Synovus Financial Corp (SNV) 2003 Q4 法說會逐字稿

Good afternoon and welcome to the Synovus fourth quarter 2003 earnings conference call. (Operator Instructions) I would now like to turn the call over to your host, Jim Blanchard.

Mr. Blanchard, the floor is yours.

Thank you.

Good afternoon, everybody.

We're in the conference room here at 1 Arsenal Place.

And we have our normal contingent, but we have an additional group with us this afternoon.

I'm glad they're here to participate in this conference call.

It's our bank management group, which is very involved in the overall strategy and the execution in our banking side of the house.

It's been an eventful day to say the least.

I'm most appreciative of you joining the call.

And I really think that in spite of the spectacular reactions and announcements from yesterday and today, it's important for us to really kind of line by line and precept by precept go through the events of the year, the results of the year and we will put particular emphasis again on the guidance that we had issued at both at TSYS and Synovus for 2004.

I will just expand on the contents of the press releases.

And I will also make the normal forward-looking statements that I will make today that are subject to risks, uncertainties and the factors that could cause our results to differ materially from these forward-looking statements, are set forth in the public reports that you have that are filed with the SEC.

Probably the best place to start would be to summarize 2003 and say that in many ways it's by far the strongest year we have ever experienced.

And, in fact, in absolute terms, a record year.

Certainly not the robust earnings growth rate that we're accustomed to, but it was a year where one single factor dramatically impacted our results.

And, of course, all of you know that fallow Synovus and that have heard our previous calls during calendar year 2003 know, that's the issue of margin compression and our inability to attain our historical net interest margin at what is a 45-year low in interest rates.

I think it's a fair beginning too, to say that in looking at 2004, we're anticipating another excellent year on the fundamentals on the banking side of a house.

And it's summary to point, I think, that we're really dealing with the guidance that is issued by TSYS in the 5 to 7 range as far as anything unique about the coming year.

Fundamentally in both 2003 but for margin compression and fundamentally but for our expectation that we will discuss in some detail on the TSYS side about their guidance.

You've got really good solid aspects in every category for Synovus.

I failed to mention that both Phil Tomlinson, our newly elected chief executive officer and Troy Woods, our newly elected chief operating officer are also here for our meeting and they will certainly be able to add a level of detail and color to the TSYS side of the story.

But really the highlights for 2003 include excellent loan growth, outstanding credit quality, really a big win for us in stabilizing the net interest margin in the fourth quarter.

It actually went up for the first time in eight quarters.

A superlative performance by our mortgage operation, represented here today by Mike Padalino, and a very successful year at TSYS where they achieved their guidance in 2003.

Our team members performed admirably and met all the challenges of the year again, with the sole exception of the margin.

And we feel like we are very well positioned with a lot of momentum on a lot of fronts for 2004.

In summary, the year 2003, our net income was 388.9 million, that's up 6.5% over the previous year, diluted EPS was $1.28, that's up 5.2% over 2002.

Our turn on assets for the year was 191 for the year compared to 210 for the year in 2002.

I think 191 is a pretty interesting number.

It's certainly down and almost totally attributable to the margin.

But in 2002, our return on assets at 210 was the third highest return on assets in the top hundred banks in the sector.

And at 191, we're expecting it to be in the top three or four or five for sure.

And so, in that respect, we're -- feel like, notwithstanding some of the challenges that we face, we managed the company pretty effectively during some very difficult times in the previous year and are poised to do the same in the current year.

Return on equity was 1795 compared to 1969.

And those return on asset comparisons, again, are impacted almost exclusively by the margin compression.

Shareholders' equity at the end of the year was 2.2 billion, at 10.4% of assets.

Pretty strong capital position, which as you know we enjoy.

It gives us a wonderful position with our regulators.

For the quarter, net income was 102 million, compared to 104 million, down slightly.

Diluted EPS for the quarter was 34 cents compared to 35 cents in the fourth quarter last year.

And again, there was a significant impact from the 9.4 million after tax gain last year from the sale of four banking locations that occurred in the fourth quarter.

As you know, while that does impact the comparison, we don't really pull that out and try to make a case for a normalized kind of number because sale of banks and branches and closing of banks and branches and the reinvestment in faster growing markets in our view is a strategic initiative of ours, and it's really just part of doing business.

But nevertheless, you will recall that one-time gain in the fourth quarter that certainly impacted the year-to-year percentage comparison.

Total assets ended the year at 21.6.

That's up 13.4% from a year ago.

Let's deal specifically with the margin and the major challenge that it's been for us now for a couple or three years.

You know, just setting the stage, those of you that are veterans with Synovus know that we're kind of used to living on a 5% margin.

At the current level of interest rates, those margins just aren't attainable.

And I think our folks in our banks and certainly our bank leaders just did a magnificent job of rallying our people about midway in the first quarter to react to the significant drop that we had there and even come in with an increase in the fourth quarter of 2003.

The margin for the year was 426.

That's a 39-basis points drop from the margin of the previous year of 465.

That decline was due obviously to a 55-basis point decline in the average prime rate for the year and a strong preference on behalf of our customers who move into variable rate loans from fixed rate loans.

You will recall in the second quarter that we told you that the customers really surprised us with that.

We figured at this level of interest rate, they would be seeking a fixed rate to lock it in.

But they, as we described it, were intoxicated with the low level of floating rates, opted for them, and frankly our percentage of floating rate loans jumped dramatically early in the year from a little over 50% to nearly 65.

I think they're right at 66 now.

The good news is, we're very well poised for upswing in rates.

But I'm sure you noted in our guidance that 8% to 10% that we're calling for in the current year does not include any rate increases.

I have already been asked the question, don't you think you might get a rate increase.

And, you know, I think the chances are we might.

But we have been predicting a rate increase for two years now.

We've been wrong for two years.

And we're not about to predict the rate increase in our guidance in 2004.

We're going to give guidance based on the current situation, and then if we have rate increases, it should give us some advantage on the upside.

During the fourth quarter, we continued to really make progress and even improve the net interest margin on a link quarter basis that margin increased four basis points to 4.26%.

Again, it's the first increase in eight quarters.

It's a great victory in our view that we were able to not only stop the bleeding, stabilize the decline but actually turn it around and achieve an increase in the quarter.

It was primarily driven by our improvement in our effective cost of funds rate, which declined 14 basis points for the quarter, but it also included an awful lot of hands-on work by our bankers, a very strong pricing discipline on the loan side and solid core deposit growth.

Deposits actually grew 14.5% over last year.

And if you exclude acquisitions core deposits grew 9.1% and the growth was led primarily by strong increases in money market and demand deposit accounts with increases of 17.4% and 16% respectively in those two categories.

And on a link quarter basis, core deposits registered rate growth increase in 10.1% annualized growth.

And that growth was paced by money market and now accounts, increasing that annualized rate at just over 20%.

Loans were another area of strength.

You remember in the third quarter, they grew very little.

I think there was some concern about that.

We cautioned you not to get to concerned, that we felt like we had an unusual convergence of circumstances in the third quarter.

And in fact that proved to be accurate 13.8% increase for the year.

If you take out acquisitions, and divestitures, that's 9.1%.

On a sequential quarter basis loan growth was 546 million.

That's 13.6% annualized, and obviously that's a sign that the traditional strength that we have at Synovus to be able to grow on an assets remains.

Our caution lights are not blinking quite as strong.

Obviously credit quality continues to improve as we told you it would by year-end actually better than we predicted.

And I think that it's safe to say that the ability of our decentralized system to generate earn and asset growth competing with our major national and super regional competitors as well as our local community banks is still very much alive and strong and healthy.

I mentioned credit quality.

We ended the year on a very positive fashion.

The NPA dropped to 0.58%, which is the lowest level in six quarters.

In September, at the end of September end of the third quarter, the NPA ratio was 0.73.

It was 0.64 at year-end last year.

And our past due levels were extremely favorable again.

They're at record lows in the history of the company.

Total past dues are only 0.67% and those greater than 90 days at this point are 0.13% of total loans.

That's a clear indicator that while non-performing assets has improved significantly at year-end they will continue to improve during 2004.

The provision for loan losses was 71.8 million for the year, up 9.9% over the prior year.

For the fourth quarter, total provision expense was 19.8 million, that's up 25% over the fourth quarter of 2002.

And that's for several reasons, the loans grew more and the net charge offs were actually up a little higher than we had predicted in the fourth quarter at 0.43.

For the year they were 0.36 a tick or two higher than we had predicted compared to 0.33.

And so the fourth quarter charge offs really reflect $3.2 million in charge offs related to two large CNI in paired credits that had allocated reserves for the exact amount of the charge offs.

So the loan loss reserve ended at 137.

That's compared to 138 a year ago.

And I think it's probably safe to give you some peace of mind about continuing progress we expect and mark is here, obviously, that can give you some detail.

I think it's very interesting also that the non-performing assets from a dollar, absolute dollar amount, declined by $21 million in the fourth quarter.

It went from 160.5 million to 95.8 million.

That's the first absolute dollar decline we have had in a number of quarters as well.

Fee income also performed nicely in the year.

It was up 15.5% over 2002.

If you excluded the impairment loss in the private equity investment recorded in 2002 non-interest income was up 12.1% over the prior year.

And the quick key drivers here were mortgage revenues were up 41.9% for the year on top of just a Blockbuster year, the year previous, and service charges on deposits were up 14.3%.

Financial management services, revenues increased right at 9% over last year.

And had a nice expansion in profit margin level.

And we also achieved our goal to add 1.5 billion an assets under management during the year and we now have a total of 14.7 billion in assets under management under our umbrella.

By the way, trust revenues were up 7%, and based on market conditions certainly in the last half of the year, we're expecting that, that number will improve even more in 2004.

Brokerage revenues were 9% and our financial planning and asset management revenue was up 24%.

On the expense side, reported G&A expenses for the banking side of the house were up 11.6% over the prior year.

If you exclude acquisitions and divestitures, the G&A expense increase over the prior year was 5.9%.

Our core infrastructure expense within the holding company support, was up only 4% according to the budget you heard all year long and we hit that target.

The rest of the growth and expenses was primarily in the sales and production areas in our highest growth banking markets.

Our efficiency ratio actually for the first time in about 10 years went up a little but it's kind of a freak occurrence, to tell you the truth, because the net overhead ratio actually improved, which is more based on the costs of our expenses as percentage of our assets.

It was 136 for the year compared to 148.

And really, the impact of the efficiency ratio not going down and in fact going up a little for the year was almost exclusively the result again of the margin compression that we experienced.

Head count in our banking side was up 6.6.

But if you exclude acquisitions and divestitures, increase was only 1.6%.

So I think we made significant progress again in 2003 in the management of our cost base.

I think you have heard us say over three, four years that we needed to be as good there as we were on the people analysis side, and as we were on the earning asset generation side.

And we believe today that we're as good as expense managers as we have ever been in the history of the company.

And we are accomplishing that in spite of investments that we're making in technology and in sales and in marketing and continual training of our people.

On the TSYS side, they announced yesterday their results for 2003.

Their net income was 141 million, that's up 12.1%.

Their diluted EPS was 71%, up 12.1% over the previous year and the total revenues for the year excluding reimbursable charges were 828 million, and that's up 14.4% from the previous year.

And, of course, the big event for the year was the beginning of the relationship with Bank One.

As you know, the world's largest Visa issuer, that conversion is going very well.

It's on schedule.

It's on budget.

And we have every reason to believe that we're going to complete the conversion of their cards to the TS2 platform in the second half of 2004.

But obviously last week's blockbuster news of the Bank One acquisition by J.P.

Morgan Chase adds clout or two to that horizon.

We communicated with the Bank One contacts.

We have been told to stay steady in the boat, full speed ahead, proceed post haste on the conversion.

Frankly we have no reason to believe at this point anything otherwise.

And we're very optimistic that this merger will represent opportunities for TSYS a lot more than it represents a threat notwithstanding the uncertainty in the short run.

TSYS accounts on file increased for the year 11.4%.

Their peak season cardholder transaction volume increased 17.5% over 2002.

It was, by all accounts, another successful year at TSYS.

They met their expectations achieving the 20th straight year of meeting their targets for growth at TSYS.

We will expand a little bit on their out look for 2004 and I will ask Phil and Troy to be prepared to respond to your questions if you have any for them.

But basically, they announced in their release yesterday not only their guidance for 2004 but they announced their expectations for 2005 and that is to attain a 10-15% growth rate in EPS.

In today's environment, we're not looking for ways to make projections, you know, out into the future.

But we felt like it was important to dramatize for all of our audiences that the 2004 guidance is an anomaly, it's an out liar, we think it's a convergence of a lot of circumstances that are coming together at one time, quite frankly, beyond what we had expected.

But it does not represent a new norm for TSYS growth and thus the 2005 guidance 10-15%.

Based on a set of assumptions that include the TSYS guidance at 5% to 7%, and based on our belief that our credit quality will improve in 2004 and based on expected fundamental loan growth of 10-12% during the coming year and based on the assumption that our net interest margin for the year will be 428, with no increases in short-term rates certainly built into our assumptions, we felt like that the best guidance that we could give was 8-10% or 2004 over calendar year 2003.

I know you're going to wonder what happens if the rate goes up.

Obviously that works to our benefit.

But, there are so many moving parts there that, to get involved in guidance based on that kind of speculation, we felt like was not prudent.

Back to TSYS for one minute.

Specifically their current year earnings are impacted by sales of portfolios by several of their clients, particularly in Mexico.

It's a continuation of the issue of consolidation and the uncertainty involved during mergers and acquisitions and then pricing concessions that occurred in renewing some of their largest contracts both at TSYS on the card side and at vital, our merchant processing side.

In addition to that, TSYS will continue to build and enhance its infrastructure to support future domestic and international growth.

So it's a transition year for TSYS that prepares us for 2005 and beyond

The assumptions for TSYS in 2005 are based on growth and revenues before reimbursable of 10 to 12%, driven by 6 to 9% revenue growth from existing core processing clients.

And the vital processing earnings growth of at least 5% and no significant client losses during 2005.The three situations that I might mention that are certainly up in the air with TSYS are the acquisition of the Sears portfolio by CITI and the conversations continue there.

The acquisition of the fleet organization by Banc of America and conversations continue there.

And then, of course, the latest being the acquisition of Bank One by J.P.

Morgan fleet.

And yesterday morning we also got the announcement about the sale of the Circuit City accounts to Bank One.

If all of those situations work positively for us, it works tremendously positive for our financials.

If all of them worked negative, it has adverse impact.

What will happen, we don't know yet.

And when the timing will be, we don't know yet.

So the effects of those three situations are largely not a part of the assumptions for 2004.

Let me conclude by telling you that we have two bank acquisitions that are in the works.

They are going to be exceptional additions to our banking franchise.

The first one is a $250 asset, People's Florida Banking corporation with four locations in Palm Harbor, Port Ritchie, Clearwater and Oldsmar, Florida.

It gives us a really strong footing in the Tampa Bay, Florida, area.

We also have recently announced the acquisition of the 424 million-asset trust one bank in Memphis.

This allows us to strengthen our growing presence in the very high growth Tennessee markets, and we're excited about welcoming the - these two teams into our family of companies.

I think in summary, I go back to my opening comment. 2003 is the year of margin compression with strong fundamentals in every other category. 2004 at least starts out as the year of lowered expectations on the T-SES side with extremely bright and optimistic possibilities for the banking side of the house.

The conditions, I don't have to explain them.

We're not looking for any cover or any excuses.

Our job is to manage this company precisely, effectively, no matter what the conditions, to perform at the upper level of our peer group.

We did that in 2003.

I can assure you we will do that again in 2004.

And we're going to hopefully climb our way to a place of excitement and gratitude and respect, and appreciation during 2004 with all of the audiences we serve, notwithstanding the concerns that I think are legitimate that have been expressed and that we have included in our discussion this afternoon.

I'm going to stop there and see if you would like to engage in any questions, and we will put the right person on giving you the answer.

(Operator Instructions) Our first question will be from Jason Goldberg.

Lehman Brothers.

Thank you.

Good afternoon.

Good afternoon.

How are you doing, Jason?

Doing well, thank you.

I guess lot of this quarter was very robust, particularly relative to some on your peers.

Maybe you can give us more color to extent in terms of -- geographically where you're seeing it, what customers are using it for and then maybe just give us more color in terms of your out look for 2004 as kind of a continuation as well above industry average growth, what you see driving that.

Jason, I'm going to pass that question to Mark and let him kind of take it from the top with you.

Thanks, Jason.

Yes, for the quarter, we had great loan growth, about $550 million.

Primarily the mix of growth was about 47% of our growth was in our, what we categorize as the investment related real estate sector.

We're seeing good fundamentals and good growth there.

When you look at the C and I sector about 43.5% of our growth was in that category.

About 34% of that growth is in with the real estate secured C and I area that we classify as commercial real estate.

Bust it is to commercial customers and with the line on the company to pay us back, not the real estate - and then we had about 9.5% of our growth in the consumer sector.

We're just at the very early stages of implementing our consumer strategy.

Last year we didn't have a lot of consumer growth.

We grew about 112 million but we were excited to see around 50 million of growth occurred in this last quarter.

And we do expect some improvement there.

We have some improved processes, technology and also focus on that so we're expecting good growth there.

If you look regionally at our growth, for the quarter, a lot of banks, about eight of our banks grew about 10% phase our coastal banks were about a 10.5% phase and if you look the remaining banks 27 other banks, that actually exceeded the growth of those two regions and the 13 to 14% growth overall.

If you look at the year, half of our growth occurred in the Atlanta and coastal areas and the other half occurred outside.

It was about $2 billion in growth overall.

Our outlook for 2004, I think as we stated earlier, we're expecting low double-digit growth.

I don't see any reason why we can't accomplish that.

I think again we should see some pick up in our consumer growth in 2004.

We believe the real estate fundamentals and the customer base that we got will be solid.

And then we do expect from an economic conditions our C and I growth to improve as well.

We will also be focused on things like our leasing company.

We should -- had that in place for about three or four years.

It's set up well and we think we can make some good progress there as well.

So if that answers your question, I will end it there.

That is helpful.

I guess in secondly -early last year when your stock was under pressure you aggressively bought it back.

It looks like you're under pressure in the early part of this year.

I guess your thoughts about stepping up the buy back in here.

Well, obviously that's an option.

I wouldn't really feel comfortable expressing any intentions there.

But -- I mean, we're not going to panic or knee jerk or overreact as a result of what happened today.

The fundamentals of our company are too strong.

They always have been.

Our ability to earn high margins, I noticed one of our competitors in the southeast the other day was really proud that they had increased their margin back up to 3%.

We're sitting here just ringing our hands over 4.27 because we're used to 5.

And so then our decentralized system has proven our ability to earn or to win business in the marketplace.

That's -- as you know, Jason, that's why our loans grow significantly more than our peers.

And then the TSYS situation, if we were going roll up the sidewalks and declare defeat with TSYS that would be one thing But these guys had a perfect storm occur that's going to cause a one-year transition kind of a year, and then back to pretty much normal.

And you know the bank one deal is our proof that we can sign the big guys, the best of the big guys.

And so we all are sitting around here notwithstanding the events of today, with smiles on our faces and optimism and looking forward to executing during the year.

And so our game plan is to left foot, right foot, left foot, right foot, get on with business.

And there's just one follow up, last final question to that.

Because that I missed the T-SES call yesterday given the plus of earnings.

But I mean you have the three reasons you cited for the slow down earlier those of T-SES was pricing concessions, customer losses and costs to build out the franchise.

I guess, at first glance those don't sound like a one time items.

Well, as far as year-to-year comparisons they are.

We just certainly have - have additional pressure from additional customers going forward.

Building out the franchise is pretty cyclical.

Probably every four or five years we go through a period where we have to reach out a little bit further than we would like to, to prepare for the next revenue wave.

And so - and then the losses that we had in Mexico almost substantially offset the increase that we had from a client like bank one.

So, yes, I don't think that I would - we're not viewing them as recurring.

We're looking at it as a kind of an aberration.

And really, you know, if it were most any other company other than T-SES to have to 5% to 7% year wouldn't be like the end of the world.

But for T-SES that's unusual.

I just tell you my personal opinion are that the market overreacts to account those - that kind of stuff.

As far as I'm concerned, both on the T-SES and the Synovus side we will build ourselves right back to where we were.

Great.

Thank you for the informative responses.

Our next question will be from Todd Hagerman.

Please go ahead, sir.

Good evening, guys.

Todd Hagerman.

Fox-Pitt Kelton.

Jim, if I could drill down a little on the financial services side and if you could kind of update us in terms of the initiatives that you got in place.

And mark briefly touched upon this earlier.

On the fee income side, particularly as it relates to the consumer and accelerating the growth in fees, particularly as we think about, you know, slowing mortgage revenues next year, what you have in place to kind of grow that mix of business and what your goals are there.

Great question, Todd, because, as you know, we're really under represented in the consumer side of our banking operation.

And we have a significant focus right now on the consumer.

We have a group that's working hard to build strategy and implement it and we're thinking in terms of the best opportunities are in the home equity side, the private banking side, and the credit card side.

And we are late to that party.

I think, you know, some of us that have been with this company for a long, long time have just focused on building our company on the commercial, the business, and the commercial real estate side.

And we've been very successful doing it at growth rates way beyond the norm.

But we've turned our focus now to the consumer as well.

It doesn't necessarily take emphasis off of our other areas of strength.

We have a sales management system that has just completed its third year.

We are late to the party with a sales management system as well but it has made remarkable progress in the year.

It's a way of life around here now.

We are basically viewing ourselves as selling unique service and relationships and our referral business, our financial management services business, and our ability to increase our products per household is all going in the right direction.

The financial management services business revenue there, is only 60 million.

We have only been at it three years.

We had a 9% increase last year.

We had just over double digit increase the year before in the worst market since the great depression.

We are very optimistic about the momentum there.

We got the model built.

It's in place.

The team is on the field.

They've proven themselves by bringing in customers.

We have satisfied customers selling our -- to our prospects.

And so really in every category, of the growth prospects of Synovus in 2004 is as good as it has been in the last three or four years with the one exception and that is the EPS outgrowth with TSYS and also as we said changes back to more normal in 2005.

Great.

That's helpful.

If you could, what is your thought process in terms of the mix or contribution there at the bank in light of, you know, the transformation taking place at TSYS, what are your goals for the fee contribution on the bank side and where do you see that going over the next year or two.

Well, to get 8to 10% and let's be optimistic and think on the high side of our range for guidance, let's think 10%.

With TSYS at 5 to 7 obviously we have got to do better than 10% on the bank side to get to 10.

So we're counting on our traditional strength of asset growth, our emerging financial management services, and we're thinking in terms of our consumer strategy that is going to take some feet and really have some legs during this year.

That's not projected out into the distant future.

And then, Todd, probably the most convincing thing to me about our ability to do that is that we're still, if you look at our press release, our fee income is only 29% of our total revenue.

And that's significantly short of our high-performing peer group.

They would be more like 35%.

So we have got a gap there that represents 60 to $70 million worth of fee income that's a big part of our plans.

We intend to gross that gap.

Great.

That's very helpful.

Thank you.

Thank you, Todd.

Our next question will be from David George.

Please go ahead, sir.

Hi, good afternoon.

A.G. Edwards.

Hi, Jim.

A question on kind of rate sensitivity.

Could you tell us how much of your loan portfolio on a percentage basis is tied to prime?

I know in your 2004 model you're not assuming any rate hikes.

But say for example we got a 25 basis point increase in fed funds what that would mean on a net interest income basis to the company?.

The first quarter percent?

Yes and also, Jim, if you could let us know how much of the portfolio is tied to -

Let me tell you how it works.

The first quarter percent would give about $5 million more.

The second quarter percent would give us about $5 million more.

The third and the fourth and the fifth and sixth would give us little more than that because of the way we have some -- not very much -- but some derivatives on the books now that have given us a little hedge against the static interest rate environment.

So, I mean, it -- it amounts to real money when the sensitivity -- when the interest rate starts going up.

Let me add this.

You asked me about the sensitivity.

I think I mentioned it.

But it is something that I stare at in my ceiling every night.

It's 66% to the decimal point floating rate assets of our total earning assets.

Do you know what the prime and Libor mix is or is it mostly primes?

It's mostly prime.

And that, David, as you know, is another kind of source of strength for us that--that's the way our client base is and that's the kind of lending we're able to do.

And we haven't had to go out and load up our books on Libor type lending and we haven't had to load it up on syndicated deals.

We can make loans kind of the old-fashioned way, and that's another reason for our historical margin.

Appreciate it.

That's helpful Jim.

Thank you.

Thank you, Dave.

Our next question will be from Christopher Marinac.

Please go ahead, sir.

Hi, Jim.

Chris, how are you doing?

I'm well, thank you.

Good?

I wanted to ask you about acquisitions and to what extent acquisitions and integration, even though the few things you have are small, limit the growth this year?

Limiting the growth?

Correct.

Does the 8 to 10% growth forecast assume little bit of near termed delusion as you have the first two months or first year of a couple of acquisitions

No, I think we figure a wash on them.

You want to help us in early.

Obviously, our track record follows they'll help us own going.

But, early on this there's little impact.

OK.

Then if I can transition to the bank one opportunity in the future, is there a scenario that you can pain out that bank one J.P.

Morgan mergers actually creates more business for you and is there any opportunity (inaudible).

Every acquisition starts from day one when we read it on the Internet with a potential gain and a potential for a loss.

Over the years, we have gained far more than we have lost.

In this one in particular, as you know, J.P.

Morgan, chase, is a major partner with our competitor.

And, of course, you know the whole story with our bank one situation that we're well down the road toward mid 2004 conversion of the bank one portfolio.

I really don't want to speculate and I don't want to say anything that anybody can pin up on the locker room wall.

But it gives us a real open door to talk to the other folks.

There's some very compelling arguments, we believe, that are in our favor.

We certainly know the Bank One preference for the deal that we made with them.

In my view, there's no reason in the world why that wouldn't be very attractive also to the other participant in this merger.

So the only thing I can tell you that's concrete and real other than our sense about it is that we've been given direction by the executives of bank down to proceed with the conversion.

OK.

And I guess as a follow up to that, Jim, to what extent does a large merger like that create any pricing pressure for TSYS and is that a challenge that you will have to deal with?

Yes, that's challenge.

Back in the old days when we had 100 clients that had $1 billion in outstanding, we basically charged them the list price.

As the consolidation of the industry has taken place, the list price starts including larger and larger discounts.

The larger and larger the organizations get.

And now we look around and there are fewer and fewer larger and larger organizations.

So the discounted prices create all kinds of pricing pressure for us every day.

The good news though, Chris, as you know, is that for the last five years our net interest margin have improved.

And that's because, on the cost side, the computers, the hardware, the software, the storage, all the expenses attendant with processing these large customers, we have had equally or sometimes greater offsetting cost decreases.

So it's a great business.

We expect it to continue to be a great business.

The acquisitions that they've made over the years have given us some diversification and some hedge against the consolidation of this business.

Our entrance into debit certainly gives us another growth opportunity.

But I tell you this, the growth opportunities in domestic U.S. in the international issuing side of the house and the commercial business, commercial card business, and in the private label retail card still are incredible.

It's a great business.

As you know I wish we owned a 100% of it instead of 80%.

Sounds great, Jim.

Thank you.

Thank you.

Our next question will be from Tony Davis.

Please go ahead, sir.

Good afternoon, gentlemen.

Jim, on that same point, that's a good guess.

Thank you.

You missed your opportunity back when you were negotiating the bank one contract to take advantage of the weak stock price that TSYS had.

And I guess I want to pressure would be on that it on that very issue, your interest in owning the entire company at some point?

Well, it's no secret that my desire would be for us to own it all.

And we talk constantly, as you know, about the options that we have.

One option is to make an offer to own the 20% that's is owned by the public.

Another option would be to spend that company out and let it go on its own.

And obviously the biggest advantage to that option is that they then would have a security that they could use as a medium of exchange in a significant acquisition.

And then the third option is to take the 80% down below that, lose consolidation lose a lot of the advantages that we have.

But still take it down through the use of TSYS stock in an acquisition.

We can take it down as long as low as 50.

That's probably the least attractive option to us.

Because at 50 you hit another wall and you got the same issue again.

Right.

And so just about all the time, the best option seems to be the status quo.

But we're always looking at all of them.

I wanted to ask Phil, of the $40 million revenue shortfall at TSYS is patient this year.

Specifically, how much of that is attributable to pricing concessions and get him to comment, a bit I guess, on how the world has changed over the last couple of years in terms of price expectations going forward.

All right, we're going to move Phil, down here by the telephone speaker.

Here is on the way and he will tackle that for you.

Thanks.

As Jimmy said we have got big crowd in here so it's hard to get around.

Could I ask you to repeat the question again?

I'm sorry.

Yeah, Phil, I wanted to get a precise number on the proportion of the $40 million revenue shortfall that you're looking at this year that is due to pricing concessions.

Also your comments to color on, how much the world has changed in terms of pricing today versus the last year or so?

Well, I'm doing this off the top of my head.

I think it's right in the 12% of that $40 million.

I'm certain that's within 1 or 2%.

To talk about the other issue, I mean, we have always been in a very price-sensitive business.

It amazes me what's happened when you look over the past 20 years.

The services that we provide for a heck of a lot less money than we did 20 years ago or two years ago.

We are certainly trying to keep all of our significant customers under contract, and we just want to study that says that about 96% of our account base is under contract through 2006.

But any time anything happens, any time there's a merger or acquisition, anything like that where we're involved, people will -- I mean, we live in a world where every client we have wants it faster, better, and cheaper, and that's just the way it is.

And we understand that and we have learned to deal with that over the years.

It's not unusual.

I think that when you look back at 2003, as Jimmy described it, we have somewhat of a perfect storm and things did kind of pull together all at once.

And, you know, we are going to have some hangover from that in 2004, but I think he hit it dead on and I believe I said it yesterday, that we are very optimistic about the long-term future of TSYS.

We are -- we believe our fundamental business is as strong as ever.

We think we absolutely the best at what we do in the world, and we -- our prospect list is as strong as it has ever been.

We have 65 million accounts in a pipeline out there.

And so we feel good about it.

Now, as he said, we are not panicked.

I mean, we're not happy over today, but we're -- we certainly expected some deterioration.

We're not panicked.

We're not going to run out and do something crazy and make some acquisition that doesn't make sense and will hurt us long-term.

We think we're good at what we do and we think that the future of this business is good.

Now when you throw those three balls up in the air that Jimmy was talking about earlier, the Bank One chase dial, the Banc of America fleet deal, the Sears CITI deal, I mean obviously our world will be a lot more clear as those decisions are completed and we understand where we're going.

We do feel comfortable that we're making progress with all of those but there are certainly no guarantees with any of that.

And as Jimmy said, we're pulling ahead on the Bank One conversion.

As a matter of fact we gave an update yesterday at our board meeting, and it really is in great shape.

And I think that certainly Bank One would tell you that.

And we think they're passionate about what they want to do long-term in this credit card business did that answer your question

Yes.

Thanks.

Our next question will be from John Pandtle.

Good afternoon, Raymond James.

Hi.

Hi, Jim.

Jim on the - with the sole growth that total system that you expect this year and really in '05 relatively historical levels, how does this change your appetite on the bank acquisition front and how it may affect your pricing on acquisitions as well if at all?

John, that's a wonderful question because it addresses kind of a hard-core, rock solid principle we have stood on for years.

It doesn't change my view of it one iota.

Yes, it's less than normal in 2004.

And, yes, even 10 to 15 doesn't get us back to the historical Norm of 15-20+%.

But I think it's very important for this company to maintain a 30%ish kind of contribution from TSYS.

So from an acquisition standpoint I think you can expect more of the same type, the two that we announced recently, the two I mentioned today, the kind of banks like Pensacola, Nashville, Covington, Bank of North Georgia, two or three here, there, yonder, along the way, and not any departure from what you're used to hearing from us as far as our commitment to the nature of the company, be it about 30% TSYS.

Then for follow-up.

I guess if anything, John, what that says is, that affirms hopefully to you that we consider this kind of an aberration kind of thing, and we're not expecting a fundamental shift or change.

OK.

You mentioned that your efficiency ratio this year was a bit of an aberration as well, relative at least to the recent trend of the past couple of years?

Right.

With the last couple of acquisitions, I guess you're up to 40 or so affiliate banks?

42.

OK.

Any thought to moving more toward, you know, a hub and spoke type strategy to get more efficient cost structure there?

No.

I think the efficiency that we've gotten out of our banking operation over the last 10 years is pretty incredible.

As you know, we have pretty well centralized and commonized and normalized the operations.

As we say from behind the customer desk, we've got one DT system, we have one financial system, one audit system and one major vendor system.

We have taken an awful lot of costs out of the company.

We don't have a lot of costs in the charters themselves.

We have a little cost in the fact that we have real high-powered people running them and boards of directors who are the influence makers in their community, but I tell you, that's the best money we spend.

So this efficiency ratio backed up on us for one reason.

That's the revenue loss from margin.

And so the system that we have is working better than it ever has.

This group sitting in this room is running -- they're running the banking operation better than our banks have ever run.

So we're not about to tamper with what's our secret weapon.

OK.

Fair enough.

Thank you.

Thank you.

Our next question will be from Nancy Bush.

Please go ahead, ma'am.

Hi, good afternoon, Jim.

How are you?

Hi, Nancy.

I guess, given that the major issue in 2003 was the net interest margin, I would just ask, what lessons were learned sort of in the whole experience and have you changed your methods of managing the margin as a result?

I think you alluded to some derivative positions.

Is that something that will be of bigger use going forward, etc?

Great question.

Let me say this that we don't really think that the margin compression that we experienced was largely impacted by our behavior.

It was largely impacted by the fact that it's the lowest interest rate environment in 45 years.

Now, I said largely because there's a little room for lessons learned.

In fact we want to learn all the lessons we can learn from it.

And one lesson we have learned is that we really have to monitor more closely the activity of our customer base on a really day-to-day basis, that the shift out of fixed rate into floating rate that occurred in the first month and a half of our first quarter caught us by surprise.

Had we not been caught by surprise, we could have reacted to that quicker.

You know, we got all the models that we thought were necessary.

We do all of the projections and alcove kind of stuff, we thought, and historically been pretty good at it.

But in that last drop or two that we experienced on the prime rate, we weren't prepared for the consequences.

Now, here's what we have learned for now.

That going back up, when these rates start going back up, we got the same opportunity to get hood winked if we're not on top of it as we have got going down.

And we have to be very careful to monitor the behavior of our customer on the way up as well.

But really, Nancy, you know me now, I'm not going to try to give you an excuse.

But when you've got a 5% margin, it doesn't work at 5% when you have a 4% primes.

That's where why some of these banks haven't been hurt as bad because they used the 3.5 margin or 4 or some of them less than 3.

But we had a 5 margin and when the rate started coming down, strictly the last three or four drops, it just -- it grabbed us in the wrong place.

I guess I would ask, as an addendum to the question, when rates start back up, have you guys formed any kind of opinions, however early they may be, about, you know, whether consumers are going to stay and businesses, are going to stay as liquid as they have been?

I mean are the deposits going to stick or are the deposits going away?

Well, that's question that all bankers are being asked right now.

And I got an answer that I think is a good one for you.

I was listening to an interview that Tiger Woods did when he won the masters two years ago.

And he was asked about the difficulty of the back nine and the fact that there weren't any eagles made, or very few birdies and the sports writer said, did you enjoy this course better when it was easy?

And he says, it never was easy.

And I'm going tell you, raising deposits never has been easy.

It's been easier in the last year than it was in the year or two or three or four before that.

But getting deposits, when you've got competitors like money market accounts and asset management accounts and mutual funds and insurance contracts, it's never been easy.

All right.

So having said that, I believe very strongly that we will continue to be as successful as anybody in raising deposits.

And it's because of these guys sitting around this table.

It's because of the decentralized system.

And it's because of our present in our relationships that we have in all of our markets.

I don't believe the nature of deposits, as a result of the change that will take place in the next cycle of interest rates will fundamentally change.

Thank you.

Thank you.

Our next question will be from Eni Hassan.

Please go ahead.

Hello guys.

On the acquisition side you spoke with respect to Synovus.

I was wondering if you would take a moment to address on the TSYS side as well.

They talked on the call last night, you know, they were looking at the nice network and it's just the part of their ongoing strategy.

So my two questions around that is, one, what sort of capacity for acquisitions does TSYS have in terms of dollar size, how large could they go.

And, number two, they seem to be pretty comfortable with some of their funding options and I was wondering if you could review how they might go about funding some of the -- at least some of the larger acquisitions, which I, you know, expected the nice network would be among those.

Thank you.

Yes, thank you.

I will take a crack at that and then Phil may have a comment.

One, we are very interested.

We were interested in it when it was on the market for the first time, just like we were interested in star and we were interested in EPS and we were not successful in prevailing in any of those interests that we expressed along the way.

That process is just beginning, and it's premature to really speculate on what might happen with it.

But can I tell you that an acquisition that would be beyond the cash ability or the stock ability of TSYS, that Synovus would be a player to step in and possibly make the acquisition using Synovus stock.

Now, having said that, they've made several cash acquisitions.

They are a cash-generating machine over there, as you know, a year or so ago we have some questions about the cash flow but I think all of those questions have been answered.

And it's very obvious that they generate a world of cash.

And it's sufficient to fund almost any internal growth - or really, any internal growth they might have, and including some external growth.

So, yes, we are interested in nice and there's not a size constraint that would keep us from being a player, because of the ability for Synovus to step in.

And do you have any guidelines or rules around doing, you know, acquisitions that are creative in the first year or created by the second year or any sort of things like that at least on the TSYS side, not necessarily on the Synovus side?

Thank you.

Well, the impact of the experience on the Synovus side is very definitely a factor in how we view an acquisition on the TSYS side.

Because as you know, we have been able historically to make almost any acquisition we make and it would be a creative.

Now, we don't fool ourselves.

We model that without the -- we take TSYS out in effect in our model so we know what we're really doing, not fooling ourselves about a creation because of the evaluation of TSYS.

TSYS is in a technology business.

Typically most acquisitions on the technology side would carry more good will, say, than on the banking side.

We have addressed that in the minor acquisitions that we have made.

We would be prepared to address that in a more major acquisition.

And quite frankly, what really matters these days is what the cash impact is and I think the market every day they go as far as getting more and more sophisticated in their ability to analyze an acquisition, not withstand in the impact GAAP affect of good will.

Does that answer the question?.

Yes, it does.

I'm sorry.

I appreciate it.

Great.

Our next question is from Jeff Davis.

Please go ahead, sir.

Good afternoon, Jeff Davis.

Question either for you Jim or Phil (Inaudible).

One is the guidance for TSYS next year that still includes full 4% to 5% creation, if you will from the bank one contract, does it not?

Yes.

OK and then if Bank One --

Could I add to his comment?

Yes is the answer.

But I think it's very important that we all understand that impact has not changed.

OK.

That impact has not changed.

It's been other circumstances in other situations and issues that we have already enumerated that -

Quite right.

That came together as far as the guidance.

And not a change in the nature of the impact of bank one.

OK.

Right.

I just wanted to affirm, Jim.

If two years down the road with the combination of one and JPM, if they came back and said we're going to go with the other side and we have got to unwind what we have done between T-SES, what sort of termination fees would like to -- realize from that?

I know that's a scenario that you don't want, but would there be a financial impact from a tech-writing event?

Yes that's certainly is, this is Phil.

That is something that we don't anticipate or want.

We do have a contract that contemplates what happened with the Morgan chase deal.

That is adding on another big player.

We do have provisions in there should they decide to go do something else.

I don't think we're prepared to get into the details of that contract, but I think we're in good shape.

Obviously you are not.

If they left it wouldn't be a positive of this force but we are covering

OK Could you comment own the opportunities of BAC-on the BAC and fleet basis -- long time customer?

Well I think the opportunities are strong there.

I think Banc of America -- TSYS is our largest customer today.

And obviously as they go through the fleet proposition and deal with it, we're certainly hopeful that we may end up with all of that or a portion of that.

They are having to deal right now with the details of people and contracts and all of that.

But we certainly are positive.

The same goes for the Circuit City acquisition that fleet made.

We think we're going to be able to do some work for fleet there.

You know, feel good about where that's headed.

And, of course, as you know, the announcement yesterday of Bank One acquiring the rest of Circuit City and we have not had any substantial conversations with them about that.

We are certainly very hopeful if history means anything it's very positive to our way.

OK.

And then a question for Tom.

It is my last.

Is personnel on the banking side was down 8,9 million link quarter.

Aside from mortgage commission what drove the link quarter reduction on the personnel side -- [Inaudible].

The biggest factor is the decline in the mortgage payouts but the second factor is we proved the at risk and pay more richly in the third quarter than in the final quarter of the year.

Very good.

Thank you, sir.

At this time we show no further questions.

Mr. Blanchard.

You may now give your closing remarks.

I think we really have covered the waterfront.

I thank you all for your wonderful questions.

I hope you all have a strong sense of how we feel about 2003 and 2004 and beyond.

We're really itching to get on into it and get with it and start doing the things that we have planned to do.

We think we're going to really make our shareholders and our employees and our customers and all of the stake holders that we have, very proud of our year.

And we want to -- we want to really start running right away toward the finish line toward another very successful year.

We will obviously be talking to you along the way.

We will be filling in gaps, adding color, and then we will be giving you progress reports at the end of each quarter along the way.

So thanks for your friendship, your interest, thanks for your confidence in us and we're going to be working mighty hard to be -- to earn it.

We appreciate your attending this conference and we will stand adjourned.