Synovus Financial Corp (SNV) 2002 Q1 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Synovus first quarter earnings release conference call. At this time all participants have been placed on a listen only mode and we will open the floor for your questions and comments following the presentation.

It is now my pleasure to turn the floor over to your host, Mr. Jim Blanchard, Chairman, and Chief Executive Officer. Sir the floor is yours.

Well, good morning everybody. We are delighted to have you join our conference this morning and wish all of you listening in on the teleconference, or the conference call could be here in the Trade Center in Columbus.

We have assembled about 300 to 400 of our key leaders.

And really for the first time we are having our conference call with our regular Tuesday morning meeting group. We wanted them to be a part of this exercise. We wanted them to see it up close.

As you normally we'll have 15 to 20 of our top executives in a room. So we have a live audience and this a particularly interesting,

I think, conference call for them to get to sit in on, obviously because of the events of yesterday. I mention that just very briefly before we get into the normal comments.

Yesterday, of course TSYS announced a very fine first quarter.

They included in the conference call some cautionary language because of concern over events may or may not occur in the next week or two. It is difficult for us to totally read the market, but we assumed that the market read the precautionary language as the bad news.

Obviously, we didn't have bad news. If we had, we would have reported the bad news. But nevertheless, the precautionary language, we felt like was appropriate, and I will comment further on that as we get into the content of today's meeting.

Let me say this though however before we start the results for the quarter. Many of you have called, have talked to

or

or

or others, and we always appreciate your genuine interest and support and encouragement of Synovus and TSYS and your friendships.

We are very excited about our first quarter. TSYS reported a 22.3 percent increase in net income for the quarter. Synovus on a consolidated basis reported a 15 percent increase in net income for the first quarter. And under the circumstances that exist in the marketplace,

in the economy, in the world, we are on target, we are on track to meet our expectations and we are excited about the challenges that we face and feel very confident that we will overcome them and have a performance that will meet expectations and will make our shareholders very proud of the results for 2002.

The net income for the first quarter was 82.8 million, that's up 15 percent over a year ago. Diluted EPS was 28 cents for the quarter, that's up 12.5 percent over the 25 cents in the first quarter of 2001, in line with our expectations.

I think it is important to keep in mind that our first quarter comparison is against a first quarter in 2001 that included an $8 million pre-tax gain from the sale of our ownership in the Star System ATM network. That equaled 1.65 cents per share last year.

The performance in the first quarter, again, is in line with our expectations and is progressive toward us meeting our expectations we believe for the remainder of the quarters and for the year as a whole.

Our return on assets was a strong 2.03 percent, that's up from 1.97 percent in 2001.

Return on equity was 19.5 percent compared to a 20 percent last year. And that primarily is because our capital to asset ratio has increase again and equals 10.33 percent of total assets at the end of the first quarter.

It was a very solid quarter.

Great contributions from financial services, our banking operation and financial management services as well as TSYS.

Let me hit the highlights of our financial services segment and that includes banking, financial management services, mortgage, insurance, and leasing services. For that financial

services operation for the quarter, net income was 60 million that's up 14 percent over the prior year.

Return on assets was 1.54 up from 1.52 and return on equity was 18.99,

or let's say 19 percent compared to 19.5. Again the difference because of the increase of the shareholders equity. The key drivers of growth in net income in the financial services operation were strong loan growth and improved net interest margin, and I think, very effective expense management.

All contributing to our strong results.

On the margin side, we continued to be very strong during the first quarter of 2002. The margin was 477 that is up from 455 in the first quarter of 2001, down slightly from the previous quarter. We had some question about that yesterday, and I

think basically it is a question of seasonally. It is a function of things that happened in the fourth quarter versus the first quarter. And it's a function of some extension of some our liabilities, which cost us just a little bit in the short run, but will be very important to us in the longer run.

We expect our margin to continue to improve. We expect 480 to 485 for the year. With improvement continuing as we go through the year. The margin continues to benefit from downward pricing of fix rate deposits and an overall improvement in our funding mix.

Core deposits grew by 10 percent during the quarter. On a link quarter basis, core deposits grew at an annualized rate of 9 percent. We had robust growth in money market and NOW accounts, and they grew at an annualized rate of 31 percent during the quarter.

Going forward, we expect a continued reduction in our cost of funds, due to the overall low interest rate environment. We do expect some further decreases in our earning asset yields, although this will be more than offset by funding cost decreases.

These dynamics will, as I mentioned, result in continued

improvement during the year. We think as high as 485 by the fourth quarter.

Our loans continued to grow during the quarter. They grew 1.5 billion or 14 percent over the prior quarter with the larger urban markets again contributing a majority of the dollar volume.

On a sequential quarter basis, loans grew by 281 million and that's an annualized growth rate of 9.2 percent.

Compared to a year ago, 26 of our 38 banks reported double digit loan growth. And on a sequential quarter basis, 16 percent of our banks had annualized double-digit growth.

I think this is again a great indicator of the strength and the uniqueness that Synovus has in each of our local markets that we serve. And a strong validation again of our decentralized approach, with our individual charters, names, CEOs, strong boards of directors, and the organizational approach that has really been a great strength for Synovus.

And I would say, as I said to you for several years now, with each quarter that goes by we think that represents an even greater strength for our ability to win in the market place.

The asset quality remained strong during the quarter. The allowance for loan losses was 138 percent of loans at quarter end.

That's unchanged from year-end. And that provides 313 percent coverage of non-performing loans. Net charge offs were down for the quarter to 0.29 down from 0.39 in the previous quarter.

Non-performing assets were 0.58 at quarter end compared to 0.54 in the previous quarter,

some slight increase, but one that does not represent any sort systemic issues for us to deal with at this point. Our provision expense was 13 million, that's up 19 percent from a year ago, a strong provision. And the coverage was 1.44

of net charge offs in the first quarter. That's up from 139 in the fourth quarter and coverage of 130 in the third quarter.

Past due levels are very positive. At quarter end, loans over 30 days past due are 1.02. We just are marveling at the

strength of the loan portfolio and obviously it's strength of Synovus. Many of you have heard me say this, but we basically have a very simple approach. We want to lend money to people who will pay us back.

And that seems pretty simple, but that's pretty important concept around here.

Also, we've always said, why would a company that owns 80 percent of TSYS reach out and stretch to make a questionable loan. We just are not in a race to win earning assets because of growth needs.

And that differentiates us from our competitors. But at the same time we are able grow faster than our competitors because of our unique strengths and presence in each of our individual markets.

On the fee income side, non interest income was down actually 3 percent as compared to the first quarter,

but again taking into consideration the $8 million gain from the sale of our ownership in the Star system. Excluding that gain, as well as excluding Securities gains, non-interest income is up 10 percent over the prior quarter.

Financial management services and insurance, that's formally our brand was Wealth Management, and as you know we have changed that to Financial Management Services, our revenues there increased 19 percent over the prior quarter, or prior year's quarter. With trust up 19 percent , brokerage up seven percent ,

our financial planning up 13 percent and insurance up 85 percent .

We are very pleased with a 19 percent total. We have a goal for the year of 20 to 25 percent . We feel like we will meet that goal. And as quarters continue to come, we will see increases we believe in that percentage.

And we are optimistic that this year we will actually meet our target.

If you will recall, last year we feel slightly short at 22 percent, but under the market conditions we faced, we felt like that was very, very good performance.

Our average assets grew 12 percent.

Our fundamental revenues grew 16 percent. And our expenses on the financial services side grew a reported 10 percent and excluding acquisitions, those G&A expenses were up 7.8 percent. That is a little bit ahead of our target, but we feel like very much within range for us to meet our goal for 2002.

Our efficiency ratio for the quarter was 53.65 percent compared to 54.48 percent and we continue on our path to see our efficiency ratio reach 50 percent. And we think we will do that, possibly as early as the fourth quarter of this year.

Yesterday, TSYS announced their results for the first quarter. They were certainly in line with the company's forecast with a 22.3 percent increase in net income. Revenues for the first quarter announced yesterday were 223.8 million, that's an increase of 3.8 percent.

But you will recall that we have been subjected to a change in a FASB rule that requires us to include reimbursable items, such as postage and courier charges. We refer to them as pass through's.

And when you exclude those, the revenue growth was, we think a very strong 8.9 percent from a year ago.

Interestingly, I think, international revenues increased by 88 percent from a year ago. And of course that is attributable to our company's European expansion.

In the press release, Rick Ussery was very cautious, I think in explaining the expectations from the year. He describes it as challenging

year and he indicated that the forecast for the year included potential revenues from both prospective and existing clients. And also an intense focus on aggressive expense control.

And I want to read from his press release that against this backdrop, we remain cautiously optimistic that TSYS can achieve its goal of growing net income by 20 percent in 2002 over 2001.

He continued by saying that adverse developments with respect to any of these matters could cause us to fall short of our goal of growing net income by 20 percent.

I think that that is the point at which we felt like the market took that as bad news. We feel like that was unfortunate reaction.

And yet to you listening on this conference call, I don't want to dilute at all the comments of the challenging year, the expectations from revenue, from prospective and existing clients, or the fact that a turn of events that is not favorable

certainly could result in us falling short of our target.

We are cautiously optimistic. I believe that is the key element of the comment that he made. I believe that his next paragraph also is a marvelous addition to the tone that we had hoped to set yesterday through our comments.

He continued in the next paragraph to say that we continue to believe that the long term opportunities for TSYS are tremendous and that we have the best prospect list that we have ever had in the history of the company. We have seen some deterioration or slow in the decision making

process as a result of the economic uncertainty and the events of 9/11. But Rick indicated that he believes that they decision making process and the timelines are beginning to return to normal.

As we said over and over again,

for TSYS to continue the kind of growth that we have experienced since 1983, it is essential that we continue to sign prospects and that we are successful in our goal of signing one or more the major card issuers in domestic USA and around the world.

He cautioned the market again yesterday by saying that were we not continue to grow through signing new prospects during this year, that it would be important to understand that it would be difficult for us to meet our goals in next year, 2003.

So I think everybody understands the environment. Everybody understands the disclosure rules. Everybody understands, I think, the propensity that we have at Synovus and TSYS to be conservative. To be a high disclosure company, to be forthright and to put it out there in a way that will cause our customer,

our shareholders, and all of the constituency that we service to feel like that we are creditable in the information that we give you.

I believe that we have done that. I hope that you sense that from the comments that were made. And I hope that you will free to ask your questions when that time comes in the program.

One final comment about Rick's release and his teleconference yesterday, at 4:15. He amplified the comments that he made in the press release, and stated that TSYS is presently in the midst of a major new system development and conversion project for a prospective non traditional client

whose business will be important to us in 2002, and whose revenues are included in our forecast.

These software development and conversion activities are progressing toward a major decision point in the next few weeks and we are optimistic that these activities will be successfully completed.

He concluded by saying yesterday, that he really couldn't comment further about this prospective client and that we will have no further comment about efforts on its behalf until the activities are concluded and it is appropriate to make an announcement.

I think that is an amplification that hopefully will clarify and really will give you a better sense of the precautionary language that we included yesterday in the press release.

So, to wrap it before questions, we are excited about our quarter.

The investments that we have made at TSYS and Synovus over the last four or five years are really coming together. Our business lines are strong. I believe that the banks in Synovus are in the best shape they have ever been in the history of our company.

I believe we are now seeing the validation of our efforts with financial management services as the revenues are coming on stream and the investments that we have made are beginning to produce a solid return. And I believe the prospects for TSYS's growth, domestic and US is as good or better than it's ever been in our history.

So in spite of the economy, in spite of the world situation, in spite of the challenges that we face and in spite of the precautionary remarks that we feel like were important for us to make in yesterday's announcement, we are strong and solid. We are on a good path and we expect good results for this year and beyond.

Thank you Mr. Blanchard. And ladies and gentlemen the floor is now open for questions.

If you have any questions or comments, please press the numbers 1 followed by 4 on your touch tone telephone at this time.

Pressing 1,4 a second time will remove you from the QU should your question be answered. Lastly, we do ask that while posing your question that you please pick your hand set as listening on speakerphone for optimum sound quality.

Please hold while we call for your questions.

Thank you. Your first question is coming from

. Please announce your affiliation and then pose your question.

Good morning, Jim.

Good morning,

.

Maybe you just said some more color in terms of , you know, given that, you know, TSYS is a big contributor to your results. In terms of what actions that you would

take, to the extent that this kind of one major contract, you know, does not come on board?

I wouldn't really be in a position to try to quantify that at this point.

We basically need to leave it with the comments that were made. We believe that the time frame is short. We are again cautiously optimistic about positive developments in that area. And we will deal with the effects of it, were something adverse to occur, but at this point it was be

prospective and speculative. And I just really don't want to delve into that. It would just be appropriate to leave it where we are.

OK. Thank you.

Thank you,

.

Thank you. Your next question is coming from

. Sir, please announce your affiliation, then pose your question.

Hi, Jim.

Hi,

.

I was wondering if you characterize the loan growth that you had in the first quarter? I know it was 14 percent year over year. But I was just wondering if you could again kind of characterize the growth? Where did you see the most strength really, I guess on a category basis in the first quarter?

Yeah, the majority of the loan growth continues to be in the commercial area,

which as you know is kind of our sweet spot. It would represent about 80 percent of our entire loan portfolio. That would include real estate, construction, both residential and commercial.

So, I think, it is more of the same of what you have seen in the past and what all of you have grown to expect.

Fair enough, thank you.

Thank you.

Thank you. Your next question is coming from

. Mam, please announce your affiliation, then pose your question.

Good morning, Jim, how are you?

how are you this morning?

I'm fine, thank you. Could you just give us a little bit of color about you your customers, you bank customers particularly, are saying to you right now? You are in one the better areas of the country for loan growth et cetera. But I still get sense from your commentary that your customers are really kind of scared.

I mean what's going on? What are people saying?

Well, I think you hit the nail on the head. We are in the best part of the country to be in. We're situated in the Southeast in four states that have experienced continued strength. On a relative basis, not the growth rates that we've seen.

But we have not avoided this modest recession at least at this point, but we have experienced more strength than any other part the country.

I think the general sense that we hear from our customers is some foot dragging,

some deferral of major capital projects. Obvious concern about terrorism, the war, the situation in Palestine and Israel. A general anxiety over the state of affairs. A realistic view that this is not normal times.

And yet, progress continues to be made. Growth still does occur. Projects are instituted. We have seen very little real collapse of major activities. There are spotty problem areas, but - I would say

that within the bounds of appropriate and reasonable caution, most people are swallowing hard and continuing to go forward.

It is that kind of sensitivity,

. And so that's not a shutdown, it's not collapse. But it is not business as usual, full speed ahead either.

Well, in looking at the economic outlook, I mean , everybody is a little bit confused at this point. Is there anything that you see, Jim that leads you to believe that we are headed for kind of a double dip recession here? Or do you see building strength in your client base?

I think we see building strength. As you know, at last quarter's conference call, I expressed

some concern that they recovery may not be as certain as was being speculated at that time. I feel more confident now. I think the Congress passed the stimulus package, which was responsible for them to do.

There was a lot talked about well we are already in recovery and we don't need it.

I think the investment credit was very important. The extension of the unemployment benefit was probably not as important financially, but probably was equally as important psychologically. And so my concern about a double dip,

us going back into this "W" sort of effect, has certainly been lessened considerably.

I don't think it's totally out the question and we are not totally out of the woods. We probably have another 90 days to go to know and have it validated. But I know I feel much better and I think our customers feel better as well.

Thank you.

Thank you. Your next question is coming from

. Sir, please announces your affiliation, then pose your question.

,

.

Morning,

.

How are you all?

We are fine.

Good. Question - if you could, a little more color on the loan growth.

Jim, could you comment a little bit on your various markets? How is the North Atlanta market doing? Is that accelerating, slowing down? And then also, you panhandle market in Florida? And specifically with regards to the building industry?

Yeah. Let me address the panhandle first,

because we've experienced some pretty serious deterioration in the panhandle back in 1989 and '90. We have not experienced that sort of deterioration this go 'round. We are cautious about beach properties and condominiums and golf courses and that type of thing.

We do projects with customers that have long term relationships. But I would say that the health of the panhandle, the health of that marvelous coast in South Carolina, and the health of the coast in Georgia, has been right remarkably

strong throughout this cycle. There is some slow down, I think, economically in the North Atlanta area.

And yet our banks there continue to have robust growth because of, I think of our uniqueness and our strength. In Alpharetta, loans actually grew 23 percent.

And we basically are feeling like the quality is high. The deterioration that says we experienced in '74 and '82 in Atlanta has not materialized.

I think that they are exercising caution there, but our growth there is not only a product of robust economy but

also of a very competitive banking operation in the North Atlanta arc that is growing significantly because of the economy. Because of that market and because of the competitions - our ability to win against the competition.

So, I think the loan growth, the quality, and the whole assets story is very strong at this point.

What about, Jim, what about competitor pricing? Are competitors being aggressive in pricing on the corporate side or is that maybe a little easier than it was? And then secondly,

seeing any pick up or market share movements out of Wachovia-First Union?

I don't think it really doesn't represent particular institution. It would be generally all of the major competitors that we face that we are able to compete effectively.

I think because of the quality of the people we have, the approach, the ability for our people to make decisions without having to call headquarters and get approval and check in. We have a strong amount of autonomy and authority in the ability of our people in field to service customers, and that's just a winning combination.

So, to your first point, the competition is not nearly as intense, although, it's never easy, but pricing competition has eased. I don't think people are reaching and stretching like they were. Terms and conditions are strong. I think everybody has dotting their "I's " and crossing their "T's."

So really in that environment, where price competition is as intense, it gives us an even stronger leg up.

Very good, thank you.

Thank you and if there will be any remaining questions or comments, please press the numbers one followed by four on your touch tone telephone at this time.

Well, Mr. Blanchard, I'm not showing any further questions. Do you have any closing comments that you would like to finish this great quarter off with?

Yes I will wrap it up really quickly.

We got 350 some odd people here in this room that need to get to work. They are going to man the desks and service the customers and lead the team.

I appreciate your questions. I appreciate your continued enthusiasm and encouragement for us. That is really important to us.

We are excited about the year. We feel like the appropriate precautionary remarks that we made yesterday are in order.

And yet I hope from the tone of today's meeting you can tell we are revved up. We are excited. We are passionate about where we are and competent about the strength of our company and its uniqueness in this marketplace.

We look forward to meeting with you in another quarter, and through out that quarter on an individual basis. And we just thank you for attending today and being such good friends.

Thank you and we will be back in touch.

Thank you, ladies, and gentlemen. This does conclude the Synovus first quarter earnings release conference call for the year 2002. You may disconnect your phone lines at this time and have a great day. Thank you for your participation.