Synovus Financial Corp (SNV) 2005 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the fourth quarter earnings 2005 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, Richard Anthony, President and CEO, Tommy Prescott, CFO and Troy Woods, President and COO of TSYS.

Sir, the floor is yours.

Thank you very much.

Good afternoon to each of you.

This is Richard Anthony.

I'm here with my fellow executives and look forward to giving you our thoughts and additional information concerning the final results for last year for Synovus.

I hope you've had a chance to review our press release.

Needless to say, we are extremely proud of our outstanding year.

As you saw, we have reported a 16.5% increase in earnings per share.

We feel that the quality of our earnings is excellent.

There's really no noise in the numbers to speak of.

The results were achieved in a fundamental manner.

The four drivers, I would classify as follows.

We had an expanding margin.

We had good, solid balance sheet growth on both the loan side and the deposit side.

Our credit quality remained excellent and we had exceptional TSYS results.

On the TSYS side, the drivers there included strong growth in their core business.

The Vital acquisition, which took place early in '05, was a nice contributor to the bottom line and they beat expectations in value-added services and revenues generated from that particular source.

So what we have done is divide the presentation today into three different parts.

Tommy Prescott, our CFO, will now go over the financial performance details.

He'll be followed by Troy Woods, the President and COO of TSYS, who will give you a TSYS overview.

Then I'll come back with a report on some of our initiatives and new strategies for the future.

At this time, Tommy Prescott.

Thanks, Richard.

Good afternoon to everyone.

We had an excellent year, both segments of the company, the financial services side and TSYS reported just stellar results for the year.

In fact, in terms of percentage increase in EPS, this was the best year since 1996.

Richard mentioned the key drivers for the year and I'll offer a little color on them, but just first, reminder of the consolidated results for the quarter.

We hit $0.44 a share, which was up 14.9% over last year and diluted earnings per share for the year were $1.64, up 16.5% over year 2004.

I'm going to cover the financial services highlights before turning it over to Troy in a little bit.

The loan story was a very good one for the year, both in terms of growth and quality of the portfolio.

We ended the quarter with 21 billion in loans, up 9.8% from a year ago.

We had a good, strong finish on the fourth quarter with linked quarter annualized growth of 9.3%.

Credit quality remained excellent, was another important driver for the year.

Good, solid finish in all the key credit metrics, led by the NPA ratio at 0.46, which represented a reduction from both last year when it was 0.52 and even last quarter when it was 0.49.

The charge off ratio for the quarter was 0.28 and was 0.29 for the year.

That left the loan loss reserve ratio at 1.35% supported by very positive coverage ratios.

Past due levels were excellent, with total past due loans at [0.4] for the portfolio and the greater than 90 due numbers at 0.07.

We challenged ourself in the year 2005 to do a better job in gathering core deposits and we did well with that.

Our focus on core deposits paid off.

We ended the year at 18.5 billion, up 13.6%.

That's about a $2.2 billion increase in core deposits.

The total deposit number was up 20.8 billion, up almost 12%.

We had declared ourself early in the year that growing core deposits faster than loans would be one of our key corporate goals and we were successful in achieving that goal, as the core deposit rate of 13.6% exceeded the loan growth rate.

Another really important part to the year and a piece that had a real good, strong fourth quarter finish was the expansion of the margin.

As you know, we've had the 13 rate increases since June of '04, with eight of those occurring in year 2005.

The asset sensitivity of our balance sheet has positioned us to benefit from those rate environments and as we did, with the margin improving the 432 in the fourth quarter of 2005, and we started the year at 411, so we had good improvement inside the year.

Early in the year the realities of playing catch-up on the deposit side were apparent to us.

The challenges of pricing and going after deposits aggressively, while the whole competitive environment was out there doing the exact same thing.

We're challenging to the margin, we grew the margin really nothing in the first quarter and we got about 3 basis points in the second and 4 in the third.

And we had a booming 14 basis point increase in the fourth quarter over the third quarter of this year.

The increase was driven, of course, by the 56 basis point average prime rate increase that took our loan yields up 41 basis points during the quarter.

That got us a 36 basis point overall earning asset increase and we have been able to manage that pretty well throughout the year.

But in the prior quarters, we were giving away a lot of that earning asset increase back to our depositors, if you will, in the total funding in terms of just price increases.

This time, we were in a better spot.

The total cost of funds went up 22 basis points, so we were able to show that very, very nice 14 basis point margin increase.

If I recall back at the end of April, we had promised 10 basis points to ourselves and we got 7 of that through the third quarter and we got an additional 14 in the fourth quarter and quite frankly, it came on a little stronger than we anticipated in the fourth quarter but we were delighted to see it.

We attribute it to some softening in the competitive landscape right in our footprint.

As the rates have increased some and a good bit of the money's been exposed to repricing, some of the immediate pressure had burned off some and we were able to keep up with the competition and be just a little more vigilant on the funding pricing side.

But we were really proud to be able to improve the margin this much and think that bodes well for the future.

Non-interest income was more of a challenge in 2005 than we expected.

Non-interest income for the financial services segment grew to 85 million in the fourth quarter, up 5%, up 327 million for the year.

The reported number was 327 million, which was flat compared to the prior year.

Keep in mind in the prior year we had the gain on the sale of our Quincy Bank, 15.5 million.

Excluding that, we would have been up approximately 5%.

The big factor in our non-interest income was the headwind that we, and we believe the rest of the industry, had in the service charge arena, particularly in NSF charges.

Of course service charges overall represent a third of fee income, so it has a pretty dramatic impact on it.

The service charge area really hit us in all three major components of service charges, NSF, declining of account analysis fees, which is purely a function of interest rates and that part is expected and predictable, and then just the competitive pricing pressures that we saw in a very competitive deposit marketplace where free checking accounts are the order of the day.

We did see some strengthening, I guess, in the last couple of quarters, though, in some of these charges with NSF fees actually having three consecutive quarterly increases.

The financial management services revenues were $76 million up 10.8%, led by a real good first year showing in our new Capital Markets unit, primarily dealing with customer-related swap products.

Other highlights in non-interest income for the year included debit charge interchange fees of $15.2 million, up 43%.

Credit card fee-related income was 22 million, which was up almost 15%, and then the mortgage business grew its revenue to almost $29 million, up 9.1%.

On the expense side of the equation, total financial services G&A expenses were 647 million on a reported basis up 4%.

When you exclude the impact of acquisitions and the change in the accounting methodology for loan costs and fees that was implemented in 2004, the fundamental number is about 9.4%.

That increase is primarily driven by expenses associated with higher levels of pay as we've been through some salary structure adjustments, entire incentive compensation that obviously should be reflected in this kind of performance environment that you saw, and then higher levels of professional fees and then other items, such as our retail strategy added to that.

The efficiency ratio continued to improve throughout the year and was 49.2% in the fourth quarter.

Our headcount during the year grew less than 200 people, which was up just under 3%, which is really very modest compared to our revenue and our balance sheet growth rates.

All in all, the financial services segment had a great 2005 and we -- as you have seen in the press release, you saw our guidance today and we expect '06 to be a great year for Synovus. 12 to 14% EPS growth, which represents EPS in the range of $1.84 to $1.87, and that includes the incremental impact of equity-based compensation.

The incremental after-tax expense of options and restricted stock awards in 2006 is estimated to be $17 million, which represents 3.2% of '05 earnings per share.

We assume that the balance sheet will continue to grow in the 10 to 12% range, that we'll continue to have very modest, one or two upticks, in the short-term rate environment, a favorable credit environment and earnings growth at TSYS of 21 to 23%.

And I want to take a minute and do something for you that I think is info you need to have and will probably preempt a question and really to kind of reconcile how we build the guidance.

We've already had a few questions on it during the day and want to just answer it for everybody.

The real question is, with all the moving parts here, multiple segments of the company and the stock option costs, how are the units fundamentally doing and our guidance, I'm going to steer you towards the center point of the 12 to 14% guidance, which obviously is 13%.

To achieve that requires a financial services net income growth of 14.5% before equity-based compensation, a TSYS contribution before equity-based compensation of 25% and that's simply taking the center point of their guidance and adding back the impact of the options.

That brings you to a Synovus consolidated 17.7% growth rate in earnings.

When you factor in the additional shares that occur each and every year for various reasons, primarily because of the new shares associated with equity compensation and also any acquisition kind of shares, then that brings the EPS growth rate down to 16.2%.

Subtract from that the 3.2% for options and that gets you to the 13%.

I just wanted to preempt that question and really try to properly shine the light on the fundamental growth rates of both financial services and TSYS.

I'm going to stop there and turn it over to Troy for the TSYS remarks.

Thank you, Tommy, and good afternoon.

TSYS also had an outstanding quarter and an exceptional year.

Quarter ending our total revenues were up 37% to $420.8 million and we ended the year at a record $1.6 billion, up 35% for the year.

On a quarterly basis for net income, we were up 15.7% at $49.7 million and total earnings for the year at $194.5 million.

And for the year, this gave us an EPS of 29% increase at $0.99 and what really makes this so exceptional for TSYS is this is after we gave guidance for the year at 19 to 22%, raised that guidance at the end of the first quarter to 22 to 25%.

At the end of the second quarter, raised it to 25 to 28% and we obviously came in at 1 point higher than that at 29% increase over 2004.

And this is the 21st year out of our 22nd year as a public company to produce double-digit earnings growth.

And as Richard indicated, the real key drivers of that exceptional performance in 2005 were four or five.

One, clearly the J.P.

Morgan Chase conversion and the volumes and activities that they brought to TSYS were a significant contributor, the Vital Processing acquisition of March 1st not only hit the targets that we anticipated for them at acquisition, but they exceeded those targets.

We continue to grow and penetrate with our value-added products, which now make up over 14% of the revenue base of TSYS.

Our international contribution in growth, which now represents over 18% of the revenue of TSYS and a very robust project revenue contribution and really the entire TSYS team is to be thanked for the hard work and dedicated work that they did in 2005 to achieve these results.

Quickly, on the fourth quarter highlights, we announced a 34% equity stake in China UnionPay Data in Shanghai, China, which is the data processing subsidiary of China UnionPay, which is the China national payments scheme.

We resigned the Allied Irish Bank in Dublin, Ireland.

We also resigned Metavante Bank to a long-term contract.

They have been a customer of ours since 1978.

We also announced the signing of Toronto Dominion Bank in Toronto, Canada, which gives us now three of the five largest card issuing entities in Canada.

And once this conversion is complete, TSYS will have a 43% market share for Visa and MasterCard-branded cards in that country.

And we also announced Target Private Label that will be converting to TSYS in 2006 and combined with the Visa portfolio that TSYS already processes for, we will be processing over 33 million accounts for Target.

No doubt in the fourth quarter, we had a tough announcement on December the 21st with the announcement that Bank of America had planned to move their consumer processing off of TSYS and take it in-house and consolidate it into the MBNA portfolio that they acquired earlier in 2005.

No doubt that coming off a contract extension in March of 2005 that took that contract out to 2014, you can certainly imagine what a tough loss that is to get that word just nine months later.

But be that as it may, they are happy with TSYS as far as our work.

They are continuing to be a valued customer of TSYS.

The commercial card business and small business of Bank of America will stay at TSYS.

The MBNA business, commercial card business will stay at TSYS, as well as all of the Bank of America merchant processing business will also stay at Vital Processing Services.

Moving on quickly to 2006, we still see significant momentum on our side.

We will take this quarter our CUP Data equity interest from 34% to 45%.

We have the largest pipeline of accounts to be converted to TSYS in the history of the company sitting at 75 million accounts.

The Vital pipeline and product expansion is robust.

We also have restructured our TSYS Managed Services Group, which is about 1300 seats that provide call center chargeback processing, retrieval processing, customer service from seven contact centers in three countries to a strategic business unit.

And we are confident that we can generate over $50 million in new revenue out of this new SVU in the next couple of years.

We believe 2006 will be a good year given the challenges that we face, but certainly the decision and timing of the Bank of America conversion will have an impact.

Provided that B of A leaves in October of 2006, which is the date that they have told us they plan to de-convert, TSYS expects total revenue to increase in the 5 to 7% range, which includes a $69 million termination fee over two months of lost processing fees from Bank of America, over seven months of lost processing fees for the Sears business de-converting in May, 2006, and the acceleration of approximately $7 million in contract acquisition costs and unamortized conversion expense.

This would result in an EPS growth of 21 to 23%, as Tommy mentioned, producing a range of $1.20 to $1.22 EPS and we should end the year in the neighborhood of 395 to 405 million accounts on file.

As we also mentioned this morning in the TSYS earnings call, baked into these 2006 projections, as a part of these assumptions, we are deferring all revenue and costs associated with the Cap One contract.

Since this contract has multiple components and deliverables, there are some outstanding questions around the timing of revenue and expense recognition to those contracts.

We're still very optimistic, encouraged and committed to our business and look forward to 2006 and beyond.

And Richard, I'll turn it back over to you.

Troy, thank you, and Tommy, thank you for those reports and each of those two individuals will be available in a few minutes when we open the floor for our questions.

I want to continue on with a few thoughts about our initiatives and strategies.

We continue to work to improve our company and its potential in many different respects.

As I go back to the beginning of last year, I can mention, as you will recall, the two most important initiatives in 2005.

One was our retail initiative.

The other is what we call our quality and efficiency initiative.

I want to give you the final report for the year on those two activities.

In retail, the implementation is complete.

It was successful.

I'm excited about what we accomplished.

We had trained 2200 of our team members in a much more effective manner.

We upgraded physically 280 of our branches.

In fact, basically all of our branches.

Our new technology for the deposit and sales system is now in place.

We spent approximately $4.7 million that was expensed on our income statement and then we had some 5.2 million in capital expenditures that were associated with the technology -- rather, with the retail initiative.

Even though we felt like the year would be a transition year from a performance standpoint, we gained some real traction in the field with performance.

As Tommy talked about core deposits, I can say with pride that our retail core deposits increased 13.8% during the year.

Our services per household continued to improve and increase.

In fact, all but four of our banks increased services per household.

We took that measure from 3.04 to 3.10 during the year.

And our home equity outstandings increased over 17%.

Our debit card fee income was up 19.5%.

The metrics that we will use in '06 will be similar.

We might have one different measure for you to follow as we report back during the course of the year, but we do expect double-digit deposit growth.

We expect continued expansion in our services per household in every bank and at least of the overall magnitude that we reported for last year.

Our home equities are the most important loan product and our target is to increase outstandings there over 15%.

And a new measure that we're tracking more closely will have to do with net new checking accounts, our anchor account.

We expect a 5% growth there after increasing the units in that measure 3% last year.

We're working toward other measures.

We just don't yet have everything in place to accurately report this to the public, but we will soon have available sales per banker per day to measure sales progress and we are going to track closed teller referrals per day.

So we think that will give us a better way of evaluating short-term performance in retail.

The quality and efficiency initiative was the second of the two important initiatives.

When this is all complete and I will remind you that there are four functional areas, deposit operations, loan operations, finance and human resources, eventually later this year we will have eliminated 200 jobs spread throughout our company, not any large number in any one group, not any layoff involved, but we will have streamlined the company.

We are probably about halfway there now.

There won't be significant cost savings in '06 because of timing, because of certain implementation costs and really some severance associated with those whose jobs are effected.

More importantly, this initiative positions us to create scale as we grow.

As we add banks, we can manage the company under this more regionalized, or even centralized in some cases, approach than was possible when we had functions spread throughout all of the banks.

So we think we already have new and better processes in place.

There is more value-added work that can now be done by our professionals, the accounting and finance staff, the human resources team, as some of the more routine administrative tasks are handled elsewhere.

Our management team has been working since June in or on a strategic planning process.

We have a firm, cornerstone consulting that has been guiding us through this process.

This is our plan, but we have found them to be a good partner in working with us.

Our management team, which would include over 20 people, has literally looked under every rock for growth and profit opportunities.

There are several conclusions that we have reached.

One is that collectively, in all of our specialty product areas in our lines of business, for example financial management services, the mortgage banking business, the card services area, leasing and asset-based lending, along with Capital Markets, all represent great potential for improvement.

I don't think any single one of these business lines or business units will make a huge difference, but collectively, as we reach our potential, as we demand and expect more from a performance standpoint, we think that our company will end up with greater diversity in our revenues and in our sources of profitability.

So we are placing a greater accountability in place.

There will be increased collaboration between these specialty product units and their leaders with our bankers, with our CEOs in each of our markets and we will have better visibility within the company and even outside the company from a management reporting standpoint, so that we can hold ourselves accountable for demonstrating progress in these specialized activities.

Another conclusion is that continued emphasis on market growth, on expanding into new and attractive markets, is a priority for our company.

We do it really in two ways, one, through acquisitions.

We will continue to follow a plan that directs us to community banks in these better southeastern urban markets.

But also we will have a more proactive and better planned de novo expansion program in the future.

Our branching activities will ramp up.

Just for directional purposes, I can say that our plan calls for 100 new branches over the next five years.

Now, assumed within that 100 number would be 25 that we would expect to come in through the acquisition of banks.

Another 75 would be roughly 15 new branches per year for each of the five years in more attractive markets.

Compare that to the recent years of six, seven, perhaps eight new branches per year.

So we will be pushing from a leadership standpoint, working with our regional CEO's to identify opportunities for expansion in existing or contiguous markets and we think at least a doubling of activity can be expected as we expand our market presence.

The last conclusion that I'll mention has to do with what we think can enable us through greater emphasis and a better plan to become the premier commercial bank in the southeast.

This statement comes from the earlier conclusion we reached that we wanted to diversify more, both within our lending activities as well as in our fee-based product areas.

Our driver, as many of you know, has been more in commercial real estate than anything else.

This is a core competency that we have.

We'll retain it.

But we feel that working with middle market companies, privately-owned companies, small businesses is another area where we excel.

Our model, our community banking model has a certain responsiveness capability that is appealing to business owners of that type.

Our senior executive stability and participation in each of our local markets is attractive to these business owners and our community banking approach is something that should allow us to grow our C&I business.

C&I business involves more than lending.

It has many relationship opportunities, corporate cash management, capital markets, leasing, asset-based lending, international services.

We have all of those capabilities as a nearly $30 billion regional bank would be expected to have.

We just want to capitalize to a greater degree.

We want to educate our bankers to a higher level.

We want to recruit and reward in a more aggressive manner.

So expect us to put, as we did last year with retail, much energy and much emphasis on this notion that we can be a premier commercial bank.

We will be, later on in the year, providing information on retail and commercial profitability throughout the company.

We have not conducted line of business reporting in the past, so we will begin to measure our performance in that respect.

I learned last year when we developed a retail plan that was put together by bankers who are close to the customer, how valuable that can be from a communications standpoint and really just from a developmental standpoint.

So the same approach will be taken over the next several months in the commercial banking arena.

We feel good about the strategic plan.

We spent much of the day sharing this with our board of directors.

There still is plenty of work to be done.

It will not be a document that is placed on the shelf but it will be a document that we will use to place action steps in the hands of those people who need to execute this plan.

That concludes my update.

I feel that now is a good time to pause and open the floor for questions and we would welcome those from the group.

Thank you.

Ladies and gentlemen, the floor is now open for questions. [OPERATOR INSTRUCTIONS] First question is coming from Nancy Bush.

Please state your affiliation then pose your question.

Hi, NAB Research.

How are you guys this evening?

Good.

How are you, Nancy?

I'm fine, thank you.

Two questions, first for Tommy.

Tommy, on the margin, how do you feel about the maintenance of the margin next year or this year, excuse me, particularly if the Fed stops raising rates sort of mid-year or so?

Are you going to be able to hang on to the gains in margin that you've made?

Nancy, we've got some risk in the margin.

We know there's some -- off that 432 great strong finish, we know there may be some latent repricing on deposit accounts.

So we have some risk in it with no additional help from the Fed.

We certainly didn't factor in any downticks from the Fed, which some believe could happen.

But we need a little wiggle room off of the current rate but we also think we have a chance to expand it slightly with a little bit of help from the rate environment.

Okay.

So it sounds like sort of if there's any damage to it, it's not going to be material?

We don't think so.

Second -- Troy, for you, just I missed Phil's comments this morning on the conference call.

I've got to go back and listen to it.

I did pick up a couple of them.

There was something about that you were going to stop construction on a data center.

Is that correct?

Yeah, Nancy, as we had indicated before we had planned to begin in 2006 a western data center.

And we did narrow that site down to Chandler, Arizona.

And really with the announcement three weeks ago with Bank of American, we just sat -- remember what you said about a year and a half ago, that timing is everything?

Do you remember telling us that?

I've always lived by that.

And so we sat down and said does it really make sense in 2006 to spend that kind of cash and take on that kind of activity in the face of what we're facing in '06 with the loss of about 136 million accounts.

So we've just delayed it and see what happens later on.

How far along was that?

Was it still just in the planning stages or hadn't actually ground been broken or buildings been bought or any of that sort of thing?

Oh, no.

Where we were going to construct one, you were correct when you said that in the beginning and we had just gotten to the point, Nancy, of real estate people and plans and that type of thing.

We have broken no ground and that kind of thing, signed no contract to do so.

So there won't be sort of major cancellation fees or -- ?

We had some fees that we took in the fourth quarter of '05.

Okay, great.

Thank you very much.

Next question is coming from Robert Rutschow.

Please state your affiliation then pose your question.

Prudential Securities.

Just wondering if you might be able to put some numbers around the commercial loan opportunity and what sort of growth you would expect there.

Mark Holladay is here and I think he probably has the best grasp of that.

Would you share your thoughts, Mark?

Yes.

Basically what the strategies that were put in place which were really several things.

One is, as Richard had mentioned, is expanding the sales of the specialty products throughout our footprint and the second is balancing out our talent.

We're going to be looking at our markets where opportunities are greatest, bringing in more C&I talent.

Our plan is to basically ramp the growth up over a five-year period.

We think we can move from, if you exclude the owner occupied group, which has been very strong and is [INAUDIBLE] but it is real estate.

We think we can move from mid-single digits, if you average our growth over the last several years, to low double-digits in the early years and then we think we can get [INAUDIBLE] 13 to 16% range in the latter years.

Okay and is a lot of the opportunity just internal-- cross sell to existing clients or you're looking to take share?

Both in our-- just an example in our asset-based lending, we just got that up and running in December, we've already committed to $30 million worth of credit activity.

That's $30 million in loan activity we wouldn't have had a year ago.

In our leasing we're expanding and moving from -- we're in large ticket items.

We're moving to [INAUDIBLE] and vendor leasing there.

Another thing we're doing is moving to a credit scoring vehicle for our retail branches that at last, we think, to boost productivity and volume from there.

But in addition, if you really look at our markets, if you look at where we've gone to, Jacksonville, if you look at Nashville, if you look at Savannah and Tampa and especially Atlanta, we barely, barely touched the surface of any C&I activity.

We've got tremendous opportunity.

A lot of it will be, we think, building relationships, moving, certainly taking customers from other competitors.

But also being in those growth markets we think there's substantial opportunity for us and that's where we're going to be focusing our resources and efforts.

I'll say this about C&I and commercial real estate.

Commercial real estate has been so strong in our footprint, in our markets, that it's good that we have been able to capitalize, but it -- a situation like that can create a path of least resistance in that the transactional opportunities are there and perhaps we haven't focused quite as much as we might on the full relationship, middle market companies that are out there in each of these cities where we compete for business.

So I think a shift in priority and a different emphasis, along with these tools that we now have, which are more comprehensive than ever before, will give us a real chance to excel in the C&I business.

Okay, and just one last question for Phil.

The CUP Data deal, do you have any numbers around that in terms of what you're talking about for revenues and what the ramp might be in 2007?

No.

We have not provided that guidance on CUP Data.

Can you ball park it at all or give us an idea of the size to the rest -- ?

What we've said, it's accretive in '06 in a slight way, but we just decided we're not going to at this point in time provide any numbers.

Our partner supports that, so that's where we are.

Okay.

Thank you.

Thank you.

Next question is coming from Christopher Marinac.

Please state your affiliation and pose your question.

Hi, thanks.

Vega Partners in Atlanta.

Richard, I was recently in Jacksonville, was very impressed by your opportunity set that you have there and I was curious on as you build out the Atlanta coast the next several years, would you rather build versus buy or any thoughts on either?

Chris, we'll probably do a little of both.

I think I would rather buy.

We've been very pleased with our de novo entries.

We have three of those under way.

You mentioned Jacksonville and we are off to a great start there, have a good team, I guess 150 million or so in assets, basically in loan outstandings there and similar pattern in Savannah, which we entered about the same time as Jacksonville.

And then most recently in Chattanooga and actually there's a new entry into Augusta, Georgia, which is just starting and looks promising.

But we always look, usually look first for community bank acquisitions when we can find a team that's compatible with ours, like we were able to do in Naples just a few months ago and up in Atlanta with the Riverside Group.

So I think our de novo activity is more than an experiment.

I think it's proving to be a good one, but we don't want to drop out of the acquisition business because we feel like we do it well and it has served us well for a long time.

Great and are there any geographical constraints?

Would it be in Florida or really anywhere else in your footprint?

Geographical constraints, you mean big markets that we would not be interested in?

Either that or just pushing all the way to south Florida, just as an example?

Well, yeah, that's a good point.

I don't see us going all the way down to Miami.

First of all, on the West Coast, if you look between Naples and the Sarasota area up the coast, there's some pockets there where branching de novo entries might make sense rather than acquisitions.

We want to build out that last frontier on the West Coast and we've done a little.

Nothing south of Jacksonville on the East Coast.

So I would say over the next two or three years that would be the best potential for acquisition.

We haven't done anything much on the interior.

We've stayed in the Coastal markets.

Wouldn't rule those out, but the Coastal markets in Florida seem a little bit better to us at this point in time.

And then in other states, you've probably -- I know you've heard us say that we would be interested in a little bit more in Tennessee, maybe around Nashville, maybe over in the Knoxville area.

I can see us entering over the next two or three years North Carolina.

We're looking more actively there for opportunities.

We're in most of the places in Georgia we want to be in, but Atlanta is still the most significant, most important market for us.

We will continue to invest there one way or the other.

In other parts of Georgia, there might be a few opportunities here and there, but not a whole lot.

Then last, I guess, about Atlanta.

Is there anything unique on the integration of Riverside into Bank of North Georgia?

Anything you need to do different there than you haven't had to do in past deals?

I tell you, it's a great thing when you have a partner like Kessel Stelling and his team that is excited about joining forces and is not resistant at all to the integration into an existing franchise.

Of course Kessel is going to be a top leader for us in Atlanta, so just the approach, the attitude, the mentality of that team has made this, the prospects for this integration to go smooth and we are real impressed and excited about that.

So, I don't foresee any real challenges or difficulties.

It's on schedule over the next couple of months.

We should be there.

Super, Richard.

Thanks for your time.

Thank you, Chris.

Your next question's coming from Tony Davis.

Please announce your affiliation, then pose your question.

Yes, Ryan Beck.

Gentlemen -- Tommy, you were talking about some easing in deposit competition or implying that.

I just wondered if you or Mark or Richard, perhaps, can talk about the loan and the pricing and deposit pricing environment today versus, say, the time of the last conference call in October.

Fred, Fred Greene is here.

Yes.

Fred was making notes on something, but the question is competition on the loan side and the deposit side and how we feel and see that.

Do you have any observations to make there?

Competition today is just as strong as it has been in the past and in the past we've had good, solid growth rates.

We tend to focus our attention on the clients of the larger banks, those banks that have larger market share and have been very successful in converting them to us.

At the same time, the smaller banks that are looking to pick off our customers aren't as well positioned with their product alignment as we have.

So we've been very successful in maintaining and keeping our own customers.

Again, the-- I'm not going to single out any particular competitor, but from across the board, the growth from the larger competitors is creating the greatest opportunity for us.

And, Mark, I would like for you maybe to spend a second on some of your key markets on the asset side, asset quality side, Atlanta, Florida.

What are you seeing there in terms of inventory levels, construction rates, home prices, general comments on credit quality.

Well, credit quality is superb and I would say in our Florida markets especially, if you look down in the Valparaiso, Fort Wallen Beach, Pensacola, those areas, we just see pristine quality.

Atlanta, the credit quality is good.

The absorption rates in the markets have really not changed dramatically.

We're still seeing houses turning in about nine months in Atlanta, less than nine.

It's in the eights.

Lot inventory turnover still running in the 18 month average range.

We have-- I have had some discussions with some of our senior lenders and CEO's that says there's a little softening in the high end housing market, but a lot of our new homes are focused on middle market homes and below.

But overall we think housing is going to hold up.

It is going to slow some.

We think that will naturally slow some of our CRE growth in the residential sector, but we still feel like we got a really good year ahead of us.

Our commercial customers have been building some very significant networks and [INAUDIBLE] over the last eight or ten years, our customers are positioned well.

They are not doing anything foolish.

They don't think they want to lose all the -- all of what they have gained, so they are working with the banks and consulting with them.

And the C&I market has not been stellar.

We were expecting some broad expansion there, but we do think there's some good opportunities out there.

The strategic plan that we talked about putting in place, selling these products and services that we have, and the yield curve, we do think that may create some desire for some of our C&I customers who want to expand equipment and plant and add some working capital.

So, overall I feel very comfortable.

I think loan growth, again, will be in the low double-digits and, again, if we can diversify a little bit, we can probably add to that.

Thanks.

Next question's coming from Jefferson Harralson.

Please state your affiliation then pose your question.

Hi, KBW.

I was going to ask you guys, since you had the dual branding in place for a little while now, have you noticed any changes, positively or negatively, in customer's reactions or the individual subsidiaries' reactions to being dual branded ?

Jefferson, right now the real branding still is that bank brand in each market.

Now, we are moving through a complete assessment of our branding position with the help of an outside firm and undoubtedly, we will begin to strengthen the awareness of our corporate brand, of our Synovus brand in the near future.

We do that very modestly today.

We think that the validation that has come from their research supports this dual approach, but it needs to be rationalized as we started to do last year through our signage and other means.

And we'll reach some conclusions on branding specifics over the next couple of months.

But the real driver in each market for us is that community bank brand.

We're starting to say that community banking powerfully connected really applies to us because of the capabilities that we, as a big company, bring into the local community bank delivery that we have.

So the work to be done will be more on the Synovus side, but the leading brand in each market will continue to be that Synovus community bank name.

All right and just one follow-up on the FMS segment.

It's under new leadership now, do you guys plan on laying out an aggressive plan for growth in that area later this year?

Work is going on very actively.

Drew Klepchick is here.

He's our executive who runs FMS and I'm going to let him tackle your question.

Initially we're spending most of our time trying to improve the margins in the businesses and in 2006 we'll be working on how we best plan to move the growth of these various lines.

The one principal acquisition, though, in 2005 has been a big driver in the fourth quarter and looks very promising for 2006, is our expansion to the Capital Markets area.

The Capital Markets Group that largely came over from the SouthTrust Group in Birmingham has begun integrating with our commercial bankers and given our commercial banking franchise, really should provide us a lot of growth in 2000 -- that will be the primary growth engine in 2006.

We're working through the trust and the other investment management pieces currently and we hope to have some strategies around greater growth as 2006 continues on.

All right.

If I can just ask Troy one quick question.

You guys were speaking on your call earlier about the potential renegotiation of some of your software and I think some hardware contracts.

How feasible is that to generate significant savings from your own contracts?

Well, there's no doubt that we've got to sit down with our significant vendors in lieu of what's going on with two of the largest losses that we've talked about.

It's always nice to have luck on your side.

We do have some significant large hardware contract leases, really, that were up around the middle of the year.

So the timing is very favorable from a TSYS perspective to help us work out of primarily the large hardware and software that goes with it.

So we're certainly working on that now.

We feel confident we can make some great strides in that direction in '06, particularly on full-year basis it will be '07.

As we mentioned this morning, on Friday you have to do everything you're doing for both of these big customers and Monday morning, you're not doing it.

So it's not really something you can ramp down to.

It's a cliff but it is something we're very much involved in and feel confident we'll get it all worked out.

All right.

That's helpful.

Thanks, guys.

Thank you.

Your next question is coming from Heather Wolf.

Please state your affiliation, then pose your question.

Hi, Merrill Lynch.

Good evening.

Hi, Heather.

I've got a couple of questions for Tommy, actually.

You guys have been talking a lot about great initiatives, including de novos and the C&I buildout.

Can you help us think about your efficiency ratio in 2006 and where that will be trending?

Yes, we've-- Heather, we would plan to continue to have very robust net interest income growth and not as robust, at least as robust as net interest income growth on the fee income side, but have some improvement there and we're really trying to manage these initiatives just very smartly.

We're not out just wantonly adding locations or any of that type of thing.

We're trying to do it very carefully and thoughtfully in the time.

Some of this was under way during year 2005 and we added less than 200 people while the balance sheet of the Company grew in double-digits.

We added about -- just under 3% additional people.

So we think that in managing all these initiatives , we just got to balance out the short-term and long-term and we saw the improvement in the efficiency ratio this year.

And while we're not specifically guiding that, the fact that the revenue numbers will outgrow the expense numbers a little bit should help us keep on that road.

Okay.

And then I was just going through your average balance sheet trying to get a little bit more detail on exactly what was happening with your margin.

It looks like you've gotten a few basis points on a bunch of different line items, but I noticed a couple where -- a couple of line items that helped you more than others.

One of them was the substantial uptick in commercial loans relative to what you had experienced in previous quarters where we've had similar rate increases.

Can you talk a little bit about why that might be?

Is it new businesses or is pricing competition not as bad this quarter?

Is it seasonal?

What would be some of the drivers to that?

Heather, the biggest single factor in the commercial loan category really relates to fixed rate lending.

We had some loans that rolled and were exposed to new pricing on a fixed rate basis and that was the biggest single factor that caused the commercial loan category to stand out a little bit.

So the-- I'm sorry.

They are fixed rate rolling into variable or they are just resetting ?

No, fixed rate loans repricing at a higher level.

Got it.

Okay.

Then the one other line item that I noticed was a little bit of a shift in your short-term versus long-term debt.

Looks like that gave you a couple of basis points.

Can you talk about that?

Yes, in the fourth quarter we had a paydown of just over 7%, piece of long-term debt.

It happened mid December.

It wasn't a dramatic impact during the quarter.

But also in the long-term debt category through the propensity to move more to variable rate debt and through our swaps book, we took a little bit of the edge off of the increase that might have been there otherwise on long-term debt.

So is there-- what's the rationale behind the repositioning?

Just trying to think a little bit down the road about when rates start moving downward, taking a little bit of asset sensitivity off the table.

Very modestly.

I mean we're not-- we're still asset sensitive and just slowly moving that down.

Got it.

Thanks very much.

Thank you.

Next we have a follow-up question from Nancy Bush.

Go ahead, please.

Actually, I got a couple of them.

Richard, I know you're not going to be able to answer this, but I feel compelled to ask it anyway.

Okay.

The equity stake in TSYS that you have right now, I mean it certainly looks like with what's going on at TSYS that they need to be able to do acquisitions.

They just need to have basically more currency.

Can you just sort of give the philosophical view from the Synovus side about your stake in TSYS at this point and how that may evolve?

Sure.

Well, we -- TSYS has been a differentiator for us for a long time and we think can certainly continue to be that, although there are more questions about the strategic positioning of TSYS than in the past because of these consolidating dynamics that are occurring in credit card issuance business.

Now, this likely could lead to a ramp-up in their appetite for acquisitions and it certainly could drive us, sooner rather than later, to a spinoff of TSYS.

But as I've said before and others have said as well, we're not going to spin off TSYS just to spin it off to the shareholders.

It would be done for a reason.

There would be a plan.

There would be, if not a transformational acquisition, at least something significant right there on the horizon to accompany that event.

So there is speculation that given recent events that this could lead to a spinoff, but I think it would only be in concert with a clear-cut strategy.

So I think the strategy comes first.

The ownership structure would come second.

Troy, would you comment on that as well?

I totally agree and as we've talked before, Nancy, we bring this subject up at least every 12 to 18 months and zero in on it and look at all the pros and the cons and what Richard has said and what Jim Blanchard has said before is that the ownership structure will not be a hindrance.

If and when that time may come to go do something different, and I think that's where we are today.

So can I infer from that that it would be sort of an event-driven kind of thing, that you would sign the deal first and then change the structure?

Yes.

Probably would find the deal first or at least have a more targeted strategy.

I mean right now we have a strategy.

The strategy involves diversification, it involves emphasis on the international marketplace.

The acquisitions we've been able to do up until now have basically been for cash for the most part, affordable because TSYS generates a lot of cash.

So I do think probably the strategic planning process is going to be accelerated a bit at TSYS over the coming months and either there will be an event or there will be this more targeted strategy that would then cause us to look at the ownership structure.

Okay, great.

Secondly, a question for Tommy.

Mortgage banking has not been a huge ingredient for you, but it's been material to earnings and sort of where do you see the mortgage banking income going in '06?

Are you going to be able to sustain what your've got right now?

Nancy, the environment, the right environment will be whatever it is and we'll certainly just have to keep our eye on that, but strategically we think we're -- we've got some good things happening in the mortgage banking area.

We've recently taken our mortgage unit that was embedded in Bank of North Georgia and merged it with our Synovus mortgage company and we think that creates energy and synergies and momentum, even -- whatever the rate environment might deal us.

Of course, we lost money in the mortgage company during 2004.

We turned that around and became profitable.

Actually the profitability mostly occurred in the second half of this year and so we feel like we're enter 2006 in good strategic footing with the mortgage company and hope that it can be a bigger contributor.

Great, thank you.

Once again, if there are any remaining questions or comments, please press the numbers one, four on your touch-tone phone.

If there will be any final questions or comments, please indicate so now by pressing one, four.

There appear to be no further questions in queue.

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

I just want to thank everybody for joining us on this call.

We appreciate the attention you have given us.

We appreciate your questions.

I want to just one last time brag on our team here for the great performance from last year.

We are extremely proud of the results that we were able to post.

We're optimistic about the future.

We have some good momentum in the margin and in loan growth and in our planning work, as we begin the year.

So stay tuned and we'll be in touch.

Thank you, ladies and gentlemen.

This does conclude today's conference call.

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

Thank you for your participation.