Synovus Financial Corp (SNV) 2004 Q4 法說會逐字稿

Welcome to the Synovus fourth-quarter earnings conference call.

At this time all participants have been placed on a listen-only mode and we will open the floor to your questions and comments following the presentation.

It is now my pleasure to turn the floor over to your host, Jim Blanchard, CEO.

Sir, you may begin.

Thank you very much and good afternoon, everybody.

We're in the conference room here at our Synovus Summit in Columbus and I've gathered a good group again.

And I want you to know that the people in the room today are the folks that make all this stuff happen.

I get the pleasure of telling you the punch line, but these are the folks who really are the folks with their shoulder to the wheel that produce for Synovus on a day-to-day basis.

Included in that group are Richard Anthony, who I will ask to cover the financial services side, and also Phil Tomlinson and Jimmy Lipham are here.

I'll cover very briefly the TSYS report from yesterday and the call this morning and then they'll be here along with Tommy Prescott and Mark and others who can answer all of your questions.

It was just an outstanding year for us and we were very excited about our announcement this morning, a 10.35 percent increase in earnings per share over the bracket that we had set of 8.10 early and then you'll remember we came in in the fourth-quarter or at the end of the third-quarter conference call and told you that we were pretty certain that we would hit the 10 percent.

And then even better news for us is that we were able to pay our full incentives to our employees.

On the Synovus side that's the first time in 3 years that we've paid full incentives; prior to that we had done it every year since 1976.

It was a little bit of a culture shock around here for us not to pay full incentives and that's including profit-sharing and our bonuses.

But to set it as a target for the year and then to fulfill it is a very exciting event for us and one that I think will be very meaningful to all of the constituencies that we serve.

And I know it will be to our team members.

It was a great year for growth in both the deposit area and in the loan area.

Fee income continues to grow nicely at least in all categories up to our expectation and even more so in some.

The credit quality is dazzling to us.

I don't know what you see in and other places, but 0.23 net charge-offs is just the best I remember in my 35 years.

And 0.52 nonperforming assets down from the previous year and continuing to improve is exceptional, certainly for us.

And then past dues again -- we've said this I think every quarter for the last three or four, were the best that we've ever seen in our history.

Credit quality is always on the uppermost part of our mind.

Even when it's not on the mind of others we know that it's the ultimate differentiator in the performance of a company and we are in a position of tremendous strength.

And then to be on the positive side of the margin improvement is also exciting for us.

We're starting to see the realization of what the interest rate increases on the short end of the curve will do and we're confident that that will continue throughout the remainder of '05 on some modest basis.

We're not expecting it to skyrocket, but that will have very positive impacts on us as well.

TSYS reported on the high end of their scale, 6.8 percent net income per share.

You'll recall that Phil had described a perfect storm that occurred -- that created the guidance for '04, first time single digit in a history of TSYS, and yet how gratifying it is to us to see that going into '05 that expectation is that the 19 to 22 percent range.

And in addition to that, after 7 to 8 years of trying, we were successful in acquiring the second 50 percent of Vital which will have a very positive impact on our performance going forward.

On the Synovus side, our guidance is 12 to 15 percent.

That's putting us back pretty much in our historical range and I think you've got to look at that on an apples-to-apples basis.

That's 3 cents a share that we'll have as expense for stock options and that represents about 2.2 percentage points of earnings.

So on an apples-to-apples basis you could say that our guidance on a fundamental basis is 14.2 to 17.2 percent.

We've got to do 14.2 to 17.22 to get 12 to 15 which obviously is you've read is officially our guidance.

And then I guess this may be old hat and not very exciting to most of you, but '04 represents the 22nd year in a row that we've announced record earnings, earnings that have increased over the prior year and that's a pretty good track record.

It puts us in at least one Hall of Fame for perpetual earnings increases and obviously we're expecting to add another year to that in 2005.

All in all without a doubt to us who live with it every day, 2004 has to be one of the most satisfying years in our recent history for certain and maybe throughout our history because of challenges that we're all facing, the regulatory burden issues that are there, the interest rate environment, the market conditions and all the environmental factors that you are so very familiar with -- a very, very satisfying year.

In addition to hitting all of our immediate financial objectives, I think we moved forward strategically and significantly by entering four new markets, great new banking markets for us.

Memphis and Tampa we entered by way of acquisition and then Jacksonville and Savannah we entered by de novo startup.

And we're just really celebrating also the milestone at TSYS and specifically the successful conversion of the Bank One accounts, which, as you've heard by now, has gone basically without a flaw, and then the definitive agreement that we reached with J.P.

Morgan Chase & Company to process the combined card portfolio for Chase Card Services.

And then I think it's worthy of mention too that we were real excited last week that Synovus was named again in the Fortune Best Places to Work in America for the eighth straight year; in fact, that's every year that they have come out with such a list.

And may even announced this year a Hall of Fame for those few companies that have been on that list for the entire 8 years that it's been published.

Just a few specifics about the quarter and the year.

The fourth quarter was a very strong finish for us for 2004.

Net income for the quarter was 118.7 million, that's up 15.7 percent.

Diluted EPS was 38 cents per share, that's up 12.98 percent or let's say 13 percent over the fourth quarter of 2003.

Net income for the year was 437 million, that's up 12.4 percent over last year, and earnings per share were $1.41, that's up again 10.35 percent over last year.

Now I'm going to ask Richard if he would to walk through the highlights of financial services and then I'll come back and cover TSYS.

The financial services side of our company had a strong year, we're proud of it.

Of our 40 banks 22 exceeded the profit plans that we set for them, 7 were pretty much right on target and I think we had 11 banks that fell a little bit short.

So on balance good performance out of the banks themselves.

If you add it all up financial services net income in the quarter was $83.9 million which is up 18.7 percent and the full year net income was 314.9 million which is up 14.7 percent.

Turning my attention to the loan side of the balance sheet, loan growth was exceptionally strong last year.

Total loans increased 18.3 percent and, if you exclude acquisitions and divestitures, fundamentally we were up 15.4 percent.

Loan growth for the quarter slowed a little, it was solid -- annualized growth in the fourth quarter was 12.9 percent.

The growth has been broad based across our markets.

We attribute this to the strength of our economy in the Southeast and the responsiveness produced by our decentralized way of operating.

Credit quality was one of the best that we can remember.

If you look at the entire year, we closed the year with our nonperforming assets ratio at 0.52 percent.

This measure was 0.58 at the end of the prior year '03 and it was 0.56 one quarter ago.

Past dues were 0.43 percent and then if you take the past dues greater than 90 days, they were only 0.09 percent.

We think this is the lowest level at least in recent times.

Charge-off ratio for the quarter 0.27 percent, this compares to 0.43 in the fourth quarter of the prior year and for the full year 0.23 percent compared to 0.36 -- 36 basis points last year.

Provision for loan losses was $20.9 million for the quarter which is 5.3 percent over last year and the loan loss provision for the year was 75.3 million which is up 4.9 percent over 2003.

Lower charge-off levels have had a lowering effect on the current year provision while loan growth has required additional provision levels.

Then the allowance for loan losses ended the fourth quarter at 1.36 percent which is in comparison to 1.37 percent at the end of '03 -- the end of the third quarter of '04 -- and also was 137 at the end of the third quarter of last year.

So credit quality has continued to improve and we worked that down, that measure down one kick.

Our coverage ratios are strong; the provision to net charge-offs ratio was 1.8 times for the year and this compares to 1.3 times for 2003.

Allowance to nonperforming assets coverage ratio was 261 percent at the end of '04 compared to 236 percent at the end of '03.

And then finally, the allowance to nonperforming loans ratio was 330 percent compared to 335 percent a year ago.

Deposits -- if you look at the total on the balance sheet deposits grew at 16.5 percent over the prior year and, if you strip out acquisitions and divestitures, total deposits grew at 13.7 percent.

And then finally, if you break down the look to include only core deposits, they were up 9.7 percent over the prior year.

This growth was led by strong increases in money market and demand deposit accounts with increases of 16.4 percent for money market accounts and 14.7 percent for demand deposit accounts.

So we've had good deposit growth in '04, but I will say one of our key areas of focus in 2005 will be to have deposit growth moved to a level that is in line with the level of loan growth for the year; we want to bring those two together.

Our most important initiative in 2005 involves a very aggressive retail strategy.

You might know that we have been performing well in our commercial deposit growth and basically in the business side of our banking operation.

But we have some unrealized potential on the retail side.

We had a group of top retail leaders coming from a number of our banks and other companies that evaluated over the last 9 months of the year our opportunities in retail.

I'm really proud of the work they've done.

They research trends in the marketplace and their recommendations really involved customizing an approach that fits with our way and Synovus of doing business with our customers.

Our differentiator in this retail strategy will be personalized service but our bankers are increasingly becoming through training and other enhancements more proactive in identifying and filling customer needs.

I want to break their recommendations down into four separate areas.

First of all, the facilities themselves.

They will be retrofitting all 281 of our existing branches by the end of this year with new merchandising, technology and floor plans that will create an improved sales environment.

In addition, we have 25 new offices in our major markets on the drawing board that will reflect this new branch or store design.

Secondly, the product line itself, expanding our retail product line to include more investment offerings such as mutual funds and variable annuities will take place in addition to -- the fixed annuities that we already sales through our retail sales force.

Then we will be packaging our products around the lead product or what we call the anchor account, that's the consumer checking account.

From a people standpoint I would say of the four components this is clearly the most significant.

We plan to invest in our people through enhanced training, through streamlined job functions and incentive compensation changes that will undoubtedly improve the talent and capabilities of our sales force and create the proper motivators for higher performance.

And finally, we must promote our retail capabilities to a greater degree through advertising and other means.

We intend to do this and create a retail presence; marketplace that will drive customer traffic to our branch network which we think is somewhat underutilized today.

All these investments should have a P&L impact of about $3 million in 2005 as we implement these changes.

It's important to note that the biggest investment in our retail focus has already been made and that's the investment we've made in our new retail desk top which we call S-Lynk (ph).

With the successful rollout of S-Lynk this past fall we are now equipped to take our retail emphasis to the next level.

We've got advanced sales functionality and better improved sales measurement tools so we can now equip our retail sales leaders with better customer information and sales information to drive better performance and to ensure individual accountability.

As a result of these changes we expect to grow the retail balance sheet faster than in the past -- and profitability as well.

For example, we expect to increase our retail deposit growth rate from recent ranges of around 4 percent to the low double-digit levels in 2005.

And we expect to increase fee income related to the consumer initiative to levels that would support our double-digit targets overall for fee income growth.

Progress can already be seen in some of our resent efforts in the consumer loan portfolio.

Home equity outstandings, for example, have doubled over the past 2 years increasing to just over $1 billion.

The net interest margin, we began to experience some lift from increasing short-term rates in the fourth quarter of 2004.

Please note that during the fourth quarter we changed our accounting methodology for FASB 91 accounting for loan fees and costs.

Synovus now recognizes cost netted against loan fees as an adjustment of yield interest income.

We have previously recognized fee income over the life of the loans after recognizing a portion of fee income upon origination to offset origination costs.

The change did not materially impact net income but it did result in a decrease in interest income and a decrease in G&A expenses since the origination costs are now netted against interest income.

So this change also had a corresponding impact on ratios such as net interest margin and efficiency ratio calculations.

The net interest margin for the fourth quarter was 4.13 percent reflecting the downward impact of the change in accounting methodology.

The margin before fees in the quarter increased by 8 basis points to 3.98 percent, which is on a linked quarter basis, which reflects the positive benefits of our asset sensitive balance sheet.

The average prime rate was up 52 basis points for the quarter and that drove a 27 basis point increase in loan yields before fees.

The margin for the year finished at 4.22 percent compared to 4.26 percent last year while the margin before fees for 2004 was 3.92 percent, up from 3.90 percent for 2003.

The next topic I would like to cover is fee income for the financial services segment of our company.

Our non-interest income for the quarter in financial services was $80.9 million which is up 6.4 percent compared to the same quarter a year ago.

And for the year this particular measure was 327.4 million which is up 5.3 percent over last year.

Now these comparisons are impacted by acquisitions, divestitures and the fact that mortgage revenue is down 55 percent for the year which amounts to a decline of $32.3 million.

To give you an idea of how everything else is working without these factors, non-interest income fundamentally is up approximately 9 percent for the quarter and 14 percent for the year.

Service charges on deposits for the year grew significantly with an increase of 12.8 percent while credit card fees are up 15.3 percent.

Fiduciary and asset management fees were up 9.6 for the year.

We did add $1.8 billion in new assets under management in '04 and now have 15.8 billion in assets under management (indiscernible).

Concerning expenses, financial services G&A expenses increased on a reported basis 7 percent for the quarter and 8 percent for the year.

As we continue to refine our processes we successfully managed overall headcount which really has declined during the year by 89 -- excluding new markets and divestitures that have occurred since the beginning of '04.

We also continue to have better than expected experience in our self-funded health plan.

Included in the fourth quarter is a $9 million reduction in reported employment expense related to the change in methodology of accounting for loan costs and fees that I talked about earlier.

It's very significant to note that included in our numbers overall is an additional $18 million of performance-based incentive pay expense over the prior years.

Richard, thank you.

I think it's easy to see why in our press release we said that financial services clearly provided the key drivers for growth in net income during 2004.

And just to recap it, financial services were up 14.7 percent, TSYS was up 6.8 percent and that combined for a consolidated increase in EPS of 10.35 percent.

I don't have to remind most of the people on this call that that's an unusual mix for us because usually since 1983 we've had a higher increase in earnings out of TSYS than we have out of the financial services side.

And that's why Phil described '04 as the perfect storm.

But we should return to more normal condition in '05 as TSYS is given that guidance of 19 to 22 percent.

So we're really excited about their momentum going into '05 and the continued strength and even improvement on the financial services side.

Yesterday TSYS announced their results for '04.

They reported net income for the fourth quarter of 43 million, that's up 9 percent over last year with diluted EPS at 22 cents or up 9.2 percent over last year.

For the year TSYS reported net income of 115.6 million, that's up 6.8 over last year, and diluted earnings per share of 76 cents, up 6.9 percent over last year.

Those results include revenues before reimbursables growing at a rate of 12.6 percent for the quarter and 15.5 percent for the year.

They really enjoyed some real big successes that have given us the foundation for our growth in 2005 and beyond at TSYS.

They signed contracts for over 100 million accounts, they made strategic acquisitions to expand our product offering in developing growth markets and they made real strides on the international front particularly in building a world-class data center at Knaresborough, England.

And there are more than 47 million accounts remaining in the conversion pipeline for 2005.

In fact, they estimate that they'll have approximately 425 million accounts on file by year end 2005.

Again, I mentioned the announcement by the Board that they had purchased the 50 percent stake that Visa has held since its inception in Vital Processing.

We expect them to close that acquisition in the first quarter of 2005.

Of course, then Vital will be a wholly-owned sub of TSYS.

The TSYS acquisition of Vital is going to give them the opportunity to offer a complete payment solution and we really do expect to fully leverage Vital's deep acquiring expertise into TSYS' broader view of the payment landscape.

Before we open up for questions I just thought there was one kind of look at the TSYS year coming up in '05 that would be worthy of putting out on the table for you.

And look at it like this; in '04 they were up 5 to 7 percent.

Their updated guidance issued yesterday is increasing the guidance from the 10 to 15 percent that they offered at the beginning of 2004 to set the tone so that 5 to 7 would not be considered a new norm.

And then yesterday they disclosed that of the 19 to 22 percent, 14 to 17 percent of that is the core base of TSYS and the remainder is the acquisition of Vital.

And then if you'll do a little apples-to-apples again and add 2.1 percent to that number based on the expensing of stock options in '05 that did not occur in '04, on a fundamental basis these guys are talking about earning a 21.1 percent increase to a high of 24.3 percent increase in 2005.

I just think that's a progression that kind of tells the story of why we're so excited about the prospect for just a blockbuster year from TSYS.

I'm going to stop there and we will open up the floor for questions.

And we'll see around the table here who would like to try to respond.

Pat, before I do that, let me make one more comment about the assumptions basically that we're looking at for our guidance.

We are assuming that the economy will continue to expand.

We're assuming that short-term rates will continue to increase at least moderately toward normal levels.

We've heard talk about a neutral number and we're expecting more movement toward that neutrality in 2005.

We expect in the credit environment we'll remain favorable and that we're going to have TSYS performing within its range of guidance that we have discussed.

For 2005 we're going to focus on blocking and tackling and fundamentals, growing deposits, managing loan growth, the quality and the mix, making sure we optimize our opportunity in a rising rate environment to optimize our margin.

We're going to continue to work on expanding fee income and our target there is 35 percent fee income as a percentage of total revenue.

Obviously we're going to continue to drive our efficiency ratio down and we have a special focus in 2005 about refining our processes to really make them as efficient as we believe we can effectively make them.

So those are our assumptions and we're not going to get specific about each category.

I think we get graded by category and we want to get graded on the totality of this thing so we've given you the broad general assumptions that we think will exist in the current year.

Questions?

(OPERATOR INSTRUCTIONS) Christopher Marinac, Fig Partners.

Good afternoon.

Can you talk about where acquisitions fit into your strategy for 2005 and maybe even a little bit further than that in the future?

Yes, I think as we've said for the last several years, look for more of the same.

Our fundamental growth is -- let's discard '03 from our averages for a minute.

We've been right at 15 percent EPS growth for the last decade or so.

A couple of percentage points have been from our acquisitions, the rest has been more fundamental and internal.

Major markets, high demographics, growth opportunities, good teams that are compatible with the Synovus culture and approach for the workplace environment and high-performance.

Don't expect anything abnormally over and above what we've been doing and I think don't expect us to be absent from that; it'll be an opportunistic approach supplemented by what I think Richard and Tommy and team and Fred have done to develop a database that's probably more deep and wide and broad than we've ever had before to really know what's out there.

So it's generally more of the same.

Okay.

And secondly, can you or Mark elaborate on the trade-off between loan pricing on the commercial side and the volume and is there any pressure on margin because there's more and more cut throat pricing that your competitors are doing that you must respond to?

No, actually -- we're not really experiencing any dramatic pricing pressure at all.

We've actually kind of slowed loan growth down a little in a few sectors.

And from a volume standpoint we're really expecting our loan growth to be in the low double digits.

That's kind of where we want it to match up with our core deposit growth.

And we really don't see any major issues with pricing at this point.

We've not gone up against any competitors at this point that make us feel uneasy about that.

Okay, super.

Thanks, guys.

Jack Micenko, Susquehanna Financial Group.

The $3 million on the retail focus -- can you just clarify?

Was that already spent or is that expected to be spent in 2005 and is that an even run rate over the four quarters?

Can you help me out with that one a little bit?

I would say that, no, the money is not spent.

That would be our rough estimated need to implement the changes that I meant.

A big portion has to do with our strength in training approach that involves really over time over 2,000 people.

Some of it involves the facilities themselves.

The run rate probably would be somewhat even.

I don't think it will be concentrated in any particular quarter.

Okay, great.

And then you had said I think you expect to see more consumer loan growth.

I'm assuming a lot of that would be on the home equity product.

In light of slowing down some of the commercial lines, are you thinking anything around lowering the provision of debt to take into account those are historically lower loss assets?

Let me address the first part and say that our home equity -- the home equity product is of course the key consumer product and we expect to continue to have a good healthy growth rate there.

The other areas of emphasis on the consumer side would include our credit card portfolio.

We are a credit card company, as you know.

We've had success here in Columbus in the lead bank and we're trying to take that success out into our other markets.

So we expect to continue to see above-average growth there.

And then finally, our private banking area has gotten a lot of attention and emphasis over the past 15 months as we have taken our model out into the top 15 markets and so we expect to see continued loan outstandings growing in the private banking units.

We did take our provision down -- I mean our reserve down just a small notch, as I guess you're indicating, and I don't think we have any big expectations of major reductions but we probably will have some pressure and some opportunities as our credit quality continues to be at a strong level.

Okay, thank you.

Todd Hagerman, Fox-Pitt.

Jim, most of my questions have actually been answered, but maybe just give us an update on the expense side of the equation with perhaps just compliance related costs going into '05; talking about Sarbanes-Oxley 404.

As I understand it there was some spillover effect in terms of the accounting change this quarter as it relates to that.

I was just wanting you to give us some perspective on what kind of budget assumptions you're making for '05 as it relates to compliance related cost for the Company.

Well, it's no secret to anybody that the Sarbanes-Oxley, and I'd say in particular 404, has created some expense that everybody in the universe is having to deal with that is over and above and beyond the regulatory expense that we had experienced up to now.

But we're not really planning on that increasing significantly over '04 as we head into '05.

I think it'll be more of a nonfactor in '05 even than it was in '04 and we were able to absorb it.

I'll tell you our general attitude about regulatory burden, increased emphasis on the Bank Secrecy Act, Sarbanes-Oxley is about like it's always been about the bank regulatory environment and that is we've got a culture that says you don't get ahead at Synovus by complaining about the regulators.

It's just part of the business.

It's putting up the flag on the poll at your branches and like cutting the grass and it's like showing up for work on time and it's like keeping the computers running.

But we are not concerned that the cost is going to jump out at us in '05.

I'm not trying to downplay the fact that it is a significant issue, but the environment we've created in Synovus is that it has not taken on a life of its own.

We're very serious about it.

It's part of what we do, but we're here to serve customers and create value and part of doing that is dealing with this regulatory cost and burden.

That's very helpful.

If I could ask just a follow-up unrelated question.

Could you give us some perspective on -- you've talked a little bit about the people component of your retail expansion or enhancement strategy.

And we've heard quite a bit from some of the Alabama banks about the -- on the people side of the equation just in terms of taking advantage of some of the market dislocation in terms of some of the mergers, i.e. SouthTrust and the like.

Have you folks been able to take advantage from say a hiring standpoint any of the SouthTrust Wachovia folks or from a revenue perspective -- client perspective?

I think the best answer to that is generally the answer is, yes.

And yet that's really not new.

We've had situations that have occurred this year and, well '04; but we've been seeing this in the marketplace for 10, 15 years now.

It certainly represents opportunity for talent.

We have a significant amount of talent that we've accumulated in our team that came from other places because of that kind of dislocation and turbulence.

And I'd say that banks like us in the Southeast have generally benefited significantly from that turbulence as far as growth of assets and deposits.

So it really is a continuation of what we've seen.

The good news is it seems to keep happening, the bad news is that the ones that go through it get their act together and they stabilize and they become very tough competitors again and then somebody else comes along.

I wouldn't want to address anything specifically about this most recent one, but generally it's a reality that it represents real opportunity for Synovus.

Thank you very much.

Nancy Bush, NAB Research.

Two questions, one for Tommy and one for Phil.

Tommy, you mentioned that in your introductory comments that 22 banks out of the 40 had exceeded plan, I think you said 7 had met plan and 11 had fallen short.

Was there any common theme in the banks that didn't make their plan?

Was there any particular common problem?

And I guess my follow-up would be what happens to those?

Do they get put into the corner or what happens?

Nancy, this is Richard.

I think I said that.

Yes, they sometimes can get into the penalty box, but usually the ones that missed the plan by a significant amount would have to do with credit issues, although thank goodness we don't have many of those.

We have only one bank that I would put in that category.

And then the others would be in the margin category just by relatively small amounts.

But impacted by the margin.

Is there any sort of remedial process for them?

Does somebody go talk to them or something?

Yes, the way we're organized is that -- I think you probably have heard us say this -- but we have regional CEO's that are responsible for regions of banks that typically would include about 7 or 8 in a group.

And the accountability starts there because the regional CEO's performance is measured strictly by the performance of those banks.

So they are personally impacted as is the CEO and our bonus and incentive programs when there are variances to the plan.

Fred Green heads up all of our banks and he meets every month with the regional CEOs and one of the things on the agenda every month would be the performance of the banks that have to be reported out by the regional CEO.

So very early in the year, if there's a variance to plan he requires remedial action or reports or at least some description of what is about to happen to get them back on plan.

And that continues on an ongoing basis throughout the year.

And certainly the incentive plans that we have are tied in a very direct way to the performance of the bank, most of that driven by profits, but certainly other indicators such as sales, effectiveness and credit quality enter into the calculation as well.

So we have I think very direct hands-on management of the performance of our banks every month.

Richard, does there seem to be any common thread about the time they've been in the network?

Are these necessarily the newer banks or just other specific issues?

No, there are not that many because overall we had good performance this year, but I would say we might have one new bank in that group and we got really a mixture of fairly new but even a couple of mature ones as well.

So there's not quite the pattern that you might predict.

The reason sometimes can come out of the blue with one particular problem that might have to be dealt with.

We had a merchant problem in one of our banks that showed up at the end of the year.

And we corrected that and we've reorganized the risk management and the accountability for that line of business.

That was a new bank.

That is an example of what can happen that affects the banks that fall sort.

Phil, the question -- and I'm sorry I missed your conference call this morning, but, as you know, there were a number of conflicts -- was just the question about Vital.

I'm very happy that you guys have taken ownership of Vital.

I guess my question is what are the practical advantages of doing that?

Are you able to accelerate what is already a pretty healthy growth rate there?

If you could just flesh that out a little bit I'd appreciate it.

Thanks for the question.

We believe that it's a great acquisition for us.

It's certainly going to help us in 2005 and beyond.

We do think that we can bring some economies of scale to Vital.

We do think that we can apply some disciplines that we use to Vital and we think we can help them in the marketplace.

There was some confusion over the years about the ownership and sometimes there was a lot of confusion around Visa's 50 percent ownership -- although they've been a great partner through the years.

But as you know, we've wanted to buy the other half of Vital now for several years and have tried on several occasions but Visa just didn't have any interest in it.

We think it will also give us some real advantages as we dig deeper into this prepaid business that we've entered into with the Clarity acquisition we made in August.

We've rebranded that company to TSYS Prepaid.

We've got some healthcare initiatives that we think make a lot of sense and we really need both sides of the point-of-sale transaction to make all that work.

So it's not only good for just the merchant side of our business, it's good for the other areas -- new, developing, emerging growth areas.

And the fact of the matter is we have not -- the Vital partnership with Visa USA was restricted to the U.S. only and so way didn't have a way to take it internationally.

We can do that now.

Now Vital is not ready to go international, but we do have the opportunity to go work on that now.

We will no doubt do that as time passes by.

Is there going to be any significant incremental investment that's going to be needed to do all these things?

I don't think anything that would affect their earnings.

We've already started several months ago building a new back-end accounting and settlement software package, it's called Vital Express.

It's going to run in the $20 to $25 million range.

We've spent a lot of that money already.

We think it will really bring Vital up to what we consider the gold standard in technology.

We think with TS2 we had the gold standard with the issuing and commercial card business.

With TSYS Prepaid we have that standard within the prepaid business and we think we'll very soon be there with Vital.

So we're excited about it.

Thanks very much.

Sundar Ashurnavisant (ph), Elliott Assoc.

A question about the commercial lending book.

Obviously a long history of great commercial real estate lending and great ratios, but with real estate prices where they are now do you guys have any additional concerns about underwriting that kind of loan?

And maybe could you give me a quick education on how you guys look at debt service ratios and other types of ways of getting the kind of credit ratios you've had in the past on that book?

I can tell you it starts with our basic lending philosophy which we're not a project lender.

So we don't go out and seek transactions, we basically look for people that way know, customers that we know, relationships that are much deeper than a loan transaction for us.

And that cultural difference has made a dramatic difference in our credit quality we think over the long period of time and that has not changed.

Secondly, we are very up to date on the marketplace and on the segments that we lend to.

We have a lot of data that we're continuously doing research on our marketplace, different locations, different localities and then we have good lenders on the ground that are trained.

We have very good training programs here at Synovus, train our lenders how to lend, what our lending philosophies are.

And we typically have a structure where large loans, anything beginning at $5 million and above get a second look.

We have a -- our lead bank in Columbus has a staff of very capable underwriters who do a lot of underwriting due diligence on our customers, make sure that our expense structures and debt service ratios and loan to values are in place.

Same thing with -- we do a lot of lending on cash flows versus appraised values.

They're not always totally reliable.

So we have a lot of capabilities in the Company to do that and feel like we can continue to do that.

In addition on a quarterly basis we may change our underwriting practices based on what we see has taken place in the market.

Recently we've added some equity requirements to land loans; we've tightened up our underwriting requirements in the hotel sector.

Those sectors are doing well and hotels are improving, but based on the levels that we're at we feel like we need to tighten those ratios.

And also have tightened equity requirements on residential development and are looking to keep our customers on short cycle versus long cycle.

We're not looking at doing a lot of residential development that may last 4 or 5 years.

We're looking for 24 month type of opportunities, although there are some customers we'll do that with.

So I think it's a function of people, it's a function of training and it's a function of processes and I think we have all of those in tact here at Synovus.

Great, thanks.

Looks like another great crop of numbers and ratios.

(OPERATOR INSTRUCTIONS) Heather Wolf, Merrill Lynch.

A couple of questions.

First, on expenses, I apologize if I'm making you repeat this, but can you run through what you guys think are sort of the unsustainable or nonrecurring items in your expense bucket this quarter?

Heather, this is Tony Prescott.

Good afternoon.

In the quarter the things that really stand out first of all is the reduction of expense related to the loan cost and fee change, about $9 million.

That stands out in the quarter but you'll actually see that carrying on into the four quarters of next year at similar levels.

Otherwise Richard Anthony had mentioned the merchant fraud, that's an approximate $8 million number that wouldn't be in the number going board.

And then we also saw some softening of a self-funded healthcare account, a couple million dollars and I don't think it's realistic do expect that going forward.

But those are the three primary items that stand out in my mind.

Okay.

And you guys also mentioned I think 18 million of incentive comps for the quarter.

Now when you look at the year-over-year numbers in the SG&A expense line there's approximately $18 million additional at risk incentive pay accrued for all of 2004 compared to 2003.

For the quarter there's about a $5 million increase over the same quarter a year ago.

But $18 million is an annual number.

And can you give us a little bit of color on what the incentive compensation will look like next year and specifically which goals have to be met in order for that compensation to get paid out?

Of course the cornerstone of our at risk incentive pay is the 7 percent profit-sharing piece of our all in 14 percent retirement plans and of course the first 7 of that is a (indiscernible) purchase pension plan that's built into the base.

The remaining 7 that we were able to afford and will pay this year that all adds up to the total of 14 will be -- continue to be a cornerstone of the plan going forward.

And then throughout the Company we have a number of production incentive plans that are based solely on production and sales and that type of thing.

And then we have financial performance-based bonuses that start at the executive level and go down throughout the affiliate banks to in many cases the vice president level and have some degree of the pay that's at risk.

And all that will continue to be aligned with corporate and unit performance for '05.

And Heather, let me add -- this is Jim Blanchard -- we want that to be recurring.

This is very important to us as a company that we continue to hit our target so that we will pay the incentives that generally we paid this year with obviously some increase as we grow the employee base and the net income.

Okay.

And just one last question.

I think last quarter you indicated that the hurricanes hurt your bottom line by a half a cent.

I'm wondering if you have any update on any benefit you could have gotten this quarter from excess deposits generation and/or loan generation in the rebuild?

Heather, most of the expense of course was taken in the third quarter.

There was a little bit of a residual amount that cost us.

What we really saw in the quarter in that marketplace -- and it's hard to pin it exactly to the hurricane activity -- but we saw a little more liquidity as the insurance checks came in.

We actually saw a reduction of service charges in those banks impacted by hurricanes to some degree which we believe had to do with the increased liquidity and the reduction of NSF fees (ph) and that type of thing.

But the history would say that there will be a good bit of liquidity and deposits that will be flowing through even this quarter we're in and the next because the reality of it is there's a lot more money in those areas now than there are people to perform the repair services and we think we will see some lift from that.

Okay, great.

Thanks very much.

Jeff Davis, NTN Securities.

If you said it I missed it and I apologize.

And I was, like Nancy, not on the TSYS call this morning.

How is the Vital purchase going to be funded?

Phil, you want to deal with that?

Yes, we're going to pay cash for it.

And Jim, how do you think about the earnings mix strategically between banking and processing within Synovus because we've been hewing (ph) pretty closely to the 70/30 mixes.

Is that something that's likely to change over time?

Is it something that you think should change over time one way or the other since it has a bearing on the valuation for the Company?

Well, you correctly pointed out that it's a real sensitive area of focus for us.

We are very cognizant of it and we are constantly -- have it under the microscope.

We'd taken it down in the early '90s as low as 20 percent and I think that was beyond where we should have done it and it's not likely that we would do that again.

Ideally I'd like to see it nudge up to 30 and a little bit over that would be fine.

And with the kind of momentum we think we have at TSYS I think that's likely.

So 35 percent wouldn't be too much to suit us.

They would take a little while to get there because I expect the bank to continue to perform at the highest levels as well.

Does that mix have any bearing on how acquisitions are done on either side of the ledger between banking and processing?

It really does.

It's a key consideration in every acquisition.

It's why we probably would never do a merger of equals for example on the Bank side because it would dilute TSYS down to half of what it is.

But historically we've done 2 or 3 or 4 or 5 smaller acquisitions, rather than one big one.

I think our appetite for size is probably larger today than it has been, but we would be very sensitive to the TSYS contribution percentage.

Just a couple other follow-ups.

Has the Vital purchase price been disclosed?

I think it has, yes.

Phil, do you want to address that?

Yes.

We paid $95 million in cash and there are some other considerations.

We had to pull the two companies apart, and some things Visa was doing for Vital and some we were doing.

So there will be -- the net income will not be a linear on that 50 percent line.

It will be somewhat less than that.

Phil, you all had a pretty good chunk of cash at year end, and the 95 is going to leave you with a fair bit of cash.

Any thoughts on TSYS coming back to the market and repurchasing shares?

Well, we have a repurchase agreement -- I mean program in place now.

We haven't really had a need to do that.

I think that in 2004, we repurchased around 52,000 shares as I recall, but we are not buying any right now and don't see that happening any time in the near future.

Okay, thank you.

Sir, there are no remaining questions in queue.

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

Yes.

What I'd like to do is ask Phil if he would just make a recap on TSYS very briefly, hit some highlights.

Ask Richard if he would hit a few highlights and then I'll wrap it up.

We'll be brief.

A couple of highlights in 2004 that I just wanted to recap, and Jimmy had covered most of them, is one, the fact that against most of the conventional wisdom, when Chase thought Bank One we were able to -- successfully able to come back and resign both Bank One and Chase.

The Bank One conversion did go off really without a hitch.

We acquired Clarity and, as I said, it's been rebranded TSYS Prepaid.

We wound up at year end processing over 350 million accounts.

2005 we think is going to be a real breakout year for us.

If you go through Jimmy's thought process from -- we started out last year at 5 to 7 percent, we wound up at 6.8.

We had, last year at this time, given you a 10 to 15 percent range for 2005; we feel like our core business is in the 14 to 17 percent range and you add Vital on top of it and we go to 19 to 22.

And then for our option expense, this real expense that has not been baked in until recently is about a penny and a half for TSYS.

So we think that's a pretty good trend line to follow.

We're really excited about the Vital acquisition.

We'll do the Fleet conversion at the end of March.

We will do the Chase conversion in the July/August time frame and we think we have several pretty important announcements that are right imminent.

I think it's also interesting to note that at the end of '05 of the top 15 issuers that use third party processors, and that does exclude Citi and MBNA and CapOne at this moment, we'll be processing 200 million of those accounts of the top 15.

And all of our competitors combined will be doing less than 14 million.

I think as a strong statement in that and I think that's about as good a seal of approval as you can get.

So we're excited about where we're at, we're looking forward to '05 and beyond and hope you'll keep asking us questions.

I'd like to conclude just by reminding the audience the momentum that we feel as we enter '05, the loan growth that we've at throughout '04 and particularly toward the end should serve us well.

We've got earning assets on the books and we expect to see strong flows of net interest income as we begin the year.

Our credit quality is another source of momentum.

We see no signs of slippage there.

And then finally the rate environment is allowing our margin to expand, so that is a factor that works in our favor.

And then finally, the initiatives, to recap, our retail strategy using our stores more as sales platforms with modern merchandising techniques is going to receive a lot of management attention throughout our company.

Our growth strategy to build out the markets that we've entered -- the good, strong markets like Atlanta, like the Tampa Bay area, Jacksonville, Nashville, Memphis, those well have a high priority and should help us over the next 5 to 10 years as we grow this company.

And then finally the efficiencies that -- opportunities that we've identified as we change processes and remove the remaining duplication in certain functions between the banks and the support units should involve the capture of some expense saving opportunities in '05.

Well, you can see, we are pretty excited about '05 and beyond.

And I'd just like to close by telling you what I told the Board today at our meeting.

And I told them this at the end of the third quarter as well.

That when you take our ownership of TSYS, when you take our decentralized system and our ability to grow loans and deposits and fee income; when you take our credit administration that's produced the kind of quality that we are able to report and you add it all up, there's not another bank holding company in the sector that I'd swap places with.

I think our opportunities exceed those of anybody else I can see certainly from the outside looking in.

And then you add on top of that what I think is one of the most experienced, mature, seasoned, strong judgment oriented management teams and then the timing and the cycle, knowing what we've got behind us as far as impediments and barriers and knowing how clear the road is ahead, we're in the catbird's seat and we're looking forward to '05 and beyond and looking forward to telling our story everywhere we can.

And again, way just thank you for your interest and your encouragement that you give us and just look forward to continuing our dialogue during the coming year.

Thank you very much and we'll see you next quarter.

Thank you, ladies and gentlemen.

This does conclude today's teleconference.

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

Thank you for your participation.