Synovus Financial Corp (SNV) 2005 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to your Synovus second quarter earnings conference call.

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

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

Sir, the floor is yours.

Thank you very much.

Good afternoon, everybody.

We appreciate you joining us for our call, and it's a great day for us.

We are really pleased with our quarter.

And we're also pleased with the culmination of our succession planning that occurred today at our Board meeting.

I wanted to report to you that the Board elected Richard Anthony as our Chief Executive Officer and President this morning, and also elected me as the Chairman of the Board.

And as you have read from our previous announcement in June of -- June 14th, I believe it was, it is my intention to serve as an Executive Chairman until October 19th of 2006.

We have had as one of our highest priorities an orderly succession transition.

I can't tell you how much I appreciate the wonderful response from all of you in connection with our June 14th announcement.

It's been relatively nonevent, kind of a yawner, exactly what we had anticipated and hoped for.

And of course, the main event here is the just exceptional person that is becoming the new CEO for the next cycle here at Synovus.

And I'm real happy at this point in time in the call to turn the microphone over to Richard, and he'll preside throughout this meeting, his first as our CEO.

And I congratulate him.

I think that the company is in magnificent hands, and I wish all of you could have been around our headquarters today to see the enthusiasm and exuberance and excitement about this culmination that occurred today.

So thank you for your friendship, all the relationships that we've had, and I'll look forward to seeing you again in the future.

But at this point in time, I want to turn the microphone over to Richard.

Jimmy, thank you.

I want to add my welcome to each one of you on the call.

We appreciate your interest in Synovus and the way you follow our company.

We did have a Board meeting here today, and I told the Board and Jimmy, as I was introduced to them as the new CEO, that I could not have asked for better support and really a better, more organized series of succession moves that have led to this day.

I really have been helped by a lot of people along the way.

And the leadership team is here in the room this afternoon, and I think we all are appreciative that Jimmy is making this transition at a time when we can start off with great news about the quarter.

We're extremely pleased with the results that we have to communicate with you here in 2005 for the second quarter of the year.

So let me get right into the financial performance.

We thought the quarter was excellent.

It was driven by very good performance in financial services and outstanding results at TSYS.

Net income for the quarter was 128.5 million, which is up 22.2%, which translates into $0.41 per share.

And the per share results are up 19.9%.

If you look at the first half of the year, you notice that net income was 245.2 million, up 17.1%.

And then on a per-share basis, we were up 14.7%.

We're almost 27 billion in assets.

Our return on assets for the quarter was just shy of 2% -- 1.98 and 1.92% ROA for the year so far.

Of course, we break our company down into two basic components -- financial services for the quarter comprised 68% of the bottom line.

And TSYS contributed 32%.

I'd like to talk just about the financial services segment.

That component of net income was 87.5 million for the quarter, which is up 15% over the second quarter of last year.

We're up for the first half of the year 8.5%, but you have to keep in mind still that the Quincy Bank charter sale which took place last year, when that is taken out, we were up 15.8%.

The drivers continue to be basically good loan growth and good credit quality, and we'll get to those features of our performance as well.

Loans ended the quarter at 20.5 billion.

That's up on a year-over-year basis 13.3%.

In the quarter, our loans grew 423 million which, if you annualize that on a linked-quarter basis, was an 8.5% growth.

This is down a little from our quarterly growth in recent quarters; but basically, by design, we have tried to tweak our loan portfolio with a little bit stronger underwriting, a little bit better pricing in spots where we feel that the risk justifies that.

And, by design, we're trying to plan for a low double digit growth number for the year as a whole.

We had good and improving results on the deposit side.

If you look at total deposits, we were up 15% over the second quarter of last year.

If you take out brokered CDs, our core deposits by our definition, which only takes our brokered CDs, are up 10.8% over the second quarter of last year.

And then, again, we do look at it on a linked quarter basis.

Core deposit growth there 15% linked quarter.

So that represents an acceleration for us.

We have a stated internal corporate goal to grow core deposits faster than loans.

We have not yet achieved that; but if you look at the trends, you can see the gap has narrowed significantly.

And in fact, the linked quarter results, I guess, indicate we did achieve it, because the 15% compares favorably with the 8.5% annualized linked quarterly growth in loans.

Credit quality continued to move in the right direction, and really the indicators are within good boundaries for us.

The nonperforming asset ratio was down slightly from last quarter at 51 basis points compared to 52 basis points.

Well -- yes.

The 52 basis points would be for the first quarter of this year.

And then the charge-off -- the net charge-off ratio was 37 basis points.

That's up some from the first quarter.

We're at 30 basis points for the first half of the year.

The factor there to consider involved two isolated C&I loans that we charged off in the quarter, so we still expect to end the year around 30 basis points in this indicator.

Our allowance for loan losses was unchanged.

We're still at 136.

Our coverage ratio was 349% of nonperforming loans and 267% of nonperforming assets, both good coverages.

Past dues are at excellent levels. 90-day number is less than one tenth of 1% at 0.08, and total past dues are at 0.59% of loans.

I know we're all interested in the margin; and of course, our net interest income line item is a key driver for us.

That particular item grew at 12.4%, almost $26 million over the second quarter of last year.

And in fact, net interest income was up $10.3 million over the first quarter of this year.

So we had good strength there.

The growth that we had last year, particularly toward the end of the year, has given us the momentum that we're enjoying so far in the first half of 2005.

The margin itself expanded 4 basis points to 4.15%.

We continue to believe that we'll see some expansion beyond that during the last half of the year.

And the percentage of variable rate loans in our portfolio is about what it has been for the last year and a half, two years -- 65% of the total loan portfolio.

Now, I'd like to shift to fee income.

Our non-interest income in financial services was up 1.6%.

For the year, we're actually down 8.6%; but included in last year's fee income would be the Quincy gain.

So if you take that out, we're flat year-over-year.

Let me explain the dynamics behind that particular analysis.

Our service charges on deposit accounts were down in the quarter 9.9%.

A couple of factors there.

One is the impact of higher short-term rates on account analysis fees.

That has driven down the cash fee income.

And then, NSF trends industry wide have been lower.

We did see some improvement there.

On a linked quarter basis, service charges were up 3.9% from the first quarter.

Another contributor to fee income has to do with mortgage banking revenue.

We had an increase there of 28.7% in mortgage banking revenue.

And then on our debit and credit card product areas, the fee income, or basically the interchange income, increased by 25.1%, more heavily weighted to debit because we're getting better penetration rates with our debit cards with our deposit customers.

Brokerage revenue increased 12.2%.

Fiduciary and asset management fees increased 6.1%.

Now, that reminds me of the FMS line of business area in our company.

It continues to be of high strategic importance for us.

As I believe most of you know, we're in the middle of a search for a new leader for our FMS team.

We have interviewed, I guess, about seven candidates.

We're closing in on a couple as top choices.

We'll soon be making a decision, I think, but we're spending a lot of time and devoting a lot of attention to this particular leadership position in our company.

On G&A expenses, the reported increase in the second quarter was 2.7%.

That's a little misleading, because you must consider the impact of acquisitions and also last year's change in methodology related to loan origination costs, so that the fundamental G&A increase was approximately 8.5% for the first half of the year.

Factors contributing to the increases would include normal merit increase and basically salary adjustments that occur as a normal course in the company.

We've got our health insurance costs that are certainly a factor.

We have enhanced some of our incentive compensation programs.

And because of our performance, we have been able to accrue higher levels for certain forms of incentive compensation and profit sharing in the company.

So those are factors.

We've made a substantial investment in technology through our S-Link platform.

We're now amortizing that after the developmental period ended, so that is in these numbers.

And then, with our retail strategy, which involves certainly refurbishment and enhancements of our physical facilities, along with training and the incentive compensation that I mentioned earlier, have resulted in taking some of our cost up, and that all would be attributable to this retail emphasis.

And then we did have some increase in professional fees during the quarter.

If you compare G&A in the second quarter to the first quarter of the year, we're flat.

I want to mention head count.

We watch that very closely.

If you look back to the same period 12 months ago, our head count in financial services is only up 38 people.

And that really can be matched almost entirely to our capital markets team that we have added, and we're very proud to have that capability in our company.

The capital markets group joined us in recent months.

Most of those professionals came from SouthTrust as a result of their merger with Wachovia.

Shifting to TSYS, the TSYS Board met yesterday.

You have seen their financial results publicized.

It was a tremendous quarter with a lot of good news.

The earnings for the quarter at TSYS were 50.6 million, $0.26 per share, up 41.1%.

For the year, TSYS's bottom line is up 41.3% at 96.8 million and $0.49 per share.

TSYS has today approximately 388 million card holder accounts on file.

There is, incidentally, a conversion taking place this weekend of the JPMorgan Chase portfolio that will take the TSYS accounts up to the $420 million range.

If you look over the last year, the accounts on file have increased about 100 million.

Two-thirds of that has been new business, and really one-third of the growth has come organically.

Revenue before reimbursables was up 41.7% for the quarter and 33.4% for the year.

But let me talk about revenue and expenses in a different context here for TSYS.

If you exclude the impact of Vital, as we have bought in that 50% share we did not own here earlier this year -- but if you just take Vital out, and if you take TSYS prepaid out and you look at the core revenue growth that remains, for the year, that growth is 12%.

If you break down expenses for the same period, they were up 6%.

So the operating leverage with those sets of numbers is tremendous and has led to this 40% plus increase in the bottom line.

Other items to mention during the quarter would have to do with the Capital One news.

We reached an agreement in principle, working toward a definitive agreement with them to provide processing services for Cap One.

I think you're aware of that.

We did sign and converted the Fifth Third consumer portfolio during the quarter.

We renewed a contract with the Navy Federal Credit Union.

And all of this has resulted in TSYS raising its guidance -- its earnings guidance -- which previously was in a range of 22 to 25% for the year, to 25 to 28%.

Concluding thoughts on TSYS would be just to mention the MBNA News.

We are optimistic there, but certainly discussions have not begun yet with Bank of America over their acquisition of MBNA and the opportunity we might have to process that additional business, but we'll look forward to those conversations in coming weeks.

And then, of course, I mentioned earlier, but remind you again of the upcoming conversion of the Chase business over the next several days.

The guidance that we are now providing in Synovus as a result of continued strength that we see in our financial services business and as a result of the TSYS performance and news moves us to a range of 14 to 17%.

That would be our guidance for the full year in Synovus consolidated.

I want to say this about our guidance, and that is that I would ask you to focus on the middle of that range.

Right now, we believe that we are headed toward, on a most likely basis, a number that falls in the middle of the range; not at the upper end, and certainly not necessarily at the lower end, but right there in the middle.

We are optimistic and would urge you to think of the most likely outcome in that manner.

As I wrap up my thoughts about the company, I do want to mention two activities.

I've already said something about retail, but just a quick update as we continue to implement that particular initiative.

We, over the next three weeks, will be converting the first 80 branches in 7 of our banks over to basically a new merchandising system involving digital displays, customer assist stations, improvement in the customer flow, leading to an improved customer experience in those locations.

We have assessed the quality of all of our 282 different facilities, and we have plans to make enhancements in each of those.

But the first 80 will be tackled here in the near future.

Signage is being addressed.

We have now more consistent signage.

We, of course, believe deeply in our dual branding approach, which supports the community banking delivery that we offer in each of our markets.

But we're now developing more consistent signage, both from a Synovus standpoint and from a local community bank standpoint.

Our ATMs, for example, now will all have the Synovus brand attached to them.

But we're making these changes throughout the course of this year.

Every bank now has a retail head that works with the corporate area as needed.

Training has begun to touch over 2000 team members on the retail side.

We just completed a small business campaign which is a part of our retail initiative.

It lasted 60 days, and we were pleased to have attracted 3,910 new accounts in this small business initiative, so we are deeming that to be a success.

The leadership team that I mentioned is working on a three-year business plan that will be more strategic than financial.

We don't have the results and the goals that will be established as a result of that yet, but this fall, we'll be completing this work and this exercise.

It is exciting and energizing to all of us.

We do see plenty of opportunities to build on the strengths that we have in this company.

If there are gaps between current performance and potential, we're identifying those.

We will make sure that current initiatives are properly implemented with adequate accountability at all levels.

But this business planning work that we're doing is coming, we think, at a very opportune time, given the management changes that are occurring now, and we're all excited about the prospects.

So that concludes the remarks that I wanted to make to you.

I'll stop now, and we'll just open the floor for questions.

Thank you.

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

If you have a question or comment, please press the numbers 1 followed by 4 on your touchtone phone.

Pressing 1-4 a second time will remove you from the queue should your question be answered.

Lastly, we do ask while posing your question that you please pick up your handset for optimum sound quality.

Please hold while we poll for questions.

Thank you, and our first question is coming from Tony Davis.

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

With Ryan Beck.

Richard, congratulations again on taking the position at Synovus, and good luck in that role.

Thank you, Tony.

You -- I wondered if you could give us some sense here.

Your core deposit growth last quarter looked like it was, as you said, 15%, but there has been some pretty rapid growth in brokered and jumbo CDs.

And is the strategy there to use that to pay down short-term borrowings?

Well, one thing that I might mention that I didn't in the remarks is we did have a debt issue that was consummated last month, and you've just reminded me of that.

Tommy is here, and Tommy -- we used, of course, some of the debt issue to pay down short term borrowings.

But really the jumbo CDs basically have been in recent years used to cover the difference between loan growth and core deposit growth.

We -- I think, Tommy, our short-term borrowings are at a low level right now, more because of the debt issue than anything else.

And deposits.

And the good deposit growth.

Right.

Okay.

One other thing.

I was wondering about S-Link.

You mentioned that.

What is the time schedule to have the deposit module and all of the account data loaded on that system, Richard?

Well, the -- think of S-Link in really three different ways.

I guess essentially the deposit and the sales systems are now totally up and running.

And we're not running any sort of parallel system at all.

But when -- we're, by the way, extremely pleased with the sales functionality.

That has streamlined a cumbersome process that we had used in recent years to track sales results, and our team members are delighted.

In addition, they've got prompting capabilities that they didn't have before on most likely products that a given customer will need.

They've got analytical capabilities that allow them to compare our products to our competition.

And so the deposit piece and the sales piece are totally up and running, and we're happy with them.

The loan system is still in a developmental phase.

It's more complicated.

There are a lot more moving parts there.

We've got plenty of reason to believe that over the next year, we will be finished with that.

But that admittedly has been more difficult than the other.

And then we're doing some work on our Internet banking product that needs still some improvement.

And S1 is our partner in this particular endeavor.

We have not yet completed the work necessary to satisfy the requirements of a multibank holding company as we are with our multiple charters, but we fully expect to have our Internet enhancements completed in the near future.

One final question was in the area of asset-based lending.

And that's something you've been looking at.

Where is that at this point?

Yes, one thing -- one option that we considered was buying an asset-based lender; and we talked with a couple, but decided, after a good bit of analysis, to build this capability internally.

We have a handful of our people primarily in the Atlanta bank, the bank in north Georgia, that have been doing some asset-based lending that are going to expand what they're doing, and we'll invest in some software, and we're going to build this on our own.

I'm looking at Mark.

Mark, when do you think we'll be truly operational there?

Yes, our plan actually will be finalized Friday.

We'll lay all of that out and we expect to actually begin producing under that process in the fourth quarter.

Thank you.

Thank you, Tony.

And our next question is coming from Kevin Fitzsimmons.

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

Sandler O'Neill.

Good afternoon, and congratulations, both Richard and Jim.

Thank you, Kevin.

Thanks.

Just wondering if you can give a little more color on the loan growth statement, Richard.

You mentioned how, you know, part of it was by design, and you've talked in the past about kind of pulling back in certain sections like land acquisition.

Is that still how you would characterize it?

Could you give any more color in terms of geography, where certain markets you're pulling back from?

And then just in terms of the mix of loan growth, you mentioned that maybe a low double kind of pace.

This quarter, for instance, we saw an annualized linked quarter of like a low single digit in commercial real estate, a low double digit -- or rather a high single digit in commercial real estate, a low double digit in consumer and a mid-single digit piece in C&I.

Is that the kind of pace you would expect going forward?

That's it.

Thank you, Kevin.

Let me make two statements, and then I'll ask Mark to fill in with the details.

First of all, the 8.5%, of course, is -- represents a slowing, but we have surveyed all of the bigger banks, and the pipelines are a little stronger than we at first thought they might be given this slight decline.

So we do think we have still a healthy flow of opportunities that will be coming forward here over the next several months.

And then the other thing -- and Mark can support this with more specifics -- is that, for the first time in a while, the concentration percentage in risk -- the commercial real estate areas that we think represent slightly more risk than others -- did not go up.

We remained stable in that calculation.

I'll let Mark give you the numbers.

So we feel like the leaning that we have been doing is moving the numbers in the right direction; but Mark, would you share some details with the group?

Yes, I'll try that.

It's really -- the growth is a function of about three things.

One is, you know, we have set some concentration limits at our bank levels, trying to ensure that we don't get overbalanced in our real estate portfolio.

The second issue is, we've tightened our underwriting in some segments of our portfolio.

We talked about some of those earlier -- land loans are one, and then the hotel sector is another that we tightened on.

And then there is a third fundamental out there, and that's this flat yield curve.

And we've been taking some of our customers to the permanent market through our securitization process.

We closed about $60 million worth of transactions this last quarter in that securitization area.

And the truth is, it's the right thing for the customers.

I mean, with the flat yield curve, they can get some long-term fixed rates.

And -- so if you really look at our portfolio, what we're seeing is our CRE growth was about 8%.

As Richard said, looking out ahead, we're expecting that to be in the 10% kind of level going forward.

Our consumer growth was 13.7%.

We had good growth in really three segments there -- our HELOC segment, our consumer real estate, and in our credit card area.

Credit card area was very strong this quarter.

And we would attribute that partially to focus, partially our S1 sales system, and some ability to authorize certain transactions while the customer's right there in front of us on credit cards, things like that.

And if you look at the decline, it's -- in the segments that we had some decline in, in the real estate segment, they occurred in hotel and land, in multi-family and in office, and those are the areas that we would expect that type of transaction to slow down some in.

So really, we're kind of right on target with what we expected, what we're trying to do.

Obviously, we'll tweak things a little bit, but I think we can hit our targets right where we want to hit them.

Great.

Thank you very much.

Thank you.

And our next question is coming from Nancy Bush.

Ma'am, please pose your question, state your affiliation.

Nancy Bush, NAB Research.

Good afternoon.

Hey, Nancy.

Congratulations, Richard.

You've got to work on that accent.

Not south Georgia enough.

Do I sound like I'm from New Jersey?

No.

But I don't sound like I'm from Atlanta either.

Yes, just a couple questions here.

On the retail initiative, could you remind us what incremental costs are associated with that and how those costs have come in thus far, and whether we should sort of expect any lumpiness in coming quarters as you, you know, do more to the branch system, et cetera?

I think, for the quarter, probably only about $1 million.

Again, S-Link is -- S-Link would be $1 million of the G&A increase, and that basically is a retail related expense.

Another million in the quarter came from training, sales incentives, advertising, depreciation, and so forth.

So really only 2 million in the quarter.

Now, for the full year, we expect about $4.5 million dollars to be the incremental impact of our retail initiative.

So that's the way the numbers shake out currently.

So do we sort of stay at this sort of 1 to 2 range, you know, for the rest of the year?

Do you kind of see that -- you know, I mean, is there any possibility of a ramp up as we go into 2006 and you get sort of further into this thing?

Yes.

There's going to be some more.

I think, as we annualize these numbers -- and I'm going from memory.

Isn't it about $7 million range?

So if we were on a full year run rate basis, I mean, it would be about $7 million, when you add training, S-Link, amortization, depreciation on the improvements and so forth.

Now, the capital expenditure piece, I'm not giving you that, because I'm just giving you the portion that would be depreciated.

Okay.

Secondly, is Phil in the room by any chance?

Phil is not, but Troy is.

If I could just ask -- and I'm sorry I missed your conference call this morning.

There was another conflict.

Is there any total at this point for if you get Capital One, the number of accounts you'll be picking up versus the number of accounts that you'll be losing with Sears?

Where do you come out in sort of the account race with your competitors if all this happens?

Hi, Nancy.

Hi.

As Richard said, we are converting about 32 million accounts this weekend, so that would put us at about 420 million accounts as we come to work Monday morning.

And if you point out on the curve and, say, these Cap One negotiations are successful and we convert that circa 50 million accounts, you can do the math.

We said we will probably end the year around 430 million, so you would add the 50 to that and then add your typical organic growth.

On the Sears side, you've got a large number of accounts pushing 80 million, but less than a third of those are active.

So I believe in FDC’s announcement two or three days ago, they said they currently have about 450 million accounts and of course, they're going to lose 32 million of those this weekend, so (multiple speakers)

I love it.

It's an account race.

Okay.

So you guys would be the -- you'd be the ultimate winners probably.

All right.

Thanks very much.

Thanks, Nancy.

Thank you.

Our next question is coming from Todd Hagerman.

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

Good afternoon, everybody.

Todd Hagerman, Fox-Pitt.

Mark, I was wondering if you could just give a little bit more color on the inflow, outflow in terms of the nonperformers in the quarter.

Specifically, I noticed that uptick in terms of the residential development.

Yes, I'll do that.

We actually had 26 credits over $1 million at last quarter.

That dropped to 21 credits over $1 million for this quarter.

So we were actually down 6 credits.

We did have a residential development loan.

I guess you see that.

It's roughly $4 million.

It's up in our Covington bank.

It's a customer who, at the time we originated a loan, had very good liquidity and good financial strength.

He went out beyond what we were doing for him and got into some additional projects and exhausted his liquidity.

The project that we have got is right at being finished.

It is going to require about $200,000 more to finish it.

We filed for foreclosure, because we had very high confidence that we could turn this credit right away.

We had some buyers.

And the customer filed Chapter 11 to prevent us from doing that, but we still feel like we'll be out of that credit this year.

That was the only area in terms of -- in our real estate that we -- we also did have an Athens credit, smaller credit that -- in that same category, but both those credits we feel comfortable with in terms of no loss, and we'll be able to turn those credits over.

In terms of -- I think our non-performing assets are turning pretty rapidly.

We are very optimistic about what we will see next quarter, and look for good things ahead of us.

Okay, that's helpful.

Any update in terms of the Florida market?

And just kind of anything you'd like to add to kind of the remarks you had made at the Investor Day with respect to Florida to kind of what you're seeing now, or any residual impact from the storm?

The storm really was not very bad in terms of what we've seen in prior storms.

If you look at the -- [indiscernible] and looked at the beach, really the only major impact in the Destin area, Fort Walton, those things, is beach erosion.

There's very low property damage at all.

And in the Pensacola area, there was some minor damage, but we walked away real happy with what we saw, and don't really expect too much in terms of problems.

Obviously the -- we have slowed down our construction activity on the coast, and I think we are seeing prices -- if you look at some of the areas, prices are beginning to level off a little bit, which may be a good thing for those markets.

We're not seeing quite the same price appreciation with cost and developers down in the Panama City area and the Destin area.

Most of the developers that I've talked to feel like that the market has topped out and probably won't see any retreat in prices, but you won't see the kind of crazy appreciation that we've seen down there in the past.

So we'll be watching that very carefully.

That's helpful.

Thanks for the comments.

Once again, if you should have a question or comment, please press numbers 1 followed by 4 on your touch-tone telephone.

Our next question is coming from Heather Wolf.

Ma'am, please state your affiliation and pose your question.

Hi.

Merrill Lynch.

Good afternoon.

First of all, in the non-interest-bearing deposit line, can you talk about what's driven the growth, both year-over-year and quarter–over-quarter, and whether or not you think that growth is sustainable or those volumes are sustainable?

Heather, thanks for your question.

Let me just say that as we push forward in the retail initiative, the checking account is our anchor account, and every office in this company is emphasizing that as the core of each retail relationship.

On the commercial side, we have strengthened there our cash -- corporate cash management capabilities.

We have a corporate director there who works with our regional heads, and we think that the emphasis in this aspect of corporate services has been driving, I guess, a lot of our non-interest bearing growth there.

And then finally we have, over the last year, begun to offer on the retail side a free checking product.

So we've had -- we've got three different factors, I guess, that drive the growth in that category that you're referring to.

Tommy, can you think of any other point to make there?

Heather, this is Tommy.

We're in some good markets.

We're aggressively marketing the -- you know, as Richard said, the DDA accounts so important to the relationship, and that's where a lot of the targeted effort is.

And we are -- we do have a lot of free checking products out there, and we -- but we're getting good growth on both the retail and the commercial side.

And we're getting it across the geography of our -- the footprint of our company pretty consistently.

Okay.

It just seems like it was a lot of dollars pretty quickly.

You guys are comfortable that it's core initiatives that are driving that?

Yes.

Typically –- you know, keep in mind, too, when you're looking at period end balance sheets on deposits, you end up having some short-term funds that might be in there -- there's always some of that, particularly on the DDA line.

There was some of that in June 30th, there was some of that a year ago.

But that's typically a factor there -- probably a little bit more this time than a year ago.

Okay, great.

And then one question on the charge-offs, and I apologize if you addressed this in your comments.

I'm juggling conference calls this afternoon.

But can you give us some more color on the uptick in the charge-off?

Yes.

We had two C&I credits that really were anomalies based upon recent performance, and I think, Mark, those totaled about $9 million.

So those two credits -- now, would there be any other factors in that number, Mark?

Well, I would just kind of want to say that the large charge-off we had -- we had one customer that had a $6.5 million charge-off.

But I've only seen this a couple times in my career, but we did have an inaccurate audit.

The loan that we made was, I think, based on some sound financial principles.

Our collateral, our secondary source of collateral, was equipment and receivables, and certainly not the strongest collateral that we take, but you know, the origination of the loan did actually make sense.

But we then found out that the auditors came back in and retracted their audit and are updating those.

We do think we have recourse.

This was a reputable auditing firm, and the company we were doing business with was a well known company in our region.

So kind of an unusual thing that does happen -- again, once in a decade or something.

But, you know, we wouldn't expect to see future charge-off ratios like you saw this quarter for the next several quarters.

Okay.

And you said these are C&I, not commercial real estate?

That's correct.

That's right.

Okay.

All right.

Thank you very much.

Thank you, Heather.

Thank you.

Our next question is coming from Jefferson Harralson.

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

Good afternoon.

KBW.

My question is about what you guys can say about MBNA.

You guys have brought in every card that MBNA has ever bought.

What do you know about MBNA and their in-house system?

What do you know about how this decision is going to be made and if there's any politics involved?

And is there any functionality that TS2 might be able to offer that you think that MBNA would like?

Jefferson, I'm looking over at Troy, and he's going to speak to your question.

But from my vantage point, we're certainly optimistic, and we have some reasons to be encouraged.

But there's still a lot of work to be done.

I'm going to let Troy talk about that.

Yes.

There's probably not a lot to add to that, Jefferson.

You asked the comment what we know about MBNA.

We are close to them.

We know them well.

We have certainly visited with them for a long time, and even recently over the past year or two and have had a lot of dialogue about how TSYS and TS2 can help them.

We really haven't had any real dialogue with MBNA and Bank of America since the June 31st announcement, other than the typical, you know, "good luck with it and congratulations".

So I think really our position is wait and see.

We're certainly optimistic that it would be a good use of TSYS.

As you made an excellent comment that, historically, without exception, B of A has relatively quickly brought in all credit card accounts that they have acquired in the past, you know, onto TSYS platform for efficiency and consolidation purposes.

So you know, we think over the coming months, perhaps it will become clearer.

And when you guys were pitching MBNA, is the total pitch -- was the total pitch to MBNA more about flexibility and we're windows based and we can help you change -- or I guess change products or change speeds quicker, or is it more that we can help you do things that you could not do before?

And I don't know if you follow the difference of that question.

I think the short answer would be yes, yes, yes.

All of the above.

All right.

That's very helpful.

Thanks a lot.

Thanks, Jefferson.

Thank you.

Our next question is coming from Christopher Marinac.

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

Hi, thanks.

FIG Partners in Atlanta.

Richard, I wanted to ask you about the sort of slight decline in borrowings this quarter.

Is that a trend or an anomaly?

Tommy -- we had the debt issue as one factor, and we have had good core deposit growth and a little bit lower loan growth, so I think we probably want it to be headed in this direction.

And will your wholesale -- use of wholesale funds in the future be less as well?

That is our objective.

You might have heard us speak to this in the past, but we certainly feel like we have got good capacity to take on wholesale funding, and we view that as a proper funding source.

But if you look at the last four years and the trends, we felt like we had moved further in that direction, I guess, quicker than we would have liked.

So we want to slow that down.

And I mentioned our internal goal of growing core deposits as fast as loans.

And that whole objective is directed toward reducing our reliance -- or slowing down our reliance on wholesale funding.

So we're very determined to do that, and we think we're gaining some ground, particularly in the most recent quarter.

And is it fair to expect that perhaps the margin has a little bit more upside as a result of that structural --?

It should, certainly, over time.

That's correct.

Okay.

Great.

And we do think the margin has upside for the remainder of the year.

We feel confident about that.

Great.

Thanks, Richard.

Thank you.

Thank you, our next question is coming from John Pandtle.

Please state your affiliation and pose your question.

Raymond James, good afternoon.

Hey, John.

Hello.

I apologize if this was touched on earlier, but historically, you've kind of had this 30% bogey in term also of contribution from total system services; and obviously, the growth picture there has brightened pretty significantly the past few quarters.

You know, as their earnings contribution increases, does that affect your acquisition appetite on the bank side at all, or are those independent decisions?

It might a little.

I've personally talked about the comfortable feeling we have with that 30-70 mix and the fact that we have liked that better than when it might have dipped down to 20-80 some years ago.

On the other hand, I think we all agree that if the right opportunity is there from a bank acquisition standpoint, we're not going to let any sort of 30% become a policy limit that constrains us.

So we're open to acquisition opportunities and possibilities, and we understand that a good viable expansion plan is an important ingredient in our future health and performance as a company.

So we're going to keep looking for expansion opportunities, and I don't think -- probably the fact that we're up to 32% from TSYS for the quarter might even make us feel freer about this approach.

But our main constraint on acquisitions recently has just been the pricing environment and just the right fit, because we'll always be disciplined in that regard.

So I think the answer to your question is probably a yes.

Okay.

Great.

Thank you.

Once again, if there should be any further questions or comments, please press the numbers 1 followed by 4 on your touch-tone telephones.

We have a follow-up coming from Heather Wolf.

Hi, again.

Just a quick question on your thoughts for the margin for the remainder of the year.

Do you think the expansion is more likely to come from the leverage in non-interest-bearing deposits, or from a widening spread between your loan and deposit yields?

Tommy?

Heather, this is Tommy.

The -- we do believe that we can grow the margin some.

We would love to have a little help from the Fed as they continue to tighten a little bit.

But we do believe it will really come from just not so much the BDA free money side, but just from the widening expansion of growing the loan yields a little bit faster than the overall cost of funds.

Okay, just to follow-up, it seems like you're still having a little bit of trouble growing your lower cost deposits at reasonable rates and, you know, holding your more expensive deposits flat.

Do you expect pricing pressure to abate, or do you expect the core deposit volumes to increase more quickly?

I mean, it's -- on the deposit side, it's a war out there.

We described in the first quarter that the war was so tough that all we could do was actually just kind of break even on our margin.

We didn't make any headway.

We were hoping that some of that was overcoming some of the lag in pricing that was out there in the marketplace.

What we saw in the first -- in the second quarter was just a little bit of wiggle room there.

And we were able to eke out the 4 basis points.

And it's a very competitive environment.

Folks are growing loans and everybody's chasing the same deposit dollar, and we don't necessarily expect the competition to lessen any, but we are hopeful, as the rates expand, there may become just a little more room to operate in in getting this margin back to a more appropriate level.

We've been saying that the competition has been coming more from the community banks on the deposit side and maybe, in some cases, more from the regionals on the loan side.

But I get the sense that here recently the regionals are stepping up, too, on the deposit side.

So I agree with Tommy.

It's -- the competition is pretty strong out there for funding.

And you guys are still comfortable that you can get to the total 10 basis points of improvement from first quarter levels by year end?

We are.

We were encouraged.

We said at the end of the first quarter that we thought we could gain the 10, and we captured 4 basis points in this second quarter.

Yes, we do think we can achieve that by the end of the year.

Okay.

Thank you.

Thank you.

Once again, if you should have a question or comment, please press the numbers 1 followed by 4 on your touchtone telephones.

Gentlemen, I'm showing no further questions at this time.

Did you have any closing remarks?

I want to thank, again, each of you for participating in the call and listening to our story.

We continue to believe that we have got the same types of momentum that we described earlier as we began this year.

We're optimistic about asset quality, and really all of the key drivers that could make this a very successful year.

We think we're on the way, and we appreciate your interest in our company.

Thank you, gentlemen.

Ladies and gentlemen, that does conclude today's conference call.

You may disconnect your phone lines at this time, and enjoy your evening.