Synovus Financial Corp (SNV) 2003 Q1 法說會逐字稿

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

At this time, all participants have been placed on a 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 Jim Blanchard.

Sir, the floor is yours.

Thank you very much.

Good afternoon, everybody.

We -- in our conference room, as usual, with our usual crowd of senior executives and are delighted that so many have joined us for this first quarter earnings conference call.

Hopefully by now all of you have had a chance to look at our release and I'm going to focus today on three elements of our release.

First will be our earnings for the first quarter, second, the share repurchase plan that we announced today and, third, our new 2003 earnings guidance.

I'll be making forward-looking statements today that are subject to risk and uncertainties, factors that could cause our results to differ materially from these forward-looking statements are set forth in our public reports filed with the SEC.

On our first quarter earnings, our net income for the quarter was 89.9 million, up 8.7 percent, while our EPS was 30 cents, up 7.29 percent over the first quarter a year ago.

Our return on assets for the quarter was 189 and return on equity 17.26 for the first quarter compared to 2.03 and 19.52 respectively in the same period last year.

Shareholders equity on March 31 was two billion 1.18 representing a very strong 10.58 percent of quarter end assets.

Our total assets, by the way, were 20.6 billion.

An increase of 23 percent from the same period a year ago.

During the quarter, we completed the acquisitions of United Financial Holdings Inc., which consists of United Bank and Trust Company in St. Petersburg, Florida and United Bank of The Gulf Coast in Sarasota, Florida, and FMD BankShares Inc. in Covington, Georgia.

These two acquisitions added $930 million in assets and 19 branches to our system.

I also wanted to mention that for the quarter our efficiency ratio was 52.8 percent versus 53.7 percent for the first quarter a year ago, representing a continual decline in that key indicator.

We expected that our first quarter this year was going to be the toughest comparison against last year.

Since our margin was at the highest point for 2002 in the first quarter.

The quarter actually turned out to be even more challenging than we anticipated in our internal targets.

And I want to mention to you the key drivers.

The net interest margin for the quarter was 4.31 percent compared to 4.77 percent in the first quarter a year ago, and 4.53 percent in the fourth quarter of 2002.

This 22 basis point quarter-to-quarter decline was more severe than we originally expected due to a number of factors.

First, loan growth remained good.

Actually 12.5 percent on a lead quarter basis, and obviously representing a decline as we have suggested over the last quarters from even more robust growth in the couple of years previous.

However, virtually all of that new growth was in variable rate loans, which have a short-term diluted impact on the margin.

In addition to that, we had movement from fixed rate loans to floating rate loans, which exacerbated that problem even more.

Secondly, we executed during the quarter a very successful $300 million 10 year subordinated debt offering in February.

We took a very long-term view, selected a solution that was even more expensive in the short term and this had the effect of diluting our margin three basis points for the quarter.

But, quite frankly, it was an exciting event.

One that we think is definitely the right answer for Synovus for the long term.

And then, thirdly, the reinvestment rate on our bond portfolio was less than we expected due to the same kind of market forces that made this debt offering so favorable.

That effected us another six basis points.

We believe very strongly that the overhang of the November 2002 50 basis points rate has now settled out and that these first quarter events are built into our assumptions for the rest of this year which will, in our view, mean limited additional margin compression and I can assure you we are actively and aggressively managing the margin on every front.

We're very confident on about our loan quality but, as always, we're vigilant on the credit front.

The MTA ratio was 0.72 at [Inaudible] .

That's up 8 basis points from the fourth quarter.

One half of that increase was from the addition of our two newly acquired banks that we completed in February.

The increased loan loss provision in the quarter was impacted by the acquisitions, by the good loan growth and by loan charge-offs that were at a rate of 0.37.

We believe that the remaining quarters of 2003 will reflect lower charge-offs and that the full year ratio will be approximately the same as it was last year around .33.

Another very, I think, key indicator past due loans were at very favorable levels at quarter end with total past due ratio of 1.03.

Now that's up somewhat from the 0.70 that we reported in the fourth quarter of last year but, as you will recall, that's the lowest number we've ever reported in our history and we're very, very happy with 1.03 and, by the way, even more important, our 90-day past dues were at 0.16 percent and that is the lowest that we've ever reported.

That any of us around here ever remember.

I think it's also important to note that the quality of our commercial real estate portfolio is strong with a non-performing loan ratio of 0.32 at quarter end.

Moving to other financial services highlights, we had great advances in fee income were up 19 percent on a fundamental basis and that's excluding acquisitions, securities gains and it was lead by a record quarter in our mortgage business.

I also hope that you saw TSYS report yesterday.

They reported an excellent quarter with net income of 31.7 million.

That's up 15.9 percent, an EPS of 0.16, up 16.2 percent over the first quarter of 2002.

Revenues before reimbursable items at TSYS grew at a pace of 13 percent and, of course, all [Inaudible] have been celebrating with us about the Bank One contract.

It really highlighted the first quarter and fuels our optimism about the future of TSYS.

Let me drill down just a little bit deeper on TSYS, though, because I think some of the reporting that has come out today has really highlighted some of the real strengths of the quarter.

TSYS revenue from our core business, or our pure processing, was up 17.2 percent.

That's a rate higher than we've seen in previous quarters.

Revenue growth from our value added services was actually up 35.5 percent.

Revenue from our international customers was up 38.8 percent and we continue to see strong internal growth of our existing customer base of 10 percent.

In addition to that, profit margins and operating margins, excluding reimbursable items, increased for the fourth consecutive year.

I know that you had concern about margin pressures at TSYS but the facts are that this is the fourth consecutive increase.

Operating margins were 22.4 percent, versus 21.1 a year ago.

Profit margin was, that's the net profit margin, was 16.5 percent, versus 16 for the first quarter of last year.

And TSYS has a backlog pipeline of 73 million accounts to convert.

And then, finally, at TSYS there's been a lot of interest in the EBITDA and the free cash flow and they were up for the quarter over 30 percent.

So a stellar report from TSYS and I think it points out, again, the diversity of our business.

In the banking side we experienced weaker than expected spreads and margins.

On the TSYS side, a real strong, fundamental quarter.

Again, the mix of our business line has served us well for three decades now and I think it -- we believe, sitting around this table, that it will continue to serve us well.

I want to move to the share repurchase plan and regarding that repurchase plan, frankly most everybody on this call and all other ships at sea have had thoughts of -- for quite some time now about why in the world have you guys not been buying in your own stock and I -- today I'd just like to mention there are many factors that you know that have to align to complete a buyback plan, including capital, cash, interest rates, stock price, securities laws issues and on and on.

Until recently we've been on the sidelines because of the Bank One contract.

When we possess material insider information, obviously, a repurchase plan is not appropriate but today we are now seeing a 200 million share -- $200 million share repurchase program which at today's price amounts to approximately 11 million shares and represents 3.6 percent of our outstanding shares.

This is a two-year authorization.

It's our intention to execute one-half of it within 90-days and we'll be starting it up hopefully at the first instance on Monday morning with the remaining amount to be executed as we determine over the balance of the plan.

Obviously I think for those of you that know us, you know that we believe very strongly in our future.

WE believe buying in our stock right now represents a great value and we're delighted that we've been able to move forward with the repurchase plan approved by the board.

Next, I'd like to cover the 2003 earnings guidance.

Last fall we offered 2003 earnings guidance based on various assumptions about growth and margins, our own beliefs and in the context of the consensus economic forecast.

That assumed an improving economy with an increasing rate environment in the second half of the year.

Also, contrary to our expectations, our customers have dramatically favored variable rate loans at a time in the cycle where fixed rate would normally prevail.

Our balance sheet was positioned to benefit in that environment.

However, when we sit here on April 16, that same forward look implies a longer road to economic recovery and a higher probability of flat rates.

Those factors coupled with the higher levels of margin compression in the first quarter lead us to revise our guidance.

We know believe that our EPS growth will be in the range of four percent to eight percent for 2002.

We are expecting at this point to be in the middle of that range at the six percent point, assuming the following.

One, flat rates for the remainder of 2003.

Two, good credit quality with a 2003 charge off ratio for the year of approximately .33.

Three, pieces earnings growth of 12 to 15 percent as they reaffirmed yesterday for 2003.

And fourth, successful execution of at least one half of our share repurchase plan within 90 days.

On the high end of that range, the following assumptions could support the eight percent.

That's first, rising interest rates.

Two, pieces at the higher end of its estimates and three, a more rapid execution of the balance of the share repurchase plan.

And then on the lower end of the range, at the four percent, it could occur with the follow assumptions.

One, further rate reductions.

Two, higher credit costs and three, a failure to execute the desired amount of the share repurchase plan.

Quite frankly at this point we feel very confident about these estimates in this current environment, but I want to add that our job here at Synovus - and this group take 100 percent responsibility - is that we need to separate the environment from execution.

And I can assure you that we'll be doing our dead level best to perform at our optimum potential.

I think it's important to remember that Synovus is coming off at a very strong base.

Last year, we earned 2.10 percent return on assets.

And with our new guidance, we believe that, at this level of performance, we will have again a very credible year at the top of our industry.

Our weaker spread is still very high, relative to the peer group.

And let me add on the share repurchase.

The share repurchase is great economics for Synovus.

And it's exciting for us because it's a rare window of opportunity.

And while we're not happy to reduce our guidance, we think it's appropriate.

And given the current regulatory environment, we believe it's prudent.

And it's certainly transparent and forthright, and I think that's what you would expect out of us.

All in all, we're very update about our report to you today about our potential for this year and about the future.

I'll stop there, and I'll be happy to entertain your questions.

Thank you.

Ladies and Gentlemen, the floor is now open for questions.

If you have any questions or comments, please press the number one, followed by four, on your touch-tone phone at this time.

Pressed again for a second time, that removes you from the queue, should your question be answered.

Lastly, we do ask for posing a question that you please pick up your handset if listening on speakerphone for optimum sound quality.

Please hold while we poll for questions.

Your first question is coming from Jason Goldberg.

Please announce your affiliation, then pose your question.

Lehman Brothers - thank you.

Good afternoon, guys.

Hey, Jason.

On BB&T's conference call, John Allison used a phrase - I think "material deterioration in the Atlanta marketplace."

I was wondering if you could comment.

Are you seeing the same stuff?

And if not, why [Inaudible] be seeing different things?

I think that is not a characterization that we would make as far as our Atlanta presence.

And I think Mark is prepared to talk about some loan quality indicators, some - in more detail on the loan portfolio, maybe with a comment or two about the Atlanta market.

So Jason, if it's OK with you, why don't we plug him in right here in response to your question.

Great.

Jason, we're not seeing the same deterioration that [Inaudible] .

And I think that very well could be a function of the composition of our portfolio.

We do not really hold very strong holdings in the sectors that they may be seeing deterioration in.

We've got a very small investment property portfolio there, multi-family.

We've got $40 million in Atlanta; hotels are $78 million; shopping centers are $57 million; and office buildings, which are not [Inaudible] normal high-rise properties, are $107 million.

We have - in those areas in Atlanta, we have zero non-performing loans in any of those categories.

Where we had put our focus is in the CNI structure in some places and in the one to four family and the one to four family sector, we had just been to Atlanta, have done a review of the builders up there, especially in our largest banks.

We feel extremely [Inaudible] feel very comfortable with how they're managing that portfolio.

They have a very specific market data on the absorption rates that are occurring in the single one to four family housing sector, market absorptions are still strong.

A lot of their one to four is in the entry-level market.

They've got a very strong Hispanic market up there that's got very considerable demand in that area and there are [Inaudible] on top of that.

Our builders are in the best shape that they've ever been in.

They've had extremely strong profitability over the last ten years.

Every one of them.

Not every one but the majority of our builders are liquid.

They're using a lot of their own money to put in their own properties.

They can get a better return by putting their own money there than setting it on the sidelines and not -- as we analyze that market, other than market data, we're doing liquidity tests on our builders up there and what we're looking for is their ability to carry inventories, even if they are very moderate or even no sells in that market place and what we're finding is that we're in very good shape.

Now that doesn't mean that we're not becoming more cautious about that market.

We've talked to all of our banks in the Atlanta region and have asked our banks to meet with their customers.

They have -- they do have councils up there.

Our banks are all members of the Lender Developer Builder councils.

They consult with each other very frequently and I think they are interests are all aligned.

So at this point I would say that, no, we're not seeing the deterioration and don't really expect to because I don't think our mix of loans looks like some of the banks you may be talking about.

That's very helpful.

And then maybe just general -- more generally speaking, you know, we've seen MTA's pick up the last several quarters, part acquisitions, part organic.

Maybe your outlook over the next several quarters and what we'd expect there.

Yes, let me -- let me tell you what we've done, and this really gives me some confidence about where our loan quality is going.

We've -- I think we told you last quarter that our top executives in this company reviewed all of our largest loans.

The largest loans that we had in this company and we walked away reaffirming that our loan quality in that sector is excellent.

We have just completed, by the top executives in our company, a review of the top ten loans in every bank in this company, regardless of the size, and most of those -- not all but on many of those fall well below that first scope that we looked at and we reviewed over 400 of our largest loans and we like the results that we got from that review.

That, again, reaffirms that our loan quality is bound .

We have also spent a considerable amount of time in the first quarter meeting with our banks, really taking a very hard look at our forecasting models, projections, going over issue by issue what may happen to us over the next two or three quarters and basically our assessment is that our credit quality will hold and our charge-offs will hold.

And we believe that at the end of the year as Jimmy stated, that our credit quality will follow some charge-offs - will fall somewhere in the category that they fell last year.

And also our non-performing status will show improvement by the end of the year.

Another factor is we just finished our regulatory exam.

We have, as you know, we're separately chartered.

We have state banks, national banks.

We're looked at by all of the regulatory agencies by state regulatory agencies, the Federal Reserve, the OCC, and the FDIC.

And our own assessment of the health of our portfolio is aligned with their assessment, and that's really all I can say about that.

The other thing is we've had a quick war.

This is one of the things that we talk to you about, that we felt like if we could move through this cycle.

Get this war out of the way, that we would see consumer confidence move back up.

The data that I'm seeing is showing that.

That consumer confidence has moved back up.

That - also still looking for quick economic package to come out of the government.

We think that's going to happen.

And we are optimistic, at least our end at this point, that we will see some movement up in our economy towards the last part of the year.

I know everybody doesn't agree with that, but I am optimistic that that will happen.

The next thing is our past dues are very stable.

We - if you look over our history, we range from 80 to 80 basis points to 1.20 basis points.

Last 12 months that's where we've fallen.

Again, we're - our past dues are staying in that area.

Our 90 days, again as Jimmy said, our at a historical low.

And I personally reviewed every 90 day past due that exceeds $250,000 in our portfolio and I am very confident that those loans will not turn into problems at this point.

That we have - we're well secured on those loans and they are in the process of collection.

And we will not see a high degree of turnover in those into non-performing assets.

The other thing is the turnover of our non-performing assets is, you know, we've had some of these loans on our list for some time and I reviewed all of the large non-performing assets with our folks, each one of our banks, and looked at the disposition of each one of those assets.

And I have a high degree of confidence that you'll see our non-performing asset turnover rate accelerate this year.

And that gives me even more confidence that we're going to see improvement in our credit quality.

There are some negatives out there.

As you know, the first quarter of the year with the war, that there was some lackluster performance in the economy.

Retail sales have slipped a little bit.

We've seen auto sales slip some.

But I don't think that is necessarily an indicator of long term and the outlook that's going to take place.

So, again, I'm optimistic.

And just, again, talk a little bit about our real estate portfolio.

I know there's been a lot of attention and focus on that, but if you look at our investment properties which are really made up of those properties that everybody is really concerned about.

The multi-family sector, the hotel sector, office buildings and shopping centers, we do not have a concentration in many of those sectors if you compare that to our total portfolio.

Our multi-family lines only make us 2.6 percent of our portfolio.

Our hotel sector, we're at 4.23 percent of our entire portfolio.

Office buildings are 3.9 percent.

And if you look at our non-performing loans, we have [Inaudible] multi-family non-performing loans.

We have [Inaudible] hotels non-performing loans.

Our office non-performing loans are at 1071 basis points.

Our total loans are 3.97, and the non-performing loan percentage is .71.

Our shopping centers, we've got 3.24.

And our non-performing loans are .60.

So we've done a good job, I believe, in the customers we've chosen.

And we've done a good job in our underwriting of those customers.

And I mentioned to you before we are now also underwriting at these low rates.

I mean what we are looking at when we put a loan on the books with one of our customers is how would these loans perform if the rates were 7.5 or eight percent? [Inaudible] .

And what kind of coverage of cash flow would that give us?

As well as, how would these loans look of occupancies or revenues diminish?

And we test both of those factors to determine whether or not we're willing to put these types of loans on our books.

And on top of that, we are not non-recourse lenders.

If a customer wants to do a non-recourse loan, then we'll take him to the permanent market through our conduit financing capabilities.

And we've got good customers.

Again, they've got good [Inaudible] liquidity and net worth.

And, again, we are not oblivious to the marketplace.

Very cognizant of what's going on.

One of the things that we're talking about right now - we've got a CEO conference coming up in three weeks - is that we have had a tendency to hold properties.

In the [Inaudible] sector, they've been good, long.

They continue to be good, long.

But in order to slow the concentration in those sectors, we'll be looking more to the permanent markets for those customers.

The rates are excellent right now.

We're recommending to them that it's time for them to lock in to a fixed rate.

And we are seeing activity in our conduit finance picking up.

Our pipeline is beginning to pick up.

And, again, we emphasize that to our CEO group in the next several weeks.

And we believe that we can balance our portfolio.

Our investment properties, that piece of the portfolio - and that's where you're relying on the property, the income from that property to pay you back; that's your primary source of repaying it - is only a third of our portfolio.

I know we've been seeing reports that come out that say we have 54 percent of our portfolio in CRE .

But there is a big difference in investment portfolio and CNI related portfolio that our customers have to have to operate their businesses.

It's not the primary source of repayment.

It's the secondary source of repayment, a source of collateral for us.

And we are relationship lenders.

And if a customer needs a working capital loan or he needs a fixed asset loan, it's likely he's going to get it from this company, because we want to control the relationship and we want to have -- we want to know what our customers are doing and we want to agree that it's prudent for us to have that entire relationship.

That was really informative.

Thank you.

I guess one final question.

The overall equity active issues in a 10 percent area, if that got TSYS, I think it's close to the 8 percent area, it's [Inaudible] just how far would you let that come into the share repurchase?

Jason, this is Tommy.

Let me try to answer that question for you.

Right now you know that we've got very healthy levels of capital that total -- tier one ratio is at about 10.7.

The total risk rate to capital ratio is at 1345.

So we've got, on a consolidated basis, somewhere in the neighborhood of 300 to 400 basis points of excess capital.

It's appropriate for us to maintain some level of excess capital due to the nature of TSYS and the fact that it's one of the primary generators of some of that capital.

It'd be our -- this buyback we're talking about, if we did the whole thing immediately, would take us down about 100 basis points and would continue to maintain some of the strongest capital ratios in the land and that's a pretty good proxy for our appetite to take the capital down right now.

We don't think it'd be appropriate to do it any more aggressively than that, you know, as we move through this economic recovery but we're certainly open to look at that in the future.

Great.

Appreciate the answer.

Thank you.

Thank you, Jason.

Thank you.

And your next question is coming from Christopher Marinac.

Please announce your affiliation, then pose your question.

Yes.

Hi.

Good afternoon.

SunTrust Robinson Humphrey Capital Markets.

Hey, Chris.

Hey, Jim.

Can you or Tommy talk a little bit about the securities portfolio.

We know its smaller relative to a lot of your peers but could you tell us a little bit about what's happening in terms of prepayments and would you expect may continue in the future?

Are there any issues with the premium rate securities getting amortized faster, et cetera?

Sure.

Jason, this is -- I mean, Chris, this is Tommy.

As you know, our main portfolio is relatively small and the elements inside that portfolio that are subjective to early repayments are equally small.

During the first quarter we had about $470 million worth of total reinvestments exposed to the market.

About 100 million of that came in the form of prepayments.

Some of that was expected.

Some of it came in earlier than we expected.

We really, you know, haven't -- we've been blessed with this great loan growth.

We have purposely let the bond portfolio, relative to assets, shrink some.

We don't really intend to reposition that all significantly right now.

The only think that you'll see us doing in the bond portfolio is offsetting a little bit of the asset sensitivity that's been generated by the market propensity to create variable rate loans, which has driven up our asset sensitivity.

We'll take a little bit of that back and have been over the last month or so by adding a, you know, a total of maybe a couple 100 million to the bond portfolio but we're just not willing to do much more than that and give up the benefits that will occur when this -- when this recovery occurs and when rates move in the right direction.

OK.

And then from a standpoint of the the loan portfolio, can you give us a sense of how much is fixed and variable and what the, maybe, average maturity of your loans might be?

The variable part of the loan portfolio has moved up to about 65 percent, and the average maturity is about two years.

OK.

Did you see your prepayments of loans, if you will, or refinancing of your loan book more than you thought?

Was that part of the underlying issue this quarter?

Yes, we've had actually a negative movement in fixed rate loans.

In fact, it's an odd way to say it but more than all of the growth in our loan portfolio has occurred in the variable rate category.

So we have had virtually all of the growth occur in variable rate loans and have actually had some movement out of fixed rate loans into variables.

And it's a market phenomena.

It's what our customers want.

We're appropriately pricing them and doing our best there.

But that has just an inherent negative impact on the margins.

Understand.

OK.

Great.

That's all.

Thank you.

Thank you.

Thank you.

Your next question is coming from Jim Argot .

Please state your coalition and then pose your question.

Good afternoon guys.

Jim Argot from Millennium Partners.

Hi Jim.

Looks like a really good quarter.

Thank you.

I wanted to ask you about, Jim, your comments on the guidance.

The range of four to eight percent EPS guidance.

It was pretty specific.

We appreciate that in terms of modeling, but the first question was with respect to the worst-case scenario, you know, the four percent growth range?

Yes.

Are you, just to clarify it, are you saying that those 50 basis points of further rate cuts and higher net charge-offs and no repo or stock repurchase fulfillment?

No.

No.

We're not really saying that.

I mean, basically we are anticipating on that low end that we could have up to 50 basis points reductions.

Somewhat higher credit costs possibly.

We think that's unlikely.

And we already anticipate that we won't execute the share repurchase, but could fall somewhat short of our expected results in the first 90 days or throughout the year.

And so I guess the bulk of the impact that you're suggesting would come from the rate reductions.

OK.

That sounds - that sounds - it's great that your giving us a low end but that sounds extremely conservative, especially relative to where peers are projecting EPS growth.

Well, we hope it's extremely conservative.

Yes.

We do to.

And then I wanted to ask you about the - your comments earlier, Jim, about, again, within that EPS range to get to - I think it's to get to the middle of the road EPS growth, you highlighted that if there's no further rate cuts there shouldn't be additional net interest margin pressure.

What sort of measures are in place to provide further NIM compression given the customers opting for variable rate loans for fixed rates.

Well, again, we're working it as hard as we can from every angle to eliminate any significant continued pressure on that margin.

We would expect at this point that we're going to continue to have some shift to floating rate loans.

But at today's interest rates, our floating rate loan isn't nearly as diluted to us as it has been over the prior periods.

And, in addition to that, we don't think we have nearly as many fixed rate loans.

It might be shifted over to floating rate loans.

And in addition to that, our guys on the banking side are working the banks as hard as I've ever seen them to improve the deposit pricing, grow core deposits, not get caught up in any irrational behavior because of competition.

Frankly, part of the best opportunity we've got is firming up loan pricing to ensure that we're getting paid properly for the credit risks that we're taking during this kind of environment.

Even some of our guys are putting [Inaudible] on floating rate loans.

So I'd say that probably there's no greater focus right now, other than credit quality in the company, than shoring up the spreads.

OK.

And then, lastly, it was on the repurchase.

I think the one gentleman hinted that you have 300 to 400 basis points of excess capital right now roughly.

And that if you did the whole repurchase, it would only take you down 100 basis points.

Yes.

Why did you settle on just $200 million in terms of an authorization?

Why didn't you authorize more and then do it over the course of two years with a higher authorization level?

Well obviously we could have.

We chose the 200 thinking that that was aggressive, thinking that if they - a big bite.

And we, quite frankly, still enjoy the fact that excess capital gives us great standing with the regulators.

So it was a choice and a balance.

And that was the point on the compass that we chose to hit.

OK.

Thanks a lot, guys.

Good luck.

Thank you.

Thank you.

Your next question is coming from Nancy Bush.

Please state your affiliation, then pose your question.

Yes, hi.

Nancy Bush, NAB Research.

Hi, Nancy.

Hi, Jim.

Jim, this is kind of a philosophical question.

And I talked to Mark about the commercial real estate exposure, and I'm pretty comfortable that you guys know what you're doing there.

But, at the same time, that level of exposure has gotten your staff killed over the last, what, year or so, you know, in a kind of recession.

I guess my question would be, you know, going forward, and looking at that exposure, is there an intention to reduce it?

What do you do from a risk management standpoint in a decentralized company to prevent those kinds of buildings of exposures, or is that something that you want to do?

Well, it is a philosophical question, and I'll try to answer it as best I can.

One, yes, we would like to reduce it.

And there's all kinds of pressure at this point to slow the growth in that category.

And it's a double-edge sword.

Because, quite frankly, this is the best earning assets we have, always has been.

We suspect will be certainly relative to any other comparisons, even if we were to have the crunch that, you know, so many people are concerned about.

Right.

The decentralized environment doesn't represent any difficulty for us there.

It represents a strength, in my view, because the diversity of the views out there have created a quality level for us that surpass and exceed the peer group.

So, you know, what's killed us on the stock , I would tell you this, Nancy, and, gosh, I mean, I don't disagree that we've been clobbered and we're about to take advantage of that, by the way, with the repurchase but up until the Bank One announcement, I would have told you that 80 percent of the concern about our future growth was TSYS growth rate. 19 percent we calculated was about commercial real estate concentration and 1 percent was everything else in the company combined and it was totally irrelevant.

The Bank One announcement has changed the formula.

I think the optimism about TSYS growth man is growing daily.

The concern about the commercial real estate portfolio has probably become the biggest concern.

We're very cognizant about it.

I really think Mark's explanation of who we lend to, how we lend, our historical success in that area is very compelling but I would agree that we're not going to get any accolades on commercial real estate until this concern is past a quarter or two or three or four or five from now and we can show a great track record.

So philosophically that's kind of where we come out.

Well is there a thought that in the future you might limit, whether it's CRA or any asset, to some percentage, you know, of the loan portfolio over which you won't want to go.

I mean are you concerned about concentration issues?

Will this be part of the thinking going forward?

I think the answer's yes.

We've been listening.

We've listened to that, as well as some of the other issues that have been raised about us and I think that we will be concerned.

Whether we'll apply a mathematical limit anytime in the near future is probably suspect but there's no question that if an issue is uppermost in our mind and we're going to be responsive to it.

Thanks.

Thank you.

Thank you.

And our next question is coming from Jason Roman .

Pleas announce you affiliation, then pose your question.

Hi, guys.

I'm with Celeron Capital .

Hey, Jason.

I guess my question was on the non-performing assets in the CNI loans in particular.

And I think at the fourth quarter you had noted that you thought MTA's had peaked in dollar and percentage terms and I was curious, you know, looking back on that now, what is -- I mean what gives you the confidence to call the peak this go around that wasn't there in the fourth quarter and then could you talk a little bit about what issues are driving the non-performers in the CNI portfolio.

Thanks.

Yes, thank you.

Mark, do you want to address that.

Yes.

I think, as we have -- at the end of the fourth quarter we did make the statement that the non-performing loans we thought had peaked and we did believe that and it was primarily a function of the turnover that we were projecting and non-performing assets and that is to predict that on a exact quarterly basis is a very difficult thing to do but over a few quarters it's very predictable.

So one of the things that we were looking at was NPA turnover and I've repeated, again, what I believe will happen with our non-performing asset turnover this year.

And the rate of turnover will accelerate.

So although we didn't hit that, we were up four basis points.

It was not a monumental change, and in fact outside the acquisition.

The second part of your question was, what - where is the change - what were those NPA's or NPL's occurring?

And this quarter we basically had five loans, I guess, that impacted our non-performing loan sector, if you exclude the acquisition.

And it primarily came out of five different banks.

Our Columbus bank we had a SPA loan that was a million dollar plus loan that was in the restaurant category.

There is a guarantee behind that and obviously we don't record a loss in that.

In the Marietta, Atlanta bank, we had one medical industry that was in the million-dollar category that we put on non-accrual.

And then we had one textile related loan in our PMC location, that was about 1.4 million that we put on non-accrual.

And then we had in the Montgomery sector we had a grading dirt moving contractor that we do believe will recover but went into a government contract and was not successful and has retreated and moved back to his core business.

And that was about a $2.3 million loan that is being paid but at this point we're put it on a non-performing status.

And then we had one residential loan in our Albany, Georgia area that was 2.3 million that we put on non-accrual as well.

So those were the five loans that caused the increase in our existing banks.

And our new banks primarily the ORE increase was just about all related to the acquisitions.

There was about 80 percent of the increase in ORE's that was attributed to our acquisitions.

And the other increase came from our St. Peters - , the NPL increase, the largest two loans came from our St. Petersburg bank.

Both of those loans - one is under contract.

It's a 1.2 million loan that will be paid out in the next 30 days.

And then we had another $1.6 million loan that we also had a lien on the customer's house.

It is up for sale and they believe with very high confidence that they will have that out of here within the next several quarters.

Great.

Thanks.

If I could ask one quick detailed follow up on the residential loan.

Was that a loan to a contractor or was that a loan against property specifically secured, just to get a flavor, sort of.

It was actually a loan to a builder in that community and we basically had just - to be open with you, we had one of our lenders who was validating inspections and had not really gone out and validated inspections.

We picked that up in our reviews, inspecting our property with our loan administration group.

And basically terminated that employee and looked through that entire portfolio.

That's the only issue that we had there.

Thanks a lot.

Appreciate it.

Could I just follow up a comment?

And I think it's important that the non-performer increase was primarily because of the turnover issue and not the supplies of additional loans that were put on.

But it was loans we expected to come off.

And I think it's also important to remember on this issue of predicting that in the second quarter of last year we had a bump up in our net charge-offs.

My recollection is it was up .32 - .44 .

And we predicted that that would be the peak for the year, and of course it was.

And the number dropped down to .33 for the year.

So we're not perfect on our predictions, but I think we've got good reason to make the ones we make and feel pretty confident about the ones we're making now, in spite of the fact that from time to time we may miss one.

Sure.

Thanks.

Thank you.

Thank you.

The next question is coming from Jeff Davis .

Please state your affiliation, then pose your question.

Jeff Davis , FTN Securities .

Good afternoon.

Hey, Jeff .

Loan growth, organic, 12.5 percent over the last period.

Jim, what's the outlook for the coming year?

Are we looking at pulling in horns pretty good here?

And then, secondly, I guess what I hear you saying is there may be a bit of a philosophical shift from commercial real estate lending, at least.

I realize that not all of that - much of that is collateral code and not purpose code .

Is the inference that you ramp up the CNI side through CNI, or maybe even do a bit more on the consumer side?

And - excuse me - and then a second follow-up, if you could also comment.

Even in cities like Birmingham, we've seen one bank put on very good CNI run growth, and then we've seen essentially nil out of the others, as well as out of the Midwest.

Is there some dichotomy in various markets with regard to commercial loan demand?

Yes there is.

But we do have a strategy, and we are thinking about how we're going to deal with our growth in the future.

And basically, we've got some very good vehicles to grow with, and we've got some new ones to grow with.

In the consumer sector, we've got two vehicles that we believe that we can grow up in consumer loans and put some real focus on, and that is through private banking initiatives that we put in place.

These have been put in place at our largest banks.

And we think there are some very attractive consumer loans out there with our [Inaudible] customers.

And we think those loans will not be very small loans.

They'll be more moderate loans.

You'll be talking about $50, $100, $200 up to a * million-dollar-type loans.

So we do think there's a good growth.

The next thing is our [Inaudible] portfolio.

And we all know that there's a lot of competition out there.

But we have aligned, we believe, the incentives of our affiliate banks because our credit card operation is centralized.

But we think we have aligned the incentives and put the focus with our CEOs on capturing our customer base in the credit card portfolio.

So we do believe that we've got a good avenue of growth to be able to capture our customer base and increase our penetration.

If we could put the penetration of our -- of our credit card portfolio at the same level as our lead bank, we would see very significant growth in our credit card portfolio.

The next thing is that we have entered into the leasing arena and that vehicle is not very old but it's showing very good results.

We've grown that portfolio to over $100 million in a very short period of time.

We have just filled out our regional sales capability.

In that -- with that product line we've got very strong, very experienced lease people in our Birmingham market, in our Tennessee market, our Atlanta market, certainly in the Columbus market and have really rounded out our capabilities and the people in the leasing arena are being -- are being adopted basically by those banks in those market areas.

So they become an integral part of the team and we do think we have very good capability to grow the leasing environment there and those are CNI sector loans.

And the next thing is the talent that we are looking to bring in.

We'll be more focused in some of our sectors on CNI.

It's a natural thing to do.

We have gray expertise in the CNI sector.

You know, if you want to -- we have people in this company that are experts at really just about every industry that's out there and we will put more emphasis in that sector as well and the other thing that I mentioned that they can have some good results in terms of concentration is just that -- your fact that in our mini firm sector we just won't allow that sector to grow at the pace we've allowed it to grow in the past, which will offset that as well but there are great growth opportunities and there are other strategies that we can deploy.

Some we've talked about and some we haven't made decisions on.

In the consumer sector and other sectors asset based lending is certainly one and, you know, there are other capabilities that we've developed.

Our credit scoring, we have implemented a consumer credit scoring model that we think is -- we've been piloting that for two years.

We think it's extremely sound.

We've used that in the credit card area but we're now beginning to use it in the consumer sector and that gives us access, if we chose to do so, to do more -- to look at things like dealer papers, to look at indirect financing if we chose to do that but that's not something that we've made a decision.

Just to let you know, we all are developing strategies and looking at ways to expand our capabilities further than they are today.

And I just conclude those remarks with the -- with the net net net is that we're expecting 10 to 12 percent growth in the loan portfolio for 2003, which does represent a slower pace than we've seen in the last number of years.

Hope that satisfies your question.

It does.

It -- just a quick follow-up and then, Tommy, would -- do earning assets basically grow at the same rate then?

Jeff, that's - earning assets going to grow at approximately the same rate as the loans.

OK.

Very good.

Thank you.

Thank you.

Thank you.

And your next question is coming from David George.

Please state your affiliation then pose your question.

Sure.

David George with A.G. Edwards.

Hi Jim.

Hey David.

Question for you, most of my questions have been answered actually, but a question on your loan portfolio data that you provided.

And appreciate that, by the way, it's very helpful.

The investment real estate - investment related real estate there at CBN are occupied around 1.8 billion, but there's an other property of almost 1.2 billion.

I was just wondering, what type of properties are those and can you put any color on that exposure you've got there?

Thanks.

Those would fall into a lot of different industry segments.

That could be manufacturing facility.

It could be a retail store, a retail facility.

It could be a pharmacy.

It could be a church.

It could be a lot of - a charitable organization.

A really wide spectrum.

What it is not, is an office.

It's everything outside of an office.

If it's an owner occupied office, we classify it as an office.

If it's something that facilitates revenue for our CNI customers, floor space, things like that, then it would be classified in that other property category.

OK, Mark, thanks for the color on that.

I appreciate it.

Thank you.

Thank you.

Your next question is coming from Jud Gore .

Please announce your affiliation then pose your question.

Hi.

Jud Gore , Synovia Capital.

Just one area of lingering uncertainty in my mind is why, exactly, are your customers preferring variable rate loans?

I know you touched on it.

I think you talked about it, but do you have any idea?

Well, we - our customers are certainly more economically astute than they have been in prior years.

I mean, they look at the same things we do.

They have access to the same economic data that we do and they're making a bet right now that rates are going to remain flat longer than rates are going up.

So, that's one of the things that they're looking at.

I mean, are your competitors offering variable rate loans and therefore your customers are seeing different offers and therefore you have to meet your competition?

Yes.

I mean, we do see variable rate loans.

I did want to mention there that something that Jimmy said, I talked to one of our senior lenders at our lead bank the other day.

And he just gave me five specific examples of where he had gone out to his customers and raised their floating rates loan from the minimum of 25 basis points to 50 basis points.

And at these low rates we do believe we have the ability to go to our customers and say, you know, these are where we think the rates ought to be and they are being accepted.

So, the other thing is, you know, we probably are making more loans than other banks.

So, therefore, you're seeing more floating rates from us probably than other banks.

OK.

And is this phenomenon across loan classes?

Is it the same in CRE as it is in CNI?

Yes.

It's across the loan class.

Thank you.

If there are any final questions or comments, please introduce them now by pressing one four.

Mr. Blanchard, there appear to be no further questions in queue.

Do you have any closing comments you'd like to finish with?

Just a few.

On the last remarks that Mark made, and the question about this phenomenon, I think it's important to kind of go back to square one and for all of us to realize that we're looking at the lowest rate environment that has existed for the last 45 years.

And there's no question in my mind that our customers are somewhat intoxicated by this low level of interest rates that they are enjoying.

They are getting their intoxication and then we're getting the hangover.

And I really think that all of the questions about the spread, the margin and the loan quality are the great questions of the day.

And I think our job, quite frankly, here at Synovus is that we need to get as good at managing the margin as we are at managing the quality.

And we have historically been very good at the quality.

Frankly, we've been historically very good at managing the margin as well.

But we've never lived in an interest rate environment like the one we're in now, where basically there is no further opportunity or very little opportunity for us to drive down liability costs.

So at this point, we're exercising all of the brainpower we have to stop the bleeding, improve the current situation.

And, quite frankly, we're spending a lot of energy right now making sure that when this [Inaudible] environment turns around, that we capitalize on it as much as we have been hurt by it on the way down.

And so thank you for your questions.

They're all good ones.

Thank you for your interest in Synovus and TSYS.

Frankly, we were pleased with our first quarter, notwithstanding the margin pressures.

We're ecstatic about our share repurchase.

And we're looking forward to going back to work this afternoon and committing to you that we're going to do our dead level best to execute at our highest potential.

So thank you very much, and we'll be in touch.

Thank you, ladies and gentlemen.

This does conclude today's conference call.

You may disconnect your phone lines at this time, and have a wonderful day.

Thank you for your participation.