Synovus Financial Corp (SNV) 2005 Q1 法說會逐字稿

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

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

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

Sir, the floor is yours.

Thank you very much, and good afternoon, everybody.

We're excited about having you here for our first-quarter call, and we're really pleased with the fine start we've gotten off to in the first quarter.

We obviously will be going over the details of the quarter and making forward-looking statements that are subject to risk and uncertainties.

There are factors that could cause our results to differ materially from those forward-looking statements we may have set forth in our public records filed with the SEC.

As I indicated, we got off to what we consider to be a great start to year 2005.

At $0.37, we were actually $0.02 above our own internal model, our own internal expectation for the first quarter.

You've seen from the press release that the financial services section sector of our business was up 16.6% when it was normalized on a basis where we excluded the Quincy gain in the first quarter of 2004.

And, of course, you've all seen and heard by now the excellent performance of TSYS net income, up 40.7% in the first quarter.

TSYS, as a result of the strength in their first quarter and their expectations for the year, raise their guidance from 19 to 22% up to 22 to 25%.

And, as you've seen in our press release, we've raised our expectations as well, from 12 to 15% to 13 to 16%.

I think as a backdrop for the details of the first quarter, it would be instructive for me to take just a few minutes to go over what we consider to be the key differentiators that we enjoy at Synovus.

They won't be any news to you, but they literally play into the strength of the first quarter and the strength of our expectations for the remainder of this year and beyond.

And they are fundamental and they are basic and they are simple principles, but they relate to the day-to-day performance.

They relate to the day-to-day decisions that we make.

And they relate directly to the strength that we enjoy in the marketplace as we compete against the very large mega-regionals and against the local-owned independent banks in our market.

I won't give you a graduate course in all of these differentiators, but let me give you an elementary course and if you would like to go into any more detail in the Q&A, we will stay here as long as you'd like to to kind of undress and peel the skin on the banana back as it relates to these key differentiators.

I think you have to start with the Synovus culture.

It's a culture that focuses on the worth of the individual.

It's a culture that has placed us in the FORTUNE Hall of Fame, meaning that we are on the top 100 places to work every year since that list was started.

And it's a key ingredient in our esprit de corps, our morale, our turnover, our extremely strong covenant that we've made with the customers of Synovus.

Secondly, I'd like to mention our geographical footprint.

We don't take for granted that we're in the best part of the United States.

Georgia, Florida, Alabama, South Carolina and Tennessee -- you just couldn't pick a better place to be.

It enjoys growth, it enjoys an in-migration of wealth and population, and while we're not immune to the ups and downs of the economy, we certainly feel like it's a position of strength and a unique differentiator for our Company.

Thirdly, as our decentralized organization, you know there are all kinds of conversation about what does that really mean?

What is the definition of it?

If you look at our commonality and our uniformity in the support area, we look a lot like a lot of other organizations.

We've taken the bulk of the cost out by a common approach to operations, finance, loan administration, major vendors, relationships, on and on.

But if you look at our customer service and our people that literally put their feet on the pavement where customers are, you find that they are empowered, they are experienced, they make a deal.

The essence of the decentralized approach is that we can field 20-year veterans who can go out and make a deal and win a deal in competition with our other competitors in the sector.

And generally, they are competing against one, two, three-year inexperienced people who are not that known in the marketplace and who have to really go to a higher headquarters for authority.

And that's the essence of why we think the decentralized organization is our secret weapon.

Fourthly is our retail strategy, which is relatively new.

It is emerging.

We will hear more about it today.

You will hear more and more about it as time goes on.

But it's an area of our Company that now is getting some focus.

It's not either-or with any other of the strengths of our Company, but it is an addition and an add-on.

It can really be icing on the cake for a Company that historically, year in and year out, has always enjoyed very high performance.

And then fifthly, as our interest rate environment that were in, we've got the wind to our back on interest rates.

We'll talk a good bit about the margin today.

But the upward movement is favorable for us.

We live for months and months and quarters and quarters in an unfavorable environment.

We performed at the top of the industry in spite of that, but now we think this gives us some great opportunity for a return to the robustness that is historical in our earnings performance.

Next is the credit quality.

We think that to have the kind of loan growth that we've had for the last decade, really two decades, to have the kind of quality numbers that we have, we keep setting records for past dues, the best we've ever seen, low charge-offs, low and continuing to go lower nonperforming assets.

Mark will give you detail on that as well.

And then finally, TSYS momentum -- last year was a year where they performed with single digits for the first time in their history.

Again, returning to 20-plus kind of growth rates -- the wind at their back again -- a clear advantage in technology, the power of TS2 -- I just feel like, more than ever, that TSYS is in its infancy and represents a tremendous differentiator when you look at Synovus versus the other competitors in the sector.

So, with those differentiators, let me hit just very briefly the broad highlights of the first quarter.

You've read where our key drivers for the quarter were very strong growth in our balance sheet, continued excellence in credit quality, obviously just an outstanding performance by TSYS in the first quarter.

Also, we had great net interest income growth.

It was robust in the first quarter.

The margin expansion was tougher than we expected.

Our asset yields performed exactly as we had predicted.

In fact, we just nailed it on the asset side.

But we had higher-than-expected funding costs in a very highly competitive marketplace that somewhat offset the positives on the revenue side.

Frankly, we believe that the industry was catching up somewhat in the first quarter from a lag during last year's short-term rate moves where we all were very disciplined.

We really held back, and yet there was some competition that increased and there was a little catch-up.

We are not discouraged at all about our margin expansion as rates continue to increase.

We do expect some modest continuation of those increases as the rest of the year continues.

And Richard will offer additional comments on the margin.

Net income for the first quarter was 116.7 million.

That's up 12.1% over last year.

EPS was $0.37, up 9.58% for the first quarter of '04.

Return on assets was 186 compared to 191 last year.

Return on equity, 1752 compared to 18% last year.

Strong in every category.

I'm going to ask Richard Anthony now if he would to review the highlights for the financial services segment for the first quarter.

Jimmy, thank you.

You all have heard Jimmy say that fundamentally, on the financial services side of our Company, in the first quarter, our net income growth was 16.6%, and that of course was after excluding the $9.7 million gain from the sale of our Quincy Bank last year.

In absolute dollars, our net income was up -- was 79.4 million, up 2.1% over the first quarter of the prior year.

And our return on assets for the quarter was 133 in financial services.

Return on equity, 16.19%.

I want to talk a little bit about the loan side of business.

Our loan growth continued to be strong in this most recent quarter.

Year-over-year reported growth of 17.9%; if you exclude acquisitions, that growth was 15.8%.

And then on a link quarter annualized basis, the loan growth was 12%.

You have heard us say that one of our objectives this year is to grow deposits faster than loans.

During the first quarter, our total deposits increased to a level of $19.1 billion, which is up 18% from a year ago on a reported basis.

And then, if you exclude acquisitions, 15.8% was the growth, which, incidentally, matches the loan growth.

On a sequential quarter basis, the total deposit growth was 11.6%, almost in line with the link quarter annualized loan growth.

We feel very good about our deposit growth overall.

In fact, even if you exclude the brokered CDs from the total, our core deposits increased 9.5% from a year ago, and this gives us reason to believe that we can expect continued acceleration in deposit growth throughout the year.

We're pleased with the progress we've made through the implementation of our deposit gathering tactics that were put in place toward the end of last year.

From a credit quality standpoint, all of our indicators remained in excellent ranges during and at the end of the first quarter and really were key drivers to our very good bottom-line performance.

The nonperforming asset ratio ended the quarter at 52 basis points, which is the same as the end of the prior quarter and is actually down from 56 basis points in the first quarter of last year.

The net charge-off ratio for the quarter was 0.23, and this compares to 0.27 in the fourth quarter of last year and compares to 0.16 in the first quarter of last year.

Provision for loan losses, 19.3 million, which -- that number exceeds our net charge-offs of 11.3 million by $8 million.

So we -- if you calculate the provision to net charge-off coverage ratio, the calculation is 171%.

The allowance for loan losses ended the quarter at 136 -- 1.36%, and this provides coverage of 354% of nonperforming loans and 263% of nonperforming assets.

Past dues were in very good shape, over 90 days were 0.07% of loans, which is down from 0.14% in the first quarter of last year.

Total past dues also are down 0.61% compared to 0.76 in the first quarter of last year.

So, overall, our credit quality continues to be good as -- really as good as we have seen in quite some time.

Net interest income and margin -- on this subject, the biggest, most significant part of the story is that net interest income grew at 11.9% over the first quarter of last year, and in fact grew at 1.3% over the fourth quarter of 2004.

Net interest income excluding loan fees grew by 17.4% over the first quarter of last year.

The margin was, as Jimmy said earlier, negatively impacted in the first quarter by stronger-than-expected loan growth and a higher level of public funds, which does require collateralization with securities.

These factors dilute the margin, but really do contribute to a net interest income, which has been a factor in the growth that I mentioned just then.

Also, the cost of deposits were slightly higher than expected in a very competitive marketplace, which held back the margin in the quarter.

The net interest margin before fees was 3.98%, which is the same as our most recent quarter and is up compared to the first quarter of 2004, when the margin before fees was 3.91%.

On a before-fee basis, earning asset yields increased by 27 basis points in the quarter, and this was offset by a 27 basis point increase in the effective cost of funds.

The net interest margin after fees was 4.11%, and this compares to 4.24% in the same period last year.

The decrease, keep in mind, was primarily due to the change in methodology for loan origination fees and costs that was implemented in the fourth quarter of 2004 -- the FAS 91 impact.

We expect to continue to have a strong margin throughout the year as expected increases in short-term rates should and will positively impact our loan portfolio, which is approximately two-thirds variable rate.

We have assumed margin expansion of approximately 10 basis points by the fourth quarter of this year, assuming contingent gradual tightening by the Federal Reserve.

Moving to fee income, our financial services non-interest income was down 17.6% compared to the first quarter of last year.

Now, a big factor in that decline is this pre-tax gain of $15.8 million resulted from the sale of the Quincy Bank that we mentioned earlier.

If you exclude that, non-interest income is essentially flat compared to the first quarter of last year.

And the key factors in our non-interest income performance would be as follows.

First of all, service charges on deposits were down 4.9% from the first quarter of last year due to the negative impact of increased short-term rates on our account analysis fees.

Also, NSF fees have trended down somewhat during this period.

On the mortgage banking side, revenue in the first quarter was down 14% compared to the first quarter of last year.

This was a tough quarterly comparison for our mortgage banking line of business.

We will have more favorable comparisons later on during the year.

As most everyone knows, the refinancing segment of the mortgage business is extremely low and, in fact, minimal at this point in time.

Overall, in mortgage banking, we are continuing to improve our mortgage unit and expect that it will produce positive results for the entire year.

Credit card fees increased by 27%, worth noting.

And our financial management services revenues increased 5%.

On that subject, I want to mention a couple of things.

Sonny Deriso had led this financial management services line of business for our Company for several years.

He left the company in February, and at this time, Sanders Griffith has assumed responsibility for the business units comprising financial management services.

He has spent the last month or two meeting every day with our FMS unit leaders.

We're assessing every component of that business.

We have some excellent possibilities, we think, to enhance performance moving forward and a search is underway for a new leader of FMS at this time.

Some good news also in FMS.

We have made a significant addition to our capital markets capability over the last couple of months.

We were fortunate that due to the Southtrust merger with Wachovia, to be able to attract 31 team members comprising the bulk of their Southtrust capital markets activity from that bank.

There was an overlap in the capital markets operation between the two combined banks, so we have an excellent team in place on the ground and they have hit the ground running.

This group is comprised of institutional bond sales team members, traders to support their activities, we have investment bankers and we have a support staff.

So we're really excited about the potential for a fairly quick contribution from this capital markets group.

We think this contribution will occur later this year.

For the first half of the year, due to the startup impact of this addition, we'll see a slight drain, but contributions coming after that.

Retail is a strategy that is very important within Synovus.

I want to bring you up to date on our activities there.

This is our most important initiative in 2005.

Our retail plan continues to progress as scheduled.

Last quarter, we talked to this group about the focus centering on four separate areas, and I will do that again.

The first of these has to do with our facilities.

We have selected our facilities partner and site assessments for changes to our entire branch network are underway.

Our customers will begin to see these changes in August, with completion expected by mid-December.

We'll be installing merchandising capabilities in all of our branches and testing other technology components such as sales kiosks and customer assist stations in about 50 branches this year.

We have approximately 300 branches in our network.

In addition, Synovus will have a new prototype for a new branch facility available by midsummer.

This prototype will incorporate a more open sales-oriented floor plan into the local look and feel of the exterior design.

The people side probably is where we can make the biggest difference through strengthening that will take place in several areas.

We're in the process of making these enhancements today, having recently completed base salary adjustments to a number of retail positions in March, making those positions more market competitive, and more progressive sales incentives have been implemented at the same time.

Sales training will be delivered over 2000 retail team members between May and November to provide a more consultative, relationship-based customer experience.

Every one of our banks has just completed naming a retail lead.

The retail lead will report to the bank CEO, whose charge is to grow retail as a line of business in each of our 39 markets.

Our banks CEOs are responsible for each of our markets, but we'll be collaborating with the corporate retail team in making these enhancements.

On the product side, we'll be packaging products around what we consider to be our lead product or anchor account, and that's the retail checking account.

Expanding retail checking account customers is an important expectation in our retail strategy.

And then, concerning promotions, we are going to have promotions on somewhat of a regular basis out into the future.

The first of those will be starting in May, a 60-day campaign that will focus on small business.

This is the first corporate-wide retail focus beyond credit cards that we have launched, and is indicative of the new emphasis on retail in each of our markets.

We're starting to realize the power of our new retail desktop S-Link, which was rolled out in the fourth quarter of last year.

We have advanced sales functionality and improved sales measurement tools to better drive our performance.

Every retail sales leader in our Company now has information at their fingertips to know how their branch or bank performed in retail sales the previous day.

Prior to the implementation of S-Link, this information was either gathered manually or was not available until month end.

So we now have a new measure of individual accountability that will be a key to our success in retail.

These investments are still expected to have an incremental P&L impact of about $3 million in '05.

This would be a net cost of about $3 million in '05 as we implement these changes.

If you converted that to a full-year cost, it would be about $7 million.

And then we will be investing approximately $6 million in capital expenditures at our retail location.

So these are relatively modest costs for a Company of our size, but the real benefit of retail is to leverage off of our existing branch infrastructure and technology investments that are already in place and have been paid for.

On the revenue side and on the product side, we continue to see good growth in home equities, which is really our key credit product and one of our key products overall.

For the quarter, home equity loans grew at an annualized rate of 20% on a sequential quarter basis.

Credit cards continue to be an area of emphasis and we have gotten off to a good start with a successful campaign in the first quarter.

Retail deposits grew nicely during the quarter, in fact, by some $365 million since year end.

We want everybody to understand that we will be providing specific retail performance measures, more specific metrics, toward the end of this year, but we need a little history under our belt and we need for these enhancements to be implemented before that becomes possible.

On G&A expenses and financial services, we were up 1.2% compared to the same quarter a year ago.

The increase excluding the impact of acquisitions and divestitures and also excluding the impact of our FASB 91 methodology change was 7%.

So, fundamentally, we were up 70%.

We will continue to refine our processes and effectively manage our headcount.

The efficiency ratio for the first quarter of this year was 52.2%, compared to 52.9% in the first quarter of 2004.

We do continue to make progress on streamlining the back rooms, specifically in the areas of loan and deposit operations, finance and human resources.

We're finalizing plans that will improve our nimbleness, enhance compliance and reduce costs.

The primary impact of these initiatives that we started out calling our benchmark initiatives will be felt in 2006.

But as we communicate the changes that we're going to make internally, we will be better able to describe these efficiencies to the public.

An update will be provided to you during our next quarter conference call.

Also, with the announcement that came out from the SEC recently, Synovus has determined that we will not adopt stock option expensing until the new required date, which will be as of January 1, 2006.

And I will turn it back to Jimmy Blanchard.

Richard, thank you for that excellent update on the financial services side.

I have Phil and a number of his key team as well here in the room, and I asked him if he would come and talk with you about the TSYS side just really to give him the great pleasure of having the opportunity to express his excitement to you about their first quarter.

They really exceeded their own expectations in the first quarter.

It turned out to be the best quarter that they have had in the last five years.

They raised their guidance in their own track to have a wonderful 2005.

So, Phil, tell us about the first quarter at TSYS.

Thank you, Jimmy.

I would have pouted for a week if he had not let me come over here and do this with this kind of quarter.

But I think we're on track to have a breakout year in 2005.

We had our earnings call last Wednesday, and our annual shareholders' meeting last Thursday, for those of you who might want some more information.

But to go to the financial highlights, if you well, our fundamental revenues before reimbursables was $280,400,000, up 24.8%.

Net income was 46.1 million, up 41.7%.

The real drivers for this quarter were the consolidation of Vital for one (technical difficulty), the accounts on file were up 32% for the year, strong growth in our value-added or ancillary services and expense control.

And as an example, on the entire Company, this is without Vital and without TSYS prepaid and without those acquisitions on a base of right at 6000 people, we're only up 67 people.

So our core expenses are up only around 5%, again, excluding Vital and TSYS.

We had a really fun first quarter.

We completed the acquisition of Vital Processing.

If you will recall, that was our 50-50 joint venture that we've had since 1996 with VISA USA.

That was effective March 1.

It was a great acquisition for us.

It gives us a lot of potential to do other things and have a more complete payment solution.

And it also allows us to consider going international in the merchant acquiring business.

You've heard me say before that if we were going to be successful in Europe, we had to have a cornerstone bank, if you will.

You saw where we signed a seven-year agreement with ABN AMRO in the Netherlands.

It's our first significant continental European customer.

We've converted that business.

We still have the commercial business to convert.

But we think they are going to be a great customer and we're going to do kind of a turnkey deal with ABN AMRO.

We have just completed, about three weeks ago, the fleet portfolio conversion for Bank of America.

It went very well.

And as you may have seen last week, we announced an agreement had been signed with Fifth Third Bank in Cincinnati.

And we converted all those accounts this past weekend for Fifth Third.

They came from in-house.

We also announced that we had signed a deal to do the Zoomcard for KeyBank, and KeyBank is a new customer for us.

And certainly, two big things that happened were we extended our Bank of America contract out to 2014 and as you know, we do all the commercial card processing for MBNA, and we extended that out to 2011.

We also, as a result of acquiring TSYS Prepaid, which was previously Clarity, announced two big gift card launches in the UK and the Netherlands.

One was ATMV, which is really the largest music dealer in the UK.

They do a fabulous job there.

And then Humphoer (ph), who is a ladies' specialty retailer in the Netherlands.

We're very excited about those.

With the help of TSYS Prepaid, we also formed a branded, prepaid card association.

We have been able to bring together some of the largest institutions in the world into that.

We think it will bring more focus on advancing the prepaid card market.

We think it creates awareness and promotes benefits of the prepaid card industry.

It will help us promote industry standards and best practices.

And last, but certainly not least, we think it's going to bring TSYS Prepaid a lot of exposure and credibility in this marketplace.

We have a lot of momentum right now, and if you'll remember last year, around this time I was talking about a perfect storm and we just didn't know what was going to happen with a lot of big bank consolidation processes that were going on.

The Chase-Bank One merger was going on.

And I think convention wisdom out there said we couldn't win both of those.

I'm proud to tell you that we have won both.

Bank One's converted;

Chase will be converted later this year.

The Bank of America fleet consolidation was going on.

As I told you, we converted the fleet business about three weeks ago.

And then Royal Bank of Scotland, who had one of our great international customers, acquired Peoples Bank up in Bridgeport, Connecticut, and we've converted those -- that bank in September of last year.

And you will recall, we were talking about that as 2004 was the first year that we've ever been looking at single-digit numbers.

It was a difficult year for us.

But all the transactions so far have come out favorably for TSYS.

And we think, again, we've created a lot of momentum.

Now, you probably have seen this, but it's with mixed emotions that I wanted to again talk about Rich Ussery, our Chairman -- our Executive Chairman, has decided to retire as a TSYS executive, effective June 30, 2005.

He's going to remain our Director and Chairman, and will certainly continue to be on the TSYS Board.

Rick has been a driving force and a visionary leader in building TSYS.

Of course, he and I have been attached at the hip for the past 30 years.

And I believe his retirement is the passing of an era.

He has always done his job with grace and style, and he has been a role model for many people here at TSYS.

I told our shareholders that he is a -- his legacy is a part of the DNA here at TSYS, and everyone here wishes Rick and his family well with his new endeavors.

Another thing that we are happy to report that in our board meeting, our board increased our dividend by 50%.

This is the sixth year in a row that has happened, and we have increased dividends.

Now, we talk about 2005, and we're very excited about 2005; as I said earlier, I think it's a breakout year for us.

We expect to grow our revenue 30 to 33%.

We believe of that that Vital will add somewhere in the 225 to $235 million revenue range.

We expect to close out the year in the 430 to 435 million account range.

Today, we are at -- it changes daily, but we're in the 370, 375 range.

We did raise our guidance, as Jimmy talked about earlier -- our initial guidance was 19 to 22%.

We have raised that guidance to 22 to 25%.

We feel good about that.

We've been winning in the marketplace.

We continue -- we believe we're going to continue to win on a go-forward basis.

I think the storm has cleared and the sky -- and we see clear sailing ahead with these blue skies we've got around here.

Jimmy, with that I'm going to turn it back over to you.

Thank you, Phil, I appreciate that.

I assume that everybody on the call this afternoon can see at this point why we feel like first quarter was such a strong start on '05 and why we feel like we have the wind at our back and momentum.

I hope also on the TSYS side, that this may put to rest once and for all the notion that the margin or the profitability or the ratios of profitability per account or whatever concerns that basically have been expressed about the new business, that TSYS is putting on the books may not maintain the same profitability as it has in the past.

The fact is that we promised you over and over again, and I hope that you know us well enough to know that we're not going to sign up new business and have to acknowledge to you that we don't make any money off of it.

And I would submit to you that, on a linear basis, the pricing today is relatively if not totally proportionate to the pricing that we've had historically.

The truth is, the accounts have gotten bigger and bigger and the issues have gotten fewer and fewer, and in those conditions, the discounts get greater and greater.

And yet, our margins, if you will look over a 10-year period, are firm and solid, sustainable and even improving.

And so we expect that to continue.

Our enthusiasm for the quarter, based on the fundamental, normalized increases in the financial services side and the TSYS performance, again, have caused us to increase our earnings guidance from 12 to 15 to 13 to 16.

The assumptions that we're making in this revised guidance upward is a continuing expanding economy, maybe slowing somewhat, but still healthy by historical standards.

A modest increase in short-term rates.

A favorable credit environment, which we have every reason, I believe, to expect.

And TSYS' ability to achieve their 22 to 25% range.

Within our 13 to 16, we're thinking that the most likely case scenario is that we will be right in the middle of that range.

As you know, with your own models, this is not an exact science.

There are just dozens and dozens of moving parts.

But based on our margin behavior and our expectations for the rest of this year, I would say that the range we're giving you and the middle of that range being the most likely scenario is as close as we can guide you.

And frankly, the margin behavior probably has more than anything else to do with whether we will be on the upside or not on the upside.

With that, why don't we stop.

I want to make one final comment about Rick Ussry.

He got 40 years under his belt.

He started as a bank teller.

Up until January of last year, he was the only CEO that TSYS has ever had.

What an exemplary career, and what a model he is for how you can get ahead in the Synovus family.

And I joined Phil and the TSYS team and the whole Synovus family in thanking him for a tremendous contribution and wish him well in his retirement.

We will stop and field your questions.

(Operator Instructions).

Heather Wolf, Merrill Lynch.

A couple of questions for you.

First, on the guidance, I understand that that's -- it's not an exact science, but if I did the math right, it seems that you raise the guidance for Synovus by about one penny, which would be sort of the same impact that you're getting from the increased guidance at TSYS.

And I note that this guidance this quarter excludes expensing for stock options, and last quarter it included it.

So I'm missing $0.03 or so from the guidance that you gave last quarter versus this quarter, and I'm wondering if that's coming from maybe the financial services unit?

Heather, good afternoon.

Jimmy said it well.

The beginning of the year, we felt like the appropriate range was 12 to 15, and we clearly have the 13 in our sights and we're hoping with some external help from rates and so forth to do better.

Lots of moving parts.

We know a lot more now than we knew back at the beginning of the year.

The TSYS move of three points gets you almost about eight-tenths of a point on Synovus.

So if that was the only moving part that you could say that -- you could add that to the base of the guidance and make it the top range.

We currently, though, feel like just considering all things that we've learned from the first quarter, the change of the TSYS guidance, the behavior of the margin in the first quarter and the realizing that it's stickier than we'd hoped for, although we're still very optimistic about it, our current thinking is that we would move that 12 to 15 to 13 to 16 with the feeling, as Jimmy said, that we can land in the middle of it.

So, really, you're talking about some very little bit of fine-tuning and beyond just the pure ads (ph) of the change at TSYS and even the stock option accounting, just a modest amount of fine-tuning.

Okay, that's helpful.

And then just one question on the core deposit growth.

The 9.5% in core deposit growth that you gave for the year-over-year growth -- does that include acquisitions or exclude acquisitions?

The 9.5% is fundamental excluding acquisitions.

And then could you discuss the divergence in the quarter-over-quarter versus year-over-year numbers?

It looks like the quarter-over-quarter numbers dropped a little bit.

The quarter-over-quarter, the -- why don't you clarify the question for me?

Oh, I'm sorry, you're highlighting very good growth in the core deposits year-over-year, but the quarter-over-quarter numbers seemed to be a little weaker (multiple speakers)?

Yes, there's a lot of seasonality in the deposits.

It's three or four different ways to look at it.

There's averages, there's linked quarter growth rates, and then there's year-over-year.

We feel like because of the various lending places that you may have in the various categories there, in a period that looking at it over a longer period of time is a fair way to look at it.

And we felt like being fair, not just talking about the reported number, which is obviously much larger than the 9.5, but undressing it back to the core deposits would be the best way to do that.

This deposit journey that we set out on isn't one that we ever intended to be able to really conquer in a quarter.

What we look for is signs in all our banks and signs in all the categories that we can move forward in.

We've begun to see that; we've got our incentives aligned with our bankers' growing core deposits, and in a quality fashion, not just through price.

And we really are encouraged by the start of the year that we will be able to hit the targets.

Kevin Fitzsimmons, Sandler O'Neill & Partners.

Jim, could you just give a little more detail on the margin?

I know at one point you said you expect to keep a strong margin throughout the year, and I thought I heard you say you hope for it to be up about 10 basis points by the end of the year -- by fourth quarter.

Maybe if you could just clarify, does that compare to this -- the current margin we're looking at right now, or are you talking kind of the yearly average in the margin?

Just which number are you basing that off of?

And then secondly, in terms of TSYS, is there any update on the Citigroup Sears negotiation?

Then does the increased guidance at TSYS give any kind of outlook on that scenario?

Thanks.

Let me hit the TSYS first.

There is no update.

It's an ongoing conversation.

And we're optimistic by nature, and we feel like our relationship is a real strong plus for us with the Citi team.

But, at this point, it's no contemplation that the impact of the guidance that we have given you will be affected by the Citi decision.

And frankly, we don't have any idea at this point in time when that decision will be forthcoming.

On the margin, we're expecting the 10 basis point improvement to occur by the end of the year, in the fourth quarter.

And the color, I think, that causes us to feel pretty optimistic about it is that we saw improvement in the fourth quarter.

I think we had five of the increases that have occurred since the beginning of the turn upward, and we've had two of those increases in the first quarter of '05.

In fact, our margin was identical to the fourth quarter's margin.

We didn't get improvement, but again, we felt like there's a little catch-up that took place in the first quarter on deposit pricing, and that will kind of normalize out for the rest of this year, and we will see improvement in the margin as the rates continue to go up.

We don't have a prediction on how far they will go up.

But any rate improvement we see we think will be beneficial to us.

Nancy Bush, NAB Research.

Hi, NIB research.

A couple of questions here.

The 13 to 16% growth, that growth range that you're projecting right now, I just went to make sure so there's no confusion.

Is this off the reported number for last year, or are we talking about taking out the Quincy gains when you're looking at that growth range?

No, it's the reported number.

Thanks for asking that, if that was a possible of confusion.

In fact, you remember our discussion at great length about the Quincy gain in the first quarter of last year?

Yes, I noted that in the report.

And we're not trying to make a big deal about normalizing it.

But when you had that gain in the first quarter last year, versus this year, we just felt like it was important to make sure that we pointed that out so there would be no misunderstanding about it.

But, hopefully, that's kind of the last we'll be talking about the Quincy gain.

Secondly, I guess the service charges and deposit accounts, that's been sort of a consistent theme throughout this whole quarterly reporting period.

And you saw a little bit more of a precipitous decline from fourth quarter to first quarter than you have seen in past similar periods.

Do you guys have a sense whether that number is going to rebound or whether we're going to bump around this number, or are you able to analyze exactly what the impacts are?

I think we are.

Let me let Tommy give you his take on it.

Nancy, on the year-over-year service charges, the primary driver is the reduction of service charges related to the higher earnings credited in commercial accounts, which would be expected.

We actually were up a little bit year-over-year on NSF fees, so the biggest factor was on the commercial accounts analysis fees.

But the linked quarter decline on service charges is, you can kind of break it into two buckets.

First one is a decline in NSF fees, and that is a phenomenon that we have experienced along with the rest of the industry and we're still trying to think through it and really see what it means.

It's typically seasonality there in the first quarter.

But we saw a little more of it than unusual.

The balance of that decline, about 2.3 million, was the NSF fee decline; about 400,000 of the decline was the analysis fee impact being a little bit stronger than the first quarter over the fourth quarter.

We would expect the analysis fees to continue to be pressured a little bit, but that will be more than made up on the interest income side as short-term rates go up.

Great.

And secondly, Tommy, this is probably a question for you as well.

Occupancy and equipment expense took a pop from the fourth quarter to sort of a, you know, what looks like kind of a new level.

Is there anything -- is that -- should we normalize that number, or was there something special in it?

Nancy, if you look at the financial services segment, the occupancy and equipment was about flat.

So that implies that it is all in TSYS.

And that really is some equipment cost of TSYS going up.

It's (multiple speakers) -- we had a write-off of some software that was under development at TSYS, the impairment charge there.

And so the impairment charge is a onetime; the other ones are, particularly as Vital comes out of that equity line and into the financial statement, we will have some longer -- we will have, really, permanent impact as the whole base of Vital builds into the financial statement.

And Nancy, let me say this to everybody, that the Vital thing really makes some of these numbers jump around, in other categories as well, including personnel costs.

And that's why I think that it would be dangerous, I think, to draw too many conclusions from the first quarter when you've got some of these big items like Vital.

It really -- most of this stuff will normalize out, and we will have pretty clear stated trends when we give you the numbers on the second quarter.

And one last question.

On your margin guidance here for the 10 basis points up in the margin by year end, is deposit pricing competition leveling off?

How confident are you of that projection, and is it possible that pricing intensifies from here and you're sort of looking at that again come mid-year?

How confident do you want me to be?

I want a guarantee, Jim.

If I could guarantee it, I would.

Obviously, we're doing the best we can, like everybody else, to figure it out.

We believe there was some catch-up.

I don't know that we're sensing that there is any diminishment of competition in the marketplace.

But, on the other hand, it's pretty clear that everybody, including us, and maybe we were kind of a market leader, were holding these things down as hard as we could.

And yet there was working against us on the deposit generating side of the ledger.

So I wish I could be more definitive.

We all are -- we have a team of folks that are studying it from early in the morning until late at night.

But the best expectation that I can give you is that the cost of the deposits, unlike the first quarter, will not offset the benefit that we get from the asset sensitivity that we enjoy on the asset side of the balance sheet.

Thanks for asking that question.

Chris Marinac, Fig Partners.

(technical difficulty) Partners in Atlanta.

I wanted to ask about the composition of funding.

There seemed to be more growth this quarter on the wholesale side in the mix, and the percentage also ticked up a little bit.

Is that temporary, or should we expect that to continue in this environment?

Chris, this is Tommy.

Good afternoon.

We did continue to grow wholesale funding some in the quarter.

I mentioned awhile ago, the quest to balance the deposits on a core basis to keep up or ahead of loans is really a journey that will take us throughout the year.

We think we will get there, and that will relieve some of the pressure on the wholesale funding.

We really got some room to grow wholesale funding, but it's our desire to really be able to fund the loan portfolio more from a core standpoint, and we think that the pressure on that will ease some during the year.

Okay, very well.

And then, a separate question, Jim.

Could you talk about how some of the affiliate presidents are compensated for sort of nonbank business from the financial management side?

Is that something that is being instituted?

Yes, let me get Fred, if he will, to kind of give you the breakout of how we compensate our bank president, what the formula is, and just generally what approach we have taken to that -- (multiple speakers)

Thank you, Jimmy.

Let me start with approach.

We look at the bank CEO as a market leader, not only for the bank that they have direct responsibility for, but for all other financial services.

And we report internally the combination of bank as well as the FMS areas and the mortgage areas in terms of products and revenues and earnings from those within the markets that they lead.

As it relates to incentives, 25% of the available incentive to the bank CEO as an individual is related to these products.

And of course, that cascades down throughout their bank to many other people within the organization.

Okay, so for selling wealth management and related stuff, 25% would be the bogey for them?

That's right.

Allocation, okay, very well.

Todd Hagerman, Fox-Pitt Kelton.

Question for you, Richard, just getting back to your discussion on the retail expansion strategy.

In particular, want to follow up a little bit on the deposit side.

If you could, Richard, reconcile for me, I think you mentioned a deposit figure of about 365 million increase from year end, and if I look at the DDA balances during the quarter, I'm having trouble kind of putting the two together.

And I'm kind of curious what the deposit flows were specifically as it relates to the retail side.

Then perhaps getting to your point about some of your metrics, how are you guys measuring kind of your deposit gathering ability as it relates to some of these different product areas?

Tommy's got some details here, and he's going to help me answer the first part of your question.

And these metrics really are going to be really broken out in several different ways.

In the simplest form, you've heard us say that our objective this year is to grow core deposits as fast as we grow loans overall.

And Fred has pushed part of the incentive plan down to the bank CEO level whereby they are going to be measured and compensated on their ability to grow core deposits as fast as loans.

So that's one aspect of this whole emphasis that we have on deposit growth.

Within retail, we don't have the metrics yet to communicate to the banks or to the outside world.

So we're going to have to buy a little time there.

But we can see that we're having already a ramp-up in activity.

Tommy, can you speak specifically to that and try to reconcile the linked quarter versus the year-over-year?

Yes, I would be glad to.

Richard stated that retail deposits would grow 365 million during the quarter, and that's period end numbers we're talking about.

Total (ph) deposits during that time grew 536 million.

Broker deposits actually grew a little over 300 million.

So what that really means is we had slightly negative growth during the quarter in commercial deposits, which is not unusual at all with the seasonality of period end.

And really, as Richard has stated, this is kind of a beginning, just to begin to stab at some retail measurement metrics and in the future would blend -- offer a much more robust display of hopefully successes on the retail categories.

So, again, it was more of a function of the growth in the brokered CD book as opposed to the everyday transaction balances?

The retail line of $365 million is all the retail categories, not just DDA accounts.

It's money markets, NOWs and retail CDs, so it's not just the DDA accounts.

Okay, and what -- did you have any specific promotions, for example, that may have been out there during the quarter that perhaps now maybe you are scaling back, or, you know, are ongoing in nature that brought that -- some of that money in?

We have had a couple of promotions.

One that comes to mind would be in two of our new markets, that being Savannah and Jacksonville.

We had led in those markets with a premium money market account that is priced at the high range of competition.

And we think that is a valid strategy to generate customer relationships and really to help them to fund on their own their rapid growth in the loan portfolio.

We have had some CD promotions -- a bump-up opportunity that some of our banks provide on a special promotional CD.

We're looking hard in the ALCO area and every promotion we're doing to decide if the benefits truly are there.

I think the premium money market approach is a good one.

Some of these CD products probably need to be altered a bit.

But we think some of the promotions that we've had at the bank level will probably not continue throughout the remainder of the year.

Okay, but look -- taking a step back, and as you mentioned, Richard, in terms of your ALCO discussion, do you guys remain pretty confident that again, your loan growth and the repricing on the asset side, you're going to continue to get the benefit and the pressure on the funding side and some of the promotions, particularly with your Denovo promotions, that it's not necessarily going to eclipse the incremental loan growth in repricing there?

Can you come back?

I heard what you said, but I'm not sure I got the (multiple speakers) crux of the question.

Just given that discussion in terms of some of the promotions that you are offering throughout the bank, the affiliate network, that while there are some targeted marketing promotions being made, that it's still your expectation that over the course of the year, the incremental pricing on the asset side -- you're going to continue to see a lift and that the funding costs are not necessarily going to key into your incremental asset growth.

Yes, it's definitely our expectation that the benefits on the asset repricing are going to outpace what we have to give back on the deposit side.

We think there's been -- we lagged pretty good toward the end of last year at the bank level.

We had a lot of hands-on contact with our bankers, and we were pretty slow to reprice on the pricing side.

There was a little bit of a catch-up in the first quarter that we think will abate somewhat in the future.

Can't guarantee it, but we feel it.

And we also think some of these promotions that we have had, which are not throughout our banking operations, but at targeted -- in targeted specific markets, will be fewer rather than more, looking out (multiple speakers).

But our models indicate that we won't have to give up all of the movement that is taking place off of these artificially low interest rates.

Jason Goldberg, Lehman Brothers.

Lehman Brothers, and good afternoon.

Jimmy, I think you started out the call saying results came in $0.02 above your internal forecast that you noted the margin was below.

Any sense in terms of, well, just what you were thinking, what drove the surprise -- I guess, other than was it totally TSYS or was there other stuff going on?

Well, it was TSYS and strong loan growth and strong growth in net interest income.

I know it probably stuns everybody that our model was $0.02 below what we actually did, when most everybody else's model was a penny or two higher.

But, you know these days we're living in, Jason, we're not sure -- we don't know how to talk about that with you until the quarterly call comes up.

And we got off to a much faster start in the first quarter than we expected.

There is the whole variety of reasons, but TSYS won't maintain 40.1%, or 7%, for the whole year because they have anniversary dates that make it harder and harder to compare against.

But that was our expectation going into the first quarter, and that -- we just, you know, frankly, I don't know that we've ever disclosed what our expectation was on a quarterly basis before or after the fact.

But we just decided that that would be interesting and relevant information for you all to get today.

That's helpful.

I guess given your best guess right out of the box, can you throw out a -- you kind of trimmed the bank only guidance for the next three quarters and patterns, seems to be a lot of questions on the margin.

Can you give us a sense of what the net interest margin was in March or even how it's progressing into April -- margins as a whole, or at least are you seeing signs of -- you're not necessarily having to raise deposit costs, yet deposit growth is continuing?

Well, we don't break it out publicly as far as month by month.

But I think as I've said now to two different questions, I can't guarantee what the margin is going to do.

I wish I could.

But, on the other hand, we have stated -- I stated and Richard has stated -- that we have every reason to believe that the benefit we get from asset repricing is going to be more than enough to offset the continuing competition pressure on the deposit side.

So we expect that trend to be favorable.

I really would be happy to sit down with you or anybody else to try to figure out how to be more definitive than we are able to be, but again, that's the closest we can come to it.

We didn't quite get it in the first quarter.

We feel better about our ability to get it in the second, third and fourth quarter, as we've indicated.

(Operator Instructions).

Sir, there appear to be no further questions in queue.

Do you have any closing comments you would like to finish with?

Yes, I would like to make some closing comments.

In the environment that we're in, to be able to raise the expectations that we have given at TSYS and to raise the expectation that we have given at Synovus is a pretty exciting thing for us.

I don't know how many other financial institutions have raised their expectation as a result of the first quarter's results, but that's a happy position for us to be in.

My closing thoughts are to want to repeat everything we've already said.

And I will save you -- I will spare you that.

But I'm looking around this room at the faces of the people that are the leaders at the highest levels of Synovus and TSYS, and I'm thinking in terms of this happy but sad retirement of Rick Ussery, and I'm really thinking in terms of the tremendous talent that exists on this management team -- the people who are responsible for the banks, responsible for the FMS operations, responsible for the operations of our Company, responsible for the accounting.

I think it should go in bold headlines that we were able to disclose an unqualified opinion with respect to SOX 404, that we were considered to be effective in our controls.

The effort there almost equaled the effort of Y2K several years ago.

The administrative functions, the leadership functions, the communication functions, the leaders sitting around this table just to me represent an incredible wealth of talent and strength for Synovus.

And I don't get the chance as often as I need to and would like to to thank them publicly in forums like this.

So I would like to thank them for their tremendous support and strength that they contribute to this Company.

We are excited about the rest of the year and can't wait to get it under our belt and continue to report our progress to all of you.

As normal, we thank you for your friendships, your continuing interest in us, Synovus and TSYS, and the encouragement that we get from your interest in us.

Thank you very much, and good afternoon.

Thank you, ladies and gentlemen.

This does conclude today's conference call.

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

Thank you for your participation.