FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 2001
Commission File Number 1-10312
SYNOVUS FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
Georgia 58-1134883
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
901 Front Avenue
P. O. Box 120
Columbus, Georgia 31902
(Address of principal executive offices)
(706) 649-2401
(Registrants' telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES X NO
At April 30, 2001, 290,037,102 shares of the Registrant's Common Stock,
$1.00 par value, were outstanding.
SYNOVUS FINANCIAL CORP.
INDEX
Page
Part I. Financial Information Number
------
Item 1. Financial Statements
Consolidated Balance Sheets (unaudited)
March 31, 2001 and December 31, 2000 3
Consolidated Statements of Income (unaudited)
Three Months Ended March 31, 2001 and 2000 4
Consolidated Statements of Cash Flows (unaudited) 5
Three Months Ended March 31, 2001 and 2000
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Part II. Other Information
Item 6. (a) Exhibits 19
(b) Report on Form 8-K 19
Signature Page 20
Exhibit Index 21
(11) Statement re Computation of Per Share Earnings
PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
SYNOVUS FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
(In thousands, except share and per share data) 2001 2000
------------ -----------
ASSETS
Cash and due from banks $ 561,580 558,054
Interest earning deposits with banks 7,259 3,806
Federal funds sold 109,604 375,765
Mortgage loans held for sale 216,370 108,234
Investment securities available for sale 2,063,315 1,807,039
Investment securities held to maturity - 270,889
Loans, net of unearned income 11,155,864 10,751,887
Allowance for loan losses (153,916) (147,867)
------------ -----------
Loans, net 11,001,948 10,604,020
------------ -----------
Premises and equipment, net 533,195 526,988
Other assets 688,536 653,297
------------ -----------
Total assets $ 15,181,807 14,908,092
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing $ 1,725,783 1,726,817
Interest bearing 9,761,545 9,434,893
------------ -----------
Total deposits 11,487,328 11,161,710
Federal funds purchased and securities sold under
agreement to repurchase 848,518 1,039,900
Long-term debt 884,971 840,859
Other liabilities 375,405 367,562
------------ -----------
Total liabilities 13,596,222 13,410,031
------------ -----------
Minority interest in consolidated subsidiaries 84,141 80,890
Shareholders' equity:
Common stock - $1.00 par value; Authorized 600,000,000
shares; issued 289,941,583 in 2001 and 284,818,042
in 2000; outstanding 289,766,319 in 2001 and 284,642,778
in 2000 289,942 284,818
Surplus 135,448 107,652
Treasury stock - 175,264 shares in 2001 and 2000 (1,285) (1,285)
Unamortized restricted stock (292) (381)
Accumulated other comprehensive income 21,596 5,936
Retained earnings 1,056,035 1,020,431
------------ -----------
Total shareholders' equity 1,501,444 1,417,171
------------ -----------
Total liabilities and shareholders' equity $ 15,181,807 14,908,092
============ ===========
See accompanying notes to consolidated financial statements.
3
SYNOVUS FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
----------------------
(In thousands, except per share data) 2001 2000
--------- -------
Interest income:
Loans, including fees $ 256,721 216,099
Investment securities:
U.S. Treasury and U.S. Government
agencies 19,234 20,905
Mortgage-backed securities 8,484 7,300
State and municipal 2,834 2,361
Other investments 888 823
Mortgage loans held for sale 2,667 1,526
Federal funds sold 1,715 1,231
Interest earning deposits with banks 70 24
--------- -------
Total interest income 292,613 250,269
--------- -------
Interest expense:
Deposits 119,121 88,620
Federal funds purchased and securities
sold under agreement to repurchase 13,237 18,803
Long-term debt 13,842 5,877
--------- -------
Total interest expense 146,200 113,300
--------- -------
Net interest income 146,413 136,969
Provision for losses on loans 10,987 10,911
--------- -------
Net interest income after provision
for losses on loans 135,426 126,058
--------- -------
Non-interest income:
Data processing services 150,302 139,016
Service charges on deposit accounts 20,037 17,803
Fees for trust services 5,790 5,759
Brokerage revenue 4,326 4,497
Mortgage banking income 8,469 4,146
Credit card fees 4,412 3,918
Securities gains (losses), net 418 (1)
Other fee income 4,337 3,476
Other operating income 25,889 22,002
--------- -------
Total non-interest income 223,980 200,616
--------- -------
Non-interest expense:
Salaries and other personnel expense 134,268 123,885
Net occupancy and equipment expense 57,274 53,799
Other operating expenses 50,594 49,192
--------- -------
Total non-interest expense 242,136 226,876
--------- -------
Minority interest in subsidiaries' net income 4,205 3,961
Income before income taxes 113,065 95,837
Income tax expense 41,180 34,445
--------- -------
Net income $ 71,885 61,392
========= =======
Net income per share :
Basic $ 0.25 0.22
========= =======
Diluted 0.25 0.22
========= =======
Weighted average shares outstanding:
Basic 287,707 282,163
========= =======
Diluted 293,248 284,951
========= =======
Dividends declared per share $ 0.13 0.11
========= =======
See accompanying notes to consolidated financial statements.
4
SYNOVUS FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
----------------------
(In thousands) 2001 2000
--------- -------
Operating Activities
Net Income $ 71,885 61,392
Adjustments to reconcile net income to net cash provided (used)
by operating activities:
Provision for losses on loans 10,987 10,911
Depreciation, amortization, and accretion, net 20,488 19,037
Deferred income tax expense 4,369 1,448
Decrease (increase) in interest receivable 7,671 (3,887)
Increase (decrease) in interest payable 6,210 (1,447)
Minority interest in subsidiaries net income 4,205 3,961
(Increase) in mortgage loans held for sale (108,136) (22,380)
Other, net (31,132) (30,680)
--------- -------
Net cash provided (used) by operating activities (13,453) 38,355
--------- -------
Investing Activities
Cash acquired from acquisition 8,330 -
Net (increase) decrease in interest earning deposits
with banks (3,440) 832
Net decrease (increase) in federal funds sold 289,611 (49,445)
Proceeds from maturities and principal collections of investment
securities available for sale 299,367 54,263
Proceeds from sales of investment securities available for sale 68,360 576
Purchases of investment securities available for sale (294,675) (80,348)
Proceeds from maturities and principal collections of investment
securities held to maturity - 12,527
Purchases of investment securities held to maturity - (18,223)
Net increase in loans (269,287) (462,221)
Purchases of premises and equipment (35,724) (16,925)
Proceeds from disposals of premises and equipment 1,836 358
Net cash paid on sale of branches - (41,835)
Proceeds from sales of other real estate 6,416 2,996
Additions to contract acquisition costs (4,509) -
Additions to computer software (17,136) (4,527)
--------- -------
Net cash provided (used) by investing activities 49,149 (601,972)
--------- -------
Financing Activities
Net increase in demand and savings deposits 21,181 198,873
Net increase in certificates of deposit 123,986 128,003
Net (decrease) increase in federal funds purchased and securities
sold under agreement to repurchase (191,382) 125,690
Principal repayments on long-term debt (158) (136)
Proceeds from issuance of long-term debt 37,618 102,985
Dividends paid to shareholders (31,323) (25,394)
Proceeds from issuance of common stock 7,908 1,792
--------- -------
Net cash provided (used) by financing activities (32,170) 531,813
--------- -------
(Increase) decrease in cash and cash equivalents 3,526 (31,804)
Cash and cash equivalents at beginning of period 558,054 466,543
--------- -------
Cash and cash equivalents at end of period $ 561,580 434,739
========= =======
See accompanying notes to consolidated financial statements.
5
SYNOVUS FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A - Basis of Presentation
- ------------------------------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and therefore do not include
all information and footnotes necessary for a fair presentation of financial
position, results of operations, and cash flows in conformity with generally
accepted accounting principles. All adjustments consisting of normally recurring
accruals which, in the opinion of management, are necessary for a fair
presentation of the financial position and results of operations for the periods
covered by this report have been included. The accompanying unaudited
consolidated financial statements should be read in conjunction with the Synovus
Financial Corp. (Synovus) consolidated financial statements and related notes
appearing in the 2000 annual report previously filed on Form 10-K.
Note B - Supplemental Cash Flow Information
- -------------------------------------------
For the three months ended March 31, 2001 and 2000, Synovus paid income taxes
(net of refunds received) of $18.5 million and $11.3 million, and interest of
$140.0 million and $114.7 million, respectively.
Noncash investing activities consisted of loans of approximately $4.1 million
and $2.9 million, which were foreclosed and transferred to other real estate
during the three months ended March 31, 2001 and 2000, respectively.
Additionally, in conjunction with the adoption of Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities," on January 1, 2001, Synovus reclassified investment
securities held to maturity with a book value of $270.9 million to the available
for sale category.
Note C - Other Comprehensive Income (Loss)
- ------------------------------------------
Other comprehensive income (loss) consists of net unrealized gains (losses) on
securities available for sale, net unrealized gains (losses) on cash flow
hedges, and foreign currency translation adjustments. Comprehensive income
consists of net income plus the change in other comprehensive income (loss). For
the three months ended March 31, 2001 and 2000, comprehensive income was $87.5
million and $59.4 million, respectively.
Note D - Business Combinations
- ------------------------------
On February 16, 2001, Synovus completed the acquisition of the $200 million
asset Carolina Southern Bank of Spartanburg, SC. Synovus issued 3,188,558 shares
of its common stock, and merged the bank into its affiliate bank, The National
Bank of South Carolina. The acquisition was accounted for as a pooling of
interests, except that the financial information preceding the date of
6
acquisition has not been restated to include the financial position and results
of operations since the effect was not material.
On February 28, 2001, Synovus completed the acquisition of Creative Financial
Group, Ltd., based in Atlanta, GA, and its operating unit Robert Andrew
Securities, Inc. The companies currently operate as divisions of Synovus Wealth
Management, the integrated asset management unit of Synovus. Synovus issued
937,701 shares of its common stock and has accounted for the transaction as a
pooling of interests, except that the financial information preceding the date
of acquisition has not been restated to include the financial position and
results of operations since the effect was not material.
Note E - 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,
insurance, and brokerage services. The transaction processing services segment
consists primarily of operations at TSYS, which primarily provides card
processing services to its clients, including debit, commercial, retail, stored
value, and consumer cards. The transaction processing services segment also
includes related services to banks and other card issuing institutions, as well
as debt collection and bankruptcy management operations at TSYS Total Debt
Management, Inc. (TDM), and the software solutions for commercial card
management programs offered by ProCard. 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 as of and for the three months ended March 31, 2001 and 2000
is presented below:
Three months ended March 31, 2001 and 2000
Transaction
Banking Processing
(In thousands) Operations Services (a) Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------
Interest income and non- 2001 $354,144 166,928 (4,479) (b) $516,593
interest income 2000 300,709 153,156 (2,980) (b) 450,885
- -----------------------------------------------------------------------------------------------------------------------
Income before taxes 2001 82,419 34,851 (4,205) (c) 113,065
2000 68,504 31,295 (3,962) (c) 95,837
- -----------------------------------------------------------------------------------------------------------------------
Income tax expense 2001 29,163 12,017 - 41,180
2000 23,690 10,755 - 34,445
- -----------------------------------------------------------------------------------------------------------------------
Net Income 2001 53,257 22,833 (4,205) (c) 71,885
2000 44,813 20,539 (3,960) (c) 61,392
- -----------------------------------------------------------------------------------------------------------------------
Total Assets 2001 14,631,999 601,868 (52,060) (d) 15,181,807
2000 12,645,183 472,582 (69,525) (d) 13,048,240
- -----------------------------------------------------------------------------------------------------------------------
(a) Includes equity in income of joint ventures, which is included in other
operating income.
(b) Principally, data processing service revenues provided to the banking
operations segment.
(c) Minority interest in TSYS.
(d) Primarily, TSYS' cash deposits with the banking operations segment.
Note F - Legal Proceedings
- --------------------------
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 and, in the opinion of management, based on consultation with external
legal counsel, any outcome of such litigation would not materially affect the
consolidated financial position or results of operations.
7
Currently, multiple lawsuits seeking class action treatment are pending against
one of the 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 subsidiary; (2) the forced
placement of insurance to protect that 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 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. The parties
have reached a settlement of this litigation, which is subject to court approval
under Rule 23(e) of the Federal Rules of Civil Procedure. The United States
District Court for the Southern District of Mississippi preliminarily approved
the settlement on May 10, 2001. Payments by TSYS to settle the litigation are
not expected to be material to its financial condition or results of operations
and management expects the settlement to be substantially covered by insurance.
Note G - Derivative Financial Instruments
- -----------------------------------------
As part of its overall interest rate risk management activities, Synovus
utilizes interest rate related derivatives to manage its exposure to various
types of interest rate risks. With the exception of commitments to fund and sell
fixed-rate mortgage loans, all off-balance sheet derivatives utilized by Synovus
represent end user activities designed as hedges of on-balance sheet assets or
liabilities. Synovus does not speculate using derivative instruments.
Synovus' risk management policies emphasize the management of interest rate risk
within acceptable guidelines. Synovus' objective in maintaining these policies
is to achieve consistent growth in net interest income while limiting volatility
arising from changes in interest rates. Risks to be managed include both fair
value and cash flow risks. Utilization of derivative financial instruments
provides a valuable tool to assist in the management of these risks.
Synovus utilizes interest rate swap agreements to hedge the fair value risk of
fixed-rate balance sheet liabilities, primarily deposit liabilities. Fair value
risk is measured as the volatility in the value of these liabilities as interest
rates change. Interest rate swaps entered into to manage this risk are designed
to have the same notional value as well as similar interest rates and interest
8
calculation methods. These agreements entitle Synovus to receive fixed-rate
interest payments and pay floating-rate interest payments based on the notional
amount of the swap agreements. Swap agreements structured in this manner allow
Synovus to perfectly hedge the fair value risks of these fixed-rate liabilities.
Synovus is potentially exposed to interest rate cash flow risk due to its
holding of loans whose interest payments are based on floating rate indices.
Synovus continually monitors changes in these exposures and their impact on its
risk management activities. These agreements, whose terms are for up to five
years, entitle Synovus to receive fixed-rate interest payments and pay
floating-rate interest payments. These agreements allow Synovus to offset the
variability of floating rate loan interest with the variable interest payments
due on the interest rate swaps. Synovus assesses the effectiveness of these
hedges by comparing the timing, frequency, and magnitude of changes in its
interest rate to that of the interest rate referenced in the swap agreements.
Changes in the fair value of interest rate swaps designated as hedges of the
variability of cash flows associated with floating rate loans are reported in
other comprehensive income. These amounts are subsequently reclassified into
interest income as a yield adjustment of the hedged loans.
By using off-balance sheet derivatives to hedge fair value and cash flow risks,
Synovus exposes itself to potential credit risk. This potential credit risk is
equal to the fair or replacement values of the swaps if the counterparty fails
to perform on its obligations under the swap agreements. 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 highly rated counterparties, and by obtaining collateral agreements for
exposures above predetermined limits.
Synovus also holds derivative instruments which consist of commitments to fund
fixed-rate mortgage loans to customers and forward commitments to sell
individual fixed-rate mortgage loans. Synovus' objective in obtaining the
forward commitments is to mitigate the interest rate risk associated with the
commitments to fund the fixed-rate mortgage loans. Both the rate-lock
commitments and the forward commitments are reported at fair value, with
adjustments being recorded in current period earnings, and are not accounted for
as hedges.
Note H - Recent Accounting Pronouncements
- -----------------------------------------
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133. In
June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an Amendment of SFAS 133". SFAS No.
133 and SFAS No. 138 standardize the accounting for derivative instruments,
including certain derivative instruments embedded in other contracts. Under the
standards, 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
9
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 are 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.
Synovus adopted SFAS No. 133 and SFAS No. 138 on January 1, 2001. In accordance
with the transition provisions of SFAS No. 133, Synovus recorded a net-of-tax
cumulative-effect gain of $765.0 thousand in accumulated other comprehensive
income to recognize at fair value all derivatives that are designated as
cash-flow hedging instruments. As of March 31, 2001, the net-of-tax fair value
of these derivatives carried as other comprehensive income was $4.1 million.
Synovus expects to reclassify from accumulated other comprehensive income
approximately $2.2 million as net-of-tax earnings during the next twelve months,
as the related payments from interest rate swaps are recorded. Upon adoption of
SFAS No. 133, gains and losses on derivatives that were previously deferred as
adjustments to the carrying amount of hedged items were not adjusted.
In connection with the adoption of SFAS No 133, on January 1, 2001, Synovus
reclassified its investment securities held to maturity portfolio to the
available for sale category.
In September 2000, SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities", was issued. SFAS No. 140
is effective for all transfers and servicing of financial assets and
extinguishments of liabilities after March 31, 2001. The Statement is effective
for recognition and reclassification of collateral and disclosures relating to
securitization transactions and collateral for fiscal years ending after
December 15, 2000. Due to the nature of its activities, Synovus does not expect
a material change to its results of operations as a result of adopting SFAS No.
140.
Note I - Other
- --------------
Certain amounts in 2000 have been reclassified to conform to the presentation
adopted in 2001.
10
ITEM 2 - MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Summary
Net income for the three months ended March 31, 2001 was $71.9 million, up 17.1%
from the same period a year ago. Revenues (excluding securities gains and
losses) increased 9.6% over the same period in 2000. Diluted net income per
share for the first three months of 2001 was $0.25, an increase of 13.8% over
$0.22 per share for the same period in 2000. Return on average assets was 1.97%
and return on average equity was 20.08% for the three months ended March 31,
2001. This compares to a return on average assets of 1.95% and a return on
average equity of 19.75% for the first three months of 2000.
Major contributors to the growth in net income include strong growth in loans
and fee income. Expense control management positively impacted the growth in net
income.
Acquisitions
On February 16, 2001, Synovus completed the acquisition of the $200 million
asset Carolina Southern Bank of Spartanburg, SC. Synovus issued 3,188,558 shares
of its common stock, and merged the bank into its affiliate bank, The National
Bank of South Carolina. The acquisition was accounted for as a pooling of
interests, except that the financial information preceding the date of
acquisition has not been restated to include the financial position and results
of operations since the effect was not material.
On February 28, 2001, Synovus completed the acquisition of Creative Financial
Group, Ltd., based in Atlanta, GA, and its operating unit Robert Andrew
Securities, Inc. The companies currently operate as divisions of Synovus Wealth
Management, the integrated asset management unit of Synovus. Synovus issued
937,701 shares of its common stock and has accounted for the transaction as a
pooling of interests, except that the financial information preceding the date
of acquisition has not been restated to include the financial position and
results of operations since the effect was not material.
Balance Sheet
During the first quarter of 2001, total assets increased $273.7 million,
resulting primarily from net loan growth of $397.9 million, or 7.3% annualized.
Additionally, mortgage loans held for sale increased by $108.1 million while
federal funds sold decreased by $266.2 million. Providing the necessary funding
for the balance sheet growth during the first three months of 2001, the deposit
base grew $325.6 million, long-term debt consisting primarily of Federal Home
Loan Bank (FHLB) advances increased $44.1 million, and shareholders' equity
increased $84.3 million. These increases were partially offset by a $191.4
million decrease in federal funds purchased.
Loans
As expected, loan volume slowed during the quarter. Excluding the acquisition of
Carolina Southern, loans grew by $262 million, or 10% annualized, since year-end
2000. Compared to a
11
year ago, loans grew by 17.5%. Our banks in larger urban markets were the
primary contributors to this growth.
Asset Quality
Credit quality continues to be strong. The nonperforming assets ratio was .49%
at March 31, 2001, down from .52% at year-end 2000. The decline was due in part
to the sale of a national syndicated credit.
The net charge-off ratio for the three months ended March 31, 2001 was .26%,
compared to .19% a year ago. The increase in charge-offs was primarily due to
the sale of the national syndicated credit and a charge-off of another large
commercial credit. Loans 90 days past due and still accruing at March 31, 2001,
were $23.2 million, or .21% of total loans, down from $33.6 million, or .32% of
total loans at December 31, 2000. These loans are in the process of collection,
and management believes that sufficient collateral value securing these loans
exists to cover contractual interest and principal payments on the loans.
Management further believes the resolution of these delinquencies will not cause
a material increase in nonperforming assets.
March 31, December 31,
(In thousands) 2001 2000
- -------------- ------------------- -------------------
Nonperforming loans $ 42,221 41,709
Other real estate 12,309 13,898
------------------- -------------------
Nonperforming assets $ 54,530 55,607
=================== ===================
Loans 90 days past due and still accruing $ 23,182 33,587
=================== ===================
Allowance for loan losses $ 153,916 147,867
=================== ===================
Allowance for loan losses as a % of loans 1.38 % 1.38
=================== ===================
As a % of loans and other real estate:
Nonperforming loans 0.38 % 0.39
Other real estate 0.11 0.13
------------------- -------------------
Nonperforming assets 0.49 % 0.52
=================== ===================
Allowance to nonperforming loans 364.55 % 354.52
=================== ===================
Capital Resources and Liquidity
Synovus continues to maintain its capital at levels that exceed the minimum
regulatory guidelines. Additionally, based on internal calculations and previous
regulatory exams, each of the subsidiary banks is currently in compliance with
regulatory capital guidelines. Total risk-based capital was $1.686 billion at
March 31, 2001, compared to $1.605 billion at December 31, 2000. The ratio of
total risk-based capital to risk-weighted assets was 12.86% at March 31, 2001
compared to 12.72% at December 31, 2000. The leverage ratio at the end of the
first quarter of 2001 was 10.38% compared to 10.24% at the end of 2000. The
equity-to-assets ratio was 9.89% at March 31, 2001 compared to 9.51% at year-end
2000. The consolidated equity-to-assets ratio, exclusive of net unrealized gains
(losses) on investment securities available for sale, was 9.75% at March 31,
2001, compared to 9.46% at year-end 2000.
Synovus' liquidity position and sources of funds have not changed significantly
since December 31, 2000. The liquidity ratio was 31.25% at March 31, 2001,
compared to 31.37% at December
12
31, 2000. Additionally, the maturity mix of investment securities and loans has
not changed significantly during the first three months of 2001.
Synovus' management monitors liquidity in coordination with the appropriate
committees at each subsidiary bank. Management must ensure that adequate
liquidity, at a reasonable cost, is available to meet the cash flow needs of
depositors, borrowers, and creditors. Management constantly monitors and
maintains appropriate levels of assets and liabilities so as to provide adequate
funding sources to meet estimated customer withdrawals and future loan requests.
Additionally, subsidiary banks have access to overnight federal funds lines with
various financial institutions, which total approximately $2.3 billion, that can
be drawn upon for short-term liquidity needs. Synovus also has access to a $25
million line of credit with an unaffiliated banking organization.
The consolidated statements of cash flows detail cash flows from operating,
investing, and financing activities. Operating activities used net cash of $13.5
million during the first three months of 2001, while $32.2 million was used by
financing activities. Investing activities provided $49.1 million of this
amount, resulting in an increase in cash and cash equivalents of $3.5 million.
Earning Assets, Sources of Funds, and Net Interest Income
Average total assets for the first three months of 2001 were $14.8 billion, up
16.7% over the first three months of 2000. Average earning assets were up 15.9%
in the first three months of 2001 over the same period last year and represented
89.9% of average total assets. When compared to the same period last year,
average deposits increased $1.7 billion, average federal funds purchased and
securities sold under agreement to repurchase decreased $358.8 million, average
long-term debt consisting primarily of FHLB advances increased $469.2 million,
and average shareholders' equity increased $20.17 million. This growth provided
the funding for the $1.7 billion growth in average net loans and the $33.7
million increase in average federal funds sold.
Net interest income was $146.4 million for the three months ended March 31,
2001, up $9.4 million, or 6.9% over the $137.0 million reported for the three
months ended March 31, 2000. Net interest income, on a tax-equivalent basis, for
the first three months of 2001 increased $9.6 million, or 7.0%, over the same
period in 2000.
The year-to-date net interest margin was 4.55%, down thirty-five basis points
from the same period last year. This decrease resulted from a fourteen basis
point increase in the yield on earning assets, which was offset by a fifty basis
point increase in the effective cost of funds. The increased yield on earning
assets was due to slightly higher yields on loans and investment securities. The
increased effective cost of funds was due to higher average rates paid on
interest-bearing funding. Funding pressure from very strong loan growth has
required that we increase the utilization of wholesale funding sources,
primarily FHLB advances and brokered certificates of deposit. On a sequential
quarter basis, the net interest margin is up 2 basis points while net interest
income is up $3.5 million. Solid core deposit growth, strong focus on loan and
deposit pricing, and the recent slowdown in loan growth were the key margin
drivers during the first quarter.
13
The tax-equivalent adjustment that is required in making yields on tax-exempt
loans and investment securities comparable to taxable loans and investment
securities is shown in the following table. The taxable-equivalent adjustment is
based on a 35% federal income tax rate.
Three Months Ended
March 31,
-----------------------------------
(In thousands) 2001 2000
-------------- ---------------- ---------------
Interest income $ 292,613 250,269
Taxable-equivalent adjustment 1,692 1,490
---------------- ---------------
Interest income, taxable-equivalent 294,305 251,759
Interest expense 146,200 113,300
---------------- ---------------
Net interest income, taxable-equivalent $ 148,105 138,459
================ ===============
Non-Interest Income
Total non-interest income during the first three months of 2001 increased $23.4
million, or 11.6%, over the same period in 2000. The increase in non-interest
income resulted from a 22.0% increase in banking operations' fee income and an
8.2% increase in transaction processing services revenues. Transaction
processing services revenues as a percentage of consolidated revenues were
43.9%, compared to 44.5% a year ago.
For the year-to-date, banking operations' non-interest income increased 22.0%,
or $11.1 million, compared to the same period a year ago. The growth in
non-interest income was led by net mortgage revenue (up $4.3 million, or
104.3%), service charges on deposits (up $2.2 million, or 12.5%), and credit
card fees (up $500 thousand, or 12.6%). Creative Financial Group, acquired in
the first quarter, added $1 million in revenue to Synovus Wealth Management.
Additionally, fee income for the first quarter includes an $8.0 million pre-tax
gain from the sale of the Star System ATM network, which represented our
ownership of the network. This gain compares to a $6.6 million pre-tax gain from
the sale of bank branches during the first quarter last year.
Transaction processing services revenues consist of TSYS, TDM, and ProCard's
revenues. The majority of these revenues are generated by TSYS from card
processing and electronic commerce services to card-issuing institutions in the
United States, Mexico, Canada, Honduras, United Kingdom, and the Caribbean.
TSYS' revenues from bankcard data processing services increased $7.4 million, or
6.0%, for the three months ended March 31, 2001 compared to the same period in
2000. Increased revenues from bankcard data processing services are attributable
to the growth in the card portfolios of existing customers, as well as
cardholder accounts of new customers converted to THE TOTAL SYSTEM(R).
Processing contracts with large customers, representing a significant portion of
TSYS' 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 bankcard portfolios, as well as the number and
activity of individual cardholder accounts processed for each customer.
Average cardholder accounts on file for the three months ended March 31, 2001
were 198.3 million, a decrease of approximately 5.3% from the average of 209.4
million for the same period in 2000. Cardholder accounts on file at March 31,
2001, were 199.2 million, a 4.9% decrease compared to the 209.5 million accounts
on file at March 31, 2000. The change in cardholder accounts on file from March
2000 to March 2001 included the deconversion of 35.0 million
14
accounts of Universal Card Services (UCS) and others, the addition of
approximately 21.7 million accounts attributable to the internal growth of
existing clients, and approximately 3.0 million accounts for new clients.
A significant amount of TSYS' revenues is derived from long-term contracts with
large customers, including certain major customers. For the three months ended
March 31, 2001, TSYS had two major customers. The two major customers for the
quarter ended March 31, 2001 accounted for approximately 28.1%, or $43.4
million, of total revenues. For the three months ended March 31, 2000, TSYS had
four major customers that accounted for 48.1%, or $70.2 million, of total
revenues. The loss of one of TSYS' major customers, or other significant
customers, could have a material adverse effect on TSYS' financial condition and
results of operations.
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. The deconversion of the consumer credit
accounts occurred during May 2000; however, TSYS continued to receive
contractually obligated minimum processing fees from UCS until August 1, 2000.
Non-Interest Expense
Total non-interest expense for the three months ended March 31, 2001, increased
$15.3 million, or 6.7%, over the same period in 2000. Management analyzes
non-interest expense in two separate components: banking operations and
transaction processing services. The following table summarizes this data for
the first three months of 2001 and 2000.
2001(*) 2000(*)
------------------------------- ----------------------------------
Transaction Transaction
Processing Processing
(In thousands) Banking Services Banking Services
- -------------- ------------- --------------- --------------- -----------------
Salaries and other personnel expenses $ 67,058 67,317 62,786 61,259
Net occupancy and equipment expense 15,466 41,815 14,608 39,206
Other operating expenses 31,063 22,936 29,757 21,362
------------- --------------- --------------- -----------------
Total non-interest expense $ 113,587 132,068 107,151 121,827
============= =============== =============== =================
(*) The added totals are greater than the consolidated totals due to
inter-segment balances which are eliminated in consolidation.
Banking operations' non-interest expense increased $6.4 million, or 6.0%, for
the three months ended March 31, 2001, compared to the same period in 2000.
Salaries and other personnel expenses, the largest component of non-interest
expense, increased $4.3 million, or 6.8%, year-to-date over 2000. This increase
is due primarily to annual salary adjustments as well as slightly higher
incentive compensation expense in 2001. The number of full-time equivalent
employees at March 31, 2001 was 5,273, compared to 5,173 a year ago. Net
occupancy and equipment expense increased $0.9 million or 5.9%. Other operating
expenses increased $1.3 million or 4.4%. The banking operations' efficiency
ratio was 54.48% in the first three months of 2001, compared to 56.93% a year
ago.
Approximately 95% of total transaction processing services non-interest expense
relates to TSYS, with the remainder related to TDM and ProCard. The following
paragraphs provide an
15
analysis of the non-interest expense components at TSYS. Non-interest expense
related to TSYS increased 5.6% for the three months ended March 31, 2001,
compared to the same period in 2000. Employment expenses increased $4.4 million,
or 7.7% for the three months ended March 31, 2001, compared to the same period
in 2000. The change in employment expenses consists of increases of $9.4 million
for the three months ended March 31, 2001, associated with the growth in the
number of employees, normal salary increases and related benefits. This change
was offset by $5.0 million invested in capitalized software development costs
and contract acquisition costs for the three months ended March 31, 2001.
Capitalized software development costs relate to the continued development of a
commercial card system for TS2 which began in May 1998 and is expected to be
substantially complete in the third quarter of 2001, and enhancements to expand
international functionality. The average number of employees in the first
quarter of 2001 increased to 4,741, a 9.3% increase over the 4,336 in the same
period of 2000.
Net occupancy and equipment expense at TSYS increased $2.1 million, or 5.3% for
the three months ended March 31, 2001, over the same period in 2000. Computer
equipment and software rentals, which represent the largest component of net
occupancy and equipment expense, remained the same in the first quarter of 2001,
compared to the same period in 2000. Due to rapidly changing technology in
computer equipment, TSYS' equipment needs are achieved to a large extent through
operating leases.
During 2000, TSYS established a processing data center in Europe and purchased a
building to house client service personnel. Although it has yet to process an
account for its new European clients, TSYS had to build the necessary
infrastructure in order to begin processing accounts in 2001.
Income Tax Expense
Income tax expense for the three months ended March 31, 2001, was $41.2 million
compared to $34.4 million for the same period a year ago. The effective tax rate
for the three months of 2001 was 36.4% compared to 35.9% for the same period in
2000.
Three Year Outlook
Synovus currently expects to grow earnings per share during the next three years
(2001-2003) by 15-18% annually. Synovus expects at least 15% growth in earnings
per share in 2001 and to be at the top of the 15-18% range by 2003. In
estimating expected growth in earnings per share, Synovus assumed, among other
things, that:
* Core banking net income will increase between 11-12% annually,
with net interest margins remaining stable.
Annual loan growth will be in the 10-11% range, and credit quality
trends will remain at current levels.
* Wealth management revenues (trust, brokerage, and insurance) will
increase between 25-30% annually with the complete integration and
sales efforts of traditional bankers, trust, brokerage, insurance,
and private banking team members.
* TSYS will increase net income by approximately 20% in 2001 and
between 20-25% annually in 2002 and 2003 with expansion of the
core businesses both domestically and internationally, market
acceptance of its stored value products and e-commerce enabling
systems, and aggressive expense management.
* Increases in banking operations expenses will not exceed 4% annually
over the next three years.
16
Forward-Looking Statements
Certain statements contained in this filing which are not statements of
historical fact constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act (the "Act"). These forward-looking
statements include, among others, statements regarding Synovus' expected growth
in net income for the years 2001 through 2003 and the assumptions underlying
such statements. 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
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.
Prospective investors are cautioned that any such forward-looking statements are
not guarantees of future performance and involve risks and uncertainties, and
that actual results may differ materially from those contemplated by such
forward-looking statements. A number of factors could cause actual results to
differ materially from those contemplated by the forward-looking statements.
Many of these factors are beyond Synovus' ability to control or predict. These
factors include, but are not limited to: (i) Synovus' inability to increase its
revenues derived from wealth management (trust, brokerage and insurance); (ii)
TSYS' inability to achieve its net income goals for the years 2001 through 2003;
(iii) Synovus' inability to achieve its net income goals for core banking; (iv)
the strength of the U.S. economy in general and the strength of the local
economies in which operations are conducted; (v) the effects of and changes in
trade, monetary and fiscal policies, and laws, including interest rate policies
of the Federal Reserve Board; (vi) inflation, interest rate, market and monetary
fluctuations; (vii) the timely development and acceptance of new products and
services and perceived overall value of these products and services by users;
(viii) changes in consumer spending, borrowing, and saving habits; (ix)
technological changes are more difficult or expensive than anticipated; (x)
acquisitions; (xi) the ability to increase market share and control expenses;
(xii) 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; (xiii) 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; (xiv)
changes in Synovus' organization, compensation, and benefit plans; (xv) the
costs and effects of litigation and of unexpected or adverse outcomes in such
litigation; and (xvi) 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.
17
ITEM 3 - QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Quantitative and qualitative disclosures about market risk were included in the
2000 annual report, which was incorporated by reference in Synovus' 2000 Form
10-K. There have been no significant changes in the contractual balances,
weighted-average interest rates, or the estimated fair values of Synovus'
on-balance sheet financial instruments.
18
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(11) Statement re Computation of Per Share Earnings
(b) Report on Form 8-K
The following report on Form 8-K was filed subsequent to the first quarter
of 2001.
The report filed on April 19, 2001, included the following events:
On April 17, 2001, TSYS issued a press release with respect to its first
quarter 2001 earnings.
On April 19, 2001, Synovus issued a press release with respect to its first
quarter 2001 earnings.
19
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SYNOVUS FINANCIAL CORP.
Date: May 15, 2001 BY: /s/ Thomas J. Prescott
-----------------------
Thomas J. Prescott
Executive Vice President and
Chief Financial Officer
20
INDEX TO EXHIBITS
Exhibit Number Description
- ------------- -----------
11 Statement re Computation of Per Share Earnings
21