is largely confined to the Atlanta market, to some degree, of course, the West Coast of Florida, and Myrtle Beach, as I said earlier.

We are confident that we continue to be proactive.

We have plans to dispose of these distressed assets using techniques, including [auctions], incentives, portfolio sales, and realtor engagement.

I'm going to stop.

I'll come back after Don and David speak to the audience with a couple of other subjects before Q&A.

But, we do think you'll be interested in hearing from these two gentlemen.

First, Don Howard.

Thank you, Richard.

The Atlanta market is the largest market in the Synovus footprint.

It consists of the -- the MSA area consists of 28 counties with more than 5 million in population.

It's a diverse market with a lot of price points.

There are pockets of weakness as well as pockets of strength within that total market.

As we've mentioned before, our first signs of deterioration in the real estate portfolio of the Atlanta banks showed up in the south and the west areas of the city.

In late '07, we merged two of our banks that operate on the south side, that being Covington and Peachtree City, into Bank of North Georgia, and that consolidation occurred in September of '07.

We recently announced our intention to merge two of our banks on the west side of the city, those being Carrollton and Douglasville, that have approximately $800 million of assets, into Bank of North Georgia.

The applications will be filed within the next 30 days, and that's pending regulatory approval.

Once that approval is granted, then we look to complete that consolidation in October of this year.

There are several reasons for moving toward a consolidation of the banks in Atlanta.

Some of it was driven by credit.

A lot of it was driven by the depth of the resources and the skill sets of the people that are in the credit administration area, the special assets area and the risk management area of Bank of North Georgia, to assist these banks in the resolution of their credit problems.

It also coincides with a business strategy that we've been looking at for a long time as to the advantages of operating in the Atlanta market under one franchise.

We at Bank of North Georgia created a special assets area early this year just for residential real estate, and have beefed that up with a number of skilled and talented people from -- that have operated at Bank of North Georgia for a number of years, understand and have operated through previous declines in the housing market in Atlanta, and feel really good about their ability to bring about some results in short order.

One of the strategies we're using is an auction where we will dispose of most of the OREO that's centered in the two banks on the west side of Atlanta, Carrollton and Covington.

That auction should take place in May of this year, which will help improve their NPAs considerably prior to the consolidation into Bank of North Georgia.

What we're currently seeing in Atlanta is that for the past four quarters, sales have outpaced starts -- one of the trends that we were all looking to see.

Total number of sales and starts, though, are significantly below a year ago as the volume continues to decline there.

The velocity of sales continue to decline.

The month supply of houses has increased marginally over the past year, while the supply of lots has increased significantly.

Finished unsold inventory continues to increase, and that is a trend that puts more product on the market and competes with resale.

Generally speaking, the south and west parts of Atlanta continue to be the weakest areas, but there are pockets of weakness in all areas of the city, to include the north side, where we have our greatest exposure.

Looking ahead, we see an increase in foreclosures as our nonperforming loans migrate to OREO.

But, we also see a decline in the pace of migration to nonperforming loans that has started showing up as we enter the spring selling season.

Prices have continued to hold steady, with only marginal declines in the average sales prices of the homes in Atlanta.

When builders sell their product, we continue to get paid out in full on our construction loans.

The nonperforming loans that are held by our builders are still working to help dispose of those.

We in some cases are asking them to bring any offer to the table so that we can jointly decide whether to move out of those nonperforming loans that keeps the builder whole, and assist them in execution of sales.

Our builder group is reporting some slight increase in traffic as we enter the spring selling season.

Our best assessment is that we will see marginal improvement in 2008, with marked improvement in 2009.

Our optimism is centered in the fundamentals that have been part of Atlanta for the last 20 years, and that's the expected continued population growth and job growth that Atlanta enjoys.

The Census Bureau just released 2007 population growth estimates, and showed that Atlanta added 120,000 people in '07, second only to Dallas.

It's the 20th year in a row that Atlanta's population has been in the top five cities in the country.

Our local economists are forecasting 45,000 new jobs in 2008, which again keeps Atlanta among the top in the nation.

These fundamentals, we think, will help pull Atlanta out of the real estate crunch that we found ourselves in much faster than most parts of the country.

That, coupled with the dedicated and skilled seasoned bankers that are dealing with our real estate problems, give us reason to think that we will be successful in addressing our nonperformers as we move through the balance of the year.

Thank you, Don.

We'll ask David Dunbar now to update.

Thank you, Richard.

The story in Florida is similar, but a little different than what Mr.

Howard referenced in Atlanta.

Addressing the credit challenges, we will in fact merge in the Naples affiliate, which was First Florida (technical difficulty) weekend.

We've been working on that for the last month or so, and finally received regulatory approval from all agencies just this week.

So we are merging that bank into Synovus Bank of Tampa Bay this weekend.

The primary reason for that is addressing the credit challenges that we had in that part of the world, with added strength of the talents of the resources, much like Don talked about in the Atlanta group.

We've got a credit administration.

We've got special assets folks.

We've got a couple dozen commercial bankers that can help provide the additional support that that team needs.

As Richard mentioned, in connection with that, we are packaging up a group of loans to try to expedite the reduction of NPAs from that group.

That package has been written down previously to a level that we think the group that is working on the disposition for us can have that back -- that piece of our balance sheet back earning in June.

As to the rest of the west coast of Florida, it's no secret; a lot of press written about the overall market conditions of Florida real estate.

Again, a little different than Atlanta.

Particularly in the lower part of Florida, you had a lot of folks that took advantage of investor-type properties.

That's what we saw in our Naples affiliate.

We're working through that with the sale of these pool of loans.

But the investor-type properties create a little bit longer delay in terms of disposition of the assets.

In the Tampa Bay franchise, it's a little different again in that we have a couple small finished lot subdivisions.

We've got some land held for future residential development, and a small golf course condominium project, $15 million, which is probably the largest single problem asset we have on our portfolio.

Those units are selling, albeit slowly, and we're getting 85 to 90% of the original asking price there.

So we feel we're in pretty good shape on that.

Our process for handling the sales, to handle the strategy and reduce any problems, we, again, like they did in Atlanta, the first of the year established a special assets group, both locally and regionally for Florida in anticipation of the need to address the reduction in NPAs.

Ours is staffed by a gentleman who has worked previously for me at another institution, got 20 years of experience.

Interesting side of that is for the last five years he's worked on the other side of the desk, if you will, working for a national investing fund to buy pool loans from holding companies.

So he's got the experience; we feel like that will be an addition that will help us expedite reduction.

The pool I talked about earlier is currently being worked, and we've got 36 interested investors on that.

So we're hoping that that will bode well for holding the price up on what we ultimately get.

The local activity -- in terms of sales and values, there's been a lot of discussion on that.

A lot depends on the type of real estate that is involved.

The market is moving, albeit slowly.

But again, it's dependent on the type of property.

I can give you one example where we actually foreclosed on a very nice Gulf-front single-family home in the Sarasota market.

We had a $4 million loan, and within 10 days we got $4 million for it.

So that's a positive indication of values.

At the other end of the spectrum, we've got this abundance of investor-type properties in that lower southwest part of Florida; the supply is so great that houses in the $250,000 range may only bring $0.50 on the dollar.

But we're, again, pooling those out.

Another interesting example of values, last week, the International South Beach had an auction in the Sarasota market, where they auctioned off $100 million worth of real estate in southwest Florida.

The type of properties that were being auctioned off in that venue range from very high-end Gulf-front properties -- one example where a lender put in a $9.9 million house and it sold at auction for $8 million.

Again, at the other end of the spectrum, a small condo project in the lower southwest part of Florida was listed at $295,000, sold $0.50 on the dollar.

Again, it depends on the type of properties.

But it is moving.

In terms of what we think the future credit trends bode for our institution, we are tracking on a monthly basis, have been for a while, the condition of the portfolio, trying to monitor any future deterioration.

And I can say with confidence we are seeing less new entering into that monitoring system, or new credit problems being reported by our frontline lenders.

While we don't think this is the end of the NPA cycle, I think the pipeline for future problems, clearly, has slowed.

So we're feeling pretty positive about that.

David, thank you for your part of the presentation.

When you put it all together, I think anybody would acknowledge the difficulty that we have in predicting the credit outlook for the remainder of the year.

But we have put thought into that, and certainly Mark Holladay and his team are running their models and doing their projections regularly.

Our best estimate today would be to take the charge-off experience that we had for '07 and create a range around that 46 basis points, and the 91 to 95 basis points that we've incurred for the last two quarters, and to believe that we would be somewhere in the middle of that range.

But don't hold me to that with a high degree of certainty, because that, clearly, could change.

It's just our best estimate at this point in time.

And we are encouraged by some of the information that Don and David shared, even though they both have very challenging situations that will continue for a while.

Before we open the call up to questions, I want to say something about two other subjects.

One is a project, an initiative that we have undertaken here in this company that began three weeks ago.

The name of this initiative is Project Optimist.

It involves an idea-generation process throughout our company's 7000 team member base that I am personally extremely excited about.

We have a sense of urgency now that is unparalleled with anything I can remember in the past to come out of this downturn in the cycle stronger as a company than we entered it, which means we've got to be more efficient, we've got to identify every revenue producing opportunity, and we've got to improve the customer experience in every way possible.

We are using an outside advisor, who has a proven process.

Many of you would be familiar with that group, Harvest Earnings Group.

I consulted with other companies before we selected them.

The thing that we most like is the fact that this is our company's process.

These are our team member ideas; this is not an arbitrary top-down benchmarking exercise that is predetermined as the work begins.

So, we are optimistic.

We have right at 3000 ideas that have already been generated.

We're in the final stages of that front-end idea-generating process.

We're optimistic.

Significant bottom-line improvements will come from this work.

And the teamwork that we're seeing as people from all parts of our company participate in this initiative is quite impressive.

So we wanted you to know about Project Optimist.

A quick reminder of one of our strengths, and we think we have several that will serve us well through this difficult 2008 -- but, capital.

As a reminder, our tier 1 ratio at the end of March was 9.05%, our risk-based capital ratio 12.43, and our leverage ratio 8.96%.

So we are definitely determined to have the flexibility that comes from a strong capital position, not being placed in a position of having to raise capital at expensive or dilutive costs.

That concludes the formal parts of the presentation.

As I said, we have other executives in the room, and I'm going to open the call for your questions at this time.

(OPERATOR INSTRUCTIONS).

Kevin Fitzsimmons, Sandler O'Neill.

I was wondering if you could comment on a statement in your press release about the Florida market becoming more stable over the last quarter relative to Atlanta.

And I was just wondering if you could give a little more color on that, whether -- is that more a reflection of Florida improving, or is it more a reflection of Atlanta getting worse, or a little of both?

And just how you're feeling in terms of what inning we're in in those two markets in terms of identifying the problems.

In a minute I'm going to ask for a little help there, Kevin, but you heard David's segment.

The word stable, the term more stable, might not be the best choice of words, because there still certainly would be concerns about Florida.

But, the rate at which we are seeing new problems emerge has definitely declined, and that is encouraging to us.

One comparison I would make is that if you look at the mix of real estate exposure that we have in Atlanta, compared to the mix down on the west coast of Florida, we've just got a lot of builder subdivision activity in and around Atlanta, much less so than along the west coast, although a lot of our loans, whether it be land loans, or the condominium project that David mentioned, or maybe a couple of subdivisions, are still worthy of concern, it's just not as concentrated in the same types of activities and volumes that we see in Atlanta.

But I think, basically -- David, feel free to add to what I am saying, or Mark Holladay -- but I think our statement has really to do with the fact that new problems emerging are decelerating.

I think the comment that I made still holds true is that we still have some time to move through those things that we previously identified and previously (technical difficulty) we've got some time to get those off our books.

As Richard indicated and I said earlier, the pace of what we're seeing as we look out with our systems is definitely slowing.

And the other comment is very true -- in our market, with this combined operation we're about 1.6 billion; we're covering nine counties in the west coast of Florida, which represents about 4.5 million people.

But we certainly don't have the kind of construction activity or commitment to builder lines that I think they do in Atlanta.

That's probably helping us, both those two facts.

If I could just ask a follow-up.

I believe both Don and David mentioned some pending sales or auctions.

I think, Don, you mentioned an auction to dispose of some OREO that's coming in May.

David, I think you were talking about the special (inaudible) group and working on a pool for that.

Are these -- obviously, the OREO is within OREO.

But is the pool of loans, is that what's in the impaired loans held for sale?

If you could just maybe bring it all together for us, like this quarter, what you see as teed up for potentially selling and getting out of the nonperforming category.

I'm going to turn to Mark Holladay, because I think he has, obviously, the best grasp of our overall asset disposition plan.

The pool of loans that we're talking about is primarily a Florida pool, and it does show up in impaired loans held for sale.

It's an NPA classification for us.

But it's something that I think I mentioned in a previous discussion that we've been working on, and we have put that together.

We do expect about -- I really hate to give you the exact number, but -- we're looking in the next quarter to move 50 or $60 million out of the ORE process.

Some of that would be through the Florida pool.

Some of that would be through the auction process that we're working on in Atlanta, some additional activities that are taking place.

We're working with -- obviously, with our banks, but we have special assets, resources here at the holding company.

We've got some really good strategies in place and believe we can execute on it.

Should we expect more of these to come in coming quarters, or is this more of like a one-shot deal out of what you have right now?

We've looked very closely at the regions of our portfolio and what the strategies ought to be.

We believe Florida is very manageable once we execute this strategy.

We will be focusing on Atlanta a little more for subsequent quarters, but we're not anticipating anything of this magnitude going forward.

And lastly, can you comment a little about looking ahead for the net interest margin?

Obviously, we understand what contributed to the compression this quarter.

Would we expect a continuing kind of pace over the next few quarters?

Tommy will address that.

I'll be glad to do that.

The net interest margin, as Richard commented, held up relatively well, given the tremendous moves that were made by the Fed during the quarter.

We worked hard to reposition the balance sheet.

Not prepared for that day because we didn't anticipate 200 basis points.

But for rates declining in general, one of the factors in that decline, as Richard mentioned, was the credit costs that's built into the margin that's now a full 20 basis points compared to 5 basis points a year ago.

We would expect that to get a little stronger as we cycle through the NPAs, and have -- continue to have some migration and interest reversals.

But as far as the other parts of the margin, we still have a little bit of rate decline that occurred in mid-March.

The very latest one that occurred has not been totally absorbed.

We would expect a little bit of (technical difficulty) from that.

And then, obviously, it depends on what goes on in the future with the rates.

Probably the biggest driver that is somewhat of an unknown in the margin is really when is this marketplace going to rationalize on the cost of deposits.

And you know and you've seen what's going on with all the entities scurrying around for the same deposit dollar, the brokered CD rates filtering into local markets.

And when and where that pressure begins to subside may be the key question.

But all in all, we would expect the base case to be a little bit more pressure from the latest round of cuts, and then working our way through the environment with all the other factors.

Thank you.

Ken Usdin, Banc of America Securities.

First of all can you talk a little bit about the Myrtle Beach area?

You mentioned that previously as an area where you'd seen a little deterioration.

There was obviously some incremental charge-offs.

Maybe that same type of color you've given around the other two areas would be great.

Mark, do you want to talk about Myrtle Beach?

I'll be happy to.

The market data for Myrtle Beach is not that different from the Florida market in terms of overpricing on condominiums.

We were seeing about a 30% overpricing in that market.

We went in and have assessed that portfolio.

We have about $90 million in condominium exposure there.

We believe that we have addressed the exposure issues that are problems for us.

We're not anticipating anymore.

We've got a few other projects there with very strong bars and good traction, so we think we've got that pretty much addressed.

My second question is just -- the Company is, obviously, sitting on a very strong capital base and that's, obviously, helping you in this tough environment.

I was wondering if you could give us your updates on capital management activities, if any at all, that we could expect either via dividend activity and buybacks at all, and where you stand on acquisitions given the environment.

Thanks.

Buybacks are not something right now that would be in order for us.

Acquisitions in 2008 are highly unlikely.

I think that's true throughout most of the industry.

This capital being on our balance sheet is an expression of strength that we're proud to point out.

But it does help us bridge this abnormal period, during which we're paying at this point in time $0.68 per share annualized to what we believe will, hopefully sooner rather that later, become a more normal earnings run rate for the Company, so that the payout ratio can come back into more normal ranges.

So it's being used to support the current dividend rate in '08.

Tommy, do you want to add anything to that?

Really just multiple factors that go into the capital decision.

Earnings growth, credit quality, current environment, the mood of the market, the rating agencies -- we've got to keep an eye on all of them.

But as Richard said, we fortunately have the capacity to weather through this cycle and keep watching it quarterly as we make any sort of decision about capital.

Thanks very much.

Steven Alexopoulos, JPMorgan.

I think this question is probably for Don.

Can you size the exposure to Atlanta now of the residential construction loans?

Maybe share LTVs if you have them.

Did you say you expect nonperforming assets to decline in Atlanta from here?

I'll address the last one.

We don't expect them to decline.

What I said is the rate of migration has slowed considerably from the first few months of this year.

We probably will still see them rise a little bit, but we hope our aggressive disposition strategies also start to kick in.

So we're taking as much out the backside as is coming in the front side, and we can manage those.

To your other point, our total exposure in Atlanta for our construction and A&D is approximately $1.4 billion, pretty much divided between construction, one-to-four family construction, and the other 50% being in lots held for builders and A&D loans.

Do you have average LTVs in those, by chance?

Just our normal underwriting, and I don't, because on the performing -- normal underwriting -- okay, I do have it.

83.6% is the current loan to value on one-to-four family construction, and 71.9% on residential development.

Thanks.

That's helpful.

Can you guys talk about the big increase we saw in the C&I nonperformers in the quarter, and what markets or industries are really causing the problems there?

I'll be glad to talk about that.

First of all, our performance indicators are still good with C&I and nonperforming loan ratio is [0.76] and our past-due ratio is 0.87.

The NPL ratio is 0.45.

We did see an increase of approximately $29 million in that category for the quarter.

About 40% of that increase is really in one loan.

It's centered in really a performing leasing portfolio.

The borrower that we have is having problems elsewhere outside of this particular loan.

It's well collateralized.

We are expecting a very quick resolution to this and really are not anticipating a loss on the credit.

That's a big piece of it.

Florida has seen some increase in their commercial pass-throughs.

Some of that is tied to housing.

But if you look at those relationships that are tied to housing in the C&I sector, our pass-through ratio is running at about 1.22%.

So we're not seeing anything of any magnitude that causes us concern.

Richard, maybe one final question.

For quite a few calls now we've heard you talk about more focus on deposits.

I'm curious what your expectations are of when we should start to see some improvement in deposit trends.

I was somewhat surprised and disappointed that we didn't have more deposit generation in the first quarter.

And as you heard from our remarks, we have very quickly, even though the incentive program was in place, we have revamped it to put more emphasis in the rewards that are available to deposits.

Starting last -- I don't know -- last year, midyear, the competition has been extremely intense.

And I think some might have heard me say that last fall, September, October, we decided in managing our margin to get out in front on deposit pricing, and lead the way down in certain key markets.

But it became apparent after four to six weeks of that more conservative positioning that our competitors, regional and community banks were not willing to follow.

So we had to adjust our approach and really become more competitive.

We also, I think -- Tommy, you might speak to this -- have adjusted to be more competitive in certain of these deposit categories once again as we look over our mix of products.

Also, we have had single service and somewhat high-cost CDs roll off during the first quarter.

Now, we've had to replace that somewhat with some wholesale funding.

Some of that wholesale funding is in the money market category, and I guess you could call it wholesale.

But it's a pretty stable, fairly reasonably priced source of funds.

But we, clearly, have got to push harder with deposits, and you note the campaigns that are underway.

Fred, do you have any thoughts about deposits as you work with the bank CEOs?

I'll just add a little bit to what you said.

The key point would be the restructuring of our incentive programs to not only the CEOs of our banks, but to the salespeople within the banks, with a heavy emphasis on core deposit growth, and primarily the lower-cost core deposits.

That, coupled with the intentional repricing of some of the single service CDs that we had built up by last year running off, kind of put us in a position where we are now.

But we do anticipate growth from here.

Thanks.

Jefferson Harralson, KBW.

I wanted to ask a question about the dividend.

You covered it a little bit.

If you go to sort of the higher end of your loss rate, guidance, if you will, hopefully we're in the middle of that range, (inaudible) higher end you are somewhere earning around your dividend for some period.

You mentioned the high capital levels supporting the dividend.

Can you talk about your thought process on the dividend, and the capital supporting how long you would go with earning at or about your dividend for some period of time, if we are in the upper range within that charge-off range?

I don't think we're going to give you a definitive answer, Jefferson.

But clearly, you can appreciate that we will have an ongoing thought process.

This is a quarter-to-quarter evaluation.

Tommy thinks about it a lot, and sort of articulates his opinion to the Board and the management team on a regular basis.

We've got a number of variables that we will be looking at.

Tommy, put it in your own words.

As Richard said, there isn't an exact time or an exact ratio we're shooting for.

We all know that over time that a bank like ours would have a dividend payout ratio that would drop below 50%.

And if we continue to be a big loan generator in the future, maybe in the mid-40s to low 40s.

We do have the luxury of some time to consider and really to see our way through the depth and test the depth and duration of this credit cycle.

And we'll continue to evaluate it.

We respect the capital account.

Capital is king, and it's the key to shareholder value just like the dividend is.

But we've got (technical difficulty) decision and balance it out, and it's a dynamic process.

And we'll keep updating you as we go.

That's helpful to get into your mindset.

One more question and then move on.

On the commercial real estate growth, the income (inaudible) properties -- you had some very strong growth there.

Can you comment on where that's coming from and what's driving it?

We can.

We've done quite a bit of analysis.

In fact, Mark and team have developed a top five in size list of transactions that occurred during the quarter in each of the major categories.

Of course, we wouldn't give you the names, but by type of income-producing properties.

Mark, do you want to comment on what drove the growth?

I really do want to reemphasize what Richard said before I get into the detail.

There are really two dynamics occurring in the market.

The first is that acquisitions in the past several years have gone straight to the CMBS market.

If you look back at our growth over '05 and the first -- '06 and the first half of '07, we grew about 1.5% in that area, and about 2% for the first half of '07.

As the CMBS market shutdown, some of that growth is accelerated.

So we're seeing opportunities for our good customers who are acquiring properties.

About 57% of our activity is tied to that kind of area.

The rest of the growth is tied to actual new construction.

So we're not out there generating a lot of new construction activity.

It's fairly normalized.

Certainly, we've tightened underwriting requirements there.

We have just finished a review of the top 25 loans that we made in those income categories.

I'm walking away feeling very good about it.

Our capital requirements have ranged from 21% to 30% cash in the projects.

We're stressing those properties to hold rates of about 7.5%.

They all have good, strong guarantors.

The guarantors have good liquidity.

And we're doing very careful global analysis on the customers.

The growth is really spread throughout those three or four or five sectors.

We've seen some office warehouse, probably the largest area of activity; some hotels would probably fall second in line, and then some multi-family and retail.

Our commercial development is down, but those types of properties are -- really that's what's causing the growth.

Thanks a lot.

Bob Patten, Morgan Keegan.

Most of my questions have been asked.

I've got a question regarding efficiency opportunities.

You guys have combined some of the banks recently.

What is sort of -- if you look out a couple years, how do you envision Synovus in terms of the structure of the banks?

How many banks would there be?

And what kind of savings could you probably accumulate?

We're moving toward fewer charters.

(technical difficulty) sense that, where it makes sense.

The biggest opportunities have been in and around Atlanta, and you know that story, although David Dunbar's operation down in Tampa, really, is a combination of four banks into one.

There are some other opportunities that we're discussing internally.

We have had recently 37 charters.

We will be headed toward a number less than that, but it won't be 20.

It will be something north of 20 or 25.

It's an evolving situation with us.

It's not always driven by efficiencies, but those do come.

I can think of, Don, when the Riverside Bank and others have been combined into the Bank of North Georgia, we have typically enjoyed very dramatic improvements in headcount and efficiencies.

But usually it's based more on leadership, on market overlap and talent as much as anything.

So the model is not -- we're not departing from our model, but we are moving toward a more efficient model.

And we feel we have to do that to retain the model.

So you can tell directionally where we're headed.

We're not prepared to disclose all of the possibilities, because some have not necessarily been worked out.

But this is an ongoing discussion point in our management leadership meetings.

One other question.

You've been around a little a few times in these cycles.

Would you say this cycle is worse than the '90, '91 cycle at this point in time?

I'm going to speak to that personally and say yes.

And for this company, although there were some challenges in that timeframe in this company -- we had some Florida bank problems as I can recall.

But certainly, the residential part is definitely more painful, as you can imagine.

The rest of commercial real estate has not ended up at this stage being a problem.

And we think, because of examples like Mark just gave in underwriting, we've got the cash flow covered, the debt service coverage protection in those loans.

But, yes; we would say for us, it is worse.

But admittedly, we have a pretty high percentage of exposure out there in that residential sector.

So we're being hit in that regard.

Thank you.

Kevin St.

Pierre, Sanford Bernstein.

Richard, I suspect there are some who are looking at your financial results and seeing a sequential increase in NPAs on the order of 50% having a little difficulty connecting that with an expected or likely range of charge-offs that would appear to imply a sequential decline, if it's going to be somewhere between '07 and the 95 basis points or so.

What would be helpful maybe, Mark, if you could explain to us or discuss with us which categories of the nonperforming assets where you've already recognized losses through the income statement, and that would perhaps (multiple speakers)

Let me point out one thing, Mark, that some people fail -- and you touched on it, so, Kevin, you're aware of it.

If you look at our NPAs, most are in real estate.

A very high percentage, very high percentage of those loans have been impaired at the time they become NPAs.

So if we're doing a good job, and if we are conservative in our impairment process, the current NPA ratio should not be necessarily a driver of future charge-offs.

Because those charge-offs on those NPAs have already occurred.

Mark, you add color to that.

I would echo what Richard said.

We have a low scope for impairment in our company, it's relationships of 1 million or more.

So a $1 million loan that goes on loan accrual gets immediate impairment treatment.

What we do is our policy is to get that property assessed immediately within the quarter and charge it off.

We charge it down to fair value less selling costs.

We also go through that same process quarterly for that same NPL to determine if further impairment has occurred.

So 75% of our portfolio has had that treatment.

That would be the 334.5 million note on the table?

I would think that's -- 389 million is my number that has had that (multiple speakers)

But that's adding 334.5 and the 42.2 of impaired loans held for sale, right?

Yes.

And in addition, our ORE gets the same treatment.

Thank you very much.

Rob Rutschow, Deutsche Bank.

The first question I have to Atlanta.

I was wondering if you can tell us what the inventory growth in housing looks like when you combine the foreclosures and starts and less the sales.

And if you can give us any idea of what the foreclosure pipeline looks like, and what the months of inventory are at this point.

I can tell you the studies that we look at include foreclosed inventory.

They -- so when we quote you numbers, we're quoting bank held property, as well as builder property, as well as homeowners.

So the housing inventory out in the market for Atlanta is 31,891 units.

That's about an 11.2 months of supply.

Lots are 148,000 units, and that's about a 68 month supply.

If you -- the foreclosure rate, and I don't know that I have that for Atlanta -- I know for Georgia it's running about one out of 351 houses.

That's actually probably improved a little bit, believe it or not, from where we have been in some months.

That's one of the rate of activities that we watch very closely.

Because that's going to be a trend in Atlanta.

That's one of the drivers of Atlanta's recovery is some slowing in the foreclosure rates.

I guess I'm also wondering if you can sort of square for us -- it seems like the months in inventory have gone up, and how that relates to the housing prices.

And then, what a further decline in housing prices would mean in terms of NPAs and charge-offs.

We continue to look at Atlanta.

We haven't seen excessive price declines.

And one of the reasons for that is that appreciation rates for years and years have been mid single digits.

If you look at the demographics for Atlanta -- and we do, we look at the dynamics of affordability, population growth -- right now Atlanta is really underpriced for what it ought to be selling for.

So our view on that is we're not really expecting a significant price decline in Atlanta.

My follow-up on that would just be, I was wondering if you could give us an idea of what the OREO costs were in the quarter, and how that's trended over the last couple.

The ORE cost was $8 million in the quarter.

And that compares -- hang on one second -- it was 12 million in the fourth quarter.

Thanks a lot.

Todd Hagerman, Credit Suisse.

Richard, just one in terms of -- you touched upon this earlier -- just in terms of the balance sheet growth and the loan demand.

Obviously, the loan pipeline, loan demand has been pretty strong for the Company over the last several quarters.

Balance sheet continues to grow at a pretty healthy clip.

You have the capital.

How do you strike that balance, that trade-off between the funding challenges that you talk about, the credit quality concerns that you have as a company, and just providing for that growth in terms of your loan loss reserve policy?

The loan growth was a little more than we expected.

And that's why we have gone back and really studied and analyzed the mix of that growth, and in particular the pricing of those transactions, as well as the underwriting.

We referred to this list of 25, I think, that Mark mentioned.

We are keenly interested in the risk-based pricing that banks in our markets are taking, and we're watching closely what competition is doing.

There are some signs that -- it has not moved like the secondary market, but there are some signs of more discipline and more risk assumed into the pricing models that are being used.

So we are becoming more disciplined with both the CRE as well the C&I on pricing.

I wish it were moving faster, but I can say for the first time in quite some time that pricing has firmed up.

It also, as you point out, has brought into focus the funding side, and the need there to keep our core deposit growth at pays.

We had a couple of excellent years for, I guess, [finally] '05 and '06, and have had good success in keeping pace with our loan growth.

But clearly there has been a gap that has reemerged over the last quarter or two.

So we've got to address that.

We also address it through the internal pricing that is charged for wholesale funding allocations that are placed in the banks that are not able to generate funding on their own.

And so they have less incentive to price aggressively, because their funding costs are up.

So the market forces internally would help, I think, correct some of this.

And we did adjust the incentives that we mentioned earlier for producers as well as CEOs.

But we need to get this -- probably need to get the growth slowed down on the loan side a bit more to -- closer to the mid single-digits than the upper single-digits.

And I think the CEOs will -- the incentives will help accomplish some of that.

That's helpful.

Just as a follow-up, in terms of the loan loss reserve, can you give us a sense for the provision this quarter and the reserve, maybe Mark, how much was tied to your impairment methodology, if you will, versus absolute growth within the portfolio?

And where do you stand at the end of the day in terms of unallocated?

I can do that.

About 57 million of the 63 million were tied to impairment.

Part of that impairment was the portfolio held for sale of 21 million.

The remainder was impairments of new nonperforming loans that came on the books.

Our growth factor -- we do have a growth factor of -- and I believe the increase was about $2.5 million in funding for the reserve.

And the remainder of the funding tied to migration in the portfolio.

Thanks a lot.

There are no further questions in the queue.

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

I just want to thank each person who participated in the call for being with us.

I thank each of you for questions.

We'll go back to work and we'll stay in touch.

Thank you, ladies and gentlemen.

This does conclude today's conference call.