FINANCIAL APPENDIX
[LOGO]
SYNOVUS
FINANCIAL CORP.
Consolidated Balance Sheets as of December 31, 1999 and 1998 ................................... F-2
Consolidated Statements of Income for the Years ended December 31, 1999, 1998, and 1997 ........ F-3
Consolidated Statements of Changes In Shareholders' Equity
for the Years ended December 31, 1999, 1998, and 1997 ................................... F-4
Consolidated Statements of Cash Flows for the Years ended December 31, 1999, 1998, and 1997 .... F-5
Summary of Significant Accounting Policies ..................................................... F-6
Notes to Consolidated Financial Statements ..................................................... F-10
Independent Auditors' Report ................................................................... F-24
Selected Financial Data ........................................................................ F-25
Financial Review ............................................................................... F-26
Summary of Quarterly Financial Data, Unaudited ................................................. F-48
F-1
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31, 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks, including $3,783 and $21,061 in 1999 and 1998, respectively,
on deposit to meet Federal Reserve requirements (note 9) ................................. $ 466,543 373,376
Interest earning deposits with banks (note 9) ............................................... 1,928 1,383
Federal funds sold (note 9) ................................................................. 92,093 77,392
Mortgage loans held for sale (note 9) ....................................................... 83,145 156,231
Investment securities available for sale (notes 2 and 9) .................................... 1,716,678 1,571,840
Investment securities held to maturity (fair value of $273,504
and $311,726 in 1999 and 1998, respectively) (notes 2 and 9) ............................. 277,279 305,633
Loans (notes 3 and 9) ....................................................................... 9,077,516 7,612,142
Less:
Unearned income .......................................................................... (9,277) (8,537)
Reserve for loan losses .................................................................. (127,558) (114,109)
------------ ----------
Loans, net ......................................................................... 8,940,681 7,489,496
------------ ----------
Premises and equipment, net (note 6) ........................................................ 437,309 381,385
Other assets (note 4) ....................................................................... 531,345 454,856
------------ ----------
Total assets ....................................................................... $ 12,547,001 10,811,592
============ ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits (notes 5 and 9):
Non-interest bearing .................................................................. $ 1,625,313 1,433,929
Interest bearing ...................................................................... 7,814,774 7,363,483
------------ ----------
Total deposits ..................................................................... 9,440,087 8,797,412
Federal funds purchased and securities sold under agreement to repurchase (note 9) ....... 1,261,391 503,287
Long-term debt (notes 6 and 9) ........................................................... 318,620 131,802
Other liabilities (notes 7 and 8) ........................................................ 235,949 215,081
------------ ----------
Total liabilities .................................................................. 11,256,047 9,647,582
------------ ----------
Minority interest in consolidated subsidiary ................................................ 64,285 52,093
Shareholders' equity (notes 1, 2, 6, 8, and 13):
Common stock -- $1.00 par value. Authorized 600,000,000 shares; issued 282,189,425 in 1999
and 278,807,393 in 1998; outstanding 282,014,161 in 1999 and 278,414,206 in 1998 ...... 282,189 278,807
Surplus .................................................................................. 79,190 59,657
Less treasury stock -- 175,264 shares in 1999 and 393,187 shares in 1998 ................. (1,285) (5,099)
Less unamortized restricted stock ........................................................ (1,293) (2,545)
Accumulated other comprehensive income (loss) ............................................ (30,134) 10,475
Retained earnings ........................................................................ 898,002 770,622
------------ ----------
Total shareholders' equity ......................................................... 1,226,669 1,111,917
Commitments and contingencies (note 10)
------------ ----------
Total liabilities and shareholders' equity ......................................... $ 12,547,001 10,811,592
============ ==========
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
F-2
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
YEARS ENDED DECEMBER 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
Interest income:
Loans, including fees ................................................... $758,517 673,288 632,546
Investment securities:
U.S. Treasury and U.S. Government agencies ........................... 81,140 80,638 83,044
Mortgage-backed securities ........................................... 26,167 17,708 17,360
State and municipal .................................................. 8,650 7,482 6,564
Other investments .................................................... 2,907 2,497 1,495
Mortgage loans held for sale ............................................ 7,659 5,502 2,368
Federal funds sold ...................................................... 2,879 5,152 2,807
Interest earning deposits with banks .................................... 88 51 77
-------- ------- -------
Total interest income ............................................. 888,007 792,318 746,261
-------- ------- -------
Interest expense:
Deposits (note 5) ....................................................... 323,752 314,036 293,527
Federal funds purchased and securities sold under agreement to repurchase 39,427 15,413 19,119
Long-term debt .......................................................... 11,534 7,804 7,695
-------- ------- -------
Total interest expense ............................................ 374,713 337,253 320,341
-------- ------- -------
Net interest income ............................................... 513,294 455,065 425,920
Provision for losses on loans (note 3) ..................................... 34,007 26,882 32,485
-------- ------- -------
Net interest income after provision for losses on loans ........... 479,287 428,183 393,435
-------- ------- -------
Non-interest income:
Data processing services ................................................ 490,154 365,605 335,991
Service charges on deposit accounts ..................................... 70,161 62,884 57,298
Fees for trust services ................................................. 20,031 15,341 12,645
Credit card fees ........................................................ 15,123 13,581 11,001
Securities gains (losses), net (note 2) ................................. 1,202 1,299 (66)
Other operating income (note 11) ........................................ 143,094 123,503 84,543
-------- ------- -------
Total non-interest income ......................................... 739,765 582,213 501,412
-------- ------- -------
Non-interest expense:
Salaries and other personnel expense (note 8) ........................... 457,741 390,142 346,067
Net occupancy and equipment expense (notes 4 and 10) .................... 208,197 158,218 138,045
Other operating expenses (note 11) ...................................... 190,611 147,452 134,579
Minority interest in subsidiary's net income ............................ 13,188 10,559 9,143
-------- ------- -------
Total non-interest expense ........................................ 869,737 706,371 627,834
-------- ------- -------
Income before income taxes ........................................ 349,315 304,025 267,013
Income tax expense (note 7) ................................................ 124,008 107,560 96,184
-------- ------- -------
Net income ........................................................ $225,307 196,465 170,829
======== ======= =======
Net income per share (note 14):
Basic ................................................................... $ 80 .72 .63
======== ======= =======
Diluted ................................................................. .80 .71 .63
======== ======= =======
Weighted average shares outstanding (note 14):
Basic ................................................................... 280,016 272,416 269,285
======== ======= =======
Diluted ................................................................. 283,355 277,223 273,152
======== ======= =======
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
F-3
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands, except per share data)
Accumulated
Unamortized Other
Shares Common Treasury Restricted Comprehensive Retained
Years Ended December 31, 1999, 1998, and 1997 Issued Stock Surplus Stock Stock Income (Loss) Earnings Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996, as previously
reported .....................................261,953 $ 261,953 9,515 (1,285) (5,344) (1,063) 519,974 783,750
Issuance of common stock for acquisitions
(note 1) ..................................... 6,982 6,982 12,681 -- -- 163 8,720 28,546
------- --------- ------ ------ ------ ------- ------- ---------
Balance at December 31, 1996, as restated ......268,935 268,935 22,196 (1,285) (5,344) (900) 528,694 812,296
Net income ..................................... -- -- -- -- -- -- 170,829 170,829
Other comprehensive income, net of tax --
change in unrealized gains/losses on
investment securities available for
sale, net of reclassification
adjustment (note 15) ......................... -- -- -- -- -- 6,824 -- 6,824
---------
Comprehensive income ........................... -- -- -- -- -- -- -- 177,653
---------
Cash dividends declared -- $.24 per share ...... -- -- -- -- -- -- (62,948) (62,948)
Cash dividends of pooled subsidiaries prior
to acquisition ............................... -- -- -- -- -- -- (2,042) (2,042)
Issuance of restricted stock (note 8) .......... 13 13 233 -- (246) -- -- --
Amortization of restricted stock (note 8) ...... -- -- (45) -- 1,856 -- -- 1,811
Stock options exercised (note 8) ............... 1,379 1,379 4,405 -- -- -- -- 5,784
Stock option tax benefit ....................... -- -- 4,775 -- -- -- -- 4,775
Treasury stock purchased by subsidiary
prior to acquisition ......................... -- -- -- (22) -- -- -- (22)
Ownership change at majority-owned
subsidiary ................................... -- -- -- -- -- -- (47) (47)
Fractional shares for stock split .............. (3) (3) (35) -- -- -- -- (38)
------- --------- ------ ------ ------ ------- ------- ---------
Balance at December 31, 1997 ...................270,324 270,324 31,529 (1,307) (3,734) 5,924 634,486 937,222
Net income ..................................... -- -- -- -- -- -- 196,465 196,465
Other comprehensive income, net of tax
(note 15):
Change in unrealized gains/losses on
investment securities available for
sale, net of reclassification
adjustment ................................ -- -- -- -- -- 4,450 -- 4,450
Gain on foreign currency translation ....... -- -- -- -- -- 1 -- 1
---------
Other comprehensive income ................. -- -- -- -- -- -- -- 4,451
---------
Comprehensive income ........................... -- -- -- -- -- -- -- 200,916
---------
Issuance of common stock for acquisitions
(note 1) ..................................... 6,436 6,436 14,517 -- -- 100 20,188 41,241
Cash dividends declared -- $.29 per share ...... -- -- -- -- -- -- (77,696) (77,696)
Cash dividends of pooled subsidiaries prior to
acquisition .................................. -- -- -- -- -- -- (2,821) (2,821)
Amortization of restricted stock (note 8) ...... -- -- 36 -- 1,189 -- -- 1,225
Stock options exercised (note 8) ............... 2,050 2,050 8,060 -- -- -- -- 10,110
Stock option tax benefit ....................... -- -- 5,351 -- -- -- -- 5,351
Treasury stock purchased by subsidiary prior
toacquisition ................................ -- -- -- (3,792) -- -- -- (3,792)
Ownership change at majority-owned subsidiary .. -- -- 141 -- -- -- -- 141
Fractional shares for stock split .............. (3) (3) (77) -- -- -- -- (80)
Commitment of stock donation to charitable
foundation ................................... -- -- 100 -- -- -- -- 100
------- --------- ------ ------ ------ ------- ------- ---------
Balance at December 31, 1998 ...................278,807 278,807 59,657 (5,099) (2,545) 10,475 770,622 1,111,917
Net income ..................................... -- -- -- -- -- -- 225,307 225,307
Other comprehensive loss, net of tax
(note 15):
Change in unrealized gains/losses on
investment securities available for
sale, net of reclassification
adjustment ................................ -- -- -- -- -- (39,913) -- (39,913)
Loss on foreign currency translation ........ -- -- -- -- -- (223) -- (223)
---------
Other comprehensive loss .................... -- -- -- -- -- -- -- (40,136)
---------
Comprehensive income ........................... -- -- -- -- -- -- -- 185,171
---------
Issuance of common stock for acquisitions
(note 1) ..................................... 2,325 2,325 9,269 -- -- (473) 6,335 17,456
Issuance of treasury stock for purchase
acquisition (note 1) ......................... -- -- -- 1,860 -- -- -- 1,860
Cash dividends declared -- $.36 per share ...... -- -- -- -- -- -- (98,460) (98,460)
Cash dividends of pooled subsidiaries prior
to acquisition ............................... -- -- -- -- -- -- (5,774) (5,774)
Amortization of restricted stock (note 8) ...... -- -- -- -- 1,252 -- -- 1,252
Stock options exercised (note 8) ............... 1,150 1,150 5,620 -- -- -- -- 6,770
Stock option tax benefit ....................... -- -- 7,390 -- -- -- -- 7,390
Retirement of subsidiary's treasury stock upon
acquisition .................................. (93) (93) (1,861) 1,954 -- -- -- --
Ownership change at majority-owned subsidiary .. -- -- (985) -- -- -- (28) (1,013)
Commitment of stock donation to charitable
foundation ................................... -- -- 100 -- -- -- -- 100
------- --------- ------ ------ ------ ------- ------- ---------
Balance at December 31, 1999 ...................282,189 $ 282,189 79,190 (1,285) (1,293) (30,134) 898,002 1,226,669
======= ========= ====== ====== ====== ======= ======= =========
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YEARS ENDED DECEMBER 31, 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income .................................................................... $ 225,307 196,465 170,829
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for losses on loans .............................................. 34,007 26,882 32,485
Depreciation, amortization, and accretion, net ............................. 72,475 61,019 50,255
Deferred income tax expense (benefit) ...................................... (144) 6,227 911
Increase in interest receivable ............................................ (7,449) (3,097) (7,215)
Increase in interest payable ............................................... 9,204 3,183 6,867
Minority interest in subsidiary's net income ............................... 13,188 10,559 9,143
Decrease (increase) in mortgage loans held for sale ........................ 73,086 (85,376) (2,522)
Other, net ................................................................. 33,374 (51,811) 940
----------- -------- --------
Net cash provided by operating activities ............................... 453,048 164,051 261,693
----------- -------- --------
INVESTING ACTIVITIES
Cash acquired from acquisitions ............................................... 7,639 22,230 --
Net (increase) decrease in interest earning deposits with banks ............... (339) (10,514) 868
Net (increase) decrease in federal funds sold ................................. (11,477) 50,876 (61,677)
Proceeds from maturities and principal collections of investment securities
available for sale .......................................................... 453,143 627,897 368,661
Proceeds from sales of investment securities available for sale ............... 48,472 131,493 89,822
Purchases of investment securities available for sale ......................... (695,526) (914,456) (497,986)
Proceeds from maturities and principal collections of investment securities
held to maturity ............................................................ 63,875 161,111 70,321
Purchases of investment securities held to maturity ........................... (32,781) (92,290) (37,884)
Net increase in loans ......................................................... (1,416,486) (456,610) (587,487)
Purchases of premises and equipment ........................................... (124,462) (119,149) (67,040)
Proceeds from disposals of premises and equipment ............................. 8,315 2,262 2,274
Net cash paid on sale of branches ............................................. (55,641) -- --
Proceeds from sales of other real estate ...................................... 8,520 10,692 8,339
Additions to contract acquisition costs ....................................... (15,812) (20,105) (17,558)
Additions to computer software ................................................ (54,189) (39,502) (15,106)
----------- -------- --------
Net cash used in investing activities ................................... (1,816,749) (646,065) (744,453)
----------- -------- --------
FINANCING ACTIVITIES
Net increase in demand and savings deposits ................................... 174,703 468,250 298,374
Net increase (decrease) in certificates of deposit ............................ 432,420 (130,939) 234,105
Net increase (decrease) in federal funds purchased and securities
sold under agreement to repurchase ........................................... 758,104 190,331 (38,403)
Principal repayments on long-term debt ........................................ (2,030) (15,430) (10,261)
Proceeds from issuance of long-term debt ...................................... 186,849 8,320 41,171
Purchases of treasury stock ................................................... -- (3,792) (22)
Purchases of treasury stock by majority-owned subsidiary ...................... (1,043) -- --
Dividends paid to shareholders ................................................ (98,837) (76,665) (61,984)
Proceeds from issuance of common stock ........................................ 6,702 9,220 5,785
----------- -------- --------
Net cash provided by financing activities ............................... 1,456,868 449,295 468,765
----------- -------- --------
Increase (decrease) in cash and cash equivalents ................................. 93,167 (32,719) (13,995)
Cash and cash equivalents at beginning of period ................................. 373,376 406,095 420,090
----------- -------- --------
Cash and cash equivalents at end of period ....................................... $ 466,543 373,376 406,095
=========== ======== ========
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
F-5
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS OPERATIONS
The consolidated financial statements include the accounts of Synovus
Financial Corp. (Parent Company) and its consolidated subsidiaries, all but one
of which were wholly-owned at December 31, 1999. Synovus has 38 wholly-owned
bank subsidiaries predominantly involved in retail and commercial banking
activities, and wholly-owned debt collection and bankruptcy management, trust,
mortgage, insurance, and broker/dealer companies. Total System Services, Inc.
(TSYS), an 80.8% owned subsidiary, provides bankcard data processing and related
services to banks and other card-issuing institutions. In addition, the
financial statements include joint ventures of TSYS accounted for under the
equity method.
Synovus has two reportable segments: banking operations and transaction
processing services. For the year ended December 31, 1999, revenues (defined as
net interest income plus non-interest income) from the banking operations
segment represent 55.3% of consolidated revenues, while the transaction
processing services segment represents the remaining 44.7% of consolidated
revenues. The banking operations' revenues are earned in four southeastern
states: Georgia (61%), Alabama (19%), South Carolina (13%), and Florida (7%).
For the year ended December 31, 1999, TSYS had two major customers which
accounted for approximately 29% of its total revenues. TSYS' revenues are
generated from customers throughout the United States, Mexico, Canada, Honduras
and the Caribbean.
BASIS OF PRESENTATION
In preparing the consolidated financial statements in accordance with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities as of the
date of the balance sheet and the reported amounts of revenues and expenses for
the period. Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant
change relate to the determination of the reserve for loan losses; the valuation
of real estate acquired in connection with foreclosures or in satisfaction of
loans; and the disclosures for contingent assets and liabilities. In connection
with the determination of the reserve for loan losses and the valuation of other
real estate, management obtains independent appraisals for significant
properties and properties collateralizing impaired loans.
The accounting and reporting policies of Synovus Financial Corp. and
subsidiaries (Synovus) conform to generally accepted accounting principles and
to general practices within the banking and transaction processing industries.
All significant intercompany accounts and transactions have been eliminated in
consolidation. The following is a description of the more significant of those
policies.
CASH FLOW INFORMATION
For the years ended December 31, 1999, 1998, and 1997, income taxes of
$106 million, $95 million, and $95 million, and interest of $367 million, $334
million, and $313 million, respectively, were paid.
Loans receivable of approximately $4 million, $9 million, and $8
million were transferred to other real estate during 1999, 1998, and 1997,
respectively.
MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale are carried at the lower of aggregate cost
or fair value. Fair values are based upon quoted prices from secondary market
investors and forward commitments to sell. No valuation allowances were required
at December 31, 1999 or 1998.
The cost of mortgage loans held for sale is the mortgage note amount
plus certain net origination costs less discounts collected.
INVESTMENT SECURITIES
Synovus classifies its securities into two categories: available for
sale or held to maturity. Held to maturity securities are those securities for
which Synovus has the ability and intent to hold until maturity. All other
securities not included in held to maturity are classified as available for
sale.
Available for sale securities are recorded at fair value. Fair value is
determined at a specific point in time, based on quoted market prices. Held to
maturity securities are recorded at cost, adjusted for the amortization or
accretion of premiums or discounts. Unrealized gains and losses, net of the
related tax effect, on securities available for sale are excluded from earnings
and are reported as a separate component of shareholders' equity, within other
comprehensive income, until realized. Transfers of securities between categories
are recorded at fair value at the date of transfer. The unrealized gains or
losses included in other comprehensive income for a security transferred from
available for sale to held to maturity are maintained and amortized into
earnings over the remaining life of the security as an adjustment to yield in a
manner consistent with the amortization or accretion of premium or discount on
the associated security.
A decline in the market value of any available for sale or held to
maturity security below cost that is deemed other than temporary results in a
charge to earnings and the establishment of a new cost basis for the security.
Premiums and discounts are amortized or accreted over the life of the
related security as an adjustment to the yield using the effective interest
method and prepayment assumptions. Dividend and interest income are recognized
when earned. Realized gains and losses for securities classified as available
for sale and held to maturity are included in earnings and are derived using the
specific identification method for determining the amortized cost of securities
sold.
Gains and losses on sales of investment securities are recognized on
the settlement date, based on the amortized cost of the specific security. The
financial statement impact of settlement date accounting versus trade date
accounting is immaterial.
LOANS AND INTEREST INCOME
Loans are reported at principal amounts outstanding, less unearned
income, including net deferred fees, and the reserve for loan losses.
Interest income on consumer loans, made on a discount basis, is
recognized in a manner which approximates the level yield method. Interest
income on substantially all other loans is recognized on a level yield basis.
Loan fees, net of certain direct origination costs, are deferred and
amortized over the terms of the loans using a method which approximates a level
yield. Annual fees, net of costs, collected for credit cards are recognized on a
straight-line basis over the period the fee entitles the cardholder to use the
card.
Loans on which the accrual of interest has been discontinued are
designated as nonaccrual loans. Accrual of interest on loans is discontinued
when the full collection of interest or principal is not probable or when they
become contractually in default for 90 days or more as to either interest or
principal, unless they are both well-secured and in the process of collection.
When a loan is placed on nonaccrual status, previously accrued and uncollected
interest is charged to interest income on loans, unless management believes
F-6
that the accrued interest is recoverable through the liquidation of collateral.
Interest payments received on nonaccrual loans are applied as a reduction of
principal. Loans are returned to accruing status when they are brought fully
current with respect to interest and principal and when, in the judgment of
management, the loans are estimated to be fully collectible as to both principal
and interest. Such interest, when ultimately collected, is recorded as interest
income in the period received. Interest on accruing impaired loans is recognized
as long as such loans do not meet the criteria for nonaccrual classification.
RESERVE FOR LOAN LOSSES
The reserve for loan losses is established through provisions for loan
losses charged to operations. Loans are charged against the reserve for loan
losses when management believes that the collection of principal is unlikely.
Subsequent recoveries are added to the reserve. Management's evaluation of the
adequacy of the reserve for loan losses is based on a formal analysis which
assesses the risk within the loan portfolio. This analysis includes
consideration of historical performance, current economic conditions, level of
nonperforming loans, loan concentrations, and review of certain individual
loans.
Management believes that the reserve for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the reserve for loan losses may be necessary based on changes in
economic conditions. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review Synovus' subsidiary
banks' reserves for loan losses. Such agencies may require Synovus' subsidiary
banks to recognize additions to the reserve for loan losses based on their
judgments about information available to them at the time of their examination.
Management, considering current information and events regarding a
borrowers' ability to repay its obligations, considers a loan to be impaired
when the ultimate collectibility of all amounts due, according to the
contractual terms of the loan agreement, is in doubt. When a loan is considered
to be impaired, the amount of impairment is measured based on the present value
of expected future cash flows discounted at the loan's effective interest rate.
If the loan is collateral-dependent, the fair value of the collateral is used to
determine the amount of impairment. Subsequent recoveries are added to the
reserve for loan losses. Cash receipts for accruing loans are applied to
principal and interest under the contractual terms of the loan agreement. Cash
receipts on impaired loans for which the accrual of interest has been
discontinued are applied first to principal and then to interest income.
The accounting for impaired loans described above applies to all loans,
except for large pools of smaller-balance, homogeneous loans that are
collectively evaluated for impairment, loans that are measured at fair value or
at the lower of cost or fair value, and debt securities. The reserve for loan
losses for large pools of smaller-balance, homogeneous commercial and retail
loans is established through consideration of such factors as changes in the
nature and volume of the portfolio, overall portfolio quality, adequacy of the
underlying collateral, loan concentrations, historical charge-off trends, and
economic conditions that may affect the borrowers' ability to pay.
PREMISES AND EQUIPMENT
Premises and equipment, including leasehold improvements and purchased
internal-use software, are reported at cost, less accumulated depreciation and
amortization, which are computed using straight-line or accelerated methods over
the estimated useful lives of the related assets.
OTHER ASSETS
The following paragraphs describe some of the more significant amounts
included in other assets. Long-lived assets and certain identifiable intangibles
are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
the assets described below is measured by a comparison of the carrying amount of
the asset to future undiscounted net operating cash flows expected to be
generated by the asset. If such assets are considered impaired, the amount of
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell.
Intangibles:
Goodwill, which represents the excess of cost over the fair value of
net assets of businesses acquired, is being amortized using the straight-line
method over periods of 5 to 40 years.
Core deposit premiums resulting from the valuation of core deposit
intangibles acquired in business combinations or in the purchase of branch
offices are amortized using accelerated methods over periods not exceeding the
estimated average remaining life of the existing customer deposit bases
acquired. Amortization periods range from 10 to 18 years.
Amortization periods for intangible assets are monitored to determine
if events and circumstances require such periods to be reduced.
Computer Software:
Software development costs are capitalized from the time technological
feasibility of the software product or enhancement is established until the
software is ready for use in providing processing services to customers.
Research and development costs and computer software maintenance costs are
expensed as incurred. Software development costs related to the TS(2) processing
system are amortized using the greater of the straight-line method over the
estimated useful life of 10 years or the ratio of current revenues to current
and anticipated revenues. All other software development costs and costs of
purchased computer software are amortized using the greater of the straight-line
method over the estimated useful life (3 to 5 years) or the ratio of current
revenues to current and anticipated revenues.
Bank-Owned Life Insurance Programs:
Premiums paid for bank-owned life insurance programs are recorded at
the net realizable value of the underlying insurance contracts. The change in
contract value during the period is recorded as an adjustment of premiums paid
in determining the expense or income to be recognized under the contract during
the period. Income or expense from bank-owned life insurance programs is
included as a component of other operating income.
Investments in Joint Ventures:
TSYS' 49% investment in Total System Services de Mexico, S.A. de C.V.
(TSYS de Mexico), a bankcard data processing operation located in Mexico, is
accounted for under the equity method, as is TSYS' 50% investment in Vital
Processing Services L.L.C. (Vital), a merchant processing operation
headquartered in Tempe, Arizona.
F-7
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Contract Acquisition Costs:
TSYS capitalizes certain contract acquisition costs related to signing
or renewing long-term contracts. These costs, which primarily consist of cash
payments for rights to provide processing services, incremental internal
conversion and software development costs, and third-party software development
costs, are amortized using the straight-line method over the contract term
beginning when the customer's cardholder accounts are converted to TSYS'
processing system.
Other Real Estate:
Other real estate, consisting of properties obtained through
foreclosure or in satisfaction of loans, is reported at the lower of cost or
fair value, determined on the basis of current appraisals, comparable sales, and
other estimates of value obtained principally from independent sources, adjusted
for estimated selling costs. Any excess of the loan balance at the time of
foreclosure over the fair value of the real estate held as collateral is treated
as a loan charge-off. Gain or loss on sale and any subsequent adjustment to the
value are recorded as a component of non-interest expense.
Originated and Purchased Mortgage Servicing Rights:
The rights to service mortgage loans for others, regardless of whether
the servicing rights are acquired through either the purchase or origination of
mortgage loans, are recognized as separate assets. The capitalized mortgage
servicing rights are evaluated for impairment based upon the fair value of those
rights. Fair value is estimated by determining the present value of the
estimated future cash flows using discount rates commensurate with the risks
involved. In determining the present value, Synovus stratifies its mortgage
servicing rights based on risk characteristics including loan types, note rates,
and note terms.
Capitalized mortgage servicing rights are amortized in proportion to
and over the period of estimated net servicing income, using a method that
approximates a level yield and taking into consideration prepayment of the
underlying loans. Management re-evaluates the terms used for amortization based
upon prepayment history and adjusts the terms as necessary.
DERIVATIVE FINANCIAL INSTRUMENTS
As part of its overall interest rate risk management activities,
Synovus utilizes off-balance sheet derivatives to modify the repricing
characteristics of on-balance sheet assets and liabilities. The primary
instruments utilized by Synovus are interest rate swaps. Synovus has also
purchased interest rate floors and collars. The fair values of these off-balance
sheet derivative financial instruments are based on dealer quotes and third
party financial models.
Interest rate swaps, purchased floors, and purchased collars are
accounted for on an accrual basis, and the net interest differential, including
premiums paid, if any, is recognized as an adjustment to interest income or
expense of the related designated asset or liability. Changes in the fair values
of the swaps, purchased floors, and purchased collars are not recorded in the
consolidated statements of income because these agreements are being treated as
synthetic alterations of the designated assets or liabilities. Synovus considers
its interest rate swaps to be a synthetic alteration of an asset or liability as
long as (i) the swap is designated with a specific asset or liability or finite
pool of assets or liabilities; (ii) the notional amount of the swap is less than
or equal to the principal amount of the designated asset or liability; and (iii)
the swap term is less than or equal to the expected remaining term of the
designated asset or liability. The criteria for consideration of a floor or
collar as a synthetic alteration of an asset or liability are generally the same
as those for a swap arrangement.
If the swap, purchased floor, or purchased collar arrangements are
terminated before their maturity, the net proceeds received or paid are deferred
and amortized over the shorter of the remaining contract life or the maturity of
the designated asset or liability as an adjustment to interest income or
expense. If the designated asset or liability is sold or matures, the swap
agreement is marked to market and the gain or loss is included with the gain or
loss on the sale or maturity of the designated asset or liability. Changes in
the fair value of any undesignated swaps, purchased floors, and purchased
collars are included in other income in the consolidated statements of income.
Premiums paid for purchased interest rate floor and collar agreements
are amortized to interest income or expense over the terms of the floors and
collars. Unamortized premiums are included in other assets in the consolidated
balance sheets. Amounts receivable or payable under collar and floor agreements
are accrued as an adjustment to interest income or expense.
DATA PROCESSING SERVICES
TSYS' bankcard data processing revenues are derived from long-term
processing contracts with banks and other institutions and are recognized as
revenues at the time the services are performed. TSYS' bankcard data processing
service contracts generally contain original terms ranging from 3 to 10 years.
INCOME TAXES
Synovus uses the asset and liability method to account for income
taxes. Under the asset and liability method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Synovus files a consolidated federal income tax return with its wholly-owned and
majority-owned subsidiaries.
STOCK-BASED COMPENSATION
Synovus accounts for its fixed stock-based compensation in accordance
with the provisions set forth in Accounting Principles Board (APB) Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations. In
accordance with APB Opinion No. 25, compensation expense is recorded on the
grant date only to the extent that the current market price of the underlying
stock exceeds the exercise price on the grant date.
The pro forma net income and earnings per share disclosures for
employee stock-based grants made in 1995 and subsequent years are determined
based upon the fair-value-based method which is defined in Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation."
POSTRETIREMENT BENEFITS
Synovus sponsors a defined benefit health care plan for substantially
all of its employees and early retirees. The expected costs of retiree health
care and other postretirement benefits are being expensed over the period that
employees provide service.
F-8
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made at a specific point in time, based on
relevant market information and other information about the financial
instrument. These estimates do not reflect any premium or discount that could
result from offering for sale, at one time, Synovus' entire holdings of a
particular financial instrument. Because no market exists for a portion of
Synovus' financial instruments, fair value estimates are also based on judgments
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. Significant assets and liabilities that are not
considered financial instruments include deferred income tax accounts, premises
and equipment, computer software, and goodwill. In addition, the tax
ramifications related to the realization of the unrealized gains and losses can
have a significant effect on fair value estimates and have not been considered
in any of the estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 standardizes the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts. Under the standard,
entities are required to carry all derivative instruments in the balance sheet
at fair value. The accounting for changes in the fair value (i.e., gains or
losses) of a derivative instrument depends on whether it has been designated and
qualifies as part of a hedging relationship and, if so, on the reason for
holding it. If certain conditions are met, entities may elect to designate a
derivative instrument as a hedge of exposures to changes in fair values, cash
flows, or foreign currencies. If the hedged exposure is a fair value exposure,
the gain or loss on the derivative instrument is recognized in earnings in the
period of change together with the offsetting gain or loss on the hedged item
attributable to the risk being hedged. If the hedged exposure is a cash flow
exposure, the effective portion of the gain or loss on the derivative instrument
is reported initially as a component of other comprehensive income (outside
earnings) and subsequently reclassified into earnings when the forecasted
transaction affects earnings. Any amounts excluded from the assessment of hedge
effectiveness as well as the ineffective portion of the gain or loss is reported
in earnings immediately. If the derivative instrument is not designated as a
hedge, the gain or loss is recognized in earnings in the period of change.
For Synovus, SFAS No. 133, as amended by SFAS No. 137, is effective
January 1, 2001. On adoption, the provisions of SFAS No. 133 must be applied
prospectively. Synovus is in the process of assessing the impact that SFAS No.
133 will have on its financial statements.
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 BUSINESS COMBINATIONS
On October 31, 1999, Synovus completed the acquisitions of Ready Bank of
Fort Walton Beach Holding Company, Inc. with $65 million in assets, and Horizon
Bancshares, Inc. with $60 million in assets. Synovus issued 1,946,416 shares of
common stock for all the issued and outstanding shares of these two entities.
Both transactions were accounted for as poolings of interests, except that the
financial information preceding the dates of acquisition have not been restated
to include the financial condition and results of operations of these two
entities since the effect was not material.
On September 30, 1999, Synovus completed the acquisition of the $306 million
asset Merit Holding Corporation. Merit Holding Corporation (Merit) is the parent
company of Mountain National Bank in Tucker, Georgia, and Charter Bank & Trust
Co. in Marietta, Georgia. Synovus issued 5,995,085 shares of common stock for
all the issued and outstanding shares of Merit.
On September 30, 1999, Synovus completed the acquisition of the debt
collection and bankruptcy management business offered by Wallace & de Mayo
(WDM), a firm based in Norcross, Georgia. Synovus issued 2,339,624 shares of
common stock for all of the outstanding common stock of WDM. Effective September
30, 1999, WDM operates as TSYS Total Debt Management, Inc. (TDM), a wholly-owned
subsidiary of Synovus.
The aforementioned two acquisitions have been accounted for as poolings of
interests. Accordingly, the financial statements for all periods presented have
been restated to include the financial condition and results of operations of
these two entities. Synovus' consolidated financial statements for the three
years ended December 31, 1999, have been restated for the mergers with Merit and
WDM as follows:
YEARS ENDED DECEMBER 31,
(In thousands) 1999 1998 1997
- --------------------------------------------------------------------------------------------
Net interest income (expense):
Synovus -- exclusive of pre-acquisition amounts .... $500,983 440,361 412,229
Merit Holding Corporation and subsidiaries ......... 12,311 14,722 13,723
Wallace & de Mayo .................................. -- (18) (32)
-------- -------- --------
Total ........................................... $513,294 455,065 425,920
======== ======== ========
Non-interest income:
Synovus -- exclusive of pre-acquisition amounts .... $718,236 562,137 489,406
Merit Holding Corporation and subsidiaries ......... 1,328 1,550 1,399
Wallace & de Mayo .................................. 20,201 18,526 10,607
-------- -------- --------
Total ........................................... $739,765 582,213 501,412
======== ======== ========
Net income:
Synovus -- exclusive of pre-acquisition amounts .... $217,432 187,107 165,236
Merit Holding Corporation and subsidiaries ......... 3,932 4,955 4,441
Wallace & de Mayo(*) ............................... 3,943 4,403 1,152
-------- -------- --------
Total ........................................... $225,307 196,465 170,829
======== ======== ========
(*)Prior to its merger with Synovus, WDM was a nontaxable enterprise due to its
S corporation status. Accordingly, the pre-acquisition net income amounts shown
above for WDM do not include income tax expense. Pro forma income tax expense
related to WDM's net income for the years ended December 31, 1999, 1998, and
1997 would be approximately $1.4 million, $1.5 million, and $400 thousand,
respectively.
On January 31, 1999, Synovus issued 333,163 shares of common stock to
acquire the remaining 80% interest in Canterbury Trust Company, Inc., which
provides trust, custody, investment and consulting services to large
institutional clients. The acquisition was accounted for as a purchase resulting
in goodwill of $5.5 million which is being amortized on a straight-line basis
over fifteen years.
On January 29, 1999, Merit acquired Source Capital Group I, Inc., an
Atlanta-based equipment leasing company, in exchange for 100,000 shares of
Merit's common stock (equivalent of 125,330 Synovus shares), valued at
approximately $1.9 million. The acquisition was accounted for as a purchase
resulting in goodwill of $1.3 million which is being amortized on a
straight-line basis over fifteen years.
On December 18, 1998, Synovus completed the acquisition of the $178 million
asset Georgia Bank & Trust (GB&T), located in Calhoun, Georgia. Synovus issued
1,811,058 shares of common stock for all the issued and outstanding shares of
GB&T.
On November 30, 1998, Synovus completed the acquisition of the $55 million
asset Bank of Georgia, located in Watkinsville, Georgia. Synovus issued 850,269
shares of common stock for all the issued and outstanding shares of Bank of
Georgia.
On September 1, 1998, Synovus completed the acquisition of the $348 million
asset Community Bank Capital Corporation (CBCC). CBCC is the parent company of
the Bank of North Georgia, located in Alpharetta, Georgia. Synovus issued
3,774,531 shares of common stock for all the issued and outstanding shares of
CBCC.
The aforementioned three acquisitions have been accounted for as poolings of
interests, except that the financial information preceding the dates of
acquisition have not been restated to include the financial position and results
of operations of these acquired entities since the effect was not material. Net
income for the years ended December 31, 1998 and 1997 would have been increased
by $2.6 million and $7.2 million, respectively, if the previous periods had been
restated.
F-10
NOTE 2 INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses, and estimated fair
values of investment securities at December 31, 1999 and 1998 are summarized as
follows:
DECEMBER 31, 1999
----------------------------------------------------------
INVESTMENT SECURITIES AVAILABLE FOR SALE GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
(In thousands) COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------------------------------------
U.S. Treasury and U.S. Government agencies .. $1,327,368 446 (39,861) 1,287,953
Mortgage-backed securities .................. 403,096 251 (10,567) 392,780
State and municipal ......................... 15,736 71 (681) 15,126
Other investments ........................... 18,094 3,597 (872) 20,819
---------- ---------- ---------- ---------
Total .................................... $1,764,294 4,365 (51,981) 1,716,678
========== ========== ========== =========
DECEMBER 31, 1998
----------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
(In thousands) COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------------------------------------
U.S. Treasury and U.S. Government agencies .. $1,190,424 16,179 (1,342) 1,205,261
Mortgage-backed securities .................. 328,195 1,954 (813) 329,336
State and municipal ......................... 13,718 285 (196) 13,807
Other investments ........................... 21,062 2,818 (444) 23,436
---------- ---------- ---------- ---------
Total .................................... $1,553,399 21,236 (2,795) 1,571,840
========== ========== ========== =========
DECEMBER 31, 1999
----------------------------------------------------------
INVESTMENT SECURITIES HELD TO MATURITY GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
(In thousands) COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------------------------------------
U.S. Treasury and U.S. Government agencies .. $ 24,914 16 (294) 24,636
Mortgage-backed securities .................. 53,698 218 (937) 52,979
State and municipal ......................... 169,745 1,041 (3,697) 167,089
Other investments ........................... 28,922 -- (122) 28,800
---------- ---------- ---------- ---------
Total .................................... $ 277,279 1,275 (5,050) 273,504
========== ========== ========== =========
DECEMBER 31, 1998
----------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
(In thousands) COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------------------------------------
U.S. Treasury and U.S. Government agencies .. $ 51,996 730 (67) 52,659
Mortgage-backed securities .................. 77,899 1,063 (101) 78,861
State and municipal ......................... 153,924 4,745 (151) 158,518
Other investments ........................... 21,814 1 (127) 21,688
---------- ---------- ---------- ---------
Total .................................. $ 305,633 6,539 (446) 311,726
========== ========== ========== =========
F-11
The amortized cost and estimated fair value of investment securities at
December 31, 1999 by contractual maturity, are shown below. Actual maturities
may differ from contractual maturities because issuers may have the right to
call or prepay obligations with or without call or prepayment penalties.
INVESTMENT SECURITIES INVESTMENT SECURITIES
HELD TO MATURITY AVAILABLE FOR SALE
-------------------------- --------------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
(In thousands) COST FAIR VALUE COST FAIR VALUE
- -----------------------------------------------------------------------------------------------------------------
U. S. Treasury and U. S. Government agencies:
Within 1 year ................................ $ 7,010 7,011 97,970 97,982
1 to 5 years ................................. 9,151 9,048 920,770 895,154
5 to 10 years ................................ 8,753 8,577 306,608 292,833
More than 10 years ........................... -- -- 2,020 1,984
---------- ---------- ---------- ----------
$ 24,914 24,636 1,327,368 1,287,953
========== ========== ========== ==========
State and municipal:
Within 1 year ................................ $ 8,742 8,780 447 451
1 to 5 years ................................. 38,474 38,505 3,434 3,445
5 to 10 years ................................ 79,815 78,634 7,140 6,951
More than 10 years ........................... 42,714 41,170 4,715 4,279
---------- ---------- ---------- ----------
$ 169,745 167,089 15,736 15,126
========== ========== ========== ==========
Other investments:
Within 1 year ................................ $ 751 752 2,445 2,222
1 to 5 years ................................. 263 265 758 775
5 to 10 years ................................ 808 809 2,529 2,547
More than 10 years ........................... 27,100 26,974 12,362 15,275
---------- ---------- ---------- ----------
$ 28,922 28,800 18,094 20,819
========== ========== ========== ==========
Mortgage-backed securities ...................... $ 53,698 52,979 403,096 392,780
========== ========== ========== ==========
Total investment securities:
Within 1 year ................................ $ 16,503 16,543 100,862 100,655
1 to 5 years ................................. 47,888 47,818 924,962 899,374
5 to 10 years ................................ 89,376 88,020 316,277 302,331
More than 10 years ........................... 69,814 68,144 19,097 21,538
Mortgage backed securities ................... 53,698 52,979 403,096 392,780
---------- ---------- ---------- ----------
$ 277,279 273,504 1,764,294 1,716,678
========== ========== ========== ==========
A summary of sales transactions in the investment securities available for sale
portfolio for 1999, 1998, and 1997 is as follows:
GROSS GROSS
REALIZED REALIZED
(In thousands) PROCEEDS GAINS LOSSES
-----------------------------------------------------------------------
1999.............................. $ 48,472 1,252 (50)
1998.............................. 131,493 1,371 (72)
1997.............................. 89,822 151 (217)
There were no sales transactions in the investment securities held to
maturity portfolio during the three years ended December 31,1999. Securities
with a carrying value of $1,297,866 and $1,152,931 at December 31, 1999 and
1998, respectively, were pledged to secure certain deposits and repurchase
agreements as required by law.
F-12
NOTE 3 LOANS
Loans outstanding, by classification, are summarized as follows:
(In thousands)
DECEMBER 31, 1999 1998
- ------------------------------------------------------------------
Commercial:
Commercial, financial, and
agricultural ................. $3,195,512 2,701,561
Real estate-construction ....... 1,609,594 1,164,443
Real estate-mortgage ........... 1,983,766 1,540,459
---------- ---------
Total commercial ............ 6,788,872 5,406,463
---------- ---------
Retail:
Real estate-mortgage ........... 1,089,217 1,058,172
Consumer loans-credit card ..... 237,546 257,721
Consumer loans-other ........... 961,881 889,786
---------- ---------
Total retail ................ 2,288,644 2,205,679
---------- ---------
Total loans ................. $9,077,516 7,612,142
========== =========
Activity in the reserve for loan losses is summarized as follows:
(In thousands)
DECEMBER 31, 1999 1998 1997
- ----------------------------------------------------------------------------------
Balance at beginning of year ...... $ 114,109 105,705 97,455
Loan loss reserves of acquired
subsidiaries ..................... 2,928 6,170 --
Provision for losses on loans ..... 34,007 26,882 32,485
Recoveries of loans previously
charged off ...................... 6,957 6,493 8,077
Loans charged off ................. (30,443) (31,141) (32,312)
--------- ------- -------
Balance at end of year ............ $ 127,558 114,109 105,705
========= ======= =======
At December 31, 1999, the recorded investment in loans that were considered
to be impaired was $29.6 million (of which $25.2 million were on a nonaccrual
basis). Included in this amount is $25.0 million of impaired loans for which the
related loan loss reserve is $12.3 million, and $4.6 million of impaired loans
for which there is no related allowance determined in accordance with SFAS No.
114, "Accounting by Creditors for Impairment of a Loan".
At December 31, 1998, the recorded investment in loans that were considered
to be impaired was $27.5 million (of which $18.8 million were on a nonaccrual
basis). Included in this amount is $14.7 million of impaired loans for which the
related loan loss reserve is $5.4 million, and $12.8 million of impaired loans
for which there is no related allowance determined in accordance with SFAS No.
114.
The loan loss reserve amounts for impaired loans were primarily determined
using the fair value of the loans' collateral. The average recorded investment
in impaired loans was approximately $26,500,000, $29,000,000, and $31,000,000
for the years ended December 31, 1999, 1998, and 1997, respectively, and the
related amount of interest income recognized during the period that such loans
were impaired was approximately $1,468,000, $1,573,000, and $1,956,000 in 1999,
1998, and 1997, respectively.
Loans on nonaccrual status amounted to approximately $26,672,000,
$20,756,000, and $18,304,000 at December 31, 1999, 1998, and 1997, respectively.
If nonaccruing loans had been on a full accruing basis, interest income on these
loans would have been increased by approximately $2,603,000, $1,891,000, and
$2,251,000 in 1999, 1998, and 1997, respectively.
A substantial portion of Synovus' loans are secured by real estate in
markets in which subsidiary banks are located throughout Georgia, Alabama, South
Carolina, and Northwest Florida. Accordingly, the ultimate collectibility of a
substantial portion of Synovus' loan portfolio and the recovery of a substantial
portion of the carrying amount of real estate owned are susceptible to changes
in market conditions in these areas.
In the ordinary course of business, Synovus has direct and indirect loans
outstanding to certain executive officers, directors, and principal holders of
equity securities (including their associates). Management believes that such
loans are made substantially on the same terms, including interest rate and
collateral, as those prevailing at the time for comparable transactions with
other customers. The following is a summary of such loans outstanding and the
activity in these loans for the year ended December 31, 1999.
(In thousands)
- ---------------------------------------------------------------------------
Balance at December 31, 1998 ............................... $ 128,362
Adjustment for executive officer and director changes ...... (13,149)
----------
Adjusted balance at December 31, 1998 ...................... 115,213
New loans .................................................. 228,614
Repayments ................................................. (214,359)
----------
Balance at December 31, 1999 ............................... $ 129,468
==========
NOTE 4 OTHER ASSETS
Included in other assets are the following significant balances: mortgage
servicing rights, bank-owned life insurance programs, TSYS' computer software
costs, contract acquisition costs, and investments in joint ventures.
At December 31, 1999 and 1998, Synovus had approximately $33,411,000 and
$28,317,000, respectively, in capitalized mortgage servicing rights. There was
no valuation allowance as of December 31, 1999 and 1998.
At December 31, 1999 and 1998, Synovus serviced mortgage loans for
unaffiliated investors of approximately $2,519,000,000 and $2,115,000,000,
respectively.
At December 31, 1999 and 1998, Synovus maintained certain bank-owned life
insurance programs with a carrying value of approximately $75,000,000 and
$40,000,000, respectively.
The following table summarizes TSYS' computer software at December 31, 1999
and 1998:
(In thousands) 1999 1998
- --------------------------------------------------------------
Purchased computer software ....... $111,331 68,636
TS(2) ............................. 33,049 33,049
Other capitalized software
development costs ............... 26,787 14,854
-------- -------
171,167 116,539
Less accumulated amortization ..... 72,342 50,677
-------- -------
Computer software, net ............ $ 98,825 65,862
======== =======
Amortization expense related to purchased and capitalized software
development costs at TSYS was $21,627,000, $16,774,000 and $11,668,000 for the
years ended December 31, 1999, 1998, and 1997, respectively.
Contract acquisition costs, net, at TSYS were $50,862,000 and $46,681,000 at
December 31, 1999 and 1998, respectively. TSYS' investments in joint ventures,
net, were $35,101,000 and $28,304,000 at December 31, 1999 and 1998,
respectively.
F-13
NOTE 5 INTEREST BEARING DEPOSITS
A summary of interest bearing deposits at December 31, 1999 and 1998 is as
follows:
(In thousands) 1999 1998
- -----------------------------------------------------------------
Interest bearing demand deposits ..... $1,364,244 1,406,885
Money market accounts ................ 1,766,893 1,708,522
Savings accounts ..................... 444,493 457,711
Time deposits under $100,000 ......... 2,451,629 2,509,196
Time deposits of $100,000 or more .... 1,787,515 1,281,169
---------- ---------
Total interest bearing deposits.. $7,814,774 7,363,483
========== =========
Interest expense for the years ended December 31, 1999, 1998, and 1997 on
time deposits of $100,000 or more was $82,685,000, $76,311,000, and $69,767,000,
respectively.
NOTE 6 LONG-TERM DEBT
Long-term debt at December 31, 1999 and 1998 consists of the following:
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------
Parent Company:
6.125% senior note, due October 15, 2003,
with semi-annual interest payments and
principal to be paid at maturity ................... $ 75,000 75,000
8.75% debenture, due May 15, 2003, with
minimum annual principal payments of
$120 and $1,120 at maturity ........................ 1,480 1,720
-------- -------
Total Parent Company debt ...................... 76,480 76,720
-------- -------
Subsidiaries:
Federal Home Loan Bank advances with interest
and principal payments due at various maturity
dates through 2009 and interest rates ranging
from 4.65% to 7.54% at December 31, 1999 ........... 241,763 54,130
9.23% note payable, due October 31, 2003,
with annual principal and interest
payments ........................................... 204 245
8.00% capital lease obligation payable, due in
monthly principal and interest
payments through 2002 .............................. 126 173
Other notes payable and capital lease obligations
payable, with an interest rate of 7.85% at
December 31, 1999, maturing in 2000 ................ 47 534
-------- -------
Total subsidiaries debt ......................... 242,140 55,082
-------- -------
Total long-term debt ............................ $318,620 131,802
======== =======
The provisions of the loan and security agreements associated with some of
the promissory notes place certain restrictions, within specified limits, on
payments of cash dividends, issuance of additional debt, creation of liens upon
property, disposition of common stock or assets, and investments in
subsidiaries. As of December 31, 1999, Synovus and its subsidiaries were in
compliance with the covenants of the aforementioned loan and security
agreements.
The Federal Home Loan Bank advances are secured by certain mortgage loans
receivable as well as all of the stock of the Federal Home Loan Bank owned by
various Synovus affiliate banks.
Synovus has an unsecured line of credit, with an unaffiliated bank, for $25
million with an interest rate of 50 basis points above the short-term index, as
defined. The line of credit requires an annual commitment fee of .125% on the
average daily available balance and draws can be made on demand (subject to
compliance with certain restrictive covenants). There were no advances
outstanding at December 31, 1999 and 1998.
Required annual principal payments on long-term debt for the five years
subsequent to December 31, 1999 are as follows:
PARENT
(In thousands) COMPANY SUBSIDIARIES TOTAL
- ----------------------------------------------------------
2000................ $ 120 33,463 33,583
2001................ 120 100,602 100,722
2002................ 120 25,576 25,696
2003................ 76,120 8,390 84,510
2004................ -- 5,597 5,597
NOTE 7 INCOME TAXES
For the years ended December 31, 1999, 1998, and 1997, income tax expense
(benefit) consists of:
(In thousands) 1999 1998 1997
- ----------------------------------------------------------------------------
Current:
Federal ......................... $ 117,284 96,223 89,479
State ........................... 6,868 5,110 5,794
--------- ------- ------
124,152 101,333 95,273
--------- ------- ------
Deferred:
Federal ......................... (122) 5,244 788
State ........................... (22) 983 123
--------- ------- ------
(144) 6,227 911
--------- ------- ------
Total income tax expense ..... $ 124,008 107,560 96,184
========= ======= ======
Income tax expense as shown in the consolidated statements of income
differed from the amounts computed by applying the U.S. Federal income tax rate
of 35% to pretax income as a result of the following:
(In thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------
Taxes at statutory Federal
income tax rate ................. $ 122,260 106,409 93,455
Tax-exempt income ................. (3,200) (2,798) (2,473)
State income taxes, net of
federal income tax benefit ...... 4,450 3,960 3,846
Minority interest ................. 4,616 3,696 3,200
Other, net ........................ (4,118) (3,707) (1,844)
--------- -------- -------
Total income tax expense ...... $ 124,008 107,560 96,184
--------- -------- -------
Effective income tax rate ..... 35.50% 35.38 36.02
========= ======== =======
F-14
The tax effects of temporary differences that gave rise to significant
portions of the deferred income tax assets and liabilities at December 31, 1999
and 1998 are presented below:
(In thousands) 1999 1998
- -------------------------------------------------------------------------------------------
Deferred income tax assets:
Provision for losses on loans ................................. $ 48,709 42,734
Net unrealized loss on investment securities available for sale 18,094 --
State tax credits ............................................. 2,622 --
Other assets .................................................. 15,180 12,732
-------- -------
Total gross deferred income tax assets ..................... 84,605 55,466
Less valuation allowance ...................................... (1,400) --
-------- -------
Total net deferred income tax assets ....................... 83,205 55,466
-------- -------
Deferred income tax liabilities:
Computer software development costs ........................... (18,311) (17,210)
Differences in depreciation ................................... (12,215) (7,710)
Capitalization of mortgage servicing rights ................... (9,201) (7,172)
Net unrealized gain on investment securities available for sale -- (7,007)
Ownership interest in partnership ............................. (2,553) (720)
Other liabilities ............................................. (7,520) (7,199)
-------- -------
Total gross deferred income tax liabilities ................ (49,800) (47,018)
-------- -------
Net deferred income tax assets .......................... $ 33,405 8,448
======== =======
The valuation allowance for deferred tax assets as of December 31, 1999 was
$1,400,000. There was no valuation allowance at December 31, 1998. In assessing
the realizability of deferred income tax assets, management considers whether it
is more likely than not that some portion or all of the deferred income tax
assets will not be realized. The ultimate realization of deferred income tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred income tax liabilities, projected
future taxable income, and tax planning strategies in making this assessment.
Based upon the level of historical taxable income and projections for future
taxable income over the periods in which the deferred income tax assets are
deductible, management believes that it is more likely than not that Synovus
will realize the benefits of these deductible differences, net of existing
valuation allowances, at December 31, 1999.
NOTE 8 EMPLOYEE BENEFIT PLANS
Synovus has various stock option plans under which the Compensation
Committee of the Board of Directors has the authority to grant options to key
Synovus employees. At December 31, 1999, Synovus had 5,436,563 shares of its
authorized but unissued common stock reserved for future grants under the stock
option plans. The general terms of the existing stock option plans include
vesting periods ranging from two to three years and exercise periods ranging
from five to ten years. Such stock options are granted at exercise prices which
equal the fair market value of a share of common stock on the grant date.
During 1999 and 1998, Synovus granted options to purchase 150 shares of
stock to each employee for a total of 1,546,650 and 1,246,650 stock options in
1999 and 1998, respectively. The exercise price per share is equal to the fair
market value at the grant date of $19.19 and $22.00 for the 1999 and 1998
grants, respectively. The options are exercisable after the price of the stock
has doubled or after three years, whichever comes first.
During 1999, Synovus granted options to purchase 500,000 shares of stock to
a key executive. The exercise price per share is equal to the fair market value
at the grant date of $19.06. The options are exercisable in equal installments
when the per share market price of Synovus common stock exceeds $40, $45, and
$50, and in any event on September 12, 2006.
Synovus applies APB Opinion No. 25 in accounting for its stock option plans,
accordingly, compensation expense for the option grants has not been recognized
in the accompanying financial statements.
A summary of the status of Synovus' stock option plans as of December 31,
1999, 1998, and 1997 and changes during the years then ended is presented below:
1999 1998 1997
---------------------------- ---------------------------- ----------------------------
WEIGHTED AVG. WEIGHTED AVG. WEIGHTED AVG.
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
---------------------------- ---------------------------- ----------------------------
Options outstanding at beginning of period 16,364,209 $ 12.84 13,349,230 $ 9.22 10,078,092 $ 5.90
Options granted .......................... 4,589,819 21.13 4,348,434 21.67 4,389,519 15.50
Options exercised ........................ (1,347,711) 5.02 (1,196,396) 4.60 (1,046,860) 3.23
Options canceled ......................... (165,367) 17.27 (137,059) 12.44 (71,521) 10.83
------------------------- ------------------------- -------------------------
Options outstanding at end of period .. 19,440,950 16.28 16,364,209 12.84 13,349,230 9.22
========================= ========================= =========================
Options exercisable at end of period .. 8,456,609 $ 8.72 6,211,534 $ 6.04 3,607,612 $ 4.30
========================= ========================= =========================
F-15
The following is a summary of stock options outstanding at December 31, 1999:
WEIGHTED AVERAGE WEIGHTED
RANGE OF OPTIONS OPTIONS WEIGHTED AVERAGE EXERCISE PRICE- AVERAGE REMAINING
EXERCISE PRICES OUTSTANDING EXERCISABLE EXERCISE PRICE OPTIONS EXERCISABLE CONTRACTUAL LIFE
- --------------- ----------- ----------- ---------------- ------------------- -----------------
$ 2.37 - $ 4.72 2,303,034 2,303,034 $ 3.83 $ 3.83 1.7 years
$ 6.74 - $ 9.61 4,624,619 4,624,619 $ 8.15 $ 8.15 4.9 years
$14.27 - $22.87 12,513,297 1,528,956 $19.29 $17.80 6.9 years
The per share weighted average fair value of stock options granted during
1999, 1998, and 1997 was $5.41, $4.96, and $3.68, respectively. The fair value
for these options was estimated at the date of grant using the Black-Scholes
option pricing model with the following weighted average assumptions for 1999,
1998, and 1997, respectively: risk-free interest rates of 5.3%, 5.4%, and 6.5%;
expected volatility of 36%, 32%, and 22%, expected life of 4.3 years, 4 years,
and 4 years; and dividend yield of 1.7%, 1.3%, and 1.4%.
Had Synovus determined compensation expense based on the fair value at the
grant date for its stock options granted during the years 1995 through 1999
under SFAS No. 123, Synovus' net income would have been reduced to the pro forma
amounts indicated below:
YEARS ENDED DECEMBER 31, 1999 1998 1997
- ---------------------------------------------------------------------------
Net income (In thousands):
As reported .................. $225,307 196,465 170,829
Pro forma .................... 213,662 187,044 166,361
Earnings per share-diluted:
As reported .................. 0.80 0.71 0.63
Pro forma .................... 0.75 0.67 0.61
In addition to the stock options described above, Synovus has awarded
non-transferable, restricted shares of Synovus common stock to various key
executives under key executive restricted stock bonus plans. The market value of
the common stock at the date of issuance is included as a reduction of
shareholders' equity in the consolidated balance sheets and is amortized as
compensation expense using the straight-line method over the vesting period of
the awards. Aggregate compensation expense with respect to the foregoing Synovus
restricted stock awards was approximately $1,252,000, $1,189,000, and $1,856,000
in 1999, 1998, and 1997, respectively. Summary information regarding outstanding
restricted stock bonus plans at December 31, 1999 is presented below:
Year awards Market value Vesting
granted at award date period
----------- ------------- --------
1995 $2,054,000 5 years
1996 3,771,000 5 years
1997 246,000 5 years
TSYS has also awarded 1,438,800 non-transferable, restricted shares of its
common stock to various key executives under restricted stock bonus plans.
Compensation expense related to these restricted stock awards was approximately
$44,325 and $357,800 in 1998 and 1997, respectively. These awards were fully
amortized during 1998.
Synovus generally provides noncontributory, trusteed, money purchase, profit
sharing and 401(k) plans which cover all eligible employees. Annual
discretionary contributions to these plans are set each year by the respective
Boards of Directors of each subsidiary, but cannot exceed amounts allowable as a
deduction for federal income tax purposes. Aggregate contributions to these
money purchase, profit sharing, and 401(k) plans for the years ended December
31, 1999, 1998, and 1997 were $46,475,366, $38,871,669, and $30,961,713,
respectively.
Synovus has stock purchase plans for directors and employees whereby Synovus
makes contributions equal to one-half of employee and director voluntary
contributions. The funds are used to purchase outstanding shares of Synovus
common stock. TSYS has established director and employee stock purchase plans,
modeled after Synovus' plans except that the funds are used to purchase
outstanding shares of TSYS common stock. Synovus and TSYS contributed
$6,365,000, $5,448,000, and $4,664,000 to these plans in 1999, 1998, and 1997,
respectively.
Synovus has entered into employment agreements with certain executive
officers for past and future services which provide for current compensation in
addition to salary in the form of deferred compensation payable at retirement or
in the event of death, total disability, or termination of employment. The
aggregate cost of these salary continuation plans and employment agreements was
not material to the consolidated financial statements.
Synovus provides certain medical benefits to qualified retirees through a
postretirement medical benefits plan. The benefit expense and accrued benefit
cost is not material to Synovus' consolidated financial statements.
F-16
NOTE 9 FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying and estimated fair values of
Synovus' on-balance sheet financial instruments at December 31, 1999 and 1998.
The estimated fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties.
1999 1998
-------------------------- -----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
(In thousands) VALUE FAIR VALUE VALUE FAIR VALUE
- -------------------------------------------------------------------------------------------------------------------------------
Financial assets:
Cash and due from banks ................................................. $ 466,543 466,543 373,376 373,376
Interest earning deposits with banks .................................... 1,928 1,928 1,383 1,383
Federal funds sold ...................................................... 92,093 92,093 77,392 77,392
Mortgage loans held for sale ............................................ 83,145 83,145 156,231 156,231
Investment securities available for sale ................................ 1,716,678 1,716,678 1,571,840 1,571,840
Investment securities held to maturity .................................. 277,279 273,504 305,633 311,726
Loans, net .............................................................. 8,940,681 8,984,381 7,489,496 7,468,278
Purchased and originated mortgage servicing rights ...................... 33,411 36,945 28,317 29,091
Financial liabilities:
Non-interest bearing deposits ........................................... 1,625,313 1,625,313 1,433,929 1,433,929
Interest bearing deposits ............................................... 7,814,774 7,757,991 7,363,483 7,379,757
Federal funds purchased and securities sold under agreement to repurchase 1,261,391 1,261,391 503,287 503,287
Long-term debt .......................................................... 318,620 318,178 131,802 133,274
The carrying and estimated fair values relating to off-balance sheet
financial instruments are summarized in Note 10.
Cash and due from banks, interest earning deposits with banks, and federal
funds sold are repriced on a short-term basis; as such, the carrying value
closely approximates fair value.
The fair value of mortgage loans held for sale is based on quoted market
prices of comparable instruments.
The fair value of loans is estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type, such as commercial,
mortgage, home equity, credit card, and other consumer loans. Fixed rate
commercial loans are further segmented into certain collateral code groupings.
Commercial and other consumer loans with adjustable interest rates are assumed
to be at fair value. Mortgage loans are further segmented into fixed and
adjustable rate interest terms. Home equity and credit card loans have
adjustable interest rates and are, therefore, assumed to be at fair value. The
fair value of loans, except mortgage loans, is calculated by discounting
contractual cash flows using estimated market discount rates which reflect the
credit and interest rate risk inherent in the loan. For mortgage loans, fair
value is estimated by discounting contractual cash flows adjusted for certain
prepayment assumptions, estimated using discount rates based on secondary market
sources adjusted to reflect differences in servicing and credit costs.
In accordance with SFAS No. 107, "Disclosures About Fair Value of Financial
Instruments," the fair value of deposits with no stated maturity, such as
non-interest bearing demand accounts, interest bearing demand deposits, money
market accounts, and savings accounts, is equal to the amount payable on demand
as of that respective date. The fair value of time deposits is based on the
discounted value of contractual cash flows. The discount rate is estimated using
the rates currently offered for deposits of similar remaining maturities.
Short-term debt that matures within ten days is assumed to be at fair value.
The fair value of short-term and long-term debt with fixed interest rates is
calculated by discounting contractual cash flows using estimated market discount
rates.
NOTE 10 COMMITMENTS AND CONTINGENCIES
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Synovus is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers,
reduce its own exposure to fluctuations in interest rates, and to conduct
lending activities. These financial instruments include commitments to extend
credit, standby and commercial letters of credit, commitments to sell mortgage
loans, and interest rate contracts. These instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amounts
recognized in the consolidated financial statements.
Synovus' exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit, and standby
and commercial letters of credit is represented by the contract amount of those
instruments. Synovus uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments. For
interest rate swap and floor agreements held at year-end, Synovus had
insignificant credit risk.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, total commitment amounts do not necessarily represent
future cash requirements.
Loan commitments and letters of credit at December 31, 1999 include the
following:
(In thousands) 1999
- -------------------------------------------------------
Standby letters of credit................ $ 359,451
Undisbursed construction loans .......... 536,028
Unused credit card lines................. 698,761
Other loan commitments................... 1,140,704
-----------
Total.................................... $ 2,734,944
===========
F-17
Due to the short-term nature of the outstanding loan commitments, and the
likelihood that, when funded, these loans will be indexed to the then current
market rates, the off-balance sheet value closely approximates fair value.
At December 31, 1999, outstanding commitments to sell mortgage loans
amounted to approximately $86,000,000. Such commitments are entered into to
reduce Synovus' exposure to market risk arising from potential changes in
interest rates, which could affect the fair value of mortgage loans held for
sale and outstanding commitments to originate residential mortgage loans held
for sale. The commitments to sell mortgage loans are at fixed prices and are
scheduled to settle at specified dates which generally do not exceed 90 days.
The off-balance sheet value of outstanding commitments to sell mortgage loans
at December 31, 1999 closely approximated fair value.
Interest rate swap transactions generally involve the exchange of fixed and
floating rate interest payment obligations without the exchange of the
underlying principal amounts. Entering into off-balance sheet interest rate
contracts involves not only interest rate risk but also, the risk of
counterparties' failure to fulfill their legal obligations. Notional principal
amounts often are used to express the volume of these transactions, but the
amounts potentially subject to credit risk are much smaller.
The consolidated notional amount of interest rate swap, floor, and collar
contracts was $665,000,000 and $595,000,000 as of December 31, 1999 and 1998,
respectively, with a carrying amount of $77,000 and $280,000 at December 31,
1999 and 1998, respectively. The estimated net unrealized gain (loss) on these
interest rate contracts was ($10,575,000) and $5,578,000 at December 31, 1999
and 1998, respectively.
These interest rate contracts are being utilized to hedge approximately
$825,500,000 in prime rate floating loans in Georgia and South Carolina and $30
million in fixed rate deposits in South Carolina.
(Dollars in thousands)
Weighted
Weighted Weighted Average Net
Notional Average Average Maturity Unrealized Unrealized Unrealized
DECEMBER 31, 1999 Amount Receive Rate Pay Rate(a) In Months Gains Losses Gains (Losses)
- ---------------------------------------------------------------------------------------------------------------------------------
Receive fixed swaps - LIBOR $180,000 5.78% 6.16% 19 $ 181 (2,711) (2,530)
Receive fixed swaps - Prime 420,000 8.82% 8.50% 39 75 (8,047) (7,972)
-------- ---- ---- -- --- -------- --------
Total receive fixed swaps 600,000 7.91% 7.80% 33 256 (10,758) (10,502)
-------- ---- ---- -- --- -------- --------
Weighted
Weighted Average Net
Notional Average Maturity Unrealized Unrealized Unrealized
Amount Floor Rate In Months Gains Losses Gains (Losses)
- ---------------------------------------------------------------------------------------------------------------------------------
Purchased interest rate floors.. 65,000 7.90% 9 -- (73) (73)
Weighted
Average Net
Notional Maturity Unrealized Unrealized Unrealized
Amount In Months Gains Losses Gains (Losses)
Total $665,000 31 $ 256 (10,831) (10,575)
======== === ======== =======
Weighted
Weighted Weighted Average Net
Notional Average Average Maturity Unrealized Unrealized Unrealized
DECEMBER 31, 1998 Amount Receive Rate Pay Rate(a)(b) In Months Gains Losses Gains (Losses)
- ---------------------------------------------------------------------------------------------------------------------------------
Receive fixed swaps - LIBOR $ 235,000 5.79% 5.33% 9 $ 1,220 (16) 1,204
Receive fixed forward
starting swaps - LIBOR 100,000 5.90% 5.07% 41 1,455 (16) 1,439
Receive fixed swaps - Prime 95,000 8.79% 7.75% 29 2,226 -- 2,226
-------- ---- ---- -- ----- -------- -------
Total receive fixed swaps 430,000 6.48% 5.80% 21 4,901 (32) 4,869
-------- ---- ---- -- ----- -------- -------
Weighted
Weighted Weighted Average Net
Notional Average Average Maturity Unrealized Unrealized Unrealized
Amount Cap Rate Floor Rate In Months Gains Losses Gains (Losses)
- ----------------------------------------------------------------------------------------------------------------------------------
Purchased interest rate collars 80,000 9.16% 7.91% 10 $ 256 -- 256
Weighted
Weighted Average Net
Notional Average Maturity Unrealized Unrealized Unrealized
Amount Floor Rate In Months Gains Losses Gains (Losses)
- ----------------------------------------------------------------------------------------------------------------------------------
Purchased interest rate floors 85,000 7.87% 24 $ 453 -- 453
Weighted
Average Net
Notional Maturity Unrealized Unrealized Unrealized
Amount In Months Gains Losses Gains (Losses)
- ---------------------------------------------------------------------------------------------------------------------------------
Total $595,000 20 $ 5,610 (32) 5,578
======== ===== ===== =====
(a) Variable pay rate based upon contract rates in effect at December 31, 1999
and 1998.
(b) Pay rate on forward starting swaps is based on the three month LIBOR at
December 31, 1998.
F-18
LEASE COMMITMENTS
Synovus and its subsidiaries have entered into long-term operating leases
for various branch locations, corporate facilities, data processing equipment,
and furniture. Management expects that, as these leases expire, they will be
renewed or replaced by other leases. At December 31, 1999, minimum rental
commitments under all such noncancelable leases for the next five years are as
follows:
Equipment
Real and
(In thousands) Property Furniture Total
- -------------------------------------------------------
2000............. $11,289 89,427 100,716
2001............. 10,687 91,958 102,645
2002............. 8,541 79,135 87,676
2003............. 2,309 44,775 47,084
2004............. 5,266 35,364 40,630
In 1997, TSYS entered into an operating lease agreement for TSYS' new
corporate campus. Under the agreement, which is guaranteed by Synovus, the
lessor paid for the construction and development costs and has leased the
facilities to TSYS for a term of three years beginning in November 1999. The
lease provides for substantial residual value guarantees and includes purchase
options at the original cost of the property. The amount of the residual value
guarantees relative to the assets under this lease is projected to be $81.4
million. The terms of this lease financing arrangement require, among other
things, that TSYS maintain certain minimum financial ratios and provide certain
information to the lessor.
Rental expense on equipment, including cancelable leases, was $82,272,000,
$55,320,000, and $51,925,000 in 1999, 1998, and 1997, respectively. Rental
expense on facilities was $11,033,000, $7,685,000, and $7,170,000 in 1999,
1998, and 1997, respectively.
CONTRACTUAL COMMITMENTS
In the normal course of its business, TSYS maintains processing contracts
with its customers. These processing contracts contain commitments, including,
but not limited to, minimum standards and time frames against which TSYS'
performance is measured. In the event that TSYS does not meet its contractual
commitments with its customers, TSYS may incur penalties and/or certain
customers may have the right to terminate their contracts with TSYS. TSYS does
not believe that it will fail to meet its contractual commitments to an extent
that will result in a material adverse effect on its financial condition or
results of operations.
LEGAL PROCEEDINGS
Synovus is subject to various legal proceedings and claims which arise in
the ordinary course of its business. Any litigation is vigorously defended by
Synovus and, in the opinion of management, based on consultation with external
legal counsel, any outcome of such litigation would not materially affect
Synovus' consolidated financial position or results of operations.
Currently, multiple lawsuits seeking class action treatment are pending
against one of Synovus' Alabama banking subsidiaries that involve: (1) payments
of service fees or interest rebates to automobile dealers in connection with
the assignment of automobile credit sales contracts to that Synovus subsidiary;
(2) the forced placement of insurance to protect that Synovus subsidiary's
interest in collateral for which consumer credit customers have failed to
obtain or maintain insurance; and (3) the receipt of commissions by that
Synovus subsidiary in connection with the sale of credit life insurance to its
consumer credit customers and the charging of an interest surcharge and a
processing fee in connection with consumer loans made by that subsidiary. These
lawsuits seek unspecified damages, including punitive damages. Synovus intends
to vigorously contest these lawsuits and all other litigation to which Synovus
and its subsidiaries are parties. Based upon information presently available,
and in light of legal, equitable, and factual defenses available to Synovus and
its subsidiaries, contingent liabilities arising from the threatened and
pending litigation are not considered material. It should be noted, however,
that large punitive damage awards, bearing little relation to the actual
damages sustained by plaintiffs, have been awarded in Alabama.
In November, 1998, a class action complaint was filed against NationsBank
of Delaware, N.A., in the United States District Court for the Southern
District of Mississippi. On March 23, 1999, the named plaintiff amended the
complaint and named TSYS and certain credit bureaus as defendants in the case.
The named plaintiff alleges, among other things, that the defendants failed to
report properly the credit standing of each member of the putative class. The
named plaintiff has defined the class as all persons and entities within the
United States who obtained credit cards from NationsBank and whose accounts
were purchased by or transferred to U.S. BankCard and whose accounts were
reported to credit bureaus or credit agencies incorrectly in August 1998. The
amended complaint alleges negligence, violation of the Fair Credit Reporting
Act, breach of the duty of good faith and fair dealing, and seeks declaratory
relief, injunctive relief and the imposition of punitive damages. This lawsuit
seeks unspecified damages. Though settlement negotiations have occurred, these
negotiations have to date not resulted in a definitive settlement agreement
among the parties. TSYS is not in a position to determine its possible
exposure, if any, as a result of this litigation.
NOTE 11 SUPPLEMENTAL FINANCIAL DATA
Components of other operating income and expenses in excess of 1% of total
revenues for any of the respective years are as follows:
(In thousands) 1999 1998 1997
- -----------------------------------------------------------------------------
Income:
Income associated with originating,
servicing, and selling mortgage loans...... $21,196 21,366 10,681
Third-party services on credit cards
and other consumer loans................... 37,698 38,220 23,580
Expenses:
Stationery, printing, and supplies......... 33,700 28,556 26,555
Third-party processing services............ 20,018 6,263 5,516
F-19
NOTE 12 OPERATING SEGMENTS
Synovus has two reportable segments: banking operations and transaction
processing services. The banking operations segment is predominately involved
in commercial banking activities and also provides retail banking, trust,
mortgage, and brokerage services. The transaction processing segment consists
primarily of operations at TSYS, which is primarily credit, debit, commercial
and private label card processing. The transaction processing services segment
also includes related services to banks and other card issuing institutions as
well as TDM's debt collection and bankruptcy management operations. The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies. All inter-segment services provided
are charged at the same rates as those charged to unaffiliated customers. Such
services are included in the revenues and net income of the respective segments
and are eliminated to arrive at consolidated totals.
Segment information for the years ended December 31, 1999, 1998, and 1997
is presented below.
TRANSACTION
BANKING PROCESSING
(IN THOUSANDS) OPERATIONS SERVICES (c) ELIMINATIONS CONSOLIDATED
- --------------------------------------------------------------------------------------------------------------------
Total revenue (e) ................ 1999 $ 692,718 568,613 (8,272)(a) 1,253,059
.............................. 1998 614,003 427,676 (4,401)(a) 1,037,278
.............................. 1997 548,769 381,420 (2,857)(a) 927,332
Net interest income .............. 1999 511,135 2,159 -- 513,294
.............................. 1998 452,755 2,310 -- 455,065
.............................. 1997 423,798 2,122 -- 425,920
Income before taxes .............. 1999 253,571 108,932 (13,188)(b) 349,315
.............................. 1998 228,213 86,371 (10,559)(b) 304,025
.............................. 1997 203,329 72,827 (9,143)(b) 267,013
Income tax expense ............... 1999 88,251 35,757 -- 124,008
.............................. 1998 80,423 27,137 -- 107,560
.............................. 1997 71,987 24,197 -- 96,184
Net income ....................... 1999 165,320 73,175 (13,188)(b) 225,307
.............................. 1998 147,790 59,234 (10,559)(b) 196,465
.............................. 1997 131,342 48,630 (9,143)(b) 170,829
Total assets ..................... 1999 12,142,344 464,969 (60,312)(d) 12,547,001
.............................. 1998 10,466,428 356,125 (10,961)(d) 10,811,592
.............................. 1997 9,304,331 299,705 (73,495)(d) 9,530,541
(a) Principally, data processing service revenues provided to the banking
operations segment.
(b) Minority interest in TSYS.
(c) Includes equity in income of joint ventures which is included in other
operating income.
(d) Primarily TSYS' cash deposits with the banking operations segment.
(e) Consists of net interest income and non-interest income.
NOTE 13 CONDENSED FINANCIAL INFORMATION OF SYNOVUS FINANCIAL CORP. (PARENT
COMPANY ONLY)
CONDENSED BALANCE SHEETS (In thousands)
DECEMBER 31, 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash .......................................................................................... $ 5,050 5,569
Investment in consolidated bank subsidiaries, at equity (including TSYS) ...................... 1,233,759 1,128,990
Investment in consolidated nonbank subsidiaries, at equity .................................... 44,171 35,686
Notes receivable from subsidiaries ............................................................ 23,776 21,463
Other assets .................................................................................. 31,274 30,788
----------- ---------
Total assets ........................................................................ $ 1,338,030 1,222,496
=========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Long-term debt ................................................................................ $ 76,480 76,720
Other liabilities ............................................................................. 34,881 33,859
----------- ---------
Total liabilities ................................................................... 111,361 110,579
----------- ---------
Shareholders' equity:
Common stock ............................................................................. 282,189 278,807
Surplus .................................................................................. 79,190 59,657
Less treasury stock ...................................................................... (1,285) (5,099)
Less unamortized restricted stock ........................................................ (1,293) (2,545)
Accumulated other comprehensive income ................................................... (30,134) 10,475
Retained earnings ........................................................................ 898,002 770,622
----------- ---------
Total shareholders' equity .......................................................... 1,226,669 1,111,917
----------- ---------
Total liabilities and shareholders' equity .......................................... $ 1,338,030 1,222,496
=========== =========
F-20
CONDENSED STATEMENTS OF INCOME (In thousands)
YEARS ENDED DECEMBER 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
Income:
Dividends received from bank subsidiaries (including TSYS) ........................... $153,689 132,714 105,486
Management fees ...................................................................... 2,125 1,871 1,806
Interest income ...................................................................... 3,301 2,237 1,853
Other income ......................................................................... 10,066 5,684 2,394
-------- ------- -------
Total income ..................................................................... 169,181 142,506 111,539
-------- ------- -------
Expenses:
Interest expense ..................................................................... 4,878 4,774 4,785
Other expenses ....................................................................... 25,217 24,651 23,718
-------- ------- -------
Total expenses ................................................................... 30,095 29,425 28,503
-------- ------- -------
Income before income taxes and equity in undistributed income of subsidiaries .... 139,086 113,081 83,036
Allocated income tax benefit ............................................................. (6,404) (5,502) (6,569)
-------- ------- -------
Income before equity in undistributed income of subsidiaries ..................... 145,490 118,583 89,605
Equity in undistributed income of subsidiaries ........................................... 79,817 77,882 81,224
-------- ------- -------
Net income ....................................................................... $225,307 196,465 170,829
======== ======= =======
CONDENSED STATEMENTS OF CASH FLOWS (In thousands)
YEARS ENDED DECEMBER 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income ........................................................................... $ 225,307 196,465 170,829
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed earnings of subsidiaries ................................ (79,817) (77,882) (81,224)
Net income of equity method investments ......................................... (60) (157) (44)
Depreciation, amortization, and accretion, net .................................. 1,705 1,309 847
Net increase (decrease) in other liabilities .................................... 2,270 (5,576) (8,382)
Net (increase) decrease in other assets ......................................... (4,233) (1,758) (6,848)
-------- ------- -------
Net cash provided by operating activities ................................... 145,172 112,401 75,178
-------- ------- -------
INVESTING ACTIVITIES
Net investment in subsidiaries ....................................................... (55,836) (52,733) (5,093)
Net increase in notes receivable from subsidiaries ................................... -- -- (700)
Net (increase) decrease in short-term notes receivable from subsidiaries ............. (2,280) 14,254 (8,392)
Purchase of premises and equipment, net .............................................. (114) (1,111) (190)
-------- ------- -------
Net cash used in investing activities ....................................... (58,230) (39,590) (14,375)
-------- ------- -------
FINANCING ACTIVITIES
Dividends paid to shareholders ........................................................ (93,923) (74,768) (60,586)
Principal repayments on long-term debt ................................................ (240) (4,289) (240)
Purchase of treasury stock ............................................................ -- (3,792) (22)
Proceeds from issuance of common stock ................................................ 6,702 9,417 5,785
-------- ------- -------
Net cash used in financing activities ....................................... (87,461) (73,432) (55,063)
-------- ------- -------
(Decrease) increase in cash .............................................................. (519) (621) 5,740
Cash at beginning of period .............................................................. 5,569 6,190 450
-------- ------- -------
Cash at end of period .................................................................... $ 5,050 5,569 6,190
======== ======= =======
For the years ended December 31, 1999, 1998, and 1997, the Parent Company
paid income taxes of $103 million, $91 million, and $93 million, respectively,
and interest in the amount of $5 million each year.
The amount of dividends paid to the Parent Company from each of the
subsidiary banks is limited by various banking regulatory agencies. The amount
of cash dividends available from subsidiary banks for payment in 2000, in the
aggregate, without prior approval from the banking regulatory agencies, is
approximately $109,655,000. In prior years, certain Synovus banks have received
permission and have paid cash dividends to the Parent Company in excess of
these regulatory limitations.
F-21
Synovus is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory, and possibly additional discretionary actions
by regulators that, if undertaken, could have a direct material effect on
Synovus' consolidated financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, Synovus must meet
specific capital guidelines that involve quantitative measures of Synovus'
assets, liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. Synovus' capital amounts and classification
are also subject to qualitative judgements by the regulators about components,
risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require Synovus on a consolidated basis, and the Parent Company and subsidiary
banks, individually, to maintain minimum amounts and ratios of total and Tier I
capital to risk-weighted assets as defined, and of Tier I capital to average
assets, as defined. Management believes, as of December 31, 1999, that Synovus
meets all capital adequacy requirements to which it is subject.
As of December 31, 1999, the most recent notification from The Federal
Reserve Bank of Atlanta categorized the significant Synovus subsidiaries as
well capitalized under the regulatory framework for prompt corrective action.
To be categorized as well capitalized, Synovus and its subsidiaries must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage
ratios as set forth in the table below. Management is not aware of the
existence of any conditions or events occurring subsequent to December 31, 1999
which would affect Synovus' or its subsidiaries' well capitalized
classification.
Actual capital amounts and ratios for Synovus are presented in the table
below on a consolidated basis and for each significant subsidiary, as defined.
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
(Amounts in thousands) ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
---------------------------- --------------------- -----------------------
DECEMBER 31, 1999 1998 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
SYNOVUS FINANCIAL CORP
Tier I capital ...................... $ 1,281,850 1,118,599 409,708 351,423 N/A N/A
Total risk-based capital ............ 1,410,888 1,230,192 819,416 702,845 N/A N/A
Tier I capital ratio ................ 12.51% 12.73 4.00 4.00 N/A N/A
Total risk-based capital ratio ...... 13.77 14.00 8.00 8.00 N/A N/A
Leverage ratio ...................... 10.52 10.82 4.00 4.00 N/A N/A
COLUMBUS BANK AND TRUST COMPANY
Tier I capital ...................... $ 501,325 428,655 98,292 84,732 147,438 127,098
Total risk-based capital ............ 521,730 446,192 196,584 169,463 245,730 211,829
Tier I capital ratio ................ 20.40% 20.24 4.00 4.00 6.00 6.00
Total risk-based capital ratio ...... 21.23 21.06 8.00 8.00 10.00 10.00
Leverage ratio ...................... 17.55 21.22 4.00 4.00 5.00 5.00
THE NATIONAL BANK OF SOUTH CAROLINA
Tier I capital ...................... $ 128,018 111,129 56,723 47,474 85,085 72,212
Total risk-based capital ............ 145,762 125,996 113,446 94,949 141,808 118,686
Tier I capital ratio ................ 9.03% 9.36 4.00 4.00 6.00 6.00
Total risk-based capital ratio ...... 10.28 10.62 8.00 8.00 10.00 10.00
Leverage ratio ...................... 7.79 8.02 4.00 4.00 5.00 5.00
F-22
NOTE 14 EARNINGS PER SHARE
The following table displays a reconciliation of the information used in
calculating basic and diluted earnings per share (EPS) for the years ended
December 31, 1999, 1998, and 1997.
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
-------------------------------- -------------------------------- --------------------------------
(In thousands, NET AVERAGE NET INCOME NET AVERAGE NET INCOME NET AVERAGE NET INCOME
except per share data) INCOME SHARES PER SHARE INCOME SHARES PER SHARE INCOME SHARES PER SHARE
- ----------------------------------------------------------------------------------------------------------------------------------
BASIC EPS $225,307 280,016 $.80 $196,465 272,416 $.72 $170,829 269,285 $.63
Effect of dilutive options -- 3,339 -- 4,807 -- 3,867
-------- ------- -------- ------- -------- -------
DILUTED EPS $225,307 283,355 $.80 $196,465 277,223 $.71 $170,829 273,152 $.63
======== ======= ==== ======== ======= ==== ======== ======= ====
The following represents options to purchase shares of Synovus common stock
that were outstanding during the periods noted below, but were not included in
the computation of diluted earnings per share because the options' exercise
price was greater than the average market price of the common shares.
WTD. AVG. EXERCISE PRICE
QUARTER ENDED NUMBER OF SHARES PER SHARE
- ------------- ---------------- ---------
December 31, 1999................. 6,260,596.................$21.87
September 30, 1999................ 6,383,651.................$21.82
June 30, 1999..................... 3,666,048.................$22.60
December 31, 1998................. 10,000.................$22.81
December 31, 1997................. 1,328,936.................$18.37
September 30, 1997................ 1,328,936.................$18.37
NOTE 15 OTHER COMPREHENSIVE INCOME (LOSS)
The components of other comprehensive income (loss) for the years ended
December 31, 1999, 1998, and 1997 are as follows:
1999 1998 1997
--------------------------------- ---------------------------------- ---------------------------------
BEFORE-TAX TAX EXPENSE NET OF BEFORE-TAX TAX EXPENSE NET OF BEFORE-TAX TAX EXPENSE NET OF
(In thousands) AMOUNT OR BENEFIT TAX AMOUNT AMOUNT OR BENEFIT TAX AMOUNT AMOUNT OR BENEFIT TAX AMOUNT
- ------------------------------------------------------------------------------------------------------------------------------------
Net unrealized
gains/losses on
investment securities
available for sale:
Unrealized gains (losses)
arising during the year ..$(63,698) 24,524 (39,174) 8,535 (3,286) 5,249 11,031 (4,247) 6,784
Reclassification
adjustment for (gains)
losses realized in
net income ............... (1,202) 463 (739) (1,299) 500 (799) 66 (26) 40
--------- ------ -------- ------- ------- ------ ------ ------- ------
Net unrealized gains
(losses) ................. (64,900) 24,987 (39,913) 7,236 (2,786) 4,450 11,097 (4,273) 6,824
Foreign currency
translation adjustments .. (223) -- (223) 1 -- 1 -- -- --
--------- ------ -------- ------- ------- ------ ------ ------- ------
Other comprehensive
income (loss) ............$(65,123) 24,987 (40,136) 7,237 (2,786) 4,451 11,097 (4,273) 6,824
========= ====== ======== ======= ======= ====== ====== ======= ======
F-23
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Synovus Financial Corp.:
We have audited the accompanying consolidated balance sheets of Synovus
Financial Corp. and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for each of the years in the three-year period ended December 31,
1999. These consolidated financial statements are the responsibility of
Synovus' management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Synovus Financial
Corp. and subsidiaries at December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
January 12, 2000
F-24
(Amounts in thousands, except per share data)
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
1999 1998 1997 1996 (b) 1995
----------------------------------------------------------------
INCOME STATEMENT:
Total revenues (a) .............................. $ 1,251,857 1,035,979 927,398 821,793 702,412
Net interest income ............................. 513,294 455,065 425,920 386,350 352,355
Provision for losses on loans ................... 34,007 26,882 32,485 32,411 26,841
Non-interest income ............................. 739,765 582,213 501,412 435,443 350,057
Non-interest expense ............................ 869,737 706,371 627,834 563,496 460,367
Net income ...................................... 225,307 196,465 170,829 144,174 118,338
PER SHARE DATA:
Net income - basic .............................. 0.80 0.72 0.63 0.54 0.45
Net income - diluted ............................ 0.80 0.71 0.63 0.53 0.44
Cash dividends declared ......................... 0.36 0.29 0.24 0.19 0.16
Book value ...................................... 4.35 3.99 3.50 3.02 2.68
BALANCE SHEET:
Investment securities ........................... 1,993,957 1,877,473 1,702,681 1,685,672 1,527,039
Loans, net of unearned income ................... 9,068,239 7,603,605 6,752,154 6,188,882 5,620,384
Deposits ........................................ 9,440,087 8,797,412 7,928,211 7,395,732 6,900,943
Long-term debt .................................. 318,620 131,802 131,492 100,415 109,299
Shareholders' equity ............................ 1,226,669 1,111,917 937,222 812,296 718,408
Average total shareholders' equity .............. 1,165,426 1,013,334 865,232 757,302 662,458
Average total assets ............................ 11,438,696 9,827,925 9,067,237 8,355,951 7,692,029
PERFORMANCE RATIOS AND OTHER DATA:
Return on average assets ........................ 1.97% 2.00 1.88 1.73 1.54
Return on average equity ........................ 19.33 19.39 19.74 19.04 17.86
Net interest margin ............................. 5.07 5.23 5.28 5.19 5.15
Efficiency ratio (c) ............................ 58.15 58.01 56.45 58.36 60.95
Dividend payout ratio (d) ....................... 43.78 41.52 38.10 36.62 36.69
Average shareholders' equity to average assets .. 10.19 10.31 9.54 9.06 8.61
Average shares outstanding, basic ............... 280,016 272,416 269,285 268,271 265,546
Average shares outstanding, diluted ............. 283,355 277,223 273,152 272,594 268,395
(a) Consists of net interest income and non-interest income, excluding
securities gains (losses).
(b) 1996 selected financial data reflects the impact of the special FDIC
assessment. Without the special FDIC assessment, net income would have been
$146,970 and diluted net income per share would have been $.57.
(c) For the banking operations segment.
(d) Determined by dividing dividends declared (excluding pooled subsidiaries)
by consolidated net income.
F-25
INTRODUCTION
To better understand financial trends and performance, Synovus analyzes
certain financial data in two separate components: banking operations and
transaction processing services.
Banking operations represents 55.3% and 73.4% of 1999's consolidated
revenues and net income, respectively.
Transaction processing services consists of majority-owned Total System
Services, Inc. (TSYS) and wholly-owned TSYS Total Debt Management, Inc. (TDM).
TSYS provides bankcard data processing and related services to banks and other
institutions generally under long-term processing contracts. TDM is a debt
collection and bankruptcy management business. TSYS represented 96.4% and 93.7%
of 1999's total transaction processing revenues and net income, respectively.
The following discussion reviews the results of operations and assesses the
financial condition of Synovus. This discussion should be read in conjunction
with the preceding consolidated financial statements and accompanying notes as
well as the selected financial data.
SUMMARY
1999 was another exceptional year for Synovus. Total revenues for 1999 were
$1.252 billion, a 20.8% increase over 1998. Net income for 1999 was $225.3
million, an increase of 14.7% over 1998 net income of $196.5 million. Diluted
net income per share increased to $0.80 in 1999, up 12.2% over $0.71 per share
in 1998. Return on assets was 1.97% in 1999, compared to 2.00% in 1998. Return
on equity was 19.33% in 1999, compared to 19.39% in 1998.
Two major growth areas -- fee income from both TSYS and banking operations;
and core commercial lending -- were the primary contributors to 1999's financial
performance. Synovus' operating results for 1999 also reflect the impact of
expense control management and continued strong credit quality, as exhibited by
the credit quality indicators.
Banking operations' revenues increased by 13.2% over 1998, while net income
increased 11.9% over 1998. Return on assets for the year was 1.49%, and return
on equity was 18.04%, compared to 1.55% and 18.16%, respectively, for 1998.
Transaction processing services revenues for 1999 were $568.6 million, a
33.0% increase over 1998. Net income for 1999 was $73.2 million, up 23.5% from
$59.2 million in 1998. The increase in revenues and net income was due
primarily to the addition of various retail credit card portfolios to TSYS'
customer base in 1999, net internal growth of existing customers, as well as
portfolio acquisitions by existing customers.
Synovus' total assets ended the year at $12.5 billion, a growth rate of
16.1% for 1999, resulting primarily from net loan growth of $1.451 billion, or
19.4%. This asset growth was partially funded by a $642.7 million, or 7.3%,
increase in total deposits. Additional funding was provided by long-term debt
(primarily in the form of Federal Home Loan Bank advances) and short-term
fundings (consisting mostly of federal funds purchased) which increased by a
total of $944.9 million, or 48.8%, over 1998. The increase in loans reflects
the continued strength of the regional economy and our competitive advantage in
the local markets we serve. Shareholders' equity grew 10.3% to $1.2 billion,
which represented 9.78% of total assets.
During 1998, Synovus completed three bank acquisitions which were accounted
for as poolings of interests; however, financial information preceding the
dates of acquisition have not been restated since the effect was not material.
Net income for the years ended December 31, 1998 and 1997 would have been
increased by $2.6 million and $7.2 million, respectively, if the previous
periods had been restated for these acquisitions. Additionally, total assets,
net loans, and deposits at December 31, 1997 would have increased by $589.9
million, $345.4 million, and $540.9 million, respectively, if prior periods had
been restated.
ACQUISITIONS
Acquisitions completed during the past three years are as follows:
(Dollars in thousands)
Total Shares Accounting
Company and Location Date Assets Issued Treatment
- -----------------------------------------------------------------------------------------------------------------------
Ready Bank of Fort Walton Beach October 31, 1999 $ 65,000 902,785 Pooling (Non-restated)
Holding Company, Inc.
Ft. Walton Beach, Florida
Horizon Bancshares, Inc. October 31, 1999 $ 60,000 1,043,631 Pooling (Non-restated)
Pensacola, Florida
Wallace & de Mayo September 30, 1999 $ 7,000 2,339,624 Pooling
Norcross, Georgia
Merit Holding Corporation September 30, 1999 $306,000 5,995,085 Pooling
Tucker, Georgia
Canterbury Trust Company, Inc. January 31, 1999 $ 7,400 333,163 Purchase
Birmingham, Alabama
Georgia Bank & Trust December 18, 1998 $178,000 1,811,058 Pooling (Non-restated)
Calhoun, Georgia
Bank of Georgia November 30, 1998 $ 55,000 850,269 Pooling (Non-restated)
Watkinsville, Georgia
Community Bank Capital Corporation September 1, 1998 $348,000 3,774,531 Pooling (Non-restated)
Alpharetta, Georgia
This information is discussed in further detail in Note 1 of the financial
statements.
F-26
TABLE ONE
NET INTEREST INCOME
(In thousands)
YEARS ENDED DECEMBER 31,
----------------------------------------
1999 1998 1997
----------------------------------------
Interest income .................................... $888,007 792,318 746,261
Taxable-equivalent adjustment ...................... 5,309 4,637 4,477
-------- ------- -------
Interest income, taxable-equivalent ............. 893,316 796,955 750,738
Interest expense ................................... 374,713 337,253 320,341
-------- ------- -------
Net interest income, taxable-equivalent ......... $518,603 459,702 430,397
======== ======= =======
EARNING ASSETS, SOURCES OF FUNDS, AND NET INTEREST INCOME
Average total assets for 1999 were $11.4 billion, or 16.4% over 1998
average total assets of $9.8 billion. Average earning assets for 1999 were
$10.2 billion, which represented 89.4% of average total assets. An $890.2
million, or 10.9%, increase in average deposits for 1999 provided the primary
funding for a $1.2 billion, or 17.6%, increase in average net loans. Average
shareholders' equity for 1999 was $1.2 billion.
For 1998, average total assets increased $760.7 million, or 8.4%. Average
earning assets for 1998 were $8.8 billion, which represented 89.5% of average
total assets. For more detailed information on Synovus' average balance sheets
for 1999, 1998, and 1997, refer to Table Two.
Net interest income (interest income less interest expense) is a major
component of Synovus' net income, representing the earnings of Synovus' primary
business of gathering funds from deposit sources and investing those funds in
loans and securities. Synovus' long term objective is to manage those assets
and liabilities to provide the largest possible amount of income while
balancing interest rate, credit, liquidity, and capital risks.
Net interest income is presented in this discussion on a tax-equivalent
basis, so that the income from assets exempt from federal income taxes is
adjusted based on a statutory marginal federal tax rate of 35% in all years
(See Table One). The net interest margin is defined as taxable-equivalent net
interest income divided by average total interest earning assets and provides
an indication of the efficiency of the earnings from balance sheet activities.
The net interest margin is affected by changes in the spread between interest
earning asset yields and interest bearing liability costs (spread rate), and by
the percentage of interest earning assets funded by non-interest bearing
liabilities.
Net interest income for 1999 was a record $513.3 million, up $58.2
million, or 12.8%, from 1998. On a taxable-equivalent basis, net interest
income was $518.6 million, up $58.9 million, or 12.8%, over 1998. During 1999,
average interest earning assets increased $1.4 billion, or 16.3%, with the
majority of this increase attributable to loan growth. Increases in the level
of federal funds purchased and time, money market, and interest-bearing demand
deposits were the main contributors to the $1.3 billion, or 18%, growth in
average interest bearing liabilities.
The 5.07% net interest margin achieved in 1999 is a 16-basis point
decrease over the 5.23% reported for 1998. This decrease is the result of lower
loan and investment yields partially offset by lower cost of funds. A 35-basis
point decrease in the average prime rate for 1999 was the primary cause of the
decreased loan yields. Another influence impacting the net interest margin is
the percentage of earning assets funded by non-interest bearing liabilities.
Funding for Synovus' earning assets comes from interest bearing liabilities,
non-interest bearing liabilities, and shareholders' equity. Earning assets
funded by non-interest bearing liabilities continue to provide a positive
impact on the net interest margin.
During 1998, net interest income and tax-equivalent net interest income
increased 6.8%. Average interest earning assets grew 7.9% while interest bearing
liabilities increased 6.5%. The net interest margin of 5.23% is a 5-basis-point
decrease over the 5.28% reported in 1997. This decrease is the result of lower
loan and investment yields partially offset by a lower cost of funds.
F-27
TABLE TWO
CONSOLIDATED AVERAGE BALANCES, INTEREST, AND YIELDS
(Amounts in thousands)
1999 1998 1997
------------------------------ ------------------------------ -----------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
------------ -------- ------ ----------- -------- ------ ----------- -------- ------
ASSETS
INTEREST EARNING ASSETS:
Taxable loans, net (a)(b) ........ $ 8,186,544 756,202 9.24% $ 6,961,897 671,167 9.64% $ 6,440,190 630,174 9.79%
Tax-exempt loans, net (a)(b)(c) .. 31,510 3,493 11.09 31,725 3,193 10.06 32,965 3,565 10.81
Reserve for loan losses .......... (119,626) -- -- (107,898 -- -- (98,496) -- --
------------ -------- ----------- -------- ----------- --------
Loans, net .................... 8,098,428 759,695 9.38 6,885,724 674,360 9.79 6,374,659 633,739 9.94
------------ -------- ----------- -------- ----------- --------
Taxable investment securities (d) 1,798,853 110,214 6.13 1,581,497 100,841 6.38 1,584,757 101,900 6.43
Tax-exempt investment
securities (c)(d) .............. 170,744 12,781 7.49 142,318 11,049 7.76 115,284 9,847 8.54
------------ -------- ----------- -------- ----------- --------
Total investment securities ... 1,969,597 122,995 6.24 1,723,815 111,890 6.49 1,700,041 111,747 6.57
------------ -------- ----------- -------- ----------- --------
Interest earning deposits with
banks .......................... 1,562 88 5.63 896 51 5.69 1,448 77 5.32
Federal funds sold ............... 57,730 2,879 4.99 92,454 5,152 5.57 43,192 2,807 6.50
Mortgage loans held for sale ..... 102,524 7,659 7.47 95,699 5,502 5.75 34,223 2,368 6.92
------------ -------- ----------- -------- ----------- --------
Total interest earning assets . 10,229,841 893,316 8.73 8,798,588 796,955 9.06 8,153,563 750,738 9.21
------------ -------- ----- ----------- -------- ----- ----------- -------- -----
Cash and due from banks ............. 340,478 329,312 325,188
Premises and equipment, net ......... 408,443 331,644 293,139
Other real estate ................... 8,773 9,958 11,336
Other assets (e) .................... 451,161 358,423 284,011
------------ ----------- -----------
Total assets .................. $ 11,438,696 $ 9,827,925 $ 9,067,237
============ =========== ===========
LIABILITIES AND SHAREHOLDERS'
EQUITY INTEREST BEARING
LIABILITIES:
Interest bearing demand deposits .... $ 1,355,301 30,429 2.25 $ 1,202,108 29,922 2.49 $ 1,087,617 28,179 2.59
Money market accounts ............... 1,796,114 73,280 4.08 1,452,386 62,859 4.33 1,253,634 54,259 4.33
Savings deposits .................... 466,879 10,085 2.16 453,487 11,166 2.46 461,415 11,999 2.60
Time deposits ....................... 3,963,862 209,958 5.30 3,710,312 210,089 5.66 3,531,265 199,090 5.64
Federal funds purchased and
securities sold under agreement
to repurchase ..................... 786,954 39,427 5.01 311,617 15,413 4.95 356,122 19,119 5.37
Other borrowed funds ................ 199,091 11,534 5.79 131,381 7,804 5.94 128,543 7,695 5.99
------------ -------- ----------- -------- ----------- --------
Total interest bearing
liabilities .................... 8,568,201 374,713 4.37 7,261,291 337,253 4.64 6,818,596 320,341 4.70
------------ -------- ----- ----------- -------- ----- ----------- -------- -----
SPREAD RATE ...................... 4.36% 4.42% 4.51%
===== ===== =====
Non-interest bearing demand
deposits .......................... 1,450,547 1,324,257 1,194,759
Other liabilities ................... 254,522 229,043 188,650
Shareholders' equity ................ 1,165,426 1,013,334 865,232
------------ ----------- -----------
Total liabilities and
shareholders' equity ........ $ 11,438,696 $ 9,827,925 $ 9,067,237
============ =========== ===========
NET INTEREST INCOME/MARGIN .......... 518,603 5.07% 459,702 5.23% 430,397 5.28%
===== ===== =====
Taxable-equivalent adjustment ....... (5,309) (4,637) (4,477)
-------- -------- --------
Net interest income, actual ......... $513,294 $455,065 $425,920
======== ======== ========
(a) Average loans are shown net of unearned income. Nonperforming loans
are included.
(b) Interest income includes loan fees as follows: 1999 - $37,155, 1998 -
$30,092, 1997 - $26,373.
(c) Reflects taxable-equivalent adjustments, using the statutory federal
income tax rate of 35%, in adjusting interest on tax-exempt loans and investment
securities to a taxable-equivalent basis.
(d) Includes certain investment securities available for sale, at their
respective average amortized cost. For the years ended December 31, 1999, 1998,
and 1997, the average amortized cost of these securities amounted to $1,680,945,
$1,411,233, and $1,354,863, respectively.
(e) In 1999, there was a $9,138 average net unrealized loss on investment
securities available for sale. In 1998, there was a $16,246 average net
unrealized gain and in 1997 there was a $973 average net unrealized loss on
investment securities available for sale.
F-28
TABLE THREE
RATE/VOLUME ANALYSIS
(In thousands)
1999 COMPARED TO 1998 1998 COMPARED TO 1997
---------------------------------- ----------------------------------
CHANGE DUE TO (a) CHANGE DUE TO (a)
---------------------------------- ----------------------------------
YIELD/ NET YIELD/ NET
VOLUME RATE CHANGE VOLUME RATE CHANGE
---------- --------- --------- -------- -------- --------
Interest earned on:
Taxable loans, net ........................ $ 118,056 (33,021) 85,035 51,075 (10,082) 40,993
Tax-exempt loans, net (b) ................. (22) 322 300 (134) (238) (372)
Taxable investment securities ............. 13,867 (4,494) 9,373 (210) (849) (1,059)
Tax-exempt investment securities (b) ...... 2,206 (474) 1,732 2,309 (1,107) 1,202
Interest earning deposits with banks ...... 38 (1) 37 (29) 3 (26)
Federal funds sold ........................ (1,934) (339) (2,273) 3,202 (857) 2,345
Mortgage loans held for sale .............. 392 1,765 2,157 4,254 (1,120) 3,134
---------- --------- --------- -------- -------- --------
Total interest income .................. 132,603 (36,242) 96,361 60,467 (14,250) 46,217
---------- --------- --------- -------- -------- --------
Interest paid on:
Interest bearing demand deposits .......... 3,815 (3,308) 507 2,965 (1,222) 1,743
Money market accounts ..................... 14,883 (4,462) 10,421 8,606 (6) 8,600
Savings deposits .......................... 329 (1,410) (1,081) (206) (627) (833)
Time deposits ............................. 14,351 (14,482) (131) 10,098 901 10,999
Federal funds purchased and securities
sold under agreement to repurchase ...... 23,529 485 24,014 (2,390) (1,316) (3,706)
Other borrowed funds ...................... 4,022 (292) 3,730 170 (61) 109
---------- --------- --------- -------- -------- --------
Total interest expense ................. 60,929 (23,469) 37,460 19,243 (2,331) 16,912
---------- --------- --------- -------- -------- --------
Net interest income .................... $ 71,674 (12,773) 58,901 41,224 (11,919) 29,305
========== ========= ========= ======== ======== ========
(a) The change in interest due to both rate and volume has been allocated to
the rate component.
(b) Reflects taxable-equivalent adjustments using the statutory federal income
tax rate of 35% in adjusting interest on tax-exempt loans and investment
securities to a taxable-equivalent basis.
NON-INTEREST INCOME
Non-interest income consists of TSYS and TDM's revenues as well as a wide
variety of fee generating services from the banking operations segment.
Non-interest income totaled $739.8 million in 1999, an increase of 27.1% from
the previous year and $582.2 million in 1998, an increase of 16.1% from 1997.
Revenues from bankcard data processing services offered by TSYS were the
largest contributor increasing $124.5 million or 34.1% in 1999, and increasing
$29.6 million or 8.8% in 1998 over the previous year. TSYS and TDM's combined
revenues represented approximately 76.6% of consolidated non-interest income in
1999 compared to approximately 73.5% in 1998. Banking operations' non-interest
income increased $31.3 million or 20.8% in 1999 and $31.4 million or 26.3% in
1998. The increase in banking operations non-interest income in 1999 was led
by increases in service charges, fees for trust services, brokerage revenue,
and credit card fees. Other operating income for 1999 includes $2.7 million in
income earned on bank-owned life insurance (new for 1999) and a $3.5 million
increase from gain on sale of a corporate investment. Additionally, the 1999
results include a $6 million gain from the sale of five bank branches in
slow-growth markets. The net income impact of the branch sales was an after tax
gain of $3.5 million.
TSYS contributed approximately 73.9% of Synovus' total non-interest
income in 1999 with the majority of it reported as data processing services
income. TSYS' revenues are derived from providing bankcard data processing and
related services to banks and other institutions generally under long-term
processing contracts. TSYS' services are provided through the company's
cardholder systems, TS(2) and TS(1), to financial institutions and other
organizations throughout the United States, Mexico, Canada, Honduras, and the
Caribbean.
Bankcard data processing services revenues are generated primarily from
charges based on the number of accounts billed, transactions and authorizations
processed, statements mailed, credit bureau requests, credit cards embossed and
mailed, and other processing services for cardholder accounts on file at TSYS.
Cardholder accounts on file include active and inactive bank, retail, debit,
stored value and commercial card accounts. Due to the expanding use of cards
and the increase in the number of cardholder accounts processed by TSYS, as
well as increases in the scope of services offered to customers, revenues
relating to bankcard data processing services have continued to grow.
Processing contracts with large customers, representing a significant portion
of TSYS' total revenues, generally provide for discounts on certain services
based on the size and activity of customers' portfolios. As a result, bankcard
data processing revenues and the related margins are influenced by the customer
mix relative to the size of customer card portfolios, as well as the number and
activity of individual cardholder accounts processed for each customer.
F-29
Due to the seasonal nature of the credit card industry, TSYS' revenues and
results of operations have generally increased in the fourth quarter of each
year because of increased transaction and authorization volumes during the
traditional holiday shopping season. Furthermore, growth in card portfolios of
existing customers, the conversion of cardholder accounts of new customers to
THE TOTAL SYSTEM, and the loss of cardholder accounts impact the results of
operations from period to period. Another factor, among others, which may
affect TSYS' revenues and results of operations from time to time is the sale
by a customer of its business, its card portfolio, or a segment of its accounts
to a party which processes cardholder accounts internally or uses another third
party processor. Consolidation in the financial services industry could
favorably or unfavorably impact TSYS' financial condition and results of
operations in the future.
The average number of TSYS' cardholder accounts on file increased 78.4% to
180.4 million in 1999, compared to 101.1 million in 1998, which represented a
15.9% increase over 87.2 million in 1997. At December 31, 1999, TSYS'
cardholder accounts on file were approximately 206.2 million, up from 117.6
million and 92.8 million at December 31, 1998 and 1997, respectively. The
increase in cardholder accounts on file at December 31, 1999, as compared to
December 31, 1998, included net internal growth of existing customers of
approximately 7.8 million accounts, and approximately 80.8 million accounts
added during 1999 were due to new customers and portfolio acquisitions by
existing customers.
TSYS had approximately 147.2 million accounts being processed on TS(2) at
year-end 1999, compared to 62.8 million at year-end 1998 and 19.2 million at
year-end 1997. The increase in accounts being processed on TS(2) is the result
of converting approximately 79.0 million new accounts and net internal growth
of existing customers of approximately 5.4 million accounts.
As a result of the completion of the conversions of the account portfolios
for Sears and Nordstrom, TSYS became the leading third-party processor of
retail accounts. At December 31, 1999, TSYS was processing approximately 88.7
million retail card accounts, a 527.8% increase over the approximately 14.1
million being processed at year-end 1998, a 120% increase over the 6.4 million
at year-end 1997. On a per account basis, the processing revenues generated by
retail accounts are generally lower than the processing revenues associated
with bankcard accounts. However, TSYS realizes profit margins from retail
accounts similar to those it generates from bankcard accounts.
A significant amount of TSYS' revenues are derived from long-term
contracts with large customers, including certain major customers. Two of TSYS'
customers, NationsBank and Bank of America, merged effective September 30,
1998. The new parent company of these entities is Bank of America Corporation.
In September 1999, TSYS announced a new ten-year agreement with the combined
entity to continue processing its credit card portfolio until 2009. The
combination of NationsBank and Bank of America under a single processing
agreement with TSYS reduced TSYS' revenues in 1999 and will reduce TSYS'
revenues in future years because together NationsBank and Bank of America will
be entitled to receive greater discounts than either would have been entitled
to receive standing alone. Bank of America accounted for approximately 16%,
21%, and 20% of total revenues for the years ended December 31, 1999, 1998, and
1997, respectively. The loss of Bank of America, or any other major or
significant customers, could have a material adverse effect on TSYS' financial
condition and results of operations.
Near the end of the first quarter of 1998, AT&T completed the sale of its
Universal Card Services (UCS) to CITIBANK, a part of Citigroup. CITIBANK
accounted for approximately 13%, 13%, and 15% of TSYS' total revenues for the
years ended December 31, 1999, 1998, and 1997, respectively. On February 26,
1999, CITIBANK notified TSYS of its decision to terminate UCS' processing
agreement with TSYS for consumer credit card accounts at the end of its
original term on August 1, 2000. Consumer credit card accounts represented 67%
of CITIBANK's revenues derived to TSYS for the year ended December 31, 1999.
TSYS' management believes that CITIBANK will not be a major customer for the
year 2000 and that the loss of revenues from CITIBANK for the months of August
through December 2000, combined with decreased expenses from the reduction in
hardware and software costs and the redeployment of personnel, should not have
a material adverse effect on TSYS' financial condition or results of operations
for the year ending December 31, 2000.
In May 1998, TSYS announced the signing of a long-term processing
agreement with Sears, Roebuck and Co. to convert and process its 65 million
retail accounts. TSYS successfully converted the first 7.2 million of these
accounts to TS(2) in October 1998 and completed the conversion in May 1999. In
January 2000, TSYS announced a one year extension of its long-term retail
processing agreement with Sears until 2010.
Synovus continues to emphasize the importance of growth in non-interest
related sources of income in its banking operations via its Financial Services
Beyond Banking strategy which offers the complete financial solutions that our
customers need. Non-interest income for Synovus' banking operations increased
$31.3 million or 20.8% in 1999, with increases in service charges on deposit
accounts of $7.3 million or 11.6%, trust service fees of $4.7 million or 30.6%,
brokerage revenues of $2.3 million or 20%, and credit card fees of $1.5 million
or 11.3%. Total banking operations' non-interest income as a percentage of
total banking operations revenues was 26.3% in 1999 up from 24.6% in 1998.
Service charges on deposit accounts represent the single largest fee
income component for banking operations. The main factors that contributed to
the 11.6% increase in service charges in 1999 were increases in the number of
individual and commercial accounts, transaction volume growth, and the effect
of pricing increases in certain service charges. Additionally, service charges
would have increased by $1.8 million in 1998 if the prior periods had been
restated for the 1998 bank acquisitions.
Fees for trust services are derived from providing estate administration
services, personal trust and investment management services, and employee
benefit plan administration. Factors contributing to the 30.6% increase in
trust revenues in 1999 included our focused, needs-based sales program that
added $2.8 million in new fee revenues during 1999, a 45% increase from 1998.
Additionally, the acquisition of Canterbury Trust Company in January 1999,
which provides trust, custody, investment, and consulting services to large
institutional clients, resulted in additional revenues of $2.1 million in 1999.
To a large extent, trust revenues are impacted by the market value of managed
assets. During 1999, the market value of a significant portion of our managed
assets decreased due to lower valuations of the underlying equity securities,
resulting in lower fees assessed to those accounts in 1999. At December 31,
1999 and 1998, the total market value of assets administered by Synovus was
approximately $7.1 billion and $6.3 billion, respectively.
Brokerage revenues increased 20% in 1999 or $2.3 million. Brokerage
revenues are derived from the retail and capital markets sectors. The retail
brokerage sector accounted for approximately 70% of total brokerage revenues in
1999, compared to approximately 64% in 1998. Revenues from retail brokerage
were up 50%
F-30
over 1998, outpacing the capital markets growth of 12%. Growth in retail
brokerage was due to the opening of new brokerage facilities in 1999 and late
1998 as well as an increase in volume in existing facilities.
During 1999, revenues from mortgage banking activities were relatively
unchanged from the previous year at $21.2 million. In 1998, Synovus experienced
the highest loan origination volume in its history, due in part to a favorable
interest rate environment. The rising interest rate environment in 1999
resulted in a decrease in loan originations and related loan origination fees
and marketing gains. The decrease in loan production revenues was partially
offset by higher revenues from loan servicing. At December 31, 1999, Synovus
serviced loans for unaffiliated investors of $2.5 billion up from $2.1 billion
at year end 1998.
In 1998, banking operations' non-interest income increased $31.4 million,
or 26.3%. Service charges on deposit accounts increased $5.6 million, or 9.7%,
primarily as a result of increases in the number of accounts serviced and
increased volume related to activity-based fees. Fees for trust services
increased $2.9 million, or 22.6%, over 1997. Other operating income increased
$19.2 million, or 38.8% in 1998 primarily due to increased product revenues
from mortgage banking activities (up $10.6 million or 99.8%), credit card fees
(up $2.6 million or 23.5%), and brokerage (up $1.8 million or 18.6%).
NON-INTEREST EXPENSE
Management analyzes non-interest expense in two separate components:
banking operations and transaction processing services. The table below
summarizes this data for the years ended December 31, 1999, 1998, and 1997:
1999 1998 1997
------------------------ ------------------------ ------------------------
TRANSACTION TRANSACTION TRANSACTION
BANKING PROCESSING BANKING PROCESSING BANKING PROCESSING
(In thousands) OPERATIONS SERVICES OPERATIONS SERVICES OPERATIONS SERVICES
------------------------ ------------------------ ------------------------
Salaries and other personnel expense ....... $242,624 215,117 221,899 168,243 192,899 153,168
Net occupancy and equipment expense ........ 55,398 152,799 51,635 106,583 42,797 95,248
Other operating expenses ................... 98,048 92,563 78,527 68,925 72,122 62,457
-------- ------- ------- ------- ------- -------
Total non-interest expense .............. $396,070 460,479 352,061 343,751 307,818 310,873
======== ======= ======= ======= ======= =======
In 1999, non-interest expense for Synovus' banking operations increased
$44.0 million or 12.5%. The primary reasons for this increase are increased
employment expenses and technology costs which include third-party processing
services and new equipment depreciation. The increase in employment expenses
includes normal merit and promotional salary adjustments, costs associated with
our PDE initiatives (Personally Developing EveryONE) and higher employee group
health insurance costs. Throughout 1999, banking operations had an emphasis on
overall expense control management and headcount growth containment, which
resulted in only a slight increase in the average number of employees in
banking operations from 5,048 in 1998 to 5,170 in 1999. The employees added
during 1999 resulted mostly from acquisitions.
Approximately $2.0 million of the $3.8 million increase in occupancy and
equipment expense during 1999 relates to increased depreciation on the computer
equipment that was added primarily as a result of the conversion to a new core
processing system as well as increased service contract expenses on this
equipment. Other factors contributing to the increase in occupancy and
equipment expenses during 1999 consist of additional carrying costs associated
with the new branch offices and other banking facilities added during the
latter part of 1998 and throughout 1999.
Technology cost increases are a major contributor to the $19.5 million or
24.9% increase in banking operations' other operating expenses in 1999. During
the second quarter of 1999, we completed the conversion to a state-of-the-art
data processing system for all of our banks provided by Marshall & Illsley
(M&I) Data Services. This conversion was a crucial step in building The New
Bank, and is allowing our banking teams to know our customers better, and to
provide them greater products and even better service when, where, and how the
customers choose. Third-party processing services increased by $13.8 million,
from $6.3 million in 1998. This increase was mainly due to a full year of
information processing fees payable to M&I in 1999 compared to only a partial
year in 1998. Other factors contributing to the increase in other operating
expenses in 1999 consist of a $1.5 million increase in telephone and
communications expenses, a $1.3 million increase in training costs, and
approximately $1.0 million increase in acquisition-related expenditures.
The banking operations' efficiency ratio increased slightly to 58.15% in
1999 compared to 58.01% in 1998 and 56.45% in 1997. The efficiency ratio in
1999 and 1998 reflects the significant investments (and the associated costs)
that we have made in the last two years. However, as a result of our continued
emphasis on expense control management, we expect that the banking operations'
efficiency ratio will improve during 2000.
Non-interest expense for Synovus' banking operations increased $44.2
million, or 14.4%, in 1998 over 1997. Expenses associated with the increase in
the number of employees and normal salary increases as well as M&I conversion
expenses were the primary reasons for this increase. The average number of
employees in banking operations increased from 4,627 in 1997 to 5,048 in 1998.
This increase was primarily due to the growth within the banking subsidiaries,
as they continued to develop new products and provide additional services for
their customers. Additionally, during the first quarter of 1998, Synovus began
the conversion of its bank data processing to the M&I system, and expensed
approximately $11.3 million for this conversion in 1998. Other factors causing
an increase in non-interest expense include training expense related to The New
Bank initiatives and performance-based employee retirement plan expenses.
During 1999, Synovus' transaction processing services operating expenses
as a percentage of revenues remained consistent with prior years at 83.1%,
compared to 82.9% and 83.5% for 1998 and 1997, respectively. Approximately 97%
of total transaction processing services non-interest expense relates to TSYS,
with the remainder related to TDM, which is owned directly by Synovus. The
following discussion provides an analysis of the non-interest expense
components at TSYS. The principal increases in operating expenses in 1999
compared to 1998 resulted from the addition of personnel; the additional
investment in property, equipment and software; the
F-31
development of global business--including the establishment of a physical
presence in the United Kingdom; the cost of materials associated with the
services provided by all companies, particularly the supplies related to
processing the increased number of accounts; and certain costs associated with
ongoing enhancements to TS(2), as well as certain costs associated with the
conversion of customers to TS(2).
A significant portion of TSYS' operating expenses relates to salaries and
other personnel costs. During 1999, the average number of employees increased
to 4,106, compared to 3,382 in 1998 and 2,895 in 1997. In addition to the
growth in the number of employees, the increase in salaries and other personnel
costs is attributable to normal salary increases and related employee benefits.
This increase was reduced by $14.9 million, $19.4 million and $4.4 million in
1999, 1998 and 1997, respectively, invested in software development costs and
contract acquisition costs.
Computer equipment and software rentals, which represent the largest
component of TSYS' net occupancy and equipment expenses, increased $27.5
million, or 51.5%, in 1999 compared to 1998, and $3.1 million, or 6.2%, in 1998
compared to 1997. Due to rapidly changing technology in computer equipment and
software, TSYS' equipment and software needs are achieved primarily through
operating leases. During 1999 and the last half of 1998, TSYS made significant
investments in computer software licenses related to its new East Center data
center to accommodate increased volumes and expected growth in the number of
accounts associated with new and existing customers.
TSYS continues to monitor and assess its building and equipment needs as
it positions itself for future growth and expansion. In 1997, construction
began on a campus-type facility which now serves as TSYS' corporate
headquarters and houses administrative, client contact and programming team
members. TSYS has entered into an operating lease agreement relating to the new
corporate campus. Under the agreement, the lessor has purchased the properties,
paid the construction and development costs and leased the facilities to TSYS.
The lease provides for substantial residual value guarantees and includes
purchase options at the original cost of the property. Real estate taxes,
insurance, maintenance and operating expenses applicable to the leased property
are the obligations of TSYS. TSYS began moving personnel into the new campus
facility in December 1998, and completed the move of a substantial number of
its personnel to this facility at the end of the third quarter of 1999. With
the move to the corporate campus, TSYS did not renew leases on certain
facilities. The increase in net occupancy and equipment expenses related to
occupying the campus was $6.4 million in 1999, and is expected to be $7.6
million in 2000, net of the relinquished lease obligations.
Other operating expenses at TSYS increased 35.9% in 1999 compared to 1998
and 6.5% in 1998 compared to 1997. The growth in other operating expenses in
1999 is primarily due to increased amortization of contract acquisition costs,
increased transaction processing provisions, increased travel and other business
development costs associated with exploring both domestic and international
business opportunities, including the establishment of an office in the United
Kingdom.
YEAR 2000 READINESS DISCLOSURE
Many computer programs were written with a two-digit date field. If these
programs were not made Year 2000 compliant, they would not be able to correctly
process date information for the year 2000 and beyond. Remediation efforts went
beyond Synovus' internal computer systems and required coordination with third-
party information processing providers, customers, vendors, government entities
and other third parties to assure that their systems and related interfaces
were compliant. Failure to achieve timely remediation of Synovus' critical
programs and computer systems for Year 2000 would have had a material adverse
effect on Synovus' financial condition and results of operations.
Synovus experienced a smooth transition in passing the century date
changeover. Synovus did not experience any significant internal or external
issues concerning Year 2000, and all Synovus companies, systems, facilities and
clients processed, and have continued to process, without incident. Synovus
will continue to monitor Year 2000 issues by overseeing critical tasks during
the year 2000.
The majority of Synovus' costs in becoming Year 2000 compliant are related
to TSYS. Such costs are being expensed as incurred. TSYS currently estimates
the total cost for the Year 2000 project will amount to approximately $17
million of direct costs. This amount consists primarily of the costs associated
with personnel dedicated to the Year 2000 project and hardware/software costs
related to testing. During 1999, TSYS incurred $6.8 million of direct costs
associated with the Year 2000 project and has incurred $15.8 million since
project inception. The banking operations' Year 2000 remediation costs, other
than those related to the conversion to M&I, are not material. Synovus
estimates that the total cost for its banking operations Year 2000 project is
approximately $2.5 million (approximately $1.4 million incurred in 1998, with
most of the remainder incurred during 1999). These costs are exclusive of the
costs associated with the conversion to the M&I system and consist primarily of
direct personnel costs and customer notifications.
All forward-looking statements regarding Year 2000 readiness, including
estimates, forecasts and expectations, are inherently uncertain as they are
based on various expectations and assumptions concerning future events and are
subject to numerous risks and uncertainties which could cause actual events or
results to differ materially from those projected. Important factors upon which
Synovus' Year 2000 forward-looking statements are premised include: (a)
retention of employees and contractors working on Year 2000 projects; (b) TSYS'
customers' remediation of their internal systems to be Year 2000 ready and
their cooperation in timely testing; (c) no material disruption of
telecommunication, data transmission networks, payment networks, government
services, utilities or other infra-structure services and no unexpected failure
of third-party products; (d) no unexpected failures by third-parties providing
services to Synovus; (e) no undiscovered subversion of systems or program code
affecting Synovus' systems; and (f) no undiscovered material flaws in Synovus'
test processes.
INVESTMENT SECURITIES
Synovus' investment securities portfolio consists of debt and equity
securities categorized as either available for sale or held to maturity.
Investment securities provide Synovus with a source of liquidity and a
relatively stable source of income. The investment securities portfolio also
provides management with a tool to balance the interest rate risk of its loan
portfolio. At December 31, 1999, approximately $1.3 billion of these investment
securities were pledged as required collateral for certain deposits and
repurchase agreements. See Table Thirteen for maturity and average yield
information of the available for sale and held to maturity investment
securities.
Synovus' investment strategy focuses on the use of the investment
securities portfolio to manage the interest rate risk created by the inherent
mismatch between the loan and deposit portfolios. With the strong loan demand
at Synovus' subsidiary banks, there is little need for investment securities
solely to augment income or utilize unpledged deposits. As such, Synovus'
investment securities are primarily U.S. Treasuries, U.S. Government agencies,
and Government agency sponsored mortgage-backed securities, all of
F-32
which have a high degree of liquidity and limited credit risk. A
mortgage-backed security depends on the underlying pool of mortgage loans to
provide a cash flow pass-through of principal and interest. At December 31,
1999, substantially all of the collateralized mortgage obligations and
mortgage-backed pass-through securities held by Synovus were issued or backed
by Federal agencies.
As of December 31, 1999 and 1998, the estimated fair value of investment
securities as a percentage of their amortized cost was 97.5% and 101.3%,
respectively. The investment securities portfolio had gross unrealized gains of
$5.6 million and gross unrealized losses of $57.0 million, for a net unrealized
loss of $51.4 million as of December 31, 1999. As of December 31, 1998, the
investment securities portfolio had a net unrealized gain of $24.5 million. In
accordance with Statement of Financial Accounting Standards (SFAS) No. 115,
shareholders' equity contained a net unrealized loss of $29.0 million and a net
unrealized gain of $11.4 million recorded on the available for sale portfolio
as of December 31, 1999 and 1998, respectively.
During 1999, the average balance of investment securities increased to
$1.97 billion, compared to $1.72 billion in 1998. Synovus earned a
taxable-equivalent rate of 6.24% and 6.49% for 1999 and 1998, respectively, on
its investment securities portfolio. As of December 31, 1999 and 1998, average
investment securities represented 19.3% and 19.6%, respectively, of average
interest earning assets.
Table Four presents the carrying value of investment securities held to
maturity and investment securities available for sale at December 31, 1999,
1998, and 1997.
TABLE FOUR
INVESTMENT SECURITIES
(In thousands) DECEMBER 31,
1999 1998 1997
Investment Securities Held to Maturity:
U.S. Treasury and U.S. Government agencies ................ $ 24,914 51,996 64,372
Mortgage-backed securities ................................ 53,698 77,899 123,519
State and municipal ....................................... 169,745 153,924 125,090
Other investments ......................................... 28,922 21,814 18,677
---------- --------- ---------
Total investment securities held to maturity ........... $ 277,279 305,633 331,658
========== ========= =========
Investment Securities Available for Sale:
U.S. Treasury and U.S. Government agencies ................ $ 1,287,953 1,205,261 1,214,690
Mortgage-backed securities ................................ 392,780 329,336 135,274
State and municipal ....................................... 15,126 13,807 959
Other investments ......................................... 20,819 23,436 20,100
---------- --------- ---------
Total investment securities available for sale ......... $ 1,716,678 1,571,840 1,371,023
========== ========= =========
Total Investment Securities:
U.S. Treasury and U.S. Government agencies ................ $ 1,312,867 1,257,257 1,279,062
Mortgage-backed securities ................................ 446,478 407,235 258,793
State and municipal ....................................... 184,871 167,731 126,049
Other investments ......................................... 49,741 45,250 38,777
---------- --------- ---------
Total investment securities ............................ $ 1,993,957 1,877,473 1,702,681
========== ========= =========
LOANS
Since lending activities are our single largest source of revenue,
Synovus' main objective is to adhere to sound lending practices. When analyzing
prospective loans, management assesses both interest rate objectives and credit
quality objectives in determining whether to extend a given loan and the
appropriate pricing for that loan. Operating under a decentralized structure,
management emphasizes lending in the local markets we serve. Synovus strives
towards maintaining a diversified loan portfolio to spread risk and reduce
exposure to economic downturns that may occur in different segments of the
economy, geographic locations, or in particular industries. As such, Synovus
has no significant concentration of loans to any single industry, geographic
location, or borrower. Synovus' loan policy discourages loans to highly
speculative real estate developments, highly leveraged transactions, and other
industries known for excessive risk.
In 1999, Synovus experienced its strongest loan growth in recent history.
At year end 1999, loans were $9.1 billion, up 19.3% over 1998 with commercial
loans accounting for 94% of the increase. Average net loans increased 17.6% or
$1.2 billion compared to 1998, representing 79.2% of average earning assets and
70.8% of average total assets. We experienced growth in our existing portfolio
and market share gains through successful business development and additional
products and services offered to the current customer base. The mix of loan
products being offered focuses on meeting the needs of our customers. As a
result of this emphasis, loans have continued to grow throughout Synovus'
subsidiary markets.
Our loan portfolio spreads across four Southeastern states with diverse
economies. Geographically, the largest portion of our loan portfolio is
originated by our Georgia affiliate banks, representing 59% of the consolidated
portfolio. The Alabama affiliate banks represent 19%, followed by South
Carolina with 16% and Northwest Florida with 6%. The growth by geographic
market during 1999 was as follows: Georgia 20%; South Carolina 24%; Alabama
14%; and Northwest Florida 10%. Specifically, the larger urban or metropolitan
markets contributed to the majority of our
F-33
loan growth: $303 million in Columbus, GA; $236 million in North Atlanta, GA;
$117 in Birmingham, AL; $77 million in Charleston, SC; $52 million in Athens,
GA; $38 million in Columbia, SC; $34 million in Carrollton, GA; $31 million in
Huntsville, AL; and $23 million in Spartanburg, SC.
The average loan-to-deposit ratio increased to 89.7% during 1999, compared
to 84.6% and 84.7% in 1998 and 1997, respectively. During 1999, average loan
growth outpaced average deposit growth by 1.36 times. As a result, our funding
mix changed, generating the need to increase external funding sources.
Table Five shows the composition of the loan portfolio at the end of the
past five years.
TABLE FIVE
LOANS BY TYPE
(In thousands)
DECEMBER 31,
1999 1998 1997 1996 1995
Commercial
Commercial, financial, and agricultural ..... $ 3,195,512 2,701,562 2,372,778 2,128,014 2,006,189
Real estate-construction .................... 1,609,594 1,164,443 875,136 765,192 604,610
Real estate-mortgage ........................ 1,983,766 1,540,459 1,333,561 1,255,223 1,181,287
----------- --------- --------- --------- ---------
Total commercial ......................... 6,788,872 5,406,464 4,581,475 4,148,429 3,792,086
----------- --------- --------- --------- ---------
Retail:
Real estate-mortgage ........................ 1,089,217 1,058,172 1,039,420 977,432 824,998
Consumer loans-credit card .................. 237,546 257,721 306,360 290,470 222,204
Consumer loans-other ........................ 961,881 889,785 830,611 782,786 795,908
----------- --------- --------- --------- ---------
Total retail ............................. 2,288,644 2,205,678 2,176,391 2,050,688 1,843,110
----------- --------- --------- --------- ---------
Total loans .............................. 9,077,516 7,612,142 6,757,866 6,199,117 5,635,196
Unearned income ............................. (9,277) (8,537) (5,712) (10,235) (14,812)
----------- --------- --------- --------- ---------
Total loans, net of unearned income ...... $ 9,068,239 7,603,605 6,752,154 6,188,882 5,620,384
=========== ========= ========= ========= =========
The commercial loan portfolio includes commercial, financial, and
agricultural loans as well as real estate loans. These loans are granted
primarily on the borrower's general credit standing and on the strength of the
borrower's ability to generate repayment cash flows from income sources. Real
estate construction and mortgage loans represent extensions of credit used as
interim or permanent financing of real estate properties that are secured by
commercial real estate as well as 1-4 family residences.
As of December 31, 1999, the commercial loan portfolio comprised 75% of
total loans compared to 71% and 68% in 1998 and 1997, respectively. During
1999, commercial loans experienced their strongest loan growth in recent years.
Commercial, financial, and agricultural loans grew by 18%, real estate
construction loans grew by 38%, and real estate mortgage loans grew by 29%.
This growth was primarily centered in our larger urban or metropolitan markets,
which are benefiting from a strong and growing economy. It is important to note
that since these markets continue to experience strong economic growth,
especially with respect to real estate, Synovus conducts ongoing reviews to
monitor rapid increases in real estate property values in these markets or any
significant overbuilding.
Retail loans consist of residential mortgages, equity lines, credit card
loans, installment loans and other credit line loans. Retail lending decisions
are made based upon the cash flow or earning power of the borrower that
represents the primary source of repayment. However, in many lending
transactions collateral is taken to provide an additional measure of security.
Transactions secured by collateral result in a secondary source of repayment in
that the collateral may be liquidated. Synovus determines the need for
collateral on a case-by-case basis. Factors considered include the purpose of
the loan, current and prospective credit-worthiness of the customer, terms of
the loan, and economic conditions.
During 1999, retail loans grew by $83 million or 4%. Loan growth in the
real estate and consumer portfolios was partially offset by a decrease in
credit card loans during 1999. This decrease was in part due to the termination
of an affinity card relationship with a customer and the sale of the related
receivables to our former affinity partner. This portfolio accounted for
approximately $5 million of outstanding credit card receivables at year-end
1998. Synovus continues to place strong emphasis on asset quality in credit
card receivables. This emphasis has contributed to lower charge-offs and past
due levels for this segment of the portfolio in 1999.
Table Six shows the maturity of selected loan categories as of December
31, 1999. Also provided are the amounts due after one year, classified
according to the sensitivity in interest rates.
F-34
TABLE SIX
LOANS MATURITY DISTRIBUTION AND INTEREST SENSITIVITY
(In thousands) DECEMBER 31,
--------------------------------------------------------
ONE OVER ONE YEAR OVER
YEAR THROUGH FIVE FIVE
OR LESS YEARS YEARS TOTAL
---------- ------------ ------- ---------
Selected loan categories:
Commercial, financial, and agricultural ............ $1,917,307 1,054,519 223,686 3,195,512
Real estate-construction ........................... 965,756 531,166 112,672 1,609,594
---------- ------------ ------- ---------
Total ........................................... $2,883,063 1,585,685 336,358 4,805,106
========== ============ ======= =========
Loans due after one year:
Having predetermined interest rates .............................................................. $1,153,226
Having floating interest rates ................................................................... 768,817
----------
Total ......................................................................................... $1,922,043
==========
Actual repayments of loans may differ from the contractual maturities
reflected above because borrowers have the right to prepay obligations with and
without prepayment penalties. Additionally, the refinancing of such loans or
the potential delinquency of such loans could also create differences between
the contractual maturities reflected above and the actual repayment of such
loans.
PROVISION FOR LOSSES ON LOANS AND NET CHARGE-OFFS
Despite Synovus' credit standards, internal controls, and continuous
loan review process, the inherent risk in the lending process results in
periodic charge-offs. The provision for loan losses is the charge to operating
earnings necessary to maintain an adequate reserve for loan losses. Through the
provision for loan losses, Synovus maintains a reserve for loan losses that
management believes is adequate to absorb losses within the loan portfolio.
However, future additions to the reserve may be necessary based on changes in
economic conditions. In addition, various regulatory agencies, as an integral
part of their examination procedures, periodically review Synovus' subsidiary
banks' reserve for loan losses. Based on their judgments about information
available to them at the time of their examination, such agencies may require
Synovus' subsidiary banks to recognize additions to their reserve for loan
losses.
To determine the adequacy of the reserve for loan losses and the need
for potential charges to the reserve, a formal analysis is completed quarterly
to assess the risk within the loan portfolio. This assessment, conducted by
lending officers and each bank's loan administration department as well as an
independent holding company loan administration department, includes analyses
of historical performance, past due trends, the level of nonperforming loans,
reviews of certain problem loans, loan activity since the last quarter,
consideration of current economic conditions, and other pertinent information.
Each one of Synovus' loans is assigned a rating, either individually or as part
of a homogeneous pool, based on an internally developed grading system. An
organizationally independent department also reviews grade assignments on an
ongoing basis. The resulting conclusions are reviewed and approved by senior
management.
The reserve for loan losses consists of two main components: the
allocated and unallocated reserves. Both components of the reserve are
available to cover inherent losses in the portfolio. The allocated component of
the reserve is determined by type of loan within the commercial and retail
portfolios. Generally, the allocated reserve for commercial loans is based on
application of loss reserve factors to the components of the portfolio based on
the assigned loan grades. The estimated loss factors are based on historical
losses adjusted for current events. The allocated reserve for retail loans is
generally determined on pools of homogeneous loan categories. Loss factors
applied to these pools are also based on average historical losses for the past
two years, current delinquency trends, changes in underwriting standards and
other factors. The unallocated component of the reserve is established for loss
estimates that may exist in the remainder of the portfolio, but have yet to be
identified. This also compensates for the uncertainty in estimating loan
losses. The unallocated component of the reserve is based upon management's
evaluation of various conditions, the effects of which are not directly
considered in the allocated reserve. These include credit concentrations,
recent levels and trends in delinquencies and non-accruals, new credit
products, changes in lending policies and procedures, changes in personnel, and
regional and local economic conditions.
In accordance with SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan", management, considering current information and events
regarding the borrowers' ability to repay their obligations, considers a loan
to be impaired when the ultimate collectibility of all amounts due, according
to the contractual terms of the loan agreement, is in doubt. When a loan
becomes impaired, management calculates the impairment based on the present
value of expected future cash flows discounted at the loan's effective interest
rate. If the loan is collateral dependent, the fair value of the collateral is
used to measure the amount of impairment. The amount of impairment and any
subsequent changes are recorded, through a charge to earnings, as an adjustment
to the reserve for loan losses. When management considers a loan, or a portion
thereof, as uncollectible, it is charged against the reserve for loan losses.
Credit quality continues to be strong. Reflecting the continued
strength of the Southeastern regional economy and the emphasis on high credit
quality and credit management, the ratio of nonperforming assets to loans and
other real estate is at its lowest level in more than twenty years at .38% as
of December 31, 1999, compared to the already low level of .40% at year-end
1998. The reserve for loan losses was 1.41% of loans, which provides coverage
of 456.80% of nonperforming loans at December 31, 1999, compared to 538.05% at
year-end 1998.
Synovus' provision for loan losses was $34.0 million, up 26.5%,
compared to $26.9 in 1998. This resulted in a provision to net charge-offs
coverage of 1.45 times net charge-offs compared to a coverage of 1.09 times in
1998. The increase in the provision expense for the year was primarily due to
the strong loan growth that we experienced in 1999, and was partially offset by
lower charge-offs. Net charge-offs were $23.5 million in 1999 down from $24.6
million in 1998. As a percentage of average net loans, the net charge-off ratio
was .29% in 1999 compared to .35% in 1998.
A summary, by loan category, of loans charged off, recoveries of loans
previously charged off, and additions to the reserve through provision expense
is presented in Table Seven.
F-35
TABLE SEVEN
RESERVE FOR LOAN LOSSES
(Amounts in thousands) YEARS ENDED DECEMBER 31,
1999 1998 1997 1996 1995
Reserve for loan losses at beginning of year ............... $114,109 105,705 97,455 83,927 76,707
Reserve for loan losses of acquired subsidiaries ........... 2,928 6,170 -- 188 1,001
Loans charged off:
Commercial:
Commercial, financial, and agricultural .............. 9,457 7,559 7,424 8,245 13,956
Real estate-construction ............................. 538 249 412 217 269
Real estate-mortgage ................................. 1,099 2,209 2,417 2,456 1,857
-------- ------- ------- ------- --------
Total commercial .................................. 11,094 10,017 10,253 10,918 16,082
-------- ------- ------- ------- --------
Retail:
Real estate-mortgage ................................. 1,598 1,347 1,750 1,032 209
Consumer loans-credit card ........................... 11,592 13,939 14,308 7,798 6,627
Consumer loans-other ................................. 6,159 5,838 6,001 6,011 2,279
-------- ------- ------- ------- --------
Total retail ...................................... 19,349 21,124 22,059 14,841 9,115
-------- ------- ------- ------- --------
Total loans charged off ........................... 30,443 31,141 32,312 25,759 25,197
-------- ------- ------- ------- --------
Recoveries on loans previously charged off:
Commercial:
Commercial, financial, and agricultural .............. 2,594 2,360 3,499 1,844 1,269
Real estate-construction ............................. 45 253 99 173 50
Real estate-mortgage ................................. 363 336 1,229 1,329 92
-------- ------- ------- ------- --------
Total commercial .................................. 3,002 2,949 4,827 3,346 1,411
-------- ------- ------- ------- --------
Retail:
Real estate-mortgage ................................. 295 202 197 352 115
Consumer loans-credit card ........................... 1,359 1,392 737 776 1,237
Consumer loans-other ................................. 2,301 1,950 2,316 2,214 1,812
-------- ------- ------- ------- --------
Total retail ...................................... 3,955 3,544 3,250 3,342 3,164
-------- ------- ------- ------- --------
Total loans recovered ............................. 6,957 6,493 8,077 6,688 4,575
-------- ------- ------- ------- --------
Net loans charged off ...................................... 23,486 24,648 24,235 19,071 20,622
-------- ------- ------- ------- --------
Additions to reserve through provision expense ............. 34,007 26,882 32,485 32,411 26,841
-------- ------- ------- ------- --------
Reserve for loan losses at end of year ..................... $127,558 114,109 105,705 97,455 83,927
======== ======= ======= ======= ========
Reserve for loan losses to loans, net of unearned income ... 1.41% 1.50 1.57 1.57 1.49
======== ======= ======= ======= ========
Ratio of net loans charged off to average loans
outstanding, net of unearned income ...................... .29% .35 .37 .32 .38
======== ======= ======= ======= ========
An allocation of the reserve for loan losses has been made according
to the respective amounts deemed necessary to provide for the possibility of
incurred losses within the various loan categories. Although other relevant
factors are considered, the allocation is primarily based on previous
charge-off experience adjusted for risk characteristic changes among each
category. Additional reserve amounts are allocated by evaluating the loss
potential of individual loans that management has considered impaired. The
reserve for loan loss allocation is based on historical data, subjective
judgment, and estimates, and therefore is not necessarily indicative of the
specific amounts or loan categories in which charge-offs may ultimately occur.
Refer to Table Eight for a five year comparison of the allocation of the
reserve for loan losses.
The unallocated component of the reserve for loan losses decreased
from .36% to .30% of total loans at December 31, 1998 and 1999, respectively.
Management continues to believe that this level of unallocated reserve is
appropriate in light of the instability in the worldwide economic environment,
the new markets entered into through recent acquisitions, the geographic
concentration of its real estate loan portfolio (Southeastern United States),
and the aggregate risk profile in the loan portfolio.
F-36
TABLE EIGHT
ALLOCATION OF RESERVE FOR LOAN LOSSES
(Amounts in thousands)
DECEMBER 31,
------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------- -------------- -------------- ------------- -------------
RESERVE %(*) RESERVE %(*) RESERVE %(*) RESERVE %(*) RESERVE %(*)
-------- --- -------- --- -------- --- ------- --- ------- ---
Commercial:
Commercial, financial, and agricultural $ 54,011 35% $ 45,431 35% $ 43,003 35% $39,570 35% $34,128 36%
Real estate-construction .............. 3,380 18 1,822 15 2,166 13 1,791 12 1,312 11
Real estate-mortgage .................. 9,324 22 6,381 21 5,562 20 5,110 20 4,392 20
-------- --- -------- --- -------- --- ------- --- ------- ---
Total commercial ................... 66,715 75 53,634 71 50,731 68 46,471 67 39,832 67
-------- --- -------- --- -------- --- ------- --- ------- ---
Retail:
Real estate-mortgage .................. 1,634 12 1,582 14 632 15 581 15 499 15
Consumer loans-credit card ............ 11,877 3 12,950 3 14,646 5 11,619 5 6,627 4
Consumer loans-other .................. 20,200 10 18,555 12 17,498 12 15,216 13 14,696 14
-------- --- -------- --- -------- --- ------- --- ------- ---
Total retail ....................... 33,711 25 33,087 29 32,776 32 27,416 33 21,822 33
-------- --- -------- --- -------- --- ------- --- ------- ---
Unallocated ........................... 27,132 -- 27,388 -- 22,198 -- 23,568 -- 22,273 --
-------- --- -------- --- -------- --- ------- --- ------- ---
Total reserve for loan losses ......... $127,558 100% $114,109 100% $105,705 100% $97,455 100% $83,927 100%
======== === ======== === ======== === ======= === ======= ===
(*) Loan balance in each category expressed as a percentage of total loans.
NONPERFORMING ASSETS AND PAST DUE LOANS
Nonperforming assets consist of loans classified as nonaccrual or
restructured, and real estate acquired through foreclosure. Nonaccrual loans
consist of those loans on which recognition of interest income has been
discontinued. Loans may be restructured as to rate, maturity, or other terms as
determined on an individual credit basis. Demand and time loans, whether
secured or unsecured, are generally placed on nonaccrual status when principal
and/or interest is 90 days or more past due, or earlier if it is known or
expected that the collection of all principal and/or interest is unlikely.
Loans past due 90 days or more, which based on a determination of
collectibility are accruing interest, are classified as past due loans.
Nonaccrual loans are reduced by the direct application of interest and
principal payments to loan principal, for accounting purposes only. In all
circumstances, the determination of when to place loans on nonaccrual status is
also based on evaluation of the individual characteristics of each particular
loan, which may result in policy deviations in some circumstances. Table Nine
presents the amount of interest income that would have been recorded on
nonaccrual loans if those loans had been current and performing in accordance
with their original terms.
Synovus' nonperforming assets increased $3.9 million to $34.6 million
with the corresponding nonperforming asset ratio improving to .38% as of
December 31, 1999 compared to .40% as of year-end 1998. Synovus incurred a
12.7% increase in nonperforming assets while increasing loans $1.5 billion, or
19.3%, during 1999. As a percentage of total loans outstanding, loans 90 days
past due and still accruing improved from prior year levels to .19% at December
31, 1999 compared to .32% at year-end 1998. Contributing to this improvement,
credit card loans 90 days past due and still accruing decreased $2.7 million in
1999 from 1998. Management believes that sufficient collateral value securing
these loans exists to cover contractual interest and principal payments on the
loans and management further believes the resolution of these delinquencies
will not cause a material increase in nonperforming assets.
Management continuously monitors nonperforming, impaired, and past due
loans, to prevent further deterioration regarding the condition of these loans.
Management is not aware of any material loans classified for regulatory
purposes as loss, doubtful, substandard, or special mention that have been
excluded from nonperforming assets or impaired loans. Impaired loans at
December 31, 1999 and 1998 are $29.6 million and $27.5 million, respectively.
Management further believes nonperforming assets and impaired loans include all
material loans in which doubts exist as to the collectibility of amounts due
according to the contractual terms of the loan agreement.
F-37
TABLE NINE
NONPERFORMING ASSETS AND PAST DUE LOANS
(Amounts in thousands) YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
1999 1998 1997 1996 1995
-------------------------------------------------------------
Nonaccrual loans ........................................... $ 26,672 20,756 18,304 24,717 22,767
Restructured loans ......................................... 1,252 452 563 1,625 1,733
-------- ------ ------ ------ ------
Nonperforming loans ..................................... 27,924 21,208 18,867 26,342 24,500
Loans 90 days past due and still accruing .................. 16,878 24,640 20,963 15,952 11,417
-------- ------ ------ ------ ------
Total ................................................ $ 44,802 45,848 39,830 42,294 35,917
======== ====== ====== ====== ======
Nonperforming assets:
Nonperforming loans (a) ................................. $ 27,924 21,208 18,867 26,342 24,500
Other real estate ....................................... 6,718 9,536 10,545 10,893 12,790
-------- ------ ------ ------ ------
Total ................................................ $ 34,642 30,744 29,412 37,235 37,290
======== ====== ====== ====== ======
Nonperforming assets to total loans and other real estate .. .38% .40 .43 .60 .66
======== ====== ====== ====== ======
Reserve for loan losses to nonperforming loans ............. 456.80% 538.05 560.26 369.96 342.56
======== ====== ====== ====== ======
Interest income on nonperforming loans that would have been reported
for the years ended December 31, 1999, 1998, and 1997 is summarized as follows:
1999 1998 1997
------ ------ ------
Interest at contractual rates (b) ...................................................... $3,177 2,929 3,237
Less interest recorded as income ....................................................... 569 1,031 977
------ ------ ------
Reduction of interest income ........................................................ $2,608 1,898 2,260
====== ====== ======
(a) Nonperforming assets exclude loans 90 days past due and still accruing.
(b) Interest income that would have been recorded if the loans had been
current and performing in accordance with their original terms.
DEPOSITS
Deposits provide the most significant funding source for Synovus'
interest earning assets. Table Ten shows the relative composition of average
deposits for 1999, 1998, and 1997. Refer to Table Eleven for the maturity
distribution of time deposits of $100,000 or more. These larger deposits
represented 18.9% and 14.6% of total deposits at December 31, 1999 and 1998,
respectively. Historically, Synovus' large denomination time deposits are
generally from customers within the local market areas of its subsidiary banks,
and, therefore, provide a greater degree of stability than is typically
associated with this source of funds. In 1999, approximately half of the
increase in time deposits over $100,000 was due to national market brokered
deposits. Synovus expects to further the utilization of this funding source
while continuing to maintain and grow its local market large denomination time
deposit base. Time deposits over $100,000 at December 31, 1999, 1998, and 1997
were $1.8 billion, $1.3 billion, and $1.3 billion, respectively. Interest
expense for the years ended December 31, 1999, 1998, and 1997 on these large
denomination deposits was $82.7 million, $76.3 million, and $69.8 million,
respectively.
During 1999, Synovus' average deposits increased $890.2 million, or
10.9%, to $9.0 billion from $8.1 billion in 1998. Average interest bearing
deposits for 1999, which include interest bearing demand deposits, money market
accounts, savings deposits, and time deposits, increased $763.9 million, or
11.2%, from 1998. Average non-interest bearing demand deposits increased $126.3
million, or 9.5%, during 1999. Average interest bearing deposits increased
$484.4 million, or 7.6%, from 1997 to 1998, while average non-interest bearing
demand deposits increased $129.5 million, or 10.8%. See Table Two for further
information on average deposits, including the average rates paid for 1999,
1998, and 1997.
TABLE TEN
AVERAGE DEPOSITS
(Amounts in thousands) YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------
1999 %(*) 1998 %(*) 1997 %(*)
------------------------------------------------------------------------
Non-interest bearing demand deposits ............. $1,450,547 16.1 1,324,257 16.3 1,194,759 15.9
Interest bearing demand deposits ................. 1,355,301 15.0 1,202,108 14.8 1,087,617 14.4
Money market accounts ............................ 1,796,114 19.9 1,452,386 17.8 1,253,634 16.7
Savings deposits ................................. 466,879 5.2 453,487 5.6 461,415 6.1
Time deposits .................................... 2,436,688 27.0 2,387,392 29.3 2,316,455 30.8
Time deposits $100,000 and over .................. 1,527,174 16.8 1,322,920 16.2 1,214,810 16.1
---------- ----- --------- ----- --------- -----
Total average deposits ........................ $9,032,703 100.0 8,142,550 100.0 7,528,690 100.0
========== ===== ========= ===== ========= =====
(*) Average deposits balance in each category expressed as percentage of
total average deposits.
F-38
TABLE ELEVEN
MATURITY DISTRIBUTION OF TIME DEPOSITS OF $100,000 OR MORE
(In thousands)
DECEMBER 31, 1999
3 months or less ................................ $ 712,642
Over 3 months through 6 months .................. 459,406
Over 6 months through 12 months ................. 432,082
Over 12 months .................................. 183,385
---------
Total outstanding ............................ $ 1,787,515
=========
INTEREST RATE RISK MANAGEMENT
Managing interest rate risk is a primary goal of Synovus'
asset/liability management function. Synovus attempts to achieve consistent
growth in net interest income while limiting volatility arising from changes in
interest rates. Synovus seeks to accomplish this goal by balancing the maturity
and repricing characteristics of balance sheet assets and liabilities along
with the selective use of off-balance sheet financial instruments.
Simulation modeling is the primary tool used by Synovus to measure its
interest rate sensitivity. On at least a quarterly basis, the following
24-month time period is simulated to determine a baseline net interest income
forecast and the sensitivity of this forecast to changes in interest rates.
These simulations include all of the company's earning assets, liabilities and
off-balance sheet instruments. Forecasted balance sheet changes, primarily
reflecting loan and deposit growth forecasts, are included in the periods
modeled. The magnitude and velocity of rate changes among the various asset and
liability groups exhibit different characteristics for each possible interest
rate scenario. Simulation modeling enables Synovus to capture the effect of
these differences. Simulation also enables Synovus to capture the effect of
expected prepayment level changes on selected assets subject to prepayment.
Synovus maintains policies designed to limit the maximum acceptable
negative impact on net interest income over twelve and twenty-four month time
horizons from a gradual change in interest rates of up and down 200 basis
points. These policies specify the maximum allowable negative change in net
interest income in the rising and declining rate scenarios from the stable rate
scenarios. The current policy limits this change to 5% of projected net
interest income for the twelve month time horizon and 7% for the twenty-four
month time horizon. As of December 31, 1999, Synovus was well within its policy
guidelines with simulations indicating that Synovus is positioned such that its
net interest income would increase by approximately 1.5% in a rising rate
environment and decrease by approximately 1.5% in a declining rate environment.
The exact change in net interest income would also depend on the specific
changes in asset and liability volumes and mix experienced over these time
horizons.
Synovus also utilizes simulation modeling to evaluate the longer-term
interest rate risk position of the company. Synovus measures this position by
simulating the market value of equity in changing rate environments. The model
estimates the impact of an immediate 200 basis point rate shock on the present
value of the future cash flows of all assets, liabilities, and off-balance
sheet instruments. Synovus maintains a policy guideline limiting the maximum
allowable change in the market value of equity in both rising and declining
rate shocks. This policy limits the maximum allowable change to an amount equal
to one percent of on-balance sheet assets. Synovus was within this guideline at
year-end.
Another tool utilized by Synovus' management is cumulative gap
analysis, which seeks to measure the repricing differentials, or gap, between
rate sensitive assets and liabilities over various time periods. Table Twelve
reflects the gap positions of Synovus' consolidated balance sheets on December
31, 1999 and 1998, at various repricing intervals. The projected deposit
repricing volumes reflect adjustments based on management's assumptions of the
expected rate sensitivity relative to the prime rate for core deposits without
contractual maturity (i.e., interest bearing checking, savings, and money
market accounts). Management believes that these adjustments allow for a more
accurate profile of Synovus' interest rate risk position. The projected
investment securities repricing reflects expected prepayments on
mortgage-backed securities and expected cash flows on securities subject to
accelerated redemption options. These assumptions are made based on the
interest rate environment as of each balance sheet date and are subject to
change as the general level of interest rates change. Management would
anticipate a modest lengthening of average investment maturities in a rising
rate environment and a slightly more significant shortening in a declining rate
environment. While these potential changes are not depicted in the static gap
analysis, simulation modeling allows for the proper analysis of these and other
relevant potential changes. This gap analysis indicates that Synovus has a
cumulative one-year gap of minus 11.5% as of December 31, 1999. While the gap
measurement would indicate a liability sensitive position, the more
comprehensive evaluation of repricing velocity and volumes available in
simulation modeling indicates a more balanced position. Management believes
that adjusted gap analysis is a useful tool for measuring interest rate risk
only when used in conjunction with its simulation model.
F-39
TABLE TWELVE
INTEREST RATE SENSITIVITY
(Amounts in millions)
DECEMBER 31, 1999
-----------------------------------------
0-3 4-12 1-5 OVER 5
MONTHS MONTHS YEARS YEARS
-------- -------- ------- -------
Investment securities (a) ........................................ $ 123.7 192.3 1,186.9 538.7
Loans and mortgage loans held for sale, net of unearned income ... 4,339.4 1,208.8 3,026.0 577.2
Other ............................................................ 93.8 0.2 -- --
-------- -------- ------- -------
Interest sensitive assets ..................................... 4,556.9 1,401.3 4,212.9 1,115.9
-------- -------- ------- -------
Deposits ......................................................... 2,575.6 2,725.3 2,022.7 491.2
Other borrowings ................................................. 1,420.9 8.4 97.7 52.8
-------- -------- ------- -------
Interest sensitive liabilities ................................ 3,996.5 2,733.7 2,120.4 544.0
-------- -------- ------- -------
Interest rate swaps ........................................... (550.0) 20.0 530.0 --
-------- -------- ------- -------
Interest sensitivity gap ................................... $ 10.4 (1,312.4) 2,622.5 571.9
======== ======== ======= =======
Cumulative interest sensitivity gap ........................ $ 10.4 (1,302.0) 1,320.5 1,892.4
======== ======== ======= =======
Cumulative interest sensitivity gap as a percentage
of total interest sensitive assets ....................... .1% (11.5) 11.7 16.8
======== ======== ======= =======
DECEMBER 31, 1998
----------------------------------------
0-3 4-12 1-5 OVER 5
MONTHS MONTHS YEARS YEARS
-------- -------- ------- -------
Investment securities (a) ........................................ $ 172.3 333.3 1,005.9 347.5
Loans and mortgage loans held for sale, net of unearned income ... 3,837.0 1,081.3 2,243.4 598.1
Other ............................................................ 77.4 -- 1.4 --
-------- ------- ------- -------
Interest sensitive assets ..................................... 4,086.7 1,414.6 3,250.7 945.6
-------- ------- ------- -------
Deposits ......................................................... 2,453.2 2,314.1 2,085.2 511.0
Other borrowings ................................................. 504.2 7.1 120.1 3.7
-------- ------- ------- -------
Interest sensitive liabilities ................................ 2,957.4 2,321.2 2,205.3 514.7
-------- ------- ------- -------
Interest rate swaps ........................................... (270.0) 25.0 245.0 --
-------- ------- ------- -------
Interest sensitivity gap ................................... $ 859.3 (881.6) 1,290.4 430.9
======== ======= ======= =======
Cumulative interest sensitivity gap ........................ $ 859.3 (22.3) 1,268.1 1,699.0
======== ======= ======= =======
Cumulative interest sensitivity gap as a percentage
of total interest sensitive assets ....................... 8.9% (0.2) 13.1 17.5
======== ======= ======= =======
(a) Excludes the effect of SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities", consisting of net
unrealized losses of $47.6 million and net unrealized gains of $18.4
million at December 31, 1999 and 1998, respectively.
F-40
TABLE THIRTEEN
MATURITIES OF INVESTMENT SECURITIES AND AVERAGE YIELDS
(Amounts in thousands) DECEMBER 31, 1999
--------------------------------------------------------------
INVESTMENT SECURITIES INVESTMENT SECURITIES
HELD TO MATURITY AVAILABLE FOR SALE
---------------------------- ----------------------------
AMORTIZED AVERAGE ESTIMATED AVERAGE
COST YIELD FAIR VALUE YIELD
--------- ------- ---------- -------
U.S. Treasury and U.S. Government agencies:
Within 1 year ............................... $ 7,010 5.47% $ 97,982 6.34%
1 to 5 years ................................ 9,151 6.07 895,154 5.96
5 to 10 years ............................... 8,753 7.39 292,833 6.65
More than 10 years .......................... -- -- 1,984 7.20
-------- ----------
Total .................................... 24,914 6.36 1,287,953 6.13
-------- ----------
State and municipal:
Within 1 year ............................... 8,742 7.97 451 9.64
1 to 5 years ................................ 38,474 7.70 3,445 7.44
5 to 10 years ............................... 79,815 7.49 6,951 7.13
More than 10 years .......................... 42,714 8.15 4,279 5.38
-------- ----------
Total .................................... 169,745 7.73 15,126 6.78
-------- ----------
Other investments:
Within 1 year ............................... 751 7.25 2,222 6.26
1 to 5 years ................................ 263 5.21 775 5.49
5 to 10 years ............................... 808 4.53 2,547 4.27
More than 10 years .......................... 27,100 6.65 15,275 3.54
-------- ----------
Total .................................... 28,922 6.59 20,819 4.09
-------- ----------
Mortgage backed securities ..................... 53,698 6.58 392,780 6.30
-------- ----------
Total investment securities:
Within 1 year ............................... 16,503 6.87 100,655 6.35
1 to 5 years ................................ 47,888 7.37 899,374 5.96
5 to 10 years ............................... 89,376 7.46 302,331 6.64
More than 10 years .......................... 69,814 7.57 21,538 4.24
Mortgage backed securities .................. 53,698 6.58 392,780 6.30
-------- ----------
Total .................................... $277,279 7.27% $1,716,678 6.15%
======== ==========
The calculation of weighted average yields for securities is based on
the amortized cost and effective yields of each security. The yield on
state and municipal securities is computed on a taxable-equivalent
basis using the statutory federal income tax rate of 35%. Maturity
information is presented based upon contractual maturity. Actual
maturities may differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
OFF-BALANCE SHEET DERIVATIVES FOR INTEREST RATE RISK MANAGEMENT
As part of the overall interest rate risk management activities, Synovus
utilizes off-balance sheet derivatives to modify the repricing characteristics
of on-balance sheet assets and liabilities. The primary instruments utilized by
Synovus are interest rate swaps where Synovus receives a fixed rate of interest
and pays a floating rate tied to either the prime rate or three month LIBOR.
These swaps are utilized to convert on-balance sheet floating rate loans to
fixed rate assets and to convert fixed rate liabilities to floating rate
liabilities.
Synovus has also purchased interest rate floors and collars to manage its
overall interest rate risk position. Interest rate floors serve to effectively
convert floating-rate loans to fixed-rate when the prime rate falls below a
pre-specified level. These instruments are utilized to reduce asset sensitivity
in falling rate environments but not in rising rate environments. Interest rate
collars convert floating-rate loans to fixed-rate when the prime rate moves
outside of a pre-specified range. These instruments reduce overall asset
sensitivity in both falling and rising interest rate environments.
All off-balance sheet derivatives utilized by Synovus represent end-user
activities designed as hedges, all of which are linked to specific assets or
liabilities as part of overall interest rate risk management practices.
Management feels that the utilization of these instruments provides greater
financial flexibility and is a very efficient tool for managing interest rate
risk.
The notional amount of off-balance sheet derivatives utilized by Synovus as
of December 31, 1999 and 1998, was $665 million and $595 million, respectively.
The notional amounts represent the amount on which calculations of interest
payments to be exchanged are based. Although Synovus is not exposed to credit
risk equal to the notional amounts, there is exposure to potential credit risks
equal to the fair or replacement values of the swaps if the counterparty fails
to perform. This credit risk is normally a very small percentage of the notional
amount and fluctuates as interest rates change. Synovus minimizes this risk by
subjecting the transaction to the same approval process as on-balance sheet
credit activities, by dealing with only highly-rated counterparties, and by
obtaining collateral agreements for exposure above certain predetermined limits.
F-41
(Dollars in thousands)
Weighted
Weighted Weighted Average Net
Notional Average Average Maturity Unrealized Unrealized Unrealized
DECEMBER 31, 1999 Amount Receive Rate Pay Rate (a) In Months Gains Losses Gains (Losses)
- ------------------------------------------------------------------------------------------------------------------------------------
Receive fixed swaps - LIBOR $180,000 5.78% 6.16% 19 $ 181 (2,711) (2,530)
Receive fixed swaps - Prime 420,000 8.82% 8.50% 39 75 (8,047) (7,972)
-------- ---- ---- -- ----- ------ ------
Total receive fixed swaps 600,000 7.91% 7.80% 33 256 (10,758) (10,502)
-------- ---- ---- -- ----- ------ ------
Weighted
Weighted Average Net
Notional Average Maturity Unrealized Unrealized Unrealized
Amount Floor Rate In Months Gains Losses Gains (Losses)
- -----------------------------------------------------------------------------------------------------------------------------------
Purchased interest rate floors 65,000 7.90% 9 -- (73) (73)
Weighted
Average Net
Notional Maturity Unrealized Unrealized Unrealized
Amount In Months Gains Losses Gains (Losses)
- -----------------------------------------------------------------------------------------------------------------------------------
Total $665,000 31 $ 256 (10,831) (10,575)
======== ===== ======= =======
Weighted
Weighted Weighted Average Net
Notional Average Average Maturity Unrealized Unrealized Unrealized
December 31, 1998 Amount Receive Rate Pay Rate (a)(b) In Months Gains Losses Gains (Losses)
- ----------------------------------------------------------------------------------------------------------------------------------
Receive fixed swaps - LIBOR $235,000 5.79% 5.33% 9 $ 1,220 (16) 1,204
Receive fixed forward
starting swaps - LIBOR 100,000 5.90% 5.07% 41 1,455 (16) 1,439
Receive fixed swaps - Prime 95,000 8.79% 7.75% 29 2,226 -- 2,226
-------- ---- ---- -- ----- --- -----
Total receive fixed swaps 430,000 6.48% 5.80% 21 4,901 (32) 4,869
-------- ---- ---- -- ----- --- -----
Weighted
Weighted Weighted Average Net
Notional Average Average Maturity Unrealized Unrealized Unrealized
Amount Cap Rate Floor Rate In Months Gains Losses Gains (Losses)
- ----------------------------------------------------------------------------------------------------------------------------------
Purchased interest rate collars 80,000 9.16% 7.91% 10 $ 256 -- 256
Weighted
Weighted Average Net
Notional Average Maturity Unrealized Unrealized Unrealized
Amount Floor Rate In Months Gains Losses Gains (Losses)
- ----------------------------------------------------------------------------------------------------------------------------------
Purchased interest rate floors 85,000 7.87% 24 $ 453 -- 453
Weighted
Average Net
Notional Maturity Unrealized Unrealized Unrealized
Amount In Months Gains Losses Gains (Losses)
- ----------------------------------------------------------------------------------------------------------------------------------
Total $595,000 20 $ 5,610 (32) 5,578
======== ======= === =====
(a) Variable pay rate based upon contract rates in effect at
December 31, 1999 and 1998.
(b) Pay rate on forward starting swaps is based on the three month
LIBOR at December 31, 1998.
The above table represents the December 31, 1999 and 1998 status of all
off-balance sheet interest rate contracts. During 1999, there were nine
maturities and two terminations. There was one termination in 1998. Off-balance
sheet interest rate contracts contributed additional net interest income of
$2,487,000 and two basis points to the net interest margin for 1999. For 1998,
the contribution was additional net interest income of $651,000 and a one basis
point increase to the net interest margin.
MARKET RISK
Market risk reflects the risk of economic loss resulting from adverse
changes in market prices and interest rates. This risk of loss can be reflected
in either diminished current market values or reduced potential net interest
income in future periods.
Synovus' market risk arises primarily from interest rate risk inherent in
its lending and deposit taking activities. The structure of Synovus' loan and
deposit portfolios is such that a significant decline in the prime rate may
adversely impact net market values and interest income. Management seeks to
manage this risk through the utilization of various tools, primarily investment
securities and off-balance sheet derivative financial instruments. The
composition and size of the investment portfolio is managed so as to reduce the
interest rate risk in the deposit and loan portfolios while at the same time
maximizing the yield generated from the portfolio. Off-balance sheet derivatives
are also utilized to reduce the risk in the combined deposit and loan
portfolios. One of the primary instruments utilized by Synovus is the receive
fixed interest rate swap which allows the company to effectively convert on-
F-42
balance sheet floating rate loans to fixed rate assets. Synovus also utilizes
receive fixed interest rate swaps to effectively convert fixed rate liabilities
to floating rate liabilities. Both of these structures allow Synovus to reduce
the exposure to declining interest rates inherent in its combined deposit and
loan portfolios.
Table Fourteen below presents in tabular form the contractual balances and
the estimated fair value of Synovus' on-balance sheet financial instruments and
the notional amount and estimated fair value of Synovus' off-balance sheet
derivative financial instruments at their expected maturity dates as of December
31, 1999, with comparative summary balances at December 31, 1998. Investment
securities' cash flows are reflected at their contractual maturity date, except
for mortgage-backed securities' cash flows which are reflected in the period in
which they are expected to prepay taking into consideration historical
prepayment experience. For core deposits without contractual maturity (i.e.,
interest bearing checking, savings, and money market accounts), the table
presents principal cash flows based on management's judgment concerning their
most likely runoff or repricing behaviors. The table below presents notional
amounts and weighted-average interest rates by contractual maturity date for
off-balance sheet derivative financial instruments. Notional amounts represent
the amount on which calculations of interest payments to be exchanged are based.
Weighted average variable rates are based on market rates at the most recent
reset date for each respective swap tied to LIBOR and the December 31, 1999
prime rate for each respective swap tied to prime. There have been no
substantial changes in Synovus' market risk profile from the preceding year and
the assumptions are consistent with prior year assumptions.
TABLE FOURTEEN
MARKET RISK INFORMATION
(In thousands) PRINCIPAL/NOTIONAL AMOUNT MATURING IN:
RATE-SENSITIVE ASSETS: 2000 2001 2002 2003 2004 Thereafter
- ---------------------------------------------------------------------------------------------------------------------------
Fixed interest rate loans $ 1,829,220 986,896 849,560 610,312 618,721 565,121
Average interest rate 8.81% 8.84% 8.66% 8.46% 8.31% 8.20%
Variable interest rate loans $ 1,605,341 890,437 445,991 306,574 295,720 147,491
Average interest rate 8.40% 8.81% 9.21% 8.59% 8.58% 8.62%
Fixed interest rate securities $ 146,972 179,457 295,150 342,821 313,708 677,109
Average interest rate 6.20% 6.24% 5.86% 5.75% 6.18% 6.27%
Variable interest rate securities $ 16,572 12,595 9,690 7,526 5,883 34,090
Average interest rate 6.13% 6.13% 6.14% 6.14% 6.15% 5.98%
Other interest bearing assets $ 94,021 -- -- -- -- --
Average interest rate 5.59% -- -- -- -- --
RATE-SENSITIVE LIABILITIES:
- ---------------------------------------------------------------------------------------------------------------------------
Savings and interest bearing checking $ 1,797,941 354,928 354,928 307,821 307,828 452,184
Average interest rate 3.66% 3.02% 3.02% 2.85% 2.85% 2.25%
Fixed interest rate time deposits $ 3,411,203 470,047 88,215 71,743 42,649 39,183
Average interest rate 5.18% 5.51% 5.38% 5.64% 5.46% 5.77%
Variable interest rate time deposits $ 91,441 20,382 4,281 -- -- --
Average interest rate 5.13% 5.34% 5.68% -- -- --
Fixed interest rate borrowings $ 13,698 5,288 753 8,240 81,516 52,424
Average interest rate 5.86% 5.95% 7.50% 5.58% 6.05% 5.45%
Variable interest rate borrowings $ 1,288,092 100,000 30,000 -- -- --
Average interest rate 5.43% 6.47% 6.43% -- -- --
RATE-SENSITIVE DERIVATIVE
FINANCIAL INSTRUMENTS:
- ---------------------------------------------------------------------------------------------------------------------------
Payable variable interest rate
swaps - LIBOR $ 50,000 55,000 75,000
Average pay rate 6.11% 6.16% 6.20%
Average receive rate 5.49% 6.42% 5.50%
Pay variable variable forward starting
interest rate swaps - LIBOR
Average pay rate
Average receive rate
Pay variable interest rate swaps - Prime $ 20,000 75,000 55,000 150,000 120,000
Average pay rate 8.50% 8.50% 8.50% 8.50% 8.50%
Average receive rate 8.94% 8.75% 8.42% 8.74% 9.11%
Purchased interest rate collars - Prime
Average cap rate
Average floor rate
Purchased interest rate floors - Prime $ 45,000 20,000
Average strike rate 7.86% 8.00%
- ---------------------------------------------------------------------------------------------------------------------------
MARKET RISK INFORMATION FAIR FAIR
(In thousands) TOTAL VALUE TOTAL VALUE
RATE-SENSITIVE ASSETS: 1999 1999 1998 1998
- ----------------------------------------------------------------------------------------------------------------------------
Fixed interest rate loans 5,459,830 5,377,645 4,461,348 4,366,762
Average interest rate 8.63% 8.76%
Variable interest rate loans 3,691,554 3,689,881 3,298,488 3,257,747
Average interest rate 8.64% 8.97%
Fixed interest rate securities 1,955,217 1,905,105 1,778,363 1,803,437
Average interest rate 6.09% 6.39%
Variable interest rate securities 86,356 85,077 80,669 80,129
Average interest rate 6.08% 6.33%
Other interest bearing assets 94,021 94,021 78,775 78,775
Average interest rate 5.59% 4.99%
RATE-SENSITIVE LIABILITIES:
- ----------------------------------------------------------------------------------------------------------------------------
Savings and interest bearing checking 3,575,630 3,518,260 3,573,118 3,581,660
Average interest rate 3.22% 3.10%
Fixed interest rate time deposits 4,123,040 4,123,560 3,666,264 3,673,650
Average interest rate 5.24% 5.50%
Variable interest rate time deposits 116,104 116,171 124,101 124,447
Average interest rate 5.19% 5.08%
Fixed interest rate borrowings 161,919 161,572 104,267 105,739
Average interest rate 5.82% 6.09%
Variable interest rate borrowings 1,418,092 1,417,997 530,822 530,822
Average interest rate 5.53% 4.65%
RATE-SENSITIVE DERIVATIVE
FINANCIAL INSTRUMENTS:
- ----------------------------------------------------------------------------------------------------------------------------
Payable variable interest rate
swaps - LIBOR 180,000 (2,530) 235,000 1,204
Average pay rate 6.16% 5.33%
Average receive rate 5.78% 5.79%
Pay variable variable forward starting
interest rate swaps - LIBOR -- 100,000 1,439
Average pay rate 5.07%
Average receive rate 5.91%
Pay variable interest rate swaps - Prime 420,000 (7,972) 95,000 2,226
Average pay rate 8.50% 7.75%
Average receive rate 8.82% 8.79%
Purchased interest rate collars - Prime -- 80,000 263
Average cap rate 9.16%
Average floor rate 7.91%
Purchased interest rate floors - Prime 65,000 4 85,000 726
Average strike rate 7.90% 7.87%
- ----------------------------------------------------------------------------------------------------------------------------
F-43
LIQUIDITY
Liquidity represents the availability of funding to meet the needs of
depositors, borrowers, and creditors at a reasonable cost, on a timely basis,
and without adverse consequences. The Synovus Asset/Liability Management
Committee actively analyzes and manages Synovus' liquidity position in
coordination with similar committees at subsidiary banks. These subsidiaries,
with the help of management, maintain liquidity in the form of cash on deposit,
securities available for sale, and cash derived from prepayments and maturities
of both their investment and loan portfolios. Liquidity is also enhanced by the
acquisition of new deposits and the well-established core deposits of Synovus'
242 banking offices in four states. The subsidiary banks monitor deposit flow
and evaluate alternate pricing structures to retain and grow deposits. Certain
Synovus subsidiary banks maintain correspondent banking relationships with
various national and regional financial organizations. These relationships
provide access to short-term borrowings through federal funds which allows
Synovus to meet immediate liquidity needs if required.
Synovus serves diverse markets. Some of these are rapidly growing areas
where loan demand outpaces the generation of deposits. However, through loan
participations and federal funds sold among Synovus' subsidiary banks, these
loans can be effectively funded by subsidiaries having lower local loan demand.
Additionally, lending is focused within the local markets served by Synovus,
enabling the development of comprehensive banking relationships.
Selected Synovus subsidiary banks maintain an additional liquidity source
through their membership in the Federal Home Loan Bank. At year-end 1999, these
banks had access to additional funding of approximately $200 million, subject to
available collateral, through utilization of Federal Home Loan Bank advances.
Additionally, the Parent Company requires cash for various operating needs
including dividends to shareholders, business combinations, capital infusions
into subsidiaries, the servicing of debt, and the payment of general corporate
expenses. The primary source of liquidity for the Parent Company is dividends
from the subsidiary banks. In addition, the Parent Company has access to a $25
million line of credit. The Parent Company enjoys an excellent reputation and
credit standing in the market place and has the ability to raise substantial
amounts of funds in the form of either short or long-term borrowings. The Parent
Company's current principal debt, senior notes totaling $75 million at a rate of
6.125%, has been rated "A" by Standard and Poors Corp., "A3" by Moody's Investor
Service and "AA-" by Thomson BankWatch, Inc. For a complete description of these
borrowings and other borrowings by other Synovus subsidiaries, see Note 6 to
Synovus' consolidated financial statements.
The consolidated statements of cash flows detail Synovus' cash flows from
operating, investing, and financing activities. Net cash provided by operating
activities was $453 million for the year ended December 31, 1999, while
financing activities provided $1.4 billion. Investing activities used $1.8
billion of this amount, resulting in a net increase in cash and cash equivalents
of $93.2 million. At year-end 1999, Synovus increased its cash on hand levels by
approximately $95 million in connection with its Year 2000 planning.
Management is not aware of any trends, events, or uncertainties that will
have, or that are reasonably likely to have a material impact on Synovus'
liquidity, capital resources, or operations. Further, management is not aware of
any current recommendations by regulatory agencies which, if they were to be
implemented, would have such effect.
CAPITAL RESOURCES
Synovus has always placed great emphasis on maintaining a strong capital
base and continues to exceed regulatory capital requirements. Management is
committed to maintaining a capital level sufficient to assure shareholders,
customers, and regulators that Synovus is financially sound, and to enable
Synovus to sustain an appropriate degree of leverage to provide a desirable
level of profitability. Synovus has the ability to generate internal capital
growth sufficient to support the asset growth it has experienced. Total
shareholders' equity of $1.23 billion represented 9.78% of total assets at
December 31, 1999.
Regulators use a risk-adjusted calculation to aid them in their
determination of capital adequacy by weighting assets based on the credit risk
associated with on- and off-balance sheet assets. The majority of these
risk-weighted assets for Synovus are on-balance sheet assets in the form of
loans. A small portion of risk-weighted assets are considered off-balance sheet
assets and primarily consist of letters of credit, loan commitments, and to a
lesser extent interest rate contracts, that Synovus enters into in the normal
course of business. Capital is categorized into two types: Tier I and Tier II.
The capital guidelines used by regulators require an 8% total risk-based
capital ratio of which 4% must be Tier I capital. Additionally, the regulatory
agencies define a well-capitalized bank as one that has a leverage ratio of at
least 5%, a Tier I capital ratio of at least 6%, and a total risk-based capital
ratio of at least 10%. At the end of 1999, Synovus and all subsidiary banks were
in excess of the minimum capital requirements with a consolidated Tier I capital
ratio of 12.51% and a total risk-based capital ratio of 13.77%, compared to Tier
I and total risk-based capital ratios of 12.73% and 14.00%, respectively, in
1998 as shown in Table Fifteen.
TABLE FIFTEEN
CAPITAL RATIOS
(Amounts in thousands) DECEMBER 31,
----------------------------------
1999 1998
----------------------------------
Tier I capital:
Shareholders' equity ............................... $ 1,226,669 1,111,917
Less: Unrealized gain on investment
securities available for sale ...................... 28,960 (11,425)
Disallowed intangibles ............................ (38,064) (33,986)
Plus: Minority interest ............................ 64,285 52,093
------------ ---------
Total Tier I capital .............................. 1,281,850 1,118,599
------------ ---------
Tier II capital:
Eligible portion of the reserve for loan losses .... 127,558 109,873
Subordinated and other qualifying debt ............. 1,480 1,720
------------ ---------
Total Tier II capital ............................. 129,038 111,593
------------ ---------
Total risk-based capital ............................. $ 1,410,888 1,230,192
============ =========
Total risk-adjusted assets ........................... $ 10,242,701 8,785,565
============ =========
Tier I capital ratio ................................. 12.51% 12.73
Total risk-based capital ratio ....................... 13.77 14.00
Leverage ratio ....................................... 10.52 10.82
Regulatory minimums:
Tier I capital ratio ............................... 4.00%
Total risk-based capital ratio ..................... 8.00
Leverage ratio ..................................... 4.00
F-44
In addition to the risk-based capital standards, a minimum leverage ratio of
4% is required for the highest-rated bank holding companies that are not
undertaking significant expansion programs. An additional 1% to 2% may be
required for other companies, depending upon their regulatory ratings and
expansion plans. The leverage ratio is defined as Tier I capital divided by
quarterly average assets, net of certain intangibles. As of December 31, 1999,
Synovus had a leverage ratio of 10.52% compared to 10.82% at December 31, 1998.
Both ratios significantly exceed regulatory requirements.
Synovus' capital levels also exceed all requirements under the Federal
Reserve Board's guidelines. The Federal Reserve Board requires a minimum primary
capital ratio of 5.50% and a total capital ratio of 6.00% for bank holding
companies and banks. At December 31, 1999, Synovus' primary and total capital
ratios as defined by the Federal Reserve Board were 11.11% and 11.12%,
respectively, compared to 11.34% and 11.35%, respectively, at year-end 1998.
Synovus' 80.8% ownership of TSYS is an important aspect of the market price
of Synovus common stock and should be considered in a comparison of the relative
market price of Synovus common stock to other financial services companies. As
of December 31, 1999, there were approximately 33,648 shareholders of record of
Synovus common stock, some of which are holders in nominee name for the benefit
of a number of different shareholders. Table Sixteen displays high and low stock
price quotations of Synovus common stock which are based on actual transactions.
TABLE SIXTEEN
MARKET AND STOCK PRICE INFORMATION
HIGH LOW
1999
Quarter ended December 31, 1999 .......... $22 1/8 18 7/16
Quarter ended September 30, 1999 ......... 20 5/16 17 1/2
Quarter ended June 30, 1999 .............. 23 9/16 19 1/8
Quarter ended March 31, 1999 ............. 25 20 1/2
1998
Quarter ended December 31, 1998 .......... $24 1/16 20 3/16
Quarter ended September 30, 1998 ......... 25 18 1/16
Quarter ended June 30, 1998 .............. 25 13/16 21 15/16
Quarter ended March 31, 1998 ............. 25 13/16 20 3/4
DIVIDENDS
It is Synovus' objective to pay out at least one-third of earnings to
shareholders in cash dividends. Synovus' dividend payout ratio was 43.78%,
41.52%, and 38.10%, in 1999, 1998, and 1997, respectively. The total dollar
amount of dividends declared increased 26.9% in 1999 to $98.5 million, from
$77.7 million in 1998. Cash dividends have been paid on the common stock of
Synovus (including its predecessor companies) in every year since 1891. It is
the present intention of the Synovus Board of Directors to continue to pay cash
dividends on its common stock in accordance with the previously mentioned
objective. Table Seventeen presents the declared and paid dates from recent
dividends, as well as per share dividend amounts.
TABLE SEVENTEEN
DIVIDENDS
PER SHARE
DATE DECLARED DATE PAID AMOUNT
------------- --------- ---------
November 15, 1999 January 3, 2000 $.0900
September 13, 1999 October 1, 1999 .0900
May 10, 1999 July 1, 1999 .0900
March 15, 1999 April 1, 1999 .0900
November 9, 1998 January 2, 1999 .0733
September 14, 1998 October 1, 1998 .0733
May 11, 1998 July 1, 1998 .0733
March 9, 1998 April 1, 1998 .0733
COMMITMENTS AND CONTINGENCIES
Synovus believes it has sufficient capital, liquidity, and future cash flows
from operations to meet operating needs over the next year. Table Eighteen, Note
6, and Note 10 to Synovus' consolidated financial statements provide additional
information on Synovus' short-term and long-term borrowings.
In the normal course of its business, TSYS maintains processing contracts
with its customers. These processing contracts contain commitments, including,
but not limited to, minimum standards and time frames against which TSYS'
performance is measured. In the event TSYS does not meet its contractual
commitments with its customers, TSYS may incur penalties and/or certain
customers may have the right to terminate their contracts with TSYS. TSYS does
not believe that it will fail to meet its contractual commitments to an extent
that will result in a material adverse effect on its financial condition or
results of operations.
Synovus and its subsidiaries are subject to various legal proceedings and
claims which arise in the ordinary course of its business. Any litigation is
vigorously defended by Synovus and, in the opinion of management, based on
consultation with external legal counsel, any outcome of such litigation would
not materially affect Synovus' consolidated financial position or results of
operations.
Currently, multiple lawsuits seeking class action treatment are pending
against one of Synovus' Alabama banking subsidiaries that involve: (1) payment
of service fees or interest rebates to automobile dealers in connection with the
assignment of automobile credit sales contracts to that Synovus subsidiary; (2)
the forced placement of insurance to protect that Synovus subsidiary's interest
in collateral for which consumer credit customers have failed to obtain or
maintain insurance; and (3) the receipt of commissions by that Synovus
subsidiary in connection with the sale of credit life insurance to its consumer
credit customers and the charging of an interest surcharge and a processing fee
in connection with consumer loans made by that subsidiary. These lawsuits seek
unspecified damages, including punitive damages. Synovus intends to vigorously
contest these lawsuits and all other litigation to which Synovus and its
subsidiaries are parties. Based upon information presently available, and in
light of legal, equitable, and factual defenses available to Synovus and its
subsidiaries, contingent liabilities arising from the threatened and pending
litigation are not considered material. It should be noted, however, that large
punitive damage awards bearing little relation to the actual damages
sustained by plaintiffs have been awarded in Alabama.
F-45
In November, 1998, a class action complaint was filed against NationsBank of
Delaware, N.A., in the United States District Court for the Southern District of
Mississippi. On March 23, 1999, the named plaintiff amended the complaint and
named TSYS and certain credit bureaus as defendants in the case. The named
plaintiff alleges, among other things, that the defendants failed to report
properly the credit standing of each member of the putative class. The named
plaintiff has defined the class as all persons and entities within the United
States who obtained credit cards from NationsBank and whose accounts were
purchased by or transferred to U.S. BankCard and whose accounts were reported to
credit bureaus or credit agencies incorrectly in August 1998. The amended
complaint alleges negligence, violation of the Fair Credit Reporting Act, breach
of the duty of good faith and fair dealing, and seeks declaratory relief,
injunctive relief, and the imposition of punitive damages. This lawsuit seeks
unspecified damages. Though settlement negotiations have occurred, these
negotiations have to date not resulted in a definitive settlement agreement
among the parties. TSYS is not in a position to determine its possible exposure,
if any, as a result of this litigation.
The following table sets forth certain information regarding federal funds
purchased and securities sold under agreement to repurchase, the principal
components of short-term borrowings.
TABLE EIGHTEEN
SHORT-TERM BORROWINGS
(In thousands)
1999 1998 1997
------------ ---------- ----------
Balance at December 31, ........... $1,261,391 503,287 312,299
Weighted average interest
rate at December 31, ............ 5.49% 4.70 5.71
Maximum month end
balance during the year ......... $1,261,391 503,287 520,409
Average amount outstanding
during the year ................. $ 786,954 311,617 356,122
Weighted average interest rate
during the year ................. 5.01% 4.95 5.37
INCOME TAX EXPENSE
As reported in the consolidated statements of income, Synovus' income tax
expense increased to $124.0 million in 1999, up from $107.6 million in 1998, and
$96.2 million in 1997. The effective income tax rate was 35.5%, 35.4%, and 36.0%
in 1999, 1998, and 1997, respectively. See Note 7 to Synovus' consolidated
financial statements for a detailed analysis of income taxes.
INFLATION
Inflation has an important impact on the growth of total assets in the
banking industry and may create a need to increase equity capital at higher than
normal rates in order to maintain an appropriate equity to assets ratio. Synovus
has been able to maintain a high level of equity through retention of an
appropriate percentage of its net income. Synovus copes with the effects of
inflation by managing its interest rate sensitivity gap position through its
asset/liability management program and by periodically adjusting its pricing of
services and banking products to take into consideration current costs.
PARENT COMPANY
The Parent Company's assets, primarily its investment in subsidiaries, are
funded, for the most part, by shareholders' equity. It also utilizes short-term
and long-term debt. The Parent Company is responsible for providing the
necessary funds to strengthen the capital of its subsidiaries, acquire new
business, fund internal growth, pay corporate operating expenses, and pay
dividends to its shareholders. These operations are funded by dividends and fees
received from subsidiaries, and borrowings from outside sources.
In connection with dividend payments to the Parent Company from its
subsidiary banks, certain rules and regulations of the various state and federal
banking regulatory agencies limit the amount of dividends which may be paid.
Approximately $109.7 million in dividends could be paid in 2000 to the Parent
Company from its subsidiary banks without prior regulatory approval. Synovus
anticipates receiving regulatory approval to allow certain subsidiaries to pay
dividends in excess of their respective regulatory limits.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 standardizes the accounting
for derivative instruments, including certain derivative instruments embedded in
other contracts. Under the standard, entities are required to carry all
derivative instruments on the balance sheet at fair value. The accounting for
changes in the fair value (i.e., gains or losses) of a derivative instrument
depends on whether it has been designated and qualifies as part of a hedging
relationship and, if so, on the reason for holding it. If certain conditions are
met, entities may elect to designate a derivative instrument as a hedge of
exposures to changes in fair values, cash flows, or foreign currencies. If the
hedged exposure is a fair value exposure, the gain or loss on the derivative
instrument is recognized in earnings in the period of change together with the
offsetting loss or gain on the hedged item attributable to the risk being
hedged. If the hedged exposure is a cash flow exposure, the effective portion of
the gain or loss on the derivative instrument is reported initially as a
component of other comprehensive income (outside earnings) and subsequently
reclassified into earnings when the forecasted transaction affects earnings. Any
amounts excluded from the assessment of hedge effectiveness as well as the
ineffective portion of the gain or loss is reported in earnings immediately. If
the derivative instrument is not designated as a hedge, the gain or loss is
recognized in earnings in the period of change.
For Synovus, SFAS No. 133, as amended by SFAS No. 137, is
effective January 1, 2001. On adoption, the provisions of SFAS No.
133 must be applied prospectively. Synovus is in the process of
assessing the impact that SFAS No. 133 will have on its financial
statements.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Annual Report which are not
statements of historical fact constitute forward-looking statements within the
meaning of the Private Securities Litigation Reform Act (the "Act"). In
addition, certain statements in future filings by Synovus with the Securities
and Exchange Commission, in press releases, and in oral and written statements
made by or with the approval of Synovus which are not statements of historical
fact constitute forward-looking statements within the meaning of the Act.
Examples of forward-looking statements include, but are not
F-46
limited to: (i) projections of revenues, income or loss, earnings or loss per
share, the payment or non-payment of dividends, capital structure, efficiency
ratios and other financial terms; (ii) statements of plans and objectives of
Synovus or its management or Board of Directors, including those relating to
products or services; (iii) statements of future economic performance; and (iv)
statements of assumptions underlying such statements. Words such as "believes,"
"anticipates," "expects," "intends," "targeted," and similar expressions are
intended to identify forward-looking statements but are not the exclusive means
of identifying such statements.
Forward-looking statements involve risks and uncertainties which may cause
actual results to differ materially from those in such statements. Factors that
could cause actual results to differ from those discussed in the forward-looking
statements include, but are not limited to: (i) the strength of the U.S. economy
in general and the strength of the local economies in which operations are
conducted; (ii) the effects of and changes in trade, monetary and fiscal
policies, and laws, including interest rate policies of the Federal Reserve
Board; (iii) inflation, interest rate, market and monetary fluctuations; (iv)
the timely development of and acceptance of new products and services and
perceived overall value of these products and services by users; (v) changes in
consumer spending, borrowing, and saving habits; (vi) technological changes are
more difficult or expensive than anticipated; (vii) acquisitions; (viii) the
ability to increase market share and control expenses; (ix) the effect of
changes in laws and regulations (including laws and regulations concerning
taxes, banking, securities, and insurance) with which Synovus and its
subsidiaries must comply; (x) the effect of changes in accounting policies and
practices, as may be adopted by the regulatory agencies, the Financial
Accounting Standards Board, or other authoritative bodies; (xi) changes in
Synovus' organization, compensation, and benefit plans; (xii) the costs and
effects of litigation and of unexpected or adverse outcomes in such litigation;
and (xiii) the success of Synovus at managing the risks involved in the
foregoing.
Such forward-looking statements speak only as of the date on which such
statements are made, and Synovus undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made to reflect the occurrence of unanticipated events.
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Presented below is a summary of the unaudited consolidated quarterly financial
data for the years ended December 31, 1999 and 1998.
(In thousands, except per share data)
FOURTH THIRD SECOND FIRST
1999 QUARTER QUARTER QUARTER QUARTER
-------- ------- -------- --------
INTEREST INCOME ....................... $240,630 225,644 214,902 206,831
======== ======= ======== ========
NET INTEREST INCOME ................... 136,296 130,634 125,901 120,463
======== ======= ======== ========
PROVISION FOR LOSSES ON LOANS ......... 8,664 8,613 9,515 7,215
======== ======= ======== ========
INCOME BEFORE INCOME TAXES ............ 98,956 89,887 82,590 77,882
======== ======= ======== ========
NET INCOME ............................ 63,256 58,005 53,313 50,733
======== ======= ======== ========
NET INCOME PER SHARE, BASIC ........... .22 .21 .19 .18
======== ======= ======== ========
NET INCOME PER SHARE, DILUTED ......... .22 .21 .19 .18
======== ======= ======== ========
1998
Interest income ....................... $205,455 199,744 194,770 192,349
======== ======= ======== ========
Net interest income ................... 119,199 114,941 111,423 109,502
======== ======= ======== ========
Provision for losses on loans ......... 6,331 5,781 7,079 7,691
======== ======= ======== ========
Income before income taxes ............ 87,406 77,147 71,988 67,484
======== ======= ======== ========
Net income ............................ 56,215 49,607 46,834 43,809
======== ======= ======== ========
Net income per share, basic ........... .20 .18 .18 .16
======== ======= ======== ========
Net income per share, diluted ......... .20 .18 .17 .16
======== ======= ======== ========
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