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Synovus Financial Corp. (NYSE:SNV)

Q3 2007 Earnings Call

October 25, 2007, 4:30 PM ET

Executives

Richard E. Anthony - Chairman of the Board and CEO

Thomas J. Prescott - EVP and CFO

Fred L. Green, III - President and COO

Philip W. Tomlinson - Chairman and CEO, TSYS

Mark G. Holladay - EVP and Chief Credit Officer

Analysts

Nancy Bush - NAB Research

Robert Patten - Morgan Keegan

Anthony Davis - Stifel Nicolaus & Company

Adam Barkstrom - Sterne, Agee & Leach

Jeff Davis - FTN Midwest Research

Kevin Pierre - Sanford Bernstein

Kevin Fitzsimmons - Sandler O'Neill & Partners

Heather Wolf - Merrill Lynch

Presentation

Operator

Good afternoon ladies and gentlemen, and welcome to the Third Quarter Earnings 2007 Conference Call for Synovus. At this time, all participants have been placed on listen-only mode, and we'll 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, you may begin.

Richard E. Anthony - Chairman of the Board and Chief Executive Officer

Thank you very much. And I want to welcome each person on the line to our third quarter conference call. We have distributed just in the last half hour two new releases, one covering our performance for the third quarter, the other having to do with our announcement that we're spinning-off TSYS, our 80% owned subsidiary company, and I want to say a little about each of those press releases. I do apologize for the short lead time you have had to, I guess, review the information but given the schedule of events today this was the best way that we felt we should communicate with the public, and we do welcome you into this call.

On performance, you will hear a little bit more in a few minutes from Tommy Prescott and Fred Green, but without a doubt the challenging credit environment has affected our performance. You will see that we have announced excluding spin costs, earnings per share of $0.45 in the quarter which would be a 5.1% decline in that particular measure. And we'll talk about the impact of several issues on that. One of which is the market down in Florida concentrated in the Fort Myers, Cape Coral, Lehigh Acres territory there.

The impact of credit costs in those markets really which came from one of our banks really impacted our charge-off numbers by about 50%. So we'll come back to that in a few minutes.

I do want to say this about our spin decision. We have been talking publicly about this potential event for over a year and half. We've certainly taken quite of bit of time to analyze the issues and to involve our Board in recent months in the decision making process. I am confident that we have arrived at the right decision. I am excited about it. Our team is excited really on both sides of the company TSYS as well as Synovus.

The primary benefit is going to be the strategic flexibility that comes from TSYS having access to its capital structure and to its currency to make acquisitions. But the two primary tests that we used all along had to do with strategic flexibility and creation of long-term shareholder value. You can do your own calculations, but the banking part of our business is clearly under valued right now. If you break the numbers down and look at to the TSYS market value and the banking and the resulting banking only market cap, so we see some opportunity for this to correct itself over time. There was a $600 million dividend, special dividend payment from TSYS that was announced $485 million of which will come to Synovus as the 80.8% owner of that company.

We've got a great leadership team at TSYS. They have proven themselves over many years. They continue to prove themselves in a positive way with excellent third quarter results and having managed their way through their own challenges over the past year-to-year and a half. And as I have said they are energized by the prospects of being able to tackle a more diversified approach to expansion and growth in the future.

Those are my thoughts on performance and the spin decision. We'll come back to both of these subjects later. We will have a question-and-answer session following the presentations that will come next.

Tommy Prescott will now go over the financial results. He will followed by Fred Green, and then Phil Tomlinson will talk about TSYS and recent financial results there. Tommy?

Thomas J. Prescott - Executive Vice President and Chief Financial Officer

Thank you, Richard and good afternoon to everyone. I want to remind that we'll be making forward-looking statements today that are subject to risks and uncertainties, factors that cause those results to differ materially from those... from these forward-looking statements are set forth in our public reports that are filed with the SEC.

Richard mentioned the third quarter earnings briefly, but on a consolidated basis, the earnings were $142 million, down $12 million from last year. That represents $0.45 per share before the spin costs that compared to $0.47 in the third quarter of 2006.

We'll be talking today about these results, and we'll generally exclude the spin costs from the consolidated results. Just a reminder there, to date we've spent about $6 million between TSYS and Synovus on the spin costs primarily to the third-party advisors. For the year so far we've reported earnings before the spin costs of $457.6 million. That's up 3.7% over last year with earnings per share of $1.39 for the first nine months of this year.

I am going to now go into some of the financial services highlights and you'll hear more from Fred later, before he turns it over to Phil to review TSYS. The financial service story is related about credit costs. Those were the key driver for the quarter with a loan lone provision of $59 million pressuring our third quarter performance. The provision was fueled by higher charge-offs of 51 basis points and higher reserves that were necessitated by the negative migration of credit risk rates and also specific convertible certain loans. And you'll hear more later about the large part of this credit story was centered around several specific developments in the West Florida markets.

Net interest income was $294.2 million for the quarter, unchanged from last year. And of course this was lifted by the year-over-year earning asset growth that we've had but pressured by the 28 basis point margin decline from a year ago. The margin for the third quarter was 402 and that's down 3 basis points from the second quarter. That was exclusively due to the higher level of interest charge-offs and higher non-performing asset levels and the pressure that comes on the margin from those elements. Otherwise we were able to stabilize the margin during the quarter as we pushed really hard on the price and primarily on our funding costs.

Loans end of the quarter at $25.8 billion, up 6.5% over the last year with linked quarter growth of $233 million dollars or 3.6% on an annualized basis. On a sequential quarter basis, commercial real-estate loans declined about $8 million or 0.3%, and then C&I loans up $100 million or 3.8% and retail loans growing $138 million or 14% helped fuel the modest loan growth that we had during the quarter.

Core deposits end of the quarter at $21.5 million, up 3.3% over last year and down $270 million against last quarter driven by lower overall funding needs, seasonal weakness and run-off of higher priced CDs.

Non-interest income was a $106.2 million, up 18.9% over last year and was $290 million for the year so far 10.8%. The third quarter includes an almost $11 million pre-tax gain from our venture capital line of business and a $30 million pre-tax gain from the sale of our MasterCard stock holdings. Service charges on deposits remained relatively flat versus last year.

Financial management services revenues grew by 12.3% for the quarter. The growth was led by a $1.6 million or 25% increase in brokerage revenues and a $1.4 million in our customer swap activities. Mortgage revenues has shown stress in the current environment declining by $2.5 million or 29% compared to same quarter year ago, but in spite of these challenges our mortgage company has recorded a net profit for the year of $1million and has really been able to keep some traction going on even against this harsh environment because of continuing to better operate the company and to really integrate the distribution channels on a better way with all our banks.

Expenses have grown modestly and excluding the spin-related costs were up 4.8% over last year and for the quarter up... I am sorry 4.8% for the quarter, 5.7% for the year-to-date, the costs that relate to the 20 new branches that have come online since one year ago have added expenses obviously but some of that has been offset by tight management of headcount otherwise and also a lower performance based pay. The results for the quarter include a $3 million reduction in income tax reserves within the financial services segment incident to a settlement of a routine audit.

Just an update on our outlook for the remaining quarter and for 2007. Based on the credit events that occurred during the third quarter we currently believe our 2000 earnings per share before the costs related to the TSYS spin-off will be approximately $1.85. This assumes a 4% annual margin net charge-off ratio for the year of approximately 34 basis points and mid-single loan growth, of course it's $1.85 that does exclude the spin costs just to be sure you have to remember that.

So I am now going to turn it over to Fred Green for his comments.

Fred L. Green, III - President and Chief Operating Officer

Thank you, Tommy. We began this year knowing the challenges we would face would be balance sheet, gross margin and credit. Tommy discussed the numbers but let me share a little more background on how we fared in these three challenges.

Loan growth this quarter is lower than historical standards but given our strategies and the current economic climate we feel the growth rates are appropriate. The hallmark of both our retail and commercial strategies was to have more diversity in our portfolio and we are accomplishing that, the growth we had in the retail and C&I portfolios more than offset the intentional reduction in our CRE portfolio.

On margin even with a greater than expected rate reduction by the Fed, it did stabilize this quarter. We achieved the stabilization by implementing market by market, product by product, price changes on deposits. We sacrificed core deposit growth primarily through reducing the higher priced promotional type deposits. The area that we've not done well on is the credit challenge. Tommy just shared some of the numbers, and I want to take a few minutes going into those in more detail.

Historically we've never discussed any of our banks but because of its impact on our company and the unique situation, I am going to stray from our normal approach. 18 months ago, we closed on the acquisition of First Florida Bank in Naples, Florida. We liked the bank, we like the market, we liked the people. But we wanted to reduce their significant concentration in the single family construction loans. We began liquidating that portfolio upon acquisition and reduce the numbers in the dollars from around $900 million when we acquired it... excuse me 900 loans in $220 million in commitments when we acquired the bank to 500 loans and around a $125 million in commitments at year end to around 300 loans and $62 million in commitments at this quarter end.

Since year end and more dramatically this quarter, home prices started falling. Mortgage markets dried up, and we have aggressively recognized the softness and the deterioration in that market. Of the slightly over 300 individual construction loans to individual borrowers to a pre-qualified for mortgages upon the completion of the house, we conducted a 100% audit focusing on each home's current value and each borrower's ability and desire to repay the construction loan with a permanent mortgage. Taking the most aggressive approach possible, this quarter in our First Florida subsidiary, we took a provision expense of $21.3 million and we increased our reserves in that bank by $12.4 million. We moved $42.6 million to non-performing non-accrual status and we charged off $17 million.

I single First Florida out not only because of its significant impact this quarter but also because of the market's price depreciation and that is the only bank in our system with this concentration of single family construction loans to second home and speculative buyers. To speak to its impact on Synovus without the moves that we have taken in First Florida in Naples the rest of our banking organization charged off around $16 million or 0.25% of loans. Our NPAs would have been around 1% and the provision expense would have been $21 million less.

As to the rest of our banking operation as an ongoing practice we stress our portfolio by periodically evaluating loans compared to their original underwriting assumptions. Because of the slowdown in housing in general we have looked at our residential construction and development loans over $1 million and compared current absorption rates, price points and borrowers' liquidity to the original underwriting assumptions. Our risk rates migrate and as they migrate we adjust reserves accordingly. As an example, of our aggressive approach of recognizing and working through credits, this past quarter we moved three large credits, all three were 30 days and less past due to non-performing status. One was in the Panhandle of Florida, two were in South Atlanta, all were residential, construction and development loans. In the aggregate this three loans again that were 30 days or less past due totaled $37.5 million and we reserved appropriately for these loans.

Going forward our approach is to continue to aggressively identify any problems in the portfolio to assess the risk and exposure of these problems to account for and reserve for the risk, and to very quickly resolve the problems. During the Q&A section Mark Holladay and I will be happy to answer any questions on these issues or any others.

And with that, let me now turn it to over to Phil.

Philip W. Tomlinson - Chairman and Chief Executive Officer, TSYS

Thank you, Fred. We at our earnings call Tuesday morning we did our turnout release loose Monday night and frankly we had a great quarter. Our revenues before reimbursables increased 4.9% for the quarter and up 5.1% year-to-date. Our net income increased 26.7% for the quarter and were up 18.3% year-to-date. Our operating income increased to 26.2% for the quarter and 19.2% year-to-date. I think the big story is the operating income has increased in the last nine months 300 basis points and that adds about $30 million in operating income to TSYS and it just shows I think that we really do have a good handle on our expenses, we're doing well there. Our earnings per share increased from 26.5% to $0.35 for the quarter and 18.4% to $0.97 year-to-date.

Internal revenue growth rate or organic growth rate is we call it here in all time high of 15% and this has really been growing well. So we are right on track as to where we expect it to be and I want to give you a couple of highlights on some new business and some things that happen to be going on in our business.

As you know Royal Bank of Scotland is one of our largest customers, and their acquisition of ABN AMRO, both of them are customers of ours. And frankly we think that that will be a good thing for us. We think that as a result of that we will have the opportunity to pick up some more business from them, from the new organization. We also announced that we had signed Nationwide, the world's largest building society in London to manage their credit card portfolio. And we are doing something a little different there that we have not quite done for anybody in our history. We are really going to manage that portfolio from A to Z. We are going to manage credit collections, customer service, settlement accounting and based on the scope of services Nationwide will rank among our top ten customers once they get converted. We are very excited about that.

If you recall, we acquired CardCheck [ph] 18 months ago or so and as a result of that, we have recently inked to deal with Tinkoff. Credit Systems in Moscow. This is our first foray into Russia, and we're excited about that. We're going to supply the card management and authorization system for them. They want to become the first monocline card issuer in Russia and focus exclusively on issuing credit cards.

We also in the U.K. launched a new money transfer card for Lloyd's Bank, it's called the Silver Account, and it's really an innovative money transfer product primarily aimed at the growing number of the immigrants living and working in the U.K.. We also inked to deal with Commerce Bank of New Jersey. They selected us to handle all their collections and recovery systems in and for the entire bank. We think that might turn into something new for us. That's also an area that we have not ventured into before and something new for us. I think there is a lot of possibilities there.

Our merchant processing companies signed an agreement with Veracity Payment Solutions, headquartered in Atlanta, to do merchant processing for them. Our international business continues to perform extremely well, and the third quarter was no exception. International revenues increased 28% in the third quarter and 38% year-to-date.

CUP Data, our joint venture in China continues to do very well. We have now signed contracts with 38 banks or issuers In China. In the last month we have signed two letters of intent and hopefully I can tell who those are the next time we chat. So, we are feeling very good about our momentum. Obviously this time last year we were struggling a bit, but we think we are back on track and rolling again.

I will speak just a minute on the spin. We are... I don't think we could have had a better parent over these years than Synovus. We have... from January we have been together in this processing business for 25 years, and it's been one of those partnerships that was frankly made in heaven. We have learned a lot from each other, and they have been a wonderful partner, and certainly we want to continue to have a wonderful and long-term relationship with them.

I think the spin though will certainly solidify our reputation and our perception in the market as a global leader in the industry, I think it will help generate more interest in our vision and future opportunities. I think that you have to look at this on a long-term basis. We are certainly proud of our past but appreciate Synovus allowing us to be an independent company, and we think that will provide an awful lot more strategic flexibility in all areas. So as I said earlier, we are working on our future and our strategies, and we feel like we are in a pretty good shape. We will have a conference call in the morning at 8:30 to kind of give you some more color on this. And I would assume that all of you have probably gotten that e-mail by now for the telephone call. Richard, I mean, that kind of concludes my report. I am happy to answer any questions later.

Richard E. Anthony - Chairman of the Board and Chief Executive Officer

Phil, thank you very much. I think at this time, we would all like to open the call up for questions and we invite them from the group.

Question And Answer

Operator

Thank you, ladies and gentlemen. The floor is now opened for questions. [Operator Instructions]. Our first question comes from Nancy Bush. Your line is live.

Nancy Bush - NAB Research

Good afternoon guys.

Richard E. Anthony - Chairman of the Board and Chief Executive Officer

Hi, Nancy.

Nancy Bush - NAB Research

Could you just tell us... give us a little bit more detail on dividend that will be paid to you, the $485 million is that a pre-tax figure? And what are the thoughts about putting that to use? Does that get paid out as a special dividend from the Synovus side or is it something else?

Richard E. Anthony - Chairman of the Board and Chief Executive Officer

Let me... Nancy let me say a little about that and perhaps Tommy will add to it, I know he will. $600 million of course with the percentage ownership takes our share to $485 million.

Nancy Bush - NAB Research

Right.

Richard E. Anthony - Chairman of the Board and Chief Executive Officer

Basically within our multi-bank holding company structure with our bank here CB&T being a clearing bank in so many ways for other affiliates, uses and operates with a higher level of capital. So initially all of that capital will be injected into CB&T. This will take our capital ratios up to a nice level and Tommy will give that to you in a minute but longer term, I'd say this well capitalized position will give us the ability to engage in stock buyback activities, at some point it will give us more flexibility and making acquisitions using some cash in those situations. Obviously this particular issue is one that had to be negotiated between the TSYS special committee and the Synovus special committee, and those deliberations went on for a while here in recent times. We think we arrived in exactly the right place, the ability for TSYS to operate with this level of distribution I think is clearly there. So I am confident that where we ended up was about right and I will get Tommy to share more specifics on those capital ratios as they will stand at the end of the year upon receipt of that dividend. The tax piece you asked about is non-taxable of course to us, internally in Synovus.

Thomas J. Prescott - Executive Vice President and Chief Financial Officer

Yes, that's correct. And Nancy just a little more color on the rationale and if what that does to the capital and that Richard said the decision was about the ballots and we did not want TSYS to be over leveraged, coming out the chute. We wanted them to have the capacity to accomplish their and we think they will. And on the Synovus side what we were really trying to do was to steer tier one capital to the right level. And then once you look inside our capital mix, you will see that we are over the years, have not had to do like the other banks and engage in hybrid offerings. But in the future we'll certainly have the capacity to engage in hybrid instruments off of this capital account and undertake whatever activities we need to do what its acquisition share repurchases... and purchases in the future all alike. The tier one ratio coming out of the chute we estimate to be about 9.4%. That's a level that we think is very healthy. It's slightly above peers the way we view it, but just slightly but we think it's appropriate as we consider the current banking environment and feel very good about the lending place on capital.

Nancy Bush - NAB Research

Okay. Question for Mark, I mean you've got two projects in South Atlanta that went on non-performing this quarter. Can you just kind of give us your sort of best view of that market right now and getting worse, getting better what's your view?

Mark G. Holladay - Executive Vice President and Chief Credit Officer

Yes Nancy I'll be glad to do that. Really Southwest Florida, the Naples area is the area that we see has been the weakest of all of our markets. We've got... if you look at top 285 MSAs, we've got seven, we have 30 markets 7 in the bottom third and they're all in the West Florida. But the worst is Cape Coral if you look at single family home sales, year-over-year they're down 37%. Our... and I think in the month of June sales were about 558 units. Home prices year-over-year 5.3 but from the peak they're down 40%. Did you ask for... I am sorry, yes Atlanta?

Nancy Bush - NAB Research

Yes I mean that's fine. If you want to give us just kind of a high view but the one I was most specifically interested in was Atlanta.

Mark G. Holladay - Executive Vice President and Chief Credit Officer

Okay. I'll talk about Atlanta I apologize. I missed the question. If you look... if you go to Atlanta, the market data there what we are seeing, the third quarter single family starts were 37,869 units, the closings were 42,683 units. Closings year-over-year are down 19.4%, at Atlanta. The average single family sales price is now up 1.5%. We've been saying mid-single digit appreciation that has come down. The inventories are... actually the physical units are coming down Nancy. They've come down from... there were at 41,510 units a year ago, they are at 36,912 units now. And that's a function of same, the closing exceeds the starts.

We got 10.3 months of housing inventory on the ground. That hasn't really changed significantly since the last quarter. About 10 months in South Atlanta and about 10.6 months in North Atlanta. The developed lot inventory we really need to see sales rebound there. Absorption rates are continuing to rise because of the lower sales. So the developed lot inventory is about 44 months at Atlanta. But one indicator we do see is that the future lot inventory is actually coming down now, so that's a good indicator. I think again the builders are doing the right things. They are restricting growth. We're still seeing net job growth for Atlanta at about 54,800 new jobs year-over-year. I would tell you that sales have not bounced back yet. We are looking for that. Some of our bankers think that will be in the middle of the year. Well we're just going to have to see but we're on the ground talking to our customers keeping track and keeping close eye on it.

Nancy Bush - NAB Research

Right. This may seem kind of a farfetched question when it's applied to Atlanta. But I mean they don't have any water essentially, and that has been an issue that has been brought up there for many years. And the governing structures more or less ignored it. Do you see Mark any kind of greater structures on development there that might come out of this?

Mark G. Holladay - Executive Vice President and Chief Credit Officer

Well that's... there is always a risk Nancy. I think obviously with the Atlanta being so important to the state that will be worked out with water flow from Tennessee. There is always long-term... we can do what the Saudi Arabians do with... and use the salination but yes this drought has not been a good thing for Georgia. It's obviously brought the water tables down. Hopefully we'll see that rebound as well. But it's an infrastructure resource issue that Georgia is grappling with especially Atlanta I think it will be resolved.

Nancy Bush - NAB Research

Okay, thanks.

Mark G. Holladay - Executive Vice President and Chief Credit Officer

All right, thank you.

Operator

Our next question is coming from Bob Patten. Your line is live.

Robert Patten - Morgan Keegan

Hey guys congratulations.

Richard E. Anthony - Chairman of the Board and Chief Executive Officer

Thank you, Bob.

Robert Patten - Morgan Keegan

Can you give us a little color on the Florida markets? You talked about where the big issues were in the Naples from the Naples Bank. What are your second areas of concern and maybe a little more color on the scope and degree of the audit you have done on your existing portfolio?

Richard E. Anthony - Chairman of the Board and Chief Executive Officer

I am just going to say a thing or two and that is that over on the East Coast of Florida we have very few if any issues to deal with. In fact, the markets specifically that we are continuing with outside of this Fort Myers, Cape Coral and Lehigh Acres area would be around Sarasota and in the Tampa Bay region and then in the Panhandle, really in those two areas. And I will let Mark take that and give more particulars on it.

Mark G. Holladay - Executive Vice President and Chief Credit Officer

Okay. Just from the market standpoint, I talked about Cape Coral, Tampa, St. Pete, single... and we're really focused on single family so that we don't have a lot of condo exposure down there. We exited that two years ago and the C&I activity has been healthy. Obviously Naples you would think the C&I business would be tight but the rest of the markets we're not really seeing any deterioration in C&I. Tampa St. Pete, prices year-over-year are down 6% but the change from the maximum there has only been 7%. So we are not seeing that kind of hit in some of these other markets.

Obviously Sarasota where we've got a very small presence it's had a little larger price depreciation 10.4%. And their change from the maximum has been about 17% over time. I think as of January 2006 price down there, sales are down everywhere. They are up a little in year-over-year and Sarasota Bradenton and they are up about 4.6%. In Tampa they're down 35.3%. We talked to our bankers on the ground, visited obviously a lot of these. Our CEO in the Tampa region has said that he is not concerned about the homes, I mean the issues that they are seeing down there are in the condos, and there are bigger drops and that's not an area that we're out there haven't to worry about right now.

The lot inventories, if you look at those Sarasota... Bradenton has got a lot of inventory down there, about 120 months of supply. Again we are not invested in residential down there. Tampa has got 31 months, Fort Myers has got about 28 months. So all of those areas are seeing certainly some weakness. The things that we're doing down there is we are updating appraisals continuously. I mean all of our CEOs down there updating on the residential side. We've had as many as four new appraisals done on property this year. We're watching the market making sure that our loans are holding up.

Land prices are doing well. We are not really seeing any significant deteriorating in terms of our values to our loans. We have had a few loans in Pensacola... land loans in Pensacola that we've... that had gone on non-accrual this year, and we've gotten now was zero losses. But overall, that's one of the things we are doing. The second is our loan review teams are down there on the ground, looking hard at our loans. The third thing is we're pulling all the A&D loans. We've got about $450 million invested in that market, the West Florida market about half of it is residential and half of is one to four construction, and we're looking at every one of those loans, talking to our bankers, and getting updates. And I think we're doing a pretty good job of that.

Robert Patten - Morgan Keegan

Okay, and then one last number. When you guy are talking about the exposure with the First Florida Bank in Naples, where it is today? I've got the first two segments of data up to year end '06. I did not get it what it currently is in terms of numbers of commitments to loans?

Fred L. Green, III - President and Chief Operating Officer

Bob it's Fred Green. We've taken our medicine in Naples. We don't expect any more write-downs or problems there. But the balance is less, write-downs and reserves are in the $40 million range, $47 million.

Robert Patten - Morgan Keegan

And number of committed relationships and number of commitments?

Fred L. Green, III - President and Chief Operating Officer

300.

Robert Patten - Morgan Keegan

Okay, thanks, guys.

Fred L. Green, III - President and Chief Operating Officer

Thank you.

Richard E. Anthony - Chairman of the Board and Chief Executive Officer

Thank you, Bob.

Operator

Our next question is from Tony Davis. Your line is live.

Anthony Davis - Stifel Nicolaus & Company

Congratulations on the spin, gentlemen.

Richard E. Anthony - Chairman of the Board and Chief Executive Officer

Thank you, Tony.

Anthony Davis - Stifel Nicolaus & Company

I've just... I want to make sure Fred and Mark, it sounds like in the first quarter and the Atlanta market, has accounted for is it 80% of the increase in NPAs after write-offs, is that right?

Richard E. Anthony - Chairman of the Board and Chief Executive Officer

That would be right.

Anthony Davis - Stifel Nicolaus & Company

Yes. Outside of those two markets, the Carolina and Georgia costal markets, places like Seattle, and what are you seeing in those areas? What's happening in risk classifications in C&I? Are you seeing spillover I guess outside the development part?

Richard E. Anthony - Chairman of the Board and Chief Executive Officer

Yes. Tony, I'll ask Mark to go into more detail, but the markets by state that we really have not had any problems with the South Carolina, Tennessee and Alabama and Georgia outside of the ones we just mentioned in Atlanta. You can go over the details by state, it's out the...

Anthony Davis - Stifel Nicolaus & Company

Thanks.

Mark G. Holladay - Executive Vice President and Chief Credit Officer

Tony I heard you asked about Seattle and I can tell you that area is believe it or not doing very well. Their sales are on target, their occupancies in the resorts are high and we have really not seen anything that gives us any lack of confidence there. We're also seeing that in Savanna and Augusta and again I think the reason for that is again we got 30 markets in the top 285 MSAs. They are in the top third of the market, so that gives us confidence that they will hold up. South Carolina, most of their markets are in the top third as well as the Alabama markets. And as Richard said they are even some Florida markets that are in the top one third MSAs, Jacksonville and Tallahassee are two of those that are still performing pretty well.

If you look at just non-performing by state, and break that down, our non-performing assets in Georgia are 118, and South Carolina they're 0.46, in Alabama they're 0. 57 and in Florida they are 2.54 as Fred said, a huge chunk of that is in Naples. So that's kind of where we are today. I didn't mention Tennessee, they are at 0.95. We did have an issue with one of our banks in Memphis that pushed our NPAs up, but it's not a housing related issue.

Anthony Davis - Stifel Nicolaus & Company

Okay. Fred, you folks have been pursing a 10% loan growth, 12% commercial deposit growth bogey, I guess you talked about the appropriateness of growing a balance sheet. I wonder if you could talk a little bit about your C&I and backlogs and kind of what we should expect in balance sheet growth here going the next several quarters?

Richard E. Anthony - Chairman of the Board and Chief Executive Officer

Okay. I'll... let me start even though what part your question complimenting our retail strategy because we did have great growth there, and I don't want to lose that in the conversation. Going back to C&I, as we ramped up our commercial strategy, we've got greater levels of commitments, more closing, more activity, not only on the loans but on the deposits and some of the fee-based items that come with it. Commercial real estate again by design we are letting run off and as I said earlier in my just brief opening comments, the solid growth we've had in retail and C&I have more than offset the reductions in commercial real estate. Looking forward, I don't think over the next several quarters we will back to that double-digit range that we have had for so long. And I do think that is appropriate given the current economy we're in. We'll see the C&I side and the retail side continue to grow at nice levels and probably would continue see run off in commercial real estate.

Anthony Davis - Stifel Nicolaus & Company

One final question, put Mark back on the hot seat. Just if you could give us your thoughts, Mark, on a comfort level if you can put it that way, in terms of what we could expect for the charge-off rate for the next several quarters?

Mark G. Holladay - Executive Vice President and Chief Credit Officer

Yes, we've looked at our migration. We looked at the different markets. As Tommy stated, our forecast for the year-end is 34 basis points. Our charge-off ratio as Fred had mentioned earlier, we did beef up the reserves a little bit this quarter on some of those loans. We really reached down in the portfolio to get ahead up, and we are looking at about a 43-44 kind of charge-off for the fourth quarter. And I would expect for the first few quarters of '08 you are going to see something in that ballpark anywhere from the 30 to the 40 kind of basis point range. Right, year-to-date our real estate losses are 35 basis points. I think we are about 22 basis points on C&I and 35 for consumer and of course the HELOCs, I think 15 basis points mortgages are running about 12 basis points. I really don't expect to see a big change in those. We got really good high credit scores, reasonable utilization on the lines in HELOCs and the C&I. We are really looking in all of our industries. We are looking hard at construction related industries but we are not seeing trends that indicate that we are having problems there. So if you ask me today West Florida, we will have some more, this thing sustains itself through '08 there will be some more issues that pop up. But I think of losses in Atlanta have not been large at all, but is a value additions are holding pretty well. So that's kind of where we are seeing potential loss.

Anthony Davis - Stifel Nicolaus & Company

Thank you much.

Richard E. Anthony - Chairman of the Board and Chief Executive Officer

Thank you Tony.

Operator

Our next question is coming from Adam Barkstrom. Your line is live.

Adam Barkstrom - Sterne, Agee & Leach

Hey, gentlemen, good afternoon.

Richard E. Anthony - Chairman of the Board and Chief Executive Officer

HelloAdam.

Adam Barkstrom - Sterne, Agee & Leach

You hear me all right.

Richard E. Anthony - Chairman of the Board and Chief Executive Officer

Yes, we can.

Adam Barkstrom - Sterne, Agee & Leach

I amsorry. It's phone speaker, how is that, a little better?

Richard E. Anthony - Chairman of the Board and Chief Executive Officer

That's better.

Adam Barkstrom - Sterne, Agee & Leach

Sorry gentlemen. Hey Fred, just wanted to circle about. If I heard you right, you just kind of made a pretty strong statement with your Naples market that you saw like you kind of took you medicine this quarter. And this is what I heard that you feel like losses are pretty contained there going forward, is that... am I understanding that correctly?

Fred L. Green, III - President and Chief Operating Officer

That is correct. The bank right now is around $400 million. We talked about this portfolio where we've had the problem. And again we've looked at add them 100% of the loans in it and they were all single family construction loans to individuals. We have written down or reserved amount that would put the loan at par with the market values. I would hope and I am going to underline hope and not, not making a commitment and we will end getting some recoveries as we work through this, but we have taken our medicine there.

Adam Barkstrom - Sterne, Agee & Leach

Okay. And Tommy you had mentioned and I didn't quite get it down, but there were couple of items in non-interest income, I believe one was a VC gain of, I think you said $11 million.

Thomas J. Prescott - Executive Vice President and Chief Financial Officer

Yes we had $11 million from the venture capital line of business. And in addition to that we had a $3 million pre-tax gain on our MasterCard stock sale.

Adam Barkstrom - Sterne, Agee & Leach

Okay, thank you.

Richard E. Anthony - Chairman of the Board and Chief Executive Officer

Thank you, Adam.

Operator

Our next question is coming from Casey Ambrecht [ph]. Your line is live.

Unidentified Analyst

Hi, thanks very much for taking my question. Congrats of spinning of TSYS that's a good way to reward shareholders.

Richard E. Anthony - Chairman of the Board and Chief Executive Officer

Thanks a lot.

Unidentified Analyst

I guess now that today I don't really know of any other banks are trading at eight times kind of an '08 number that Synovus is now trading. Especially considering you guys have almost 10% capital. So going forward, how do you plan on improving this valuation of your company? Does that mean buybacks, it looks like the dividend might trend down as you kind of reset that but, what you do if your stock at 8 times earning, I mean it should be a part of the larger company, should you sell this company or what are you guys going to do from here?

Richard E. Anthony - Chairman of the Board and Chief Executive Officer

Well, first of all, I think performance takes care of valuation over time but admittedly it is a surprise to us right now, of that the embedded value for the bank is at the two times discount to our peers. I would anticipate perhaps that with the spin decision having now been announced and the separation of the two companies was really more clarity coming in total transparency from those 2 separate units that this might start to be reset. But I don't know how the market will handle that in the near term. I frankly think that our... the quality of our franchise, the presence we have in good markets throughout the Southeast, the shifting emphasis that we have now placed on a commercial strategy which really fits our responsive model very well will lead to a premium evaluation. We don't aspire to get back up to average levels, we expect to have a premium now.

Over time what tools we'll use rather than just basically aggressive sales and business development and adding customers one at a time and all our banks, I mean we'll have the ability to enter into stock buyback program, so certainly the dividend policy is one that, that needs to be right as we've had a good history for our retail shareholders of increasing dividends. Leveraging this capital through acquisitions is going to be a part of our expansion plan. We have had a history of making community bank acquisitions in good markets, and we continue to state that we would like to enter new markets in the Southeast. And we believe that we can take billion dollar community banks and have good strong double-digit growth rates in these key markets that we would like to enter. So the growth plan would be a combination of factors. I think at the top of the list would be our commercial strategy which will lead to a better balance in our customer mix and in our loan portfolio away from the concentration that we've had in recent years in real-estate, particularly the residential development piece.

Unidentified Analyst

Okay, great. And what about the perhaps joining a larger organization now that your bank is kind of cleaned up from the TSYS business?

Richard E. Anthony - Chairman of the Board and Chief Executive Officer

Say about what --

Unidentified Analyst

What about joining a larger bank?

Richard E. Anthony - Chairman of the Board and Chief Executive Officer

A sale of the company our merger of equals or --

Unidentified Analyst

Well, we all know that our responsibility is to create value for the shareholders. We believe because we've done it consistently in the past that we can accomplish this on our own. But we do have the overriding responsibility to create this value. We think we have got a business plan in place. We don't think we have to do this by consolidating our company with one that is larger or even by doing a merger vehicles, but strategic options will always be out there and will have to pick the one that creates the best value for the shareholders. But I like our plan, I like the ability that we have to grow in these key markets with the community bank delivery back to buy large bank expertise, product array, legal lending limits, all of which support this commercial strategy. So our aspiration and the team joins me and this is to show that we can be the premier regional banking franchise in the Southeast. I see no reason that we can't achieve that.

Unidentified Analyst

Okay. At any time only of these, I think you have a lot of upside. Thanks very much.

Richard E. Anthony - Chairman of the Board and Chief Executive Officer

Thank you.

Operator

Our next question comes from Jeff Davis. Your line is live.

Jeff Davis - FTN Midwest Research

Good afternoon. Richard, any plans to twig the Synovus model by consolidated charters?

Richard E. Anthony - Chairman of the Board and Chief Executive Officer

We have done a little of that, Jeff. We've most recently consolidated couple of our Atlanta area banks into our flagship bank there, the Bank of North Georgia. And we will consistently look at the right opportunities we have particularly when we have a small presence in a large market, certainly when we have a large market like a Tampa Bay area or like an Atlanta Metro area where there is a blur, between one community extending into the next. So we'll pick our spots. We won't do... we are not going to change the personality of the company. But if we can do some of these things to attract better talent as sometimes you can do in a bigger organization like the Bank of North Georgia. We will capitalize on those opportunities.

Jeff Davis - FTN Midwest Research

Let me ask you just little different that, no plans to go from 37 down to 15 to 16 --

Richard E. Anthony - Chairman of the Board and Chief Executive Officer

Not like that. No, it wouldn't be that.

Jeff Davis - FTN Midwest Research

Okay and if I could ask a follow-up, please of Mark... market, it sounds like you are expecting charge-offs to at least for the time being to crest somewhere near here over the next couple of quarters, if we average amount around 40 bits. What about NPAs? Big jump this quarter out of Naples and then downgrading the stuff that's not non-performing technically yet. What are your thoughts there over the next two to three quarters of when the non-performers crest?

Mark G. Holladay - Executive Vice President and Chief Credit Officer

Well again I think one of the things we are looking forward is some rebound in sales. But if you were to pin me down right now and looking as our migration changes, we are looking for some increase in some NPAs over the next couple of quarters. We've done it loan by loan and we've done it through risk migration. And if you pin me down today I would say there is a potential for an increase up to the 120 level. The other thing we are doing that I think is going to be a meaningful to us is that we typically have not outsourced some of our collection duties, those kind of things. We are in Atlanta, we are signing up with all utilization of our ORE, with the company the SunTrust uses. They have had good success turning in about 17.5% of the inventory a month. So we think we can exit properties quicker if we are smart about it, if we are... we have sold some loans we may pick that up a little bit. And we again built our reserve to 138 of loans. We've I think factored the charge-offs into that so the provision expense we don't think will be as meaningful but the charge-off ratio might be up a little bit. Again, we are very aggressive in looking at our past dues, our 90 day loans, we did see some of the bank reports where 90 day loans were moving way up, ours have not done that. And we look closely at those every single quarter and justify why they're still there. So if you ask me I'd say for the first few quarters of the year they are still pressured, we think by mid year that that pressure will lighten but at this point I can't give you an absolute number.

Jeff Davis - FTN Midwest Research

Okay, it's fine. And Tommy, so at Columbus Bank and Trust Capital, the tier one capital is going to be what about 11% or 12%.

Thomas J. Prescott - Executive Vice President and Chief Financial Officer

Tier one at CB&T, just remember they are coming off of a tier one number that's been --

Jeff Davis - FTN Midwest Research

24, 25.

Thomas J. Prescott - Executive Vice President and Chief Financial Officer

28% roughly, at least that would be our year end estimate with ours being... and post in tier one out the chute at CB&T you are looking at something in the 17 range. And as Richard mentioned while ago CB&T does have some unique activities as sort of the center of the Synovus and also some of the unique businesses there and do require some more capital. We believe we can tune that capital utilization something they really haven't had to do much of because of the pieces ownership, we think we can tune that and free some up over time.

Jeff Davis - FTN Midwest Research

Thank you, very much.

Richard E. Anthony - Chairman of the Board and Chief Executive Officer

Thank you.

Operator

Our next question is coming from Kevin St. Pierre. Your line is live.

Kevin Pierre - Sanford Bernstein

Yes, good afternoon gentlemen, Mark I would just like you to clarify maybe and maybe even restate what you touched on in the last answer in that the tone of the press release as well as some of the calls here is that you put some of these issues behind you. I guess what I am having trouble looking at the rate of increase of the NPAs and then some guidance about sequential declines and charge-offs and moving into the 40 basis point range from 50. Could you... would you actually, can you an actually envision the scenario over the next few quarter where non-performers are continuing to rise and yet the provision expense is lagging in that charge-offs?

Mark G. Holladay - Executive Vice President and Chief Credit Officer

Yes. I think what we talked about is, there is not... we did not believe there is another Naples in our port folio. And this 51 basis point charge, half of the charge is coming from that. If you backed that out loss rates were 25 basis points. So what we think, what I think I am trying to say is do I expect those losses to grow up some? Yes from 25 I do but I don't expect the 51 basis point rate going forward over the next few quarters. In terms of non-performing assets it's really a function of... we looked at every potential loan in the higher risk classification, we got about $45 million in residential, that's accruing that... they have some weaknesses but they don't reserve non-accrual. That's kind of where we're looking at it.

What if these loans go to non-accrual? An example of that is we got a loan, and an $87 million loan in South Carolina, we've got a new appraisal worth $12 million. We got a borrower who is not performing like we wanted to, we got buyers in line, ready to buy our property if... and we're pursuing a foreclosure on that property. If we succeed in acquiring the property the property will be sold, and there will be no issues. If the borrower resists us and files for a bankruptcy then we got a longer delay on turning that property. So, there are things like that in the portfolio that makes it very difficult to give you a prediction.

Kevin Pierre - Sanford Bernstein

That's reserve 20.

Richard E. Anthony - Chairman of the Board and Chief Executive Officer

Right.

Mark G. Holladay - Executive Vice President and Chief Credit Officer

That particular loan is reserved even though, we've got a $12 million appraisal and an $8 million loan, we got a 22.5% reserve against it.

Kevin Pierre - Sanford Bernstein

Right, and as we see some of these flow-through to charge-offs can we... could we see that reserve to loans drift down and provisions like sort of.

Mark G. Holladay - Executive Vice President and Chief Credit Officer

Yes, I think that's what we are... I think that's what we're trying to say is that we've got ahead of these things. We've added to a reserves, it's very possible for the reserves to actually drop.

Kevin Pierre - Sanford Bernstein

Right, and I think just to get back to the Casey's point I think if we demonstrate to the market that 40 basis points range in '08 and that this dramatic year-over-year rise in 1 to 4 family non-performers is not going to translate into extraordinary charge-offs then I think that's when you move for make times to your premium multiple.

Mark G. Holladay - Executive Vice President and Chief Credit Officer

We understand that.

Kevin Pierre - Sanford Bernstein

Thank You.

Mark G. Holladay - Executive Vice President and Chief Credit Officer

Thanks.

Operator

Our next question comes from Kevin Fitzsimmons. You line is live.

Kevin Fitzsimmons - Sandler O'Neill & Partners

Good afternoon everyone.

Richard E. Anthony - Chairman of the Board and Chief Executive Officer

Hi Kevin.

Kevin Fitzsimmons - Sandler O'Neill & Partners

Richard, can you just remind us some of the markets that are kind of at the top of your list in terms of where you would like to enter? And I know you have mentioned Carolina in the past, North Carolina, could you also talk about... I know you mentioned the size of an acquisition, you talked about a billion dollar size. But what about the pace of acquisitions? I know one thing that's always been, a bit constraining acquisitions for small versus that you wanted to limit or not to loot the contribution of pieces but without that constraint now do you feel more freed up in a sense to do acquisitions? Thanks.

Richard E. Anthony - Chairman of the Board and Chief Executive Officer

I don't necessarily feel that way. A couple of years ago, we began to sort of mentally get away from this percentage of bottom line constraint that we used to talk about with thesis. I don't expect to deliver a half pace of acquisitions, right now. I mean we have got to make sure we have got the right currency which leads to the right economics and fundamentals in these deals. But I would say for now the size of acquisitions that we would want to target would be about the same that you mentioned a closer amount as a billion dollars maybe a little less but not down in that $3 million to $4 million range.

I think that Florida for now would be out, we'll return with an appetite to fill out more in Florida but for obvious reasons, we would not have that on our list. We do expect to have a clearer Tennessee strategy not that many opportunities but there are some in Tennessee. And we have got Don Howard who is one of our great leaders in this company taking over that market, and he is working on a Tennessee strategy for us. North Carolina clearly is on the list. We definitely are interested in it. And I can see Virginia being in a state although we've not looked at anything there that would fit our company.

But we still like our positioning term community banking powerfully connected which means we like well run community banks that can benefit from having this additional product set in areas of expertise like capital markets and corporate cash management and wealth management that we would bring to them. So the strategy for expansion is still the same, those are the examples of some of the markets that we would want to enter and the pace would continue about where's been in the recent years.

Kevin Fitzsimmons - Sandler O'Neill & Partners

Okay, great and just one clarifying point when you talk about $1.85 for full year 2007. I assume first quarter was $0.45 the second quarter I'm assuming you are talking about just income from continuing operations that was $0.48 and then you are probably including $0.45 for third quarter which is ex spin costs.

Richard E. Anthony - Chairman of the Board and Chief Executive Officer

Yes, that would be correct. Tommy is that?

Thomas J. Prescott - Executive Vice President and Chief Financial Officer

That's correct.

Kevin Fitzsimmons - Sandler O'Neill & Partners

Okay, great. Thank you everyone.

Richard E. Anthony - Chairman of the Board and Chief Executive Officer

Thank you.

Operator

Our next question is coming from Doug Charles [ph]. Your line is live.

Unidentified Analyst

Congratulations on the spin. I think it will do wonders for shareholders. I just wanted to confirm your dividend pro forma for Synovus after the spin from where I read in the release it's $0.68 and by my math that's over 6% dividend yield for the bank only. Am I doing that right?

Mark G. Holladay - Executive Vice President and Chief Credit Officer

Tommy, do you have?

Thomas J. Prescott - Executive Vice President and Chief Financial Officer

I don't have on those numbers. I guess based simply back out the current thesis value out of today's market cap that's in the numbers that's in the 5.5% range on the yield, and I think that comes back to the valuation issue that we were discussing earlier.

Unidentified Analyst

Okay, that does sound like a very high yield. I just wanted to confirm, I was doing the math right. Thank you.

Richard E. Anthony - Chairman of the Board and Chief Executive Officer

Okay.

Thomas J. Prescott - Executive Vice President and Chief Financial Officer

And the rational on the dividend was to keep the Synovus shareholder from looking in two baskets now to keep them hold from where they were before, when you add back to the $0.68 to the amount of that they will receive based on the just under 0.5 a share thesis and then they will come back to where they were on the previous basis of $0.82.

Unidentified Analyst

Okay, thank you.

Richard E. Anthony - Chairman of the Board and Chief Executive Officer

Thank you, Doug.

Operator

We have a follow-up come from Adam Barkstrom. Your line is live.

Adam Barkstrom - Sterne, Agee & Leach

Hey gentlemen, just a quick follow up. You I guess on the dividend and thinking about, sort of penciling out pro forma tangibles equity levels. With... you made some share repurchase and I was curious if you could give us some timing there I was kind of expecting to see a fairly aggressive share repurchase plans perhaps announced with the spin-off. If any thoughts on that, especially given the fact that from an acquisition perspective, I guess it's going to be still be cash deals but from a currency deal given where the current share prices, as you maybe somewhat limited from a dilution perspective, going forward. What are sort of thoughts on the timing of your share repurchases from here?

Mark G. Holladay - Executive Vice President and Chief Credit Officer

Adam, as you know, it's been very difficult in our history though to acquire our own shares for a couple of reasons. One was the really build on the financial services capital of the right level to prepare for this transaction that was announced today. And the other issue was I guess by nature of theses, business and the large customer news that was always out there, the windows were narrower for us to operate in, described while ago getting the tier-1 capital right being very well in to remix the components of tier-1 capital and to go to the marketplace with hybrid securities to correct the capacity for the share buybacks or acquisitions or other purposes and all that's on the table, right, in front of us. While we do not have an authorization out there but it certainly something that now where the decks have been cleared and we can do that as... move forward as we see appropriate.

Adam Barkstrom - Sterne, Agee & Leach

Okay, and then are we going see any further spin off costs in 4Q?

Mark G. Holladay - Executive Vice President and Chief Credit Officer

You will. There are some fees associated with success that cannot and should not have been accounted for, since they were unknown in the third quarter. In addition, there's some continued advisory work that goes on, so there'll be some more of that.

Adam Barkstrom - Sterne, Agee & Leach

Or do you think we are through the lion share of that or will it be... I mean any sense of magnitude?

Richard E. Anthony - Chairman of the Board and Chief Executive Officer

It will be the larger than what you saw in the third quarter.

Adam Barkstrom - Sterne, Agee & Leach

Okay. Thank you.

Richard E. Anthony - Chairman of the Board and Chief Executive Officer

Thank you.

Operator

Our next question comes from Heather Wolf. Your line is live.

Heather Wolf - Merrill Lynch

Hi there.

Richard E. Anthony - Chairman of the Board and Chief Executive Officer

Hello Heather.

Heather Wolf - Merrill Lynch

Tommy did you say yet what your tangible common equity asset ratio will be first then?

Thomas J. Prescott - Executive Vice President and Chief Financial Officer

We are estimating that to be about 8.8%.

Heather Wolf - Merrill Lynch

Okay. And do you have a target out there?

Thomas J. Prescott - Executive Vice President and Chief Financial Officer

I think our focus would be more on the tier-1 ratio. Obviously our tangible common equity ratios spans a little higher than other ratios because of the mix of our business. The tier 1 capital ratio we think appropriately deals with that element, and I described a while ago we feel like that 99.4% stands out a couple of notches basis points at least above the peers, and we think that that's appropriate right now in this banking environment. It's sort of a dynamic answer to that that will evolve I guess as the credit environment changes. But we like it where we are headed for the moment.

Heather Wolf - Merrill Lynch

Okay. And Mark I wanted to ask you a question that a lot of investors ask me some times, and that is you guys I think came on last quarter and said that everything was pretty much under control and that you thought things were going to improve from here and obviously that wasn't the case. So looking forward where do you think if there are going to further hiccups, where do you think you could be wrong in your assessment that they should stabilize from here?

Mark G. Holladay - Executive Vice President and Chief Credit Officer

Well again but for Naples, and I'd say that you know we would things would have been relatively normal. But you know again if you are asking me where are the hotspots. They are in Southwest Florida. Atlanta is the other area that we continue to watch. If you looking at our non-performing assets, West Florida is the area we got again about $500 million, $460 million, and residential activity in that area. And that's the one if you were to say, could you have higher loss ratios, obviously if that market continues to deteriorate further, we could. But I would say that, that's really in terms of our target of loss ratios that's what we factored in.

Heather Wolf - Merrill Lynch

Okay, so it sounds like you're more worried about loss content rather than more non-performers in other geographies?

Mark G. Holladay - Executive Vice President and Chief Credit Officer

That's right.

Heather Wolf - Merrill Lynch

Okay. And did I calculate right that you're loss severity assumption for Naples was about 40%?

Mark G. Holladay - Executive Vice President and Chief Credit Officer

Yes and it's a function of a couple of things. Part of it was the two locations we're in, one Cape Coral, one Lehigh Acres, the severity is different in those two markets. The other is there were some lot loans that we had down there that we did not... we totaled our bars, we didn't go forward on construction. We were not contractually obligated to and the lot prices have been really hit hard. I mean if you look it the fee prices down there they've been running $82,000, and we're seen a lot prices down there and 15 to $30,000 range. We didn't know whether they're in Cape Cool or Lehigh and that was about half of our loss.

Heather Wolf - Merrill Lynch

Okay, and then in your rough commentary about losses sort of folding in somewhere, it sounded like in the 40-ish basis point area, through the first half of '08. Have you assumed that C&I and some of the other loan categories fold where they are?

Richard E. Anthony - Chairman of the Board and Chief Executive Officer

Heather, we have, because they continue to do so. Obviously if there is a recession in the country, if things really change there, then we come back to you and change our model; but we are not seeing it right now.

Heather Wolf - Merrill Lynch

Okay, all right great. Thanks so much.

Richard E. Anthony - Chairman of the Board and Chief Executive Officer

Thank you, Heather.

Operator

A follow-up comes from Nancy Bush. Your line is live.

Nancy Bush - NAB Research

I just want a couple of quick follow-ups here. Richard, in sort of looking down the line and trying to value the stock going forward, could you just tell me what you think your perfect balance sheet balances, C&I loans, CRE and retail would be? What's the target there?

Richard E. Anthony - Chairman of the Board and Chief Executive Officer

Well, you'd have to go I guess five years out or thereabouts. And Mark you are going to have to help me with it. Including unoccupied in C&I we are at 41... and 5 years out I would really like to see that over 45 closer to 50, and I don't see retail percentages increasing a lot. Maybe just a little, a tick or two. So the differences would come out of the CRE investor properties.

Nancy Bush - NAB Research

So you'd still be looking at sort of a 75% or so being CRE?

Richard E. Anthony - Chairman of the Board and Chief Executive Officer

We are not... I understand your question and that basically has to do with whether we are going to sort of exit the commercial real estate lending business, and we talked about that particular issue but we feel like... first of all this is an area of strength traditionally for us. Now this is an unusual but sort of painful point in the cycle. I do think that some of what we are experiencing as you can tell is within our control. And I mean I think we can in that residential piece, we can be better underwriters, and I do think we will clearly shrink that exposure. The rest of CRE we like. Now our appetite will vary from time to time but the income producing properties, the multi-family, the hotel motel sector, the shopping centers, the retail centers, we'll continue to be active there. So the bulk of the shrinkage will come from that residential component. But I don't see us totally exiting there. We think that with the right kind of underwriting that we can be active in that business.

Nancy Bush - NAB Research

My other question would be perhaps aimed at as much at Tommy, but just one of the issues I think in evaluation of the bank side has been the trends in margin, not so much the downward trend which many in the industry have experienced, but just sort the variability and the difficulty predicting margin trends this year, do you guys feel you have got a handle now where your margins going and is there sort of more of a solidity in the outlook now than there has been perhaps earlier in the year?

Richard E. Anthony - Chairman of the Board and Chief Executive Officer

Nancy I think the third quarter results indicated an affirmative answer to what you just said. The ability to predict it obviously as you know has five or six key moving parts. Some you control, some you don't. I think a huge part of the issues that we've had in 2007 have been the tightening, the execution all the way to the frontline and I feel very good about where that is and I think that's a key indicator give us some confidence in the future.

Nancy Bush - NAB Research

And Richard, just one final question for you. The thesis in Synovus have a lot of interlocking parts, Boards of Directors, representations, etcetera. Do those remain or will they be separated or does there have to be some separation of governance there? I mean how does that play out, because it's hard for me... I mean I can sort of get my hands around the math. I can't get my hands around the psychology between the two companies which has always been so intertwined.

Richard E. Anthony - Chairman of the Board and Chief Executive Officer

Well, they have and really as you heard Phil say I think intertwined in a positive way. I think it is layered to opportunities and advantages somewhat on both sides. The answer to your question about directors is that we do have I think eight interlocking directors, and we have no plans to change that. It was aired out as it should have been at the Board level and we concluded that those Directors add value to both companies. They're good leaders, they have a great history and knowledge of our company. So we have elected not to change that. The question becomes, well, is there a perception problem there? We don't really think so. We view it more as a positive than anything else, so that's where we stand on that subject. No change in the Boards.

Nancy Bush - NAB Research

Thank you.

Operator

Our next question is a follow up from Jeff Davis. Your line is live.

Jeff Davis - FTN Midwest Research

I am fine, thank you.

Richard E. Anthony - Chairman of the Board and Chief Executive Officer

Okay.

Operator

Your next question is coming from Bob Patten. Your line is live.

Robert Patten - Morgan Keegan

Hey guys, just a follow up. After what happened with the Naples bank, I guess in terms of what lessons do you learn, you guys have a boat load of capital and acquisitions will probably be part of your growth as you're going forward. In this environment, obviously buying somebody else's problem is everybody's risk. What you do today that you have learned from the Naples acquisition?

Richard E. Anthony - Chairman of the Board and Chief Executive Officer

Let me just talk about due diligence and acquisitions of... and others can add to it, Bob. But we have learned not just from Naples but from our acquisition history that first of all, they had of just doing a sampling of the loan portfolio to feel comfortable about credit quality is not nearly enough due diligence and certainly we've done more than that. But there historically has been a temptation just to view due diligence as credit related. We have learned even in the credit due diligence that being on the ground, seeing the properties traveling into the neighborhoods, understanding all of the underwriting approaches is mandatory today. So higher sampling, physical inspection of assets and just more hours involved in interacting with the banking officers would be essential.

Secondly would be what I would call the importance of strategic due diligence. Understanding the growth plan and how likely it is to be achieved is essential. To be honest but we've got a couple of banks that we have acquired in recent years that have falling short of their growth plan. And if we were to do them again because they still have a lot of potential for us, we would reach tighter understandings about the strategies that we are going to enable them to achieve the growth, because that's what we are acquiring is that growing income strength. So we'll have a lot more strategic due diligence.

And then the final point is that banking has been a good business for the last 10 or 15 years, and there had been entrepreneurs in banking that have created perceived value. And naturally you create a liquidity when you buy a bank. What you can lose if you are not careful is the engagement of the people who are the beneficiary of the money you are paying and the currency you are issuing. So making sure you have got commitment, engagement, further skin in the game from that group has got to make the growth happen, is not to be taken for granted. And we understand that. Actually, we've had a much better track record in that regard than many of our peers. I am aware of many situations where regional banks have acquired community banks and ended up competing with those bankers. That is not at all acceptable situation, and we've been fortunate in that respect. But it does happen. So you have to have good chemistry, good fit with the culture and the people. Those are my thoughts.

Robert Patten - Morgan Keegan

Thank you, Richard. One last question on the capital levels. I have 9.4 and 17% written on capital is... can somebody clarify that for me in terms of coming out of the chute?

Thomas J. Prescott - Executive Vice President and Chief Financial Officer

Yes, Bob, I'll be glad to. The 9.4 is the pro forma tier-1 ratio for Synovus. The 17% is the CB&T ratio.

Robert Patten - Morgan Keegan

Thank you, Tommy.

Operator

Gentlemen, there appears to be no further questions in queue. Do you have any closing comments that you can finish with?

Richard E. Anthony - Chairman of the Board and Chief Executive Officer

I want to thank everybody for their interest. We are excited about this spin announcement. It's been a long time coming. A lot of great work has been done and we had an opportunity to thank those who participated in it earlier to date. I will say one last thing, and that is this current pressure that we are feeling in performance creates opportunity for us in the company perhaps to address... well definitely to address any weak area, rest assured that we are reviewing every operating unit of our company at the level of expense management, credit oversight and talent very thoroughly. And we will come out of this current downturn in a stronger position than we've ever had before. So the management team is excited about this opportunity. Thanks for being with us.

Operator

: Thank you, ladies and gentlemen. This does conclude today's teleconference. You may disconnect your phones at this time and have a wonderful day.

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Source: Synovus Financial Corp. Q3 2007 Earnings Call Transcript
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