Synovus Financial Corp (SNV) 2006 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Synovus sponsored fourth quarter 2006 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, Mr. Richard Anthony.

Sir, the floor is yours.

Thank you very much.

And thanks, to each of you, for joining us on this occasion to present our year-end numbers and the quarterly results for Synovus.

We have concluded an outstanding year.

We are very pleased and happy.

In fact, we have exceeded our expectations.

You might remember that we began the year with guidance for our growth and earnings per share in the 12 to 14% range, and you have seen our numbers today indicating full-year earnings per share growth of 16%, return on assets of 2.07.

I will say that a lot of people in our Company deserve a lot of credit for the outstanding results, and I will remind those of you in the investment community that we always expect to perform at the top of our industry, and I really believe that the results that we posted for the year will again place us in the top handful of companies in the regional bank group, in terms of earnings growth and returns.

The format today that we will follow is consistent with the format that we have used over the last couple of years.

I am going to be followed by our CFO, Tommy Prescott, who will give you a detailed report on all financial results, including both the income statement and the balance sheet.

Phil Tomlinson, our TSYS CEO is with us as well, and he will follow Tommy with a TSYS report.

And then I will come back with some concluding comments that I will have to make about the overall results, and then we will open the floor for questions and answers.

I do want to say this at the outset, before Phil speaks, that I know there will continue to be interest in our work regarding the possibility of a TSYS spin.

We continue with that work.

There is no change to report to you at this time, and certainly you can expect when the time is right to hear from us on that, but we will not have any new information today concerning the ownership structure for TSYS.

So, again, thanks for being with us.

We will now move into our CFO's report.

Tommy Prescott.

Thank you, Richard, and good afternoon to all.

I want to remind you that we will be making forward-looking statements that are subject to risks and uncertainties, and factors that could cause our results to differ materially from those forward-looking statements are set forth in our public documents filed with the SEC.

With that, we had an excellent quarter that topped off an excellent year.

As Richard mentioned, we continue to have great momentum, really in both segments of the Company, the financial services side and the TSYS side of the Company.

Just a few consolidated highlights, and then I will focus on the financial services side of the Company before I turn it over to Phil to hear about the TSYS.

For the quarter, we reported $175.5 million in earnings, up 27.9% over the same quarter a year ago.

Earnings per share of $0.54, up 22.9% over the same quarter a year ago.

For the year, we are reporting $616.9 million, up 19.5%, while diluted earnings per share was $1.90, up 16% compared to year 2005.

Keep in mind that as you compare all the results of consolidated numbers and the financial services and TSYS, that the incremental impact of the stock-based compensation this year represented on a consolidated basis, $0.044 per share that was expensed in '06 and not in the '05 base, and that represented 2.7% reduction in our year-over-year EPS, which really just means it was factored in as you think about fundamental performance.

There is a similar percentage dependent on which segment you are looking at that you would add back to financial services and TSYS to get back to apples and apples, in terms of the equity comp.

2006 was an excellent year for Synovus, the two drivers for the year were the great growth that we had both by the balance sheet and loans and deposits.

Credit quality continued at a very excellent level.

We had year-over-year margin expansion which really helped drive the income statement and then the TSYS results finished off a very good year for us.

The fourth quarter represented a strong finish for '06, with continued growth and momentum.

Loan story is a very important story, as you look at 2006.

Our ability to generate high-quality loans is a long standing strength of Synovus, and was a great source of strength for us in year 2006.

We ended up growing loans in-line with our early expectation that was a part of our '06 guidance to grow in the 10 to 12% range.

Reported loan growth was 15.2% versus 12/31/05, but of course that includes the two acquisitions that were completed in '06, and excluding those we had an 11.4% increase in loans.

I think it is important to note that loan growth is beginning to reflect the results of our commercial strategy as C&I loans grew 11.5% for the year, really the same as the fundamental growth rate.

We finished the year with slightly lower loan growth.

The fourth quarter last quarter growth rate was 7.6%.

That really was in-line with the way we thought things would happen in the fourth quarter, and we did have slower demand.

We continue to be very prudent and a little tighter on the underwriting, and then also you have some fourth quarter seasonality and a higher level of payoffs that occurred during the quarter.

Credit quality was another great source of strength for 2006.

The credit quality ratios remained very strong as we close the year with 50 basis point NPA ratio. 26 basis point net charge-off ratios, past dues greater than 90 days at 0.14.

Past dues greater than 30 days at 0.62.

All at really good levels.

Net charge-off ratio for the quarter was a little bit higher 0.39, and that was driven primarily by the charge-off of two C&I credits.

The allowance for loan losses finished the year at 1.28% of loans, and the decrease that has occurred in the loan loss reserve over the prior year and from the prior quarter was driven by charge-offs of loans that had specific allocations within the loan loss reserve, the impaired loans that were charged off, and then also overall improvement in the weighted average risk grades of the loan portfolio.

While we continue to be very selective and watchful on the credit front, our overall credit outlook remains very good.

Core deposits grew nicely in 2006.

A strong year for growth, year-over-year growth rate of 15%, 11.1% excluding acquisitions.

Fourth quarter represented a strong finish with linked quarter growth rate of 9.9% on an annualized basis.

During the quarter, we continued to experience solid growth in CDs with an annualized growth rate of 13.6%.

Competitive pricing pressures on the CDs remains, still remains very firm, but did moderate some during the quarter.

We saw a good growth in retail deposits, 18.5% for the year, 14.1% retail excluding acquisitions.

Retail loan growth was led by the growth in time deposits and money market accounts.

Commercial deposits grew 12.9% for the year, or 9.4% excluding acquisitions.

Money market and NOW accounts led the commercial categories for growth.

The margin was a key factor in our year-over-year performance as the margin was 430 for all of '06, compared to 419 for year 2005.

The margin expansion helped drive interest, that interest income up almost 17%.

That coupled with the great balance sheet growth.

You will recall that the modest margin expansion that we saw in the first half of '06 was replaced by margin compression, just like the industry saw, beginning in the third quarter and continuing into the fourth quarter.

The fourth quarter margin was 420, compared to 430 in the third quarter, with a further inversion of the yield curve this continuing margin compression is coming from higher than expected funding costs, customer preference for fixed rate loans, and pressure on investment yields.

If you recall at the end of the third quarter, we told you that we felt like that margin compression that would occur in the fourth quarter would not exceed the margin compression that occurred in the third quarter of 9 basis points.

And we were just outside the edge of that with a 10 basis point decline, and I saw the pressure on the asset yields was one of the greatest factors there, complicated by the steep incursion of the short end of the curve.

Non-interest interest income grew 14.8% for the quarter, to 9.8% over prior year.

Bank card fees which includes both debit and credit card fees are up 14.1% for the year.

Service charges on deposit accounts are for the year up 2.2%, and when you look, kind of look inside the covers of service charge, the category is driven by NSFs, which represents about two-thirds of the category, and NSFs are up 8.2%, while the other two categories are down.

The regular service charges, general service charges, which represents about 20% of the total are down almost $2 million, 7.8% for the year in this very competitive free or low cost checking environment.

The other component, of course, is the analysis fees which represents 13% of the total, and those fees are down $1.6 million, or 9.9%.

We are encouraged, I guess, by the connection to the retail strategy and the success there as we look at the growth in the bank card fee revenue, and even the growth in our accounts that will ultimately help us in this service charge area.

We also saw improving contributions from our financial management services group.

The FMS related revenues are up $8.3 million, or 11.3% for the year.

The biggest drivers there are the very successful capital markets offering that we now have within our FMS area, primarily matchbook customer slots.

In addition, fourth quarter results reflect a $3.8 million after-tax valuation gain from an investment inside our Total Technology Ventures operation.

G&A expenses were up 18.2% on a reported basis over 2005, excluding acquisitions of stock-based compensation, G&A expenses were up 13.4%.

Employment expenses are the biggest driver in the year-over-year expense growth.

Excluding acquisitions, we added 352 fee members and also increased production in performance-based incentive comps that we associated with the kind of results that you see in front of you there for 2006.

The majority of the head count growth was in front line positions to support branch expansion, as we added 17 new branches during 2006.

I am excluding acquisitions.

During the quarter G&A expenses grew at a higher rate than normal.

Really stuck out a little bit in the quarter, and certainly higher than recent trends.

The largest increase in G&A in the quarter was Other non-interest expense category, and it is driven by higher levels of professional fees and third-party process and servicing fees.

We expect that the expenses will return to more historical levels from a run rate standpoint in the future periods.

You have seen the guidance in our release, we expect that the financial services net income will grow about 10%, approximately 10% over 2006, and that earnings per share will be in the $1.96 to $1.98 range.

The general assumptions that are behind that are that we anticipate an environment where the long-term interest rates are stable to modestly lower, the economy remains favorable.

TSYS will perform within its range of guidance, and also we believe that the balance sheet growth outlook, both loans and deposits should be in the 10% range.

The charge-offs in the same approximate range as this year, and that applies in the 26 basis point range, and then the same for the margin where we ended the year in the 420 range.

So those are the basic assumptions for the '07 guidance, and I'm going to stop there and turn it over to Phil Tomlinson for TSYS remarks.

Thanks, Tommy.

We had a, what I thought was a very successful earnings call this morning at 8:30, and had a lot of good questions, and I hope you have had a chance to see our press release that we issued yesterday afternoon.

We believe that we have just finished one of the more remarkable, and in many ways one of the more difficult years in the history of our Company.

If you will think back to last year about this time, I think I made the comment that I felt like the captain of that cruise ship that kind of tilted about 30 degrees, because we had just received the bad news from Bank of America, that they were going to be leaving and going in-house, and we were trying to deal with that.

And as you know, we had two major departures this year, and we were trying to figure out how to increase our revenues and reduce our expenses that would allow us to continue to grow.

I am absolutely convinced that we made a lot of really great high quality progress, and we are closing the chapter on 2006, and looking ahead into 2007 and beyond, and believe it is very bright.

I think our team has really gotten a lot better and demonstrated a lot of impressive discipline and good old-fashioned hard work in achieving our goals for 2006.

In addition to really having to understand our business better and deal with expenses, we really executed some very complex conversions into TS2, and some very large conversions.

And we did those conversions virtually flawlessly, and had no disruption to any of our clients, or to the industry in general.

We added a total of 91.2 million new accounts, with nine new clients in 2006.

We resigned 14 current clients, and renegotiated those contracts to a good ending.

And we closed out 2006 with a total of 416 million cardholder accounts at year end, which really surpassed our expectations in large part, it didn't kind of, it did compensate for some of the departures that we experienced over the year.

As an example, our processing volumes during the peak holiday spending period increased about approximately 13% in North America, and 20% in Europe.

And if you think about, you know, we added Cap One about the same time that Bank of America left, but we are also excited about the Toronto Dominion and Banco Popular, just to name a few.

So we had a really good year-end.

I will talk a little bit about our financials, and I know my banker friends will probably pass out when I say I want to talk a little bit about a non-GAAP basis too.

But I think you have to, you have to look at us a little bit that way going into 2007.

But on a GAAP basis, for the fourth quarter, our earnings per share increased 75.8% to $0.44 a share.

Our total revenues increased 19.8%, to 503, or really $504 million and for the year, our 2006 earnings per share increased 28.3% to $1.26 per share.

Total revenues increased 11.5% to [$1.0787 billion].

Now those results are GAAP results, and included in that is the $69 million early termination fee that we were paid, which had been anticipated since the news that we received in late '05.

I think it's very important to understand that our financial performance, what we think it will be on a go-forward basis, when you take that $69 million and just set it aside for a minute, and if you disregard that termination fee, our net income increased 11% in 2006 versus '05, but the big deal on a go-forward basis is our guidance.

As you know, we improved our guidance down to a negative 5 to 3%, but on a non-GAAP basis for 2007, we would be at a 14 to 17% range.

I think it's incredibly impressive when you think that we have lost two clients and 130 million accounts, and we are anticipating J.P.

Morgan Chase going from a processing contract to a software model in the third quarter.

Our operating margins continue to increase, and we believe those margins will be in the 24 to 26% range this year.

Our value-added business was up right at 9%.

Our organic growth was in the 10% range.

Our international business was up 22%.

We have got a lot of things headed in the right direction, and as I said this morning, I think we are pretty well hitting on all cylinders as we are going forward.

We did have a couple things that I wanted to let you know.

I mean, we are very proud to announce that Bob Philbin has been appointed President of our merchant company, and Bob was our former CFO, and he replaces Bev Wells who retired, and Bob will do a great job.

And he certainly has done a great job, and he deserves a chance to really see what he can do with TSYS acquiring.

We have made a lot of big investments.

We will continue to make a lot of investments.

We have a good pipeline of prospects.

I think you will see us make at least one international merchant processing deal, hopefully in the next quarter.

We are still feeling very good about where we are in China and in that part of the world.

I think things may be picking up a little bit there, and they are not jumping off the board, but they are picking up.

We did announce, we didn't announce but you need to know it.

We have announced to our Manhattan office, our prepaid office up there that we are going to close that down.

It will be shut down probably by mid-summer.

A lot of those people will move to our Alpharetta, Georgia office.

Some will not take that.

We think we can save between $7 million and $8 million on annualized basis, and so we will pick up about half of that for the year, hopefully.

Richard, with that I will stop, and will be available for any questions that anybody might have.

Phil, thank you.

I would just like to say that in my opinion, this TSYS story continues to be an outstanding story.

I almost feel like we get too distracted at times worrying about the consolidation that has gone on in the credit issuing industry, because despite that TSYS is such a resilient company, that it comes back from any setback almost stronger than ever before.

The story today that has been told at TSYS is a good one.

The stock market reaction, in my opinion, validates that, and I think the real strength of TSYS goes back many years, as it demonstrates over time the ability to grow organically, and to grow in a fundamentally sound manner.

So those strengths continue to remain intact, and we are just proud to see the results that have contributed to the overall outstanding Synovus year.

I want to go back to a couple of subjects that Tommy addressed in his report.

The first of those would be our net interest margin, or our, well, yes, our net interest margin.

He talked about the results in that measure for the last several months.

My thoughts on the margin are these.

First of all, in 2007, we will see some of the higher rate promotional products that were put on the books of our bank run off in the second half of the year.

So we will get some relief there.

We are not doing any more special promotions.

I think there was a time for those earlier this year, but our need to grow in that manner is no longer there.

So the goal of our bankers today instead of just concentrating as we asked them to on core deposit growth, is to work on improving the mix.

And we have tweaked our incentive plans throughout the banking operations to encourage the type of behavior in sales and positioning on the liability side of the balance sheet, so that the mix will be improved as we move throughout the year, away from the more expensive certificates of deposit and premium money market types of accounts.

The other area, I think that will start to show even more traction in improving our funding lies with our cash management efforts in our commercial strategy.

We are gaining traction there every day and we think that we will see improved growth through commercial deposits in 2007.

Another subject I want to turn to briefly has to do with our non-interest expenses, our G&A, as Tommy referred to the double digit increase that we saw in 2006.

It is good in a way that we were able to achieve the performance that you have heard about, while continuing to invest in growth for the future.

And a lot of this G&A expense was attributable to team member expansion and building of new branches.

In 2006, we added 17 new branches to our banks.

All of these in high potential markets, high potential in terms of future growth.

We will continue to proactively plan for a more aggressive branch expansion policy going forward with right now 20 new offices planned for '07.

These numbers compare to four, five, and six new branches, which was sort of the pattern for the several years prior to 2006.

So we are very interested in positioning ourselves by building out our presence in new markets, or in some cases expanding de novo into brand new communities.

All of this, however, will mean that this year, 2007, will be a much tighter year from the standpoint of managing our non-interest expenses.

We have just completed a round of budgeting that has involved a much more conservative attitude toward the addition of non-interest expense on the income statement.

We are looking at new processes that can be changed, so that we can become more efficient.

We have had our round of what we call quality and efficiency changes, or enhancements that took place over the past 18 months.

And we will look beyond that to see how we can streamline and become more efficient in the back office.

We added 352 new people in financial services last year.

Clearly we can not come anywhere close to that number in terms of 2007 additions.

And our practices will make the additions to head count much more difficult for our managers to have approved just because of affordability, and the need to generate profits in that guidance range that Tommy mentioned to you.

We are looking at prioritizing our projects differently.

We will delay some, if needed, if appropriate.

And then we have got the incentive area which can provide a cushion if growth is not there in certain other categories, so that the generous payouts that we are accustomed to can be trimmed a bit if, again, needed and appropriate.

The last two subjects I want to address have to do with the retail and commercial areas of our Company, and the initiatives involved within those groups.

The retail emphasis goes back now two plus years.

I just want to point out what we were able to achieve during the past year, related to the quantitative measures of the goals that were placed upon the banks.

The first of those would be the deposit growth challenge, which was 10% fundamentally.

Our deposits were up 14.1% for the year.

We expected of ourselves a 10 basis point increase in services per household for the year.

We came in exactly on that measure, 10 basis point improvement, which is up from 6 basis points in 2005.

Our home equity product, which is the key earning asset in retail banking was expected to grow 15%.

Fundamentally we didn't quite make it.

We were at 11.9, but we did have a good active year there, with double digit increases in most of the banks.

We expected a 5% growth in net new checking accounts.

We were able to achieve that, in fact 5.9% was the number, was the percentage, compared to 3% in 2005.

And then in deposit fees, we established a 5% growth goal.

We hit 9.3%, which was in comparison to a flat 2005.

And then our debit fees, which is a key driver on the non-interest income side, we expected to grow 24%.

We were over 20%, not quite to the 24, but we were at 20.9%.

And then finally, the key metrics for '07, 10% deposit growth, with continued emphasis on the mix. 10% consumer credit growth. 10% fee income growth.

Another 10 basis point increase in services per household, and we are establishing as a goal 100,000 new checking accounts to be sold throughout the Company.

So that too will contribute to an improvement in the mix of deposits.

And then last would be the most important strategic priority that we have, and that is execution within the set of goals established for our commercial plan.

The awareness that has improved throughout our five state footprint in commercial activity has already led to improved results, loan growth and deposit growth.

But I would like to point out during recent months, we have designated a commercial lead in each bank.

We have developed consistent incentive plans for our commercial bankers.

We have strengthened our training and credit sales in the product areas.

We continue to address talent gaps.

We have a more targeted, more aggressive business development approach throughout the Company, and anticipating growth and diversification, we have strengthened our credit infrastructure, to insure that we maintain quality at high levels.

We don't have all the metrics that we will be using, but I can tell you that they will center around a more balanced loan growth for this Company going forward, and moving away from dependency on commercial real estate, as we have had in the past.

We will see enhanced commercial deposit growth, as I mentioned earlier, and we certainly have, through these small business and middle market companies, and the relationship opportunities provided there, more of an opportunity to increase fee income on the commercial side of the Company.

Those conclude the finishing touches that I wanted to put on the two presentations that you have heard, so now I would like to open up the floor and encourage you to ask questions, and we have a team of people here that will be able to answer those for you.

Thank you very much.

Ladies and gentlemen, the floor is now open for questions. [OPERATOR INSTRUCTIONS] We will take the first question from Nancy Bush.

Your line is live.

Good afternoon, guys.

Hi, Nancy.

Okay.

Here's the problem.

You have got net income that's up 28% year-over-year fourth quarter over fourth quarter.

You have loan growth that was what, 15% year-over-year, yet in 2007, you are guiding to basically consensus, which is sort of 9 to 10% growth.

Is this margin?

Is this expenses?

You know, what, I can't sort of add this all up, and come out with anything.

And I know given the fact that TSYS is, you know, looks like it will do better in '07 than expected.

Nancy, I'm going to ask Tommy to answer that.

I will say up front, there are, as we all are aware, some potential headwinds out there, and certainly I think our strategies deal with those, but I want Tommy to give you his perspective on that question.

Good afternoon, Nancy.

The two issues you keyed on, the big quarter, keep in mind the TSYS penalty, the one-time penalty is in that quarter.

And on a go-forward basis not only will the penalty not be there, the lost revenue from the loss of that client will not be there.

So that sort of straightens out the run rate on the quarter.

And then kind of fast forward to the other question on the loan growth year-over-year, as opposed to the outlook, we did have reported loan growth and balance sheet growth in the mid-teens.

You take the acquisitions out of it, it gets into the low double digits.

You look at the fourth quarter, particularly on loans, and the growth was a little slower.

If you go back to our page, I guess, in the press release that shows how the net income goals were built, we have assumed, first of all, that TSYS will be within its guidance, and really as Phil described.

When you move over into the financial services side of the company, we have assumed a 10% increase as the building block for the guidance, and that's, the key assumptions there are that you will have a margin that is about like it is in the fourth quarter, in the 420 plus or minus a little bit range, that you will have 10% balance sheet growth, which we think is a very, very favorable number in the environment that we are looking into in '07.

We will have to do a better job in managing fee income and expenses, as Richard mentioned, particularly on expenses to get there.

And we will have to continue to have very good credit metrics to get there.

The distraction, I guess, besides the absence of the penalty and the client revenue at TSYS, back to the financial services side, you will have, with an outcome as I just described, you will have a margin that is 10 basis points for '07 below what it was for all of '06.

And I think that's probably the biggest distracter, if I get to provide an answer to your question.

That is roughly in the $25 million range pretax right there.

So those are the building blocks, and the way we assembled the guidance.

But Richard had said something about, you know, higher costs funding sort of beginning to roll off, but you are still expecting that you are going to have to pay deposit rates or whatever, funding costs are going to be up for you year-over-year?

Yes, we look at the last two quarters and while we did find the margin has dropped from 439 to 430, and now to 420, we were encouraged in the fourth quarter that we saw some sensibility in the market place, and even inside the quarter some stability in the margin.

But we do think that it's a fight to hang on to it.

It's a margin that's superior to the, you know, most of our peers, and Richard's describing things that really can help defend that margin, and we would love to build it, but really aren't prepared, you know, to offer, you know, guidance that would include that.

Tommy, can you just talk a little bit about how this stepping away from CRE might impact all of this?

I mean is that going to be a near-term cost to you from a margin spread point?

Well, it's been happening already.

I mean, just looking at the growth rates in, you know, that occurred on almost a quarter-by-quarter basis, the CRE growth has slowed down some.

It's been at least partially replaced by the commercial strategy, and all that comes with that.

We think the commercial strategy will really kick in in 2007, as the true program, and definitive plans and strategies and incentives are in place.

We think that will help replace it.

And again, on this drive, I guess kind of bringing down the high growth engine CRE machine, and replacing it with a C&I machine, is not a slam the brakes on strategy and start over.

It is a transitional strategy, and we think we can manage our way through it based on that.

Okay.

Phil, just a quick question for you.

There was an AP story this morning on the wires about total systems earnings, and an analyst who shall remain anonymous who rated the stock at underperform in a client note, but raised his target price from $22.17, and since your stock is selling close to $30 now, that is another sign of value-added by Wall Street I guess.

Increased his 2007 earnings per share estimate to $1.22 from $1.07.

Here's what he said "The company's margins were lower than expected", he wrote, "and long term trends do not favor total systems."

Would you just address those two issues, margins and long term trends?

Well, margins are improving.

Hold on a second here.

Our operating margin in 2006 was 24.9, on a non-GAAP basis it was 21.5.

But now we said this morning that we fully expect our margins in 2007 to be in the 24 to 26% range.

This individual has always had us well below what anybody else in the market place has us, and we can't seem to change anybody's mind by what we say in public.

And so there is very little we can do about that.

I think the trends favor us.

I think we have proven that.

Our organic growth has just always been rather amazing.

I think Richard hit it right on the head.

Very resilient company.

A lot of good things going on, and I think we are building a lot of good things for the future.

So you know, I think we have an outlier there, and you know, everybody has got their opinion.

And you know, that's about all I can say about it.

Do you just, do you see the long, do you see the dominant long-term trend as being the move to plastic and, you know, the move to payment methods that will --?

Well, I think the payment methods other than cash.

Right.

You know, it's debit.

It's plastic.

You know, there's a lot of energy now around cell phones, and you know, I don't know where that's going to go.

I wouldn't want to predict right now.

They have been testing transactions on cell phones in Japan since seven or eight years ago.

I don't know that it has really exploded, but certainly it is available, and we could manage that today.

I think we are upbeat and we are comfortable with where we are at.

Now last year at this time, I was a little stunned, as you know--

Right.

--and was a little down.

It took us a while to kind of come out of that funk and get our act together.

And I think we have done that, and as I said earlier, we are better operators as a result.

We understand economies of scale better than we ever have, and that is certainly playing in our favor.

We have got a significant amount of cash on hand.

And so we think we are in good shape.

Okay.

Thank you very much.

Thank you.

Thank you very much.

We will take the next question from Kevin Fitzsimmons.

Your line is live.

Good afternoon, everyone.

Hi, Kevin.

Richard, I apologize if you covered this at the outset, and I got on a little late.

But one subject that you have brought up, and I don't think you waited for it to come to a question in past conference calls, is this subject of potential spinoff of TSYS, and how you have been looking at it, and looking at it harder than at any point in your history.

And I just found it interesting that it wasn't brought up, wasn't mentioned in the release, and I am just wondering is there any change?

Is there any update?

And if not, how should we interpret that?

And what kind of things are still left to be resolved in that investigation?

Thanks.

Kevin, there really is no change.

There is a lot to cover in the set of issues.

We continue to do the work.

We obviously want to do it on our own terms and on our own timetable, and we have always been reluctant to attach a date to this subject.

But we are going to be informing our constituency groups, the investment community in particular when it's appropriate.

And right now, we don't have anything new to add to that subject.

Okay.

And, Kevin, by the way, I mentioned this earlier.

I guess before you came on, I had commented along these lines.

Okay.

Thank you.

One other just clarification on the issue of higher expenses.

I think Tommy, when he was talking about it earlier, in referring to the professional fees and third-party servicing that was driving up G&A.

Are you specifically talking about the Other non-interest expense line item within financial services that it jumped up about $10 million linked quarter?

Is that where it is, or is it spread off of into a couple other categories?

Kevin on a linked quarter basis, the issues are really the process and expenses from several vendors at a very high, unusual level.

And also an extremely unusual level of professional fees, attorney fees, consultant fees, that type of thing.

The sum of those adds up to almost $7 million, and for the most part, that's not the run rate for the future.

On a year-over-year basis, of course the big expense growth is built by some of those things, in addition to the 352 people, and the big increases in employment expense, including the equity comp and acquisitions, and plus the incentive pay that is associated with this performance.

Okay.

Great.

Thank you very much.

Thank you, Kevin.

Thank you.

Our next question is coming from Christopher Marinac.

Your line is live.

Hi, guys, good afternoon.

Hi, Chris.

I wanted to ask Tommy about the additional professional expenses, et cetera, that was mentioned.

Could you pencil any amounts on those, or just any color on just sort of this year-end of type of things, and timing.

Chris, would you repeat your question?

I didn't hear it.

Could you tell us the amount of the professional expenses and sort of other expenses that kind of look one-time in nature in this quarter?

Yes, within that non-interest expense line, there was two key items, and one is a collection of professional fees, almost $3 million, and the other is a data processing expense increase of almost $3.7 million, that for the most part those will come out of the run rate, but they are abnormal to the fourth quarter.

Okay.

Very well.

And then I had a follow-up question for Mark on just, you know, on the reserve.

Do you anticipate any changes on the unallocated reserve?

And as we see, you know, details on that in the 10-K going forward, I mean will you position that any differently than in past quarters?

Well, we don't anticipate a major change in the levels, overall level of the reserve, but we are improving our methodology, and we may move some of our unallocated reserve into an allocated portion of the reserve.

But in terms of just a big shift, and the level of the reserve, the answer would be no.

Okay.

Very well.

And Mark, just one last thing, would you expect the growth in some of the consumer lines, particularly the home equity and credit card that we just saw this quarter, to continue?

We are optimistic about our ability to grow consumer loans, and with the strategy that we got in place, and the leadership at the banks, we feel good about our ability to go out and capture a good percentage of the market share, and be able to continue to grow.

Our expectations are that we can grow all three segments of our portfolio, consumer, commercial, and real estate, at about a 10% pace this year.

Okay.

Great.

Thanks very much.

Thank you, Chris.

Thank you.

We will take the next question from John Pandtle.

Your line is live.

Good afternoon.

Good afternoon, John.

I had a question, a couple of questions.

The first one regards loan growth in the quarter.

One to four family construction and home equity, you experienced very healthy growth in both categories.

I am wondering if you could give us a sense of what percentage of that is related to new originations, and then maybe what percentage is related to draws, if you will, on existing commitments.

Yes, our utilization rate on construction loans is running around 65%.

So I would say a reasonable amount of that is targeted towards draws.

But we are still active in our markets.

If you look at some of the markets we are in, like Tampa, Atlanta, and Savannah, and some of our South Carolina markets, the growth is really still there.

We are not, you know, we are not totally eliminating our loans to our customers.

Our population growth in those areas have been strong.

Unemployment is still good, and there is still activity there, and we would expect in 2007 that would not, that would not change.

Probably the areas that you would see that we were off on our growth sectors are in some of our coastal markets, where we have restrained growth in those sectors, but we expect to continue to have reasonable growth in those good markets.

Okay.

And then as a follow-up question on a separate subject, Richard, if we look at the strength in TSYS shares over the past several months, we are almost approaching the situation we had in the '90s, where you know, it turns out to be pretty accretive to Synovus' valuation implies the bank, straight and a meaningful discount to the regional bank peer group.

I just wanted to get your thoughts from an acquisition standpoint on the bank side, how the strength in TSYS may or may not affect, you know, the consideration of spinning TSYS at this point.

Well, I don't really want to offer an opinion related to the spin, because anything done there would be done given a long timeframe view.

The valuation boost that we have gotten from TSYS over the years, has clearly helped us build a very attractive banking franchise.

It also creates interesting ways to view valuation in our Company.

In fact, today if you take the current TSYS valuation, and subtract it from the Synovus market cap, you see that our banking business, financial services business is trading at 11.3 times '07 earnings.

Take that for what it's worth.

We do look at that measure every day.

And certainly indicates room for improvement, if you focus on the proper valuation for our banking franchise, which we think performs certainly in the upper levels of our peers.

Okay.

Thank you.

Okay.

Thank you.

We will take the next question from John Stewart.

Good afternoon, it's actually [Gerry Cronin].

Hey, Gerry.

Tommy, I was wondering, I hate to do this to you, but if you wouldn't mind possibly detailing the line items, and maybe the pretax amounts that were impacted by the Bank of America [game]?

Just where those all fill in, what went into the minority interest, what went into the processing revenue, and then maybe if there were any one-time expenses?

I will give you the big, I mean, Gerry, are you looking at the '07 guidance, and the adjustment of '06 base, or--?

I am really just looking at the fourth quarter.

Okay.

I will give you the way that we have really portrayed it in the guidance.

Okay.

Basically what we have done, is to try to isolate the one-time penalty of $69 million, less the early amortization fees associated with that, that brought that number down to about $62 million pretax.

Okay.

And then you apply to that the minority interest and the after-tax impact of that, and it brings you down to about a $33 million impact on Synovus.

About a $42 million impact on all of TSYS, $33 million at the Synovus level.

Okay.

And really that's the, you know, we don't disclose the client revenue, or that type of thing, but you can isolate the impact of the penalty, by doing what I just described.

Okay.

And the easy way, I guess, to get the minority interest impact would be just to apply the percentage of TSYS you don't own?

Yes, you just basically take 81% of the TSYS number, and you come down to the Synovus impact.

Perfect.

Okay.

Great.

And that's done fairly well on that table, when you get a chance to look at that, it will help you.

Okay.

Great.

Just two other quick questions.

I know you talked about the Other fee income line, but it also looked like the premises and equipment, or occupancy and equipment expenses, relative to the their quarter were up almost $16 million.

I'm just wondering what was the impact there?

Are you looking at the consolidated or the --?

I'm looking at, yes, Synovus consolidated.

Okay.

I think it's on page 6 of 12.

Yes, of the $16 million increase, about $11 million of that is from TSYS.

That is the primary item in there, and it's from the accelerated amortization of its mainframe operating software, that TSYS retired during the fourth quarter.

That's the biggest piece of that area.

Okay.

So that, was that related to shutting down anything?

No, it's basically related to just replacing the software with another solution.

Okay.

Okay.

And one last question.

The D.C. gain you gave on an after-tax basis, could you disclose what that was pretax?

$6.2 million.

Great.

Super.

All right.

Guys, thank you.

Great year.

Thank you, Gerry.

Thank you, Gerry.

Thank you.

We will take the next question from David George.

Sir, your line is live.

Good afternoon.

Dave.

A couple of questions, I guess.

Just the first on capital and acquisitions in general.

Capital continues to build.

Your Tier 1 is obviously 10.84, and I am coming up with a tangible capital number of about 9.5.

Is there an internal target that you guys think about with respect to capital?

Obviously if you do something or don't do something with TSYS is obviously going to play a role in that, I realize.

But can you talk about capital, and how you are thinking about it today, and also along with that your acquisition appetite, both in the bank area, as well as at TSYS?

Thanks.

Yes, we have been positioning capital over the long haul to make sure that each segment of the company was properly capitalized in the event of a spinout.

A couple of years ago, it was fair to say that that type of transaction would have been possible, but the strain and the capital markets transactions that would have been necessitated would have made it tougher.

We managed our way with some good earnings being thoughtful about capital in every decision, and as you indicated to improve those ratios.

We certainly occasionally get accused of having too much capital when you look at the consolidated ratios, and include the impact of the TSYS equity, which obviously doesn't have any real bearing on a financial services company traditional measurements.

It inflates it.

When you undress the capital ratios, you really get back to a financial services company that is about properly capitalized at this point.

So where we go from here, obviously depends on, you know, the corporate structure decisions, and you know, those decisions would have to be made before you can make any other capital decisions.

As far as the M&A activity, we have been, you know, all during that time frame, we have been positioned to be able to do transactions, typically with mainly stock-based.

We like doing those kind of acquisitions, and paying with it with stock, because of the style and bringing in the ownership at the local level and engagement of the locals Boards that are typically the big stockholders.

So we have been positioned that way, and I guess down the road could consider the build up of capital to be utilized in a variety of ways, including, you know, a war chest for acquisitions were we to want to go that route, even on a cash basis.

But we haven't been really withheld from doing what we need to do on the financial services side of the company from an acquisition standpoint.

Can you just quickly, as a follow-up can you characterize both for the bank and TSYS the kind of acquisition environment or backdrop.

Are you seeing a lot of opportunities out there?

Can you characterize maybe the pricing environment, again both in banking, as well as at TSYS?

I will say a little something about banks and Phil will address the question on TSYS.

We always have a pipeline of acquisition possibilities.

We really probably spend a little bit more time than others building relationships, getting to know the people, understanding the markets, and just courting each other.

And that is going on now, and certainly Florida is sort of at the top of the list.

We have looked in North Carolina, and continue to have an interest in that state, as a good next new market to enter.

The prices have been a little steep in some cases, and whether or not those will change remains to be seen, but community bank prices and expectations have been up there at pretty high levels, compared to most banking companies own PE ratios.

And we struggle with that just like anybody else, wanting to make sure that we can do a transaction that makes sense for everybody concerned, but we have been good acquirers.

We have been the acquirer of choice in a lot of situations over the years, and it's basically still a line of business for us that we continue to work on on a regular basis.

And Phil can speak to the TSYS acquisition front.

Well, if you recall, we completed the Card Tech acquisition back in July of '06, and we think that has been and will continue to be a good acquisition for us, and gives us a lot of flexibility.

Since then, we now have four letters of intent in our hands for new clients of cards.

But we think there are several very good opportunities here in North America.

And as you probably know, there is a land grab going on in Europe.

A lot of activity in Europe, and we certainly, we want to play in Europe.

And we want to be a leading player in our business in Europe.

So, you know, one thing that we would really like to do is be more into the merchant business in Europe, and I think hopefully, I think you will see some, an announcement of our first client there in the second quarter of this year, and we feel very good about where we are at with that.

But there is a lot of activity in that part of the world, and then you can carry that on through South America and Canada.

So we have got a lot of opportunities.

Okay.

Thanks, guys.

Thank you.

Thank you.

Our next question is coming from Todd Hagerman.

Sir, your line is live.

Good evening, everybody.

Hello, Todd.

Just Richard, maybe a follow-up.

I think you mentioned that in the course of '06, you added roughly 352 or so employees in the financial services segment.

Can you give us a sense of how that breaks down in general terms between retail and commercial, and then in particular, you know, what are the expectations, or how should we think about the breakeven point, in terms of a front line producer on the commercial side?

Well, first of all, the talent gaps on the commercial side have been real important to us, and sometimes are not as easy to fill as we would like, and we are working every day to create the right sort of attractive opportunity.

So the numbers are far greater on the retail side, in terms of the team members.

If you just look at the 17 branches, and other expansions that have taken place on the retail banking side, that is where a majority of the people are.

Now we have been very careful to study the ratio between back office support and front line production.

And a good majority of the 352 is over on the production, or front line side of the business.

The expectations going forward for additions to head count, of course, are going to be far fewer, but you can tell with 20 branches planned for '07, we are going to continue to bring both retail and commercial bankers in.

We just are going to have to manage the attrition in a way that we are not adding on a net basis nearly as many people throughout the financial services side of the company, as we did this past year.

So I hope that gives some insight on your question.

That's helpful.

On the commercial side, however, could you give us a sense, though, you know, again with following along the lines of the C&I strategy, and the expansion there.

You know, was there a fair amount of new personnel added in that regard, in terms of specialists in terms of C&I lenders, as opposed to some of the more traditional real estate lenders, you know, maybe making the switch over, or changing hats so to speak?

How much is through the addition of new personnel, as opposed to existing staff changing focus and changing emphasis, in terms of C&I?

The new people on the commercial side have basically been much better prepared, I think, in the middle market and the C&I sector, than our average lender today.

The people that we have added have been pretty well trained and qualified, although we, I break the additions into several different categories.

The best of all worlds is to bring somebody in from a competing institution that has a book of business that they can just expect to follow, and they pay for themselves very quickly.

We can't always get the numbers of those, of people that meet that description, in some of these key major markets.

So we are having to now beef up our entry level management associate programs, so that we can have bench strength for the future, and train these people ourselves.

We find also that our form, our model, our relationship-oriented approach to banking really blends both sales and credit into the same job for a given individual, whereas many of the regional banks have got the hunters and the skinners, they have got the salespeople and then the credit support people, so that you go out to another regional bank, you may not get exactly what you want, although sometimes those people with talent want to make the switch and come into a relationship environment, which we have.

So that is the set of issues that we struggle with.

But there is a war for talent out there.

The compensation levels have ramped up significantly over the last few years.

We are willing to be competitive and meet the price, but there is a lot of interest in good lender and sales talent in commercial production.

Okay.

And just finally, just as you mentioned, or talked about some of the gaps, very successful in the capital markets with that group that you added over the course of the past year.

Anything else, again you have talked in the past about asset-based lending in other areas, is there any other areas that we may want to watch for in the course of the next couple of quarters or so, in terms of new groups, or something that you are looking to add or enhance?

I think the specialization that will evolve and become more apparent will be less formal.

We have got industry groups in certain of our banks that might be a healthcare team in a certain bank, that really can be used as a resource throughout our Company, but we don't, we still believe in the community bank approach.

If you create too many centralized, specialized units, then you begin to get away from relationship banking.

You start chasing volumes.

You start lending money outside of your footprint, and you run into risks that we're able to avoid through the diversification that takes place in our community bank style.

So, Mark, I don't think that we are going to be really be forming any new units in '07, unless you can think of one that I might not know about?

No, I think the areas that we are focusing on, both through incentives and through, you know, profitability models for the bank, and the core structures, are really centered around the capital markets, the asset-based lending approach, our leasing vehicles, some new talent that we have brought in, in some of our growth markets, but I also want to say that we have got tremendous C&I talent in this Company.

It's housed in areas like South Carolina, and Nashville, and Savannah, and other areas of our Company.

So we're not without that strength, but what we are doing is supplementing that in the areas that we really feel like they need to be supplemented in.

And Atlanta is one of those areas that we really want to build our C&I talent.

We have brought in some new talent from mergers, things like that around the Company, and we have been very fortunate to pick some very, very strong, to be able to bring some very strong people in, and still have some very strong prospects that we expect to bring in in the first quarter of this year.

Great.

Very helpful.

Thank you.

Thank you.

Thank you very much.

The next question is coming from Tony Davis.

Sir, your line is live.

Yes, just quickly, guys.

Tommy, a little more color on the margins situation.

Are you still adding, received fixed swaps these days, and as we ended the year, what percentage of the loans are variable rate right now?

Tony, good afternoon.

Earlier in the year, we were adding some of the [received] fixed swaps, we discontinued that in the fourth quarter.

And today 60, about two-thirds of our loans contractually are variable rate loans, and when you consider the swaps, that brings that number down to about, effectively about 57%.

Okay.

So no real change over the last year?

No, no real change since last quarter.

Okay.

You mentioned the promotional deposit funding you added last year.

Is that a meaningful number?

And in terms of dollar amount, and can you give us some idea about the embedded rate on that?

Yes, that is a little over $400 million.

Okay.

And it is at approximately 6.5%, kind of a blended yield.

That will start running off towards the end of the first quarter a little bit, and on into the second quarter in a meaningful sort of way.

So it will be gone by this fall?

Some of it.

It has got different lengths on it, but the bulk of it, I think is second quarter.

Okay.

Good.

And Mark, just the color on the progress you guys are making in C&I, just wonder about what the unfunded backlog looks like right now in C&I, and how that might compare with 6 to 12 months ago.

Our pipeline is, the mix in our pipeline has improved.

We are running about 50/50 now from a CRE commercial pipeline, and basically our forecast is that balance grows 10% C&I and 10% CRE is kind of based on those forecasts, the mix, and the incentives, alignment of the incentives that we have got in place.

So we are feeling pretty good about our folks' ability to go out, and bring those kind of clients into the company.

And I couldn't let go without this question.

Just some color on the watch list today, versus say three to six months ago, and I think you said the classification migrations are pretty stable still.

Yes, our average weighted risk grades have actually improved over the quarter.

It has really allowed us to change our reserve levels a little bit.

I guess the thing that gives me the high degree of confidence in our credit for the year, is if you really look out at our larger impaired loans, we have got 12 loans over $2 million that range, that range from that low of $2 million to about $3.4 million.

We really see no credit loss exposure in those credits.

And that's the biggest piece of our, you know, non-performing asset ratio.

If you look out at our processes that we put in place, with our asset-based lending, we have got about 120 million in credit there.

We will expect to cover that.

We have got real strong processes.

We also expanded our credit scoring capabilities in our small business, commercial loans, and we just feel like we are positioned well, that we are going to have a decent economy with decent growth, it is not going to be quite as stellar as 2006, but overall, we feel good about our portfolio, and where we stand right now.

Thank you much.

Thank you, Tony.

Thank you very much.

The last question we have in queue is coming from Jennifer Demba.

Your line is live.

Good afternoon.

I was wondering if you could give us an idea of your loan demand right now by geography, and where the strength is versus maybe weaker areas?

Mark, can you comment on that?

Yes, let me try and fill that out for you.

We, if you look at our overall loan growth in terms of regions, I would say that it's really strong across the board.

Our C&I loan growth in our Atlanta region, which comprises quite a few banks there, was running at about 11.5%.

Our coastal region C&I growth was 21%, and if you look at our banks outside of those footprints, they have averaged about 11.4%.

So you have got good, strong C&I growth across the whole franchise.

Our commercial real estate, we are obviously having some, due to the restraint in the coastal markets, we are not seeing the growth there.

We grew about 1.5%, and the bulk of that is not actually, is payoffs.

We have had some very large payoffs in condos, and we expect a little more of that during the first half of the year, which will restrain the coastal growth, but in our Atlanta and other banks across the footprint, we are growing at about a 6% pace.

And we would expect that to bump up slightly, closer to the 9 to 10% range.

Our consumer growth, you know obviously as we said, our HELOC has been the key grower for our consumer portfolio.

But our credit card growth was good, 15% for the quarter, and our HELOC growth has been strong as well.

And it's been, the largest growth has been outside of the coastal areas as well, in our other footprints for consumer as well.

So those are the key areas.

But we see good, strong growth across the footprint.

Mark, what do you think is going to cause an acceleration in your pace of commercial real estate growth from that 6% pace up to 9 or 10%?

Basically what we are seeing is, and what I expect is that you will see 8% kind of growth in the first half of the year maybe, and then you will see it pick up considerably in the last half of the year.

Part of that is inventories are being, are correcting themselves in the housing market.

So we'll see some good growth in the last half of the year there, we believe.

And then, you know the other areas of commercial real estate are really in great shape, and there is a lot of activity out there, if you look in the office warehouse sector, Savannah and some of our coastal markets.

There is demand there.

The hotel sector is in good shape, and there is new construction, new project demand there.

And then we also think that we will see that in other areas like, you know, mini storage, things like that.

And so if you break the portfolio apart, we feel like we have got good potential in areas outside of housing for the first half of the year, and then we think housing will, the inventories will be in balance, and that we will be able to grow that sector at a really good pace.

A good healthy pace.

Okay.

One other question for Tommy.

What are you looking at for the effective tax rate for 2007?

It should be approximately 36%.

Okay.

Thanks a lot.

Appreciate the color on the loan growth.

Thank you very much, ladies and gentlemen. [OPERATOR INSTRUCTIONS] And we will take the last question from Adam Barkstrom.

Sir, your line is live.

I apologize if this has been addressed before, but I wanted to get some more color on the 2 C&I credits that rolled into charge-offs this quarter.

Could you frame up--?

Let me do that.

You know, our losses has averaged about, you know, about $12 million a quarter.

We did have a high quarter of losses in the fourth quarter, a 9 basis point ratio, and then we actually had C&I credit in the entertainment industry that has been deteriorating.

We had a pretty large impairment, a specific reserve against that.

We are going to sell that loan in the market, and we have had a receiver in there that is turning the company around.

But we decided that we needed to take that loss and exit that credit, and then the other credit was actually, we have had fraudulent activity on a warehouse line.

We, along with three other banks, it's a mortgage warehouse line.

Three other banks outside of the Synovus also got caught with this company.

We actually caught the fraud.

But there is some financial fraud in the financial statements, as well as some company fraud, document fraud, and we basically, that was an unexpected surprise.

We took our loss in that, and we do believe that there are some recoveries through the accounting firm, as well as tax returns and other assets, but we wrote that credit down, and then moved forward on that.

The warehouse one, did you write that down to zero?

No.

Charge off the whole thing?

No, we did not.

We actually they were assigned mortgages.

We basically have Synovus Mortgage servicing those mortgages for us, and we have done an audit on all of those mortgages.

They are in good shape.

And we did get some double bookings on some mortgages, between us and some other banks, and obviously, this was not a new company either.

This is an old line company, and unfortunately, your character shows up when somebody gets in a bind, and it showed up on this customer.

So of these two credits, could you, what were the size of the credits, and what was the size of the charge-offs?

The warehouse line was about $20 million, and the loss was $6 million, and the entertainment company was around $11 million, and the loss we wrote down was about half of that as well.

Okay.

You say both of these credits.

Have they been with, had they been with you guys for some time?

Are they relatively new credits?

Yes.

Are they relatively new credits.

No, actually both of those credits have been with us in the earlier '90s.

One was a dying industry, and you know, to be honest with you, we probably could have reacted a little quicker on that one than we did, but we did feel like we could turn the company around before we sold it.

And we still may be able to do that, but I think we have taken a reasonable or aggressive position on our write-down.

All right, thank you, gentlemen.

Thank you.

Thank you very much, ladies and gentlemen.

There appear to be no further questions.

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

I feel like I need to end this on a little bit more pleasant note than the last discussion about charge-offs.

And I will give you three parting thoughts.

First of all, consistency in this Company at high levels, is one of the things we are most proud of, and I can assure you we are driving to maintain a high level of performance, but a consistent high level of performance, and I think this past year proved that we can do that.

I want to remind the group that our model is different.

Our multi-bank decentralized approach that involves dual-branding creates empowerment, and creates responsiveness, and we think very much facilitates growth.

So expect us to continue to achieve growth at the higher levels of our industry.

And finally, on strategy, we have worked hard over the last two years, to have a comprehensive strategy that meets the needs in the competitive marketplace, we are now working to simplify that, our commercial strategy is at the top of that list, along with market expansion that continues.

So we think we have a good plan in place.

We appreciate your interest in our Company, and we look forward to staying in touch.

Thank you very much ladies and gentlemen.

This does conclude today's conference call.

You may disconnect your lines.

Have a wonderful day!