UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
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 Identification No.)
incorporation or organization)
1111 Bay Avenue, Suite #500
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
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES X NO
Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of the latest practicable date.
Class July 31, 2004
- ---------------------------- ------------------
Common Stock, $1.00 Par Value 309,403,049 shares
PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
SYNOVUS FINANCIAL CORP.
INDEX
Page
Part I. Financial Information: Number
------
Item 1. Unaudited Financial Statements
Consolidated Balance Sheets
June 30, 2004 and December 31, 2003 3
Consolidated Statements of Income
Six and Three Months Ended June 30, 2004 and 2003 4
Consolidated Statements of Cash Flows
Six months Ended June 30, 2004 and 2003 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 36
Item 4. Controls and Procedures 37
Part II. Other Information:
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities 38
Item 4. Submission of Matters to a Vote of Security Holders 39
Item 6. Exhibits and Reports on Form 8-K 40
Signature Page 41
Exhibit Index 42
(31.1) Certification of Chief Executive Officer
(31.2) Certification of Chief Financial Officer
(32) Certification of Periodic Report
2
SYNOVUS FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
(unaudited)
June 30, December 31,
(In thousands, except share and per share data) 2004 2003
-------------- ---------------
ASSETS
Cash and due from banks $ 756,534 696,030
Interest earning deposits with banks 4,134 4,423
Federal funds sold and securities purchased under resale agreements 182,414 172,922
Mortgage loans held for sale 160,507 133,306
Investment securities available for sale 2,604,799 2,529,257
Loans, net of unearned income 18,075,007 16,464,914
Allowance for loan losses (248,585) (226,059)
--------------- ---------------
Loans, net 17,826,422 16,238,855
--------------- ---------------
Premises and equipment, net 861,815 791,439
Contract acquisition costs and computer software, net 360,561 383,562
Goodwill, net 381,059 248,868
Other intangible assets, net 35,808 33,970
Other assets 386,163 399,997
--------------- ---------------
Total assets $ 23,560,216 21,632,629
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing $ 3,148,562 2,833,567
Interest bearing 14,342,194 13,108,042
--------------- ---------------
Total deposits 17,490,756 15,941,609
Federal funds purchased and securities sold under repurchase agreements 1,325,692 1,354,887
Long-term debt 1,732,490 1,575,777
Billings in excess of costs and profit on uncompleted contracts 1,407 17,573
Other liabilities 370,509 355,906
--------------- ---------------
Total liabilities 20,920,854 19,245,752
--------------- ---------------
Minority interest in consolidated subsidiaries 153,265 141,838
Shareholders' equity:
Common stock - $1.00 par value; Authorized 600,000,000 shares; issued
314,638,104 in 2004 and 307,748,133 in 2003; outstanding
308,976,481 in 2004 and 302,090,128 in 2003 314,638 307,748
Surplus 612,343 442,931
Treasury stock - 5,661,623 shares in 2004 and 5,658,005 shares in 2003 (113,986) (113,940)
Unearned compensation (186) (266)
Accumulated other comprehensive income (loss) (8,704) 29,509
Retained earnings 1,681,992 1,579,057
--------------- ---------------
Total shareholders' equity 2,486,097 2,245,039
--------------- ---------------
Total liabilities and shareholders' equity $ 23,560,216 21,632,629
=============== ===============
See accompanying Notes to Consolidated Financial Statements.
3
SYNOVUS FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Six Months Ended Three Months Ended
June 30, June 30,
-------------------------- -----------------------
(In thousands, except per share data) 2004 2003 2004 2003
------------ --------- --------- ---------
Interest income:
Loans, including fees $ 493,302 473,194 250,446 242,344
Investment securities 49,389 49,251 24,442 23,950
Mortgage loans held for sale 3,363 7,190 1,956 3,996
Federal funds sold and securities purchased
under resale agreements 894 849 418 445
Interest earning deposits with banks 9 15 4 7
------------ --------- --------- ---------
Total interest income 546,957 530,499 277,266 270,742
------------ --------- --------- ---------
Interest expense:
Deposits 96,109 115,804 48,147 58,072
Federal funds purchased and securities sold
under repurchase agreements 7,435 6,504 3,780 2,786
Long-term debt 30,203 35,671 14,877 18,947
------------ --------- --------- ---------
Total interest expense 133,747 157,979 66,804 79,805
------------ --------- --------- ---------
Net interest income 413,210 372,520 210,462 190,937
Provision for losses on loans 33,272 36,869 17,548 16,565
------------ --------- --------- ---------
Net interest income after provision
for losses on loans 379,938 335,651 192,914 174,372
------------ --------- --------- ---------
Non-interest income:
Electronic payment processing services 377,538 342,326 192,738 175,698
Other transaction processing services revenue 78,694 50,808 39,696 25,755
Service charges on deposit accounts 59,620 51,167 31,188 26,484
Fees for trust services 15,998 14,736 7,907 8,084
Brokerage revenue 11,375 9,770 5,616 4,833
Mortgage banking income 12,666 33,970 5,772 18,282
Credit card fees 13,549 12,007 7,509 6,297
Securities gains (losses), net (65) 581 521
Other fee income 14,122 11,296 7,202 5,571
Other non-interest income 48,695 26,781 17,919 15,136
------------ --------- --------- ---------
Non-interest income before reimbursable items 632,192 553,442 315,547 286,661
Reimbursable items 116,190 113,112 55,745 54,638
------------ --------- --------- ---------
Total non-interest income 748,382 666,554 371,292 341,299
------------ --------- --------- ---------
Non-interest expense:
Salaries and other personnel expense 361,586 333,566 174,955 174,925
Net occupancy and equipment expense 164,577 138,583 86,187 69,046
Other non-interest expense 142,222 111,404 74,365 58,065
------------ --------- --------- ---------
Non-interest expense before reimbursable item 668,385 583,553 335,507 302,036
Reimbursable items 116,190 113,112 55,745 54,638
------------ --------- --------- ---------
Total non-interest expense 784,575 696,665 391,252 356,674
------------ --------- --------- ---------
Minority interest in subsidiaries' net income 13,101 12,673 6,852 6,529
Income before income taxes 330,644 292,867 166,102 152,468
Income tax expense 121,341 106,581 60,961 56,101
------------ --------- --------- ---------
Net income $ 209,303 186,286 105,141 96,367
============ ========= ========= =========
Net income per share:
Basic $ 0.69 0.62 0.34 0.32
============ ========= ========= =========
Diluted 0.68 0.61 0.34 0.32
============ ========= ========= =========
Weighted average shares outstanding:
Basic 304,912 302,423 306,180 302,776
============ ========= ========= =========
Diluted 307,835 306,529 308,857 305,015
============ ========= ========= =========
Dividends declared per share $ 0.35 0.33 0.17 0.17
============ ========= ========= =========
See accompanying Notes to Consolidated Financial Statements.
4
SYNOVUS FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
-------------------------------
(In thousands) 2004 2003
---------------- -------------
Cash flows from operating activities:
Net Income $ 209,303 186,286
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for losses on loans 33,272 36,869
Depreciation, amortization, and accretion, net 75,928 57,072
Increase in interest receivable (3,231) (2,042)
(Decrease) increase in interest payable (6,932) 1,559
Minority interest in subsidiaries' net income 13,101 12,673
Increase in mortgage loans held for sale (27,201) (116,941)
(Decrease) increase in billings in excess of costs
and profit on uncompleted contracts (16,166) 28,473
Gain on sale of banking locations (15,849) -
Impairment of developed software 10,059 -
Other, net 41,783 13,121
---------------- -------------
Net cash provided by operating activities 314,067 217,070
---------------- -------------
Cash flows from investing activities:
Net cash paid for acquisitions (2,749) (66,419)
Net decrease in interest earning deposits with banks 89 526
Net increase in federal funds sold
and securities purchased under resale agreements (12,487) (14,599)
Proceeds from maturities and principal collections of
investment securities available for sale 981,374 822,869
Proceeds from sales of investment securities available for sale 22,221 84,014
Purchases of investment securities available for sale (1,023,160) (939,818)
Net cash received on sale of banking locations 25,069 -
Net increase in loans (1,210,800) (763,278)
Purchases of premises and equipment (64,234) (169,422)
Proceeds from disposals of premises and equipment 1,379 868
Contract acquisition costs (3,283) (13,379)
Additions to licensed computer software from vendors (14,001) (20,000)
Additions to internally developed computer software (3,703) (9,033)
---------------- -------------
Net cash used by investing activities (1,304,285) (1,087,671)
---------------- -------------
Cash flows from financing activities:
Net increase in demand and savings deposits 920,413 796,959
Net increase in certificates of deposit 185,552 208,544
Net decrease in federal funds purchased
and securities sold under repurchase agreements (74,618) (312,764)
Principal repayments on long-term debt (198,540) (36,338)
Proceeds from issuance of long-term debt 307,989 462,450
Dividends paid to shareholders (103,432) (94,691)
Proceeds from issuance of common stock 13,358 11,046
Treasury stock purchased - (100,798)
---------------- -------------
Net cash provided by financing activities 1,050,722 934,408
---------------- -------------
Increase in cash and due from banks 60,504 63,807
Cash and due from banks at beginning of period 696,030 741,092
---------------- -------------
Cash and due from banks at end of period $ 756,534 804,899
================ =============
See accompanying Notes to Consolidated Financial Statements.
5
SYNOVUS FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - 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 that, 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 2003 annual report previously filed on Form 10-K.
Note 2 - Supplemental Cash Flow Information
- -------------------------------------------
For the six months ended June 30, 2004 and 2003, Synovus paid income taxes (net
of refunds received) of $87.8 million and $85.6 million, respectively. For the
six months ended June 30, 2004 and 2003, Synovus paid interest of $139.5 million
and $154.5 million, respectively.
Noncash investing activities consisted of loans of approximately $5.3 million
and $10.6 million, which were foreclosed and transferred to other real estate
during the six months ended June 30, 2004 and 2003, respectively. The more
significant non-cash items for the six months ended June 30, 2004 related to the
acquisitions of Peoples Florida Banking Corporation and Trust One Bank and
consist of $498.8 million in net loans, $132.3 million in investment securities
available for sale, and $545.6 million in deposits. The more significant
non-cash items for the six months ended June 30, 2003 related to the
acquisitions of United Financial Holdings, Inc. and FNB Newton Bancshares, Inc.
and consist of $620.1 million in net loans, $64.3 million in investment
securities available for sale, and $690.2 million in deposits.
Note 3 - Comprehensive Income
- -----------------------------
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 other comprehensive income (loss). Comprehensive
income for the six months ended June 30, 2004 and 2003 was $171.1 million and
$186.4 million, respectively. For the three months ended June 30, 2004 and 2003,
comprehensive income was $59.0 million and $102.1 million, respectively.
Note 4 - 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.
6
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," established accounting and disclosure requirements
using a fair value based method of accounting for stock-based compensation
plans. As allowed by SFAS No. 123, Synovus has elected to apply the accounting
method prescribed under APB Opinion No. 25, and has adopted the disclosure
requirements of SFAS No. 123, as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure."
If Synovus had determined compensation expense based on the fair value at the
grant date for its stock options granted under SFAS No. 123, net income and
earnings per share for the three and six months ended June 30, 2004 and 2003
would have been reduced to the pro forma amounts indicated in the following
tables.
For the six months ended June 30, 2004 and 2003:
- -------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data) 2004 2003
- -------------------------------------------------------------------------------------------------------------------
Net income as reported $ 209,303 186,286
Total stock-based employee compensation expense determined under fair
value based method for all awards, net of related tax effects
(6,114) (6,703)
---------------- -----------------
Net income - pro forma $ 203,189 179,583
================ =================
Earnings per share:
Basic - as reported $ 0.69 0.62
Basic - pro forma 0.67 0.59
Diluted - as reported 0.68 0.61
Diluted - pro forma 0.66 0.59
- -------------------------------------------------------------------------------------------------------------------
For the three months ended June 30, 2004 and 2003:
- -------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data) 2004 2003
- -------------------------------------------------------------------------------------------------------------------
Net income as reported $ 105,141 96,367
Total stock-based employee compensation expense determined under fair
value based method for all awards, net of related tax effects
(2,930) (3,467)
---------------- -----------------
Net income - pro forma $ 102,211 92,900
================ =================
Earnings per share:
Basic - as reported $ 0.34 0.32
Basic - pro forma 0.33 0.31
Diluted - as reported 0.34 0.32
Diluted - pro forma 0.33 0.30
- -------------------------------------------------------------------------------------------------------------------
7
Note 5 - Business Combinations
- ------------------------------
On June 1, 2004, Synovus acquired all the issued and outstanding common shares
of Trust One Bank (Trust One) in Memphis, Tennessee, a $423.5 million asset bank
with a net book value of approximately $34.4 million. Trust One has six branches
serving east Shelby County, Tennessee, which includes Germantown, Cordova,
Collierville and east Memphis. The acquisition was accounted for using the
purchase method of accounting, and accordingly, the results of operations of
Trust One have been included in the consolidated financial statements beginning
June 1, 2004.
The aggregate purchase price was $110.9 million, consisting of 3,841,302 shares
of Synovus common stock valued at $107.7 million, approximately $3,000 in cash,
and stock options valued at $3.2 million. The value of the common stock issued
was determined based on the average market price of Synovus' common stock over
the 2-day period before and after the terms of the acquisition were agreed to
and announced. The fair value of the stock options was determined based on the
Black-Scholes option pricing model.
Synovus has not yet completed the allocation of the purchase price of this
acquisition to the respective assets acquired and liabilities assumed. It is
expected that such purchase price allocation will be completed in the third
quarter and result in the majority of the excess purchase price being recorded
as goodwill. Such amount is approximately $78.6 million and has been included in
goodwill as of June 30, 2004.
On January 30, 2004, Synovus acquired all the issued and outstanding common
shares of Peoples Florida Banking Corporation (Peoples Bank), the parent company
of Peoples Bank, headquartered in Palm Harbor, Florida. The acquisition was
accounted for using the purchase method of accounting, and accordingly, the
results of operations of Peoples Bank have been included in the consolidated
financial statements beginning February 1, 2004.
The aggregate purchase price was $78.4 million, consisting of 1,636,827 shares
of Synovus common stock valued at $43.7 million, $32.1 million in cash, and
stock options valued at $2.6 million. The value of the common stock issued was
determined based on the average market price of Synovus' common stock over the
2-day period before and after the terms of the acquisition were agreed to and
announced. The fair value of the stock options was determined based on the
Black-Scholes option pricing model.
Of the $58.9 million of acquired intangible assets, $53.6 million was allocated
to goodwill. The goodwill will not be deductible for tax purposes. The
identifiable intangible asset consists of the core deposit premium, which has an
estimated fair value of $5.3 million and a weighted average useful life of 10
years.
8
The purchase price allocation has been preliminarily determined as follows:
-----------------------------------------------------------------------------------
(In thousands) At January 31, 2004
-----------------------------------------------------------------------------------
Cash and due from banks $ 15,449
Investments 47,844
Federal funds sold 3,454
Loans, net 185,931
Premises and equipment 8,274
Core deposit premium 5,349
Goodwill 53,563
Other assets 4,125
----------------------
Total assets acquired 323,989
----------------------
Deposits 199,979
Federal funds purchased 28,765
Notes payable 15,237
Other liabilities 1,608
----------------------
Total liabilities assumed 245,589
----------------------
Net assets acquired $ 78,400
======================
Proforma information related to the impact of these acquisitions on Synovus'
consolidated financial statements, assuming such acquisitions had occurred at
the beginning of the periods reported, is not presented as such impact is not
significant.
Note 6 - Operating Segments
- ---------------------------
Synovus has two reportable segments: Financial Services and TSYS. The Financial
Services segment provides financial services including banking, financial
management, insurance, mortgage and leasing services through 40 affiliate banks
and other Synovus offices in Georgia, Alabama, South Carolina, Florida, and
Tennessee. Through online accounting and electronic payment processing systems,
TSYS provides electronic payment processing services and other related services
to card-issuing institutions in the United States, Mexico, Canada, Honduras,
Europe, and the Caribbean. The significant accounting policies of the segments
are described in the summary of significant accounting policies in the 2003
annual report previously filed on Form 10-K. All inter-segment services provided
are charged at the same rates as those charged to unaffiliated customers. Such
services are included in the results of operations of the respective segments
and are eliminated to arrive at consolidated totals.
9
Segment information as of and for the six months ended June 30, 2004 and 2003 is
presented in the following table:
Six months ended June 30, 2004 and 2003
- --------------------------------------------------------------------------------------------------------------------------
Financial
(In thousands) Services TSYS (a) Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------------
Interest income 2004 $546,956 376 (375) (b) $ 546,957
2003 530,508 592 (601) (b) 530,499
- --------------------------------------------------------------------------------------------------------------------------
Interest expense 2004 134,054 68 (375) (b) 133,747
2003 158,550 30 (601) (b) 157,979
- --------------------------------------------------------------------------------------------------------------------------
Net interest income 2004 412,902 308 - 413,210
2003 371,958 562 - 372,520
- --------------------------------------------------------------------------------------------------------------------------
Provision for loan losses 2004 33,272 - - 33,272
2003 36,869 - - 36,869
- --------------------------------------------------------------------------------------------------------------------------
Net interest income after provision 2004 379,630 308 - 379,938
for loan losses 2003 335,089 562 - 335,651
- --------------------------------------------------------------------------------------------------------------------------
Total non-interest income 2004 169,821 587,702 (9,141) (c) 748,382
2003 153,917 520,491 (7,854) (c) 666,554
- --------------------------------------------------------------------------------------------------------------------------
Total non-interest expense 2004 309,542 484,174 (9,141) (c) 784,575
2003 283,391 421,128 (7,854) (c) 696,665
- --------------------------------------------------------------------------------------------------------------------------
Income before income taxes 2004 239,909 103,836 (13,101) (d) 330,644
2003 205,615 99,925 (12,673) (d) 292,867
- --------------------------------------------------------------------------------------------------------------------------
Income tax expense 2004 86,112 35,229 - 121,341
2003 72,959 33,622 - 106,581
- --------------------------------------------------------------------------------------------------------------------------
Net income 2004 153,797 68,607 (13,101) (d) 209,303
2003 132,656 66,303 (12,673) (d) 186,286
- --------------------------------------------------------------------------------------------------------------------------
Total assets 2004 22,627,410 1,030,839 (98,033) (e) 23,560,216
2003 20,212,311 882,819 (30,643) (e) 21,064,487
- --------------------------------------------------------------------------------------------------------------------------
10
Segment information as of and for the three months ended June 30, 2004 and 2003
is presented in the following table:
Three months ended June 30, 2004 and 2003
- --------------------------------------------------------------------------------------------------------------------------
Financial
(In thousands) Services TSYS (a) Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------------
Interest income 2004 $ 277,266 172 (172) (b) $ 277,266
2003 270,751 252 (261) (b) 270,742
- --------------------------------------------------------------------------------------------------------------------------
Interest expense 2004 66,964 12 (172) (b) 66,804
2003 80,048 18 (261) (b) 79,805
- --------------------------------------------------------------------------------------------------------------------------
Net interest income 2004 210,302 160 - 210,462
2003 190,703 234 - 190,937
- --------------------------------------------------------------------------------------------------------------------------
Provision for loan losses 2004 17,548 - - 17,548
2003 16,565 - - 16,565
- --------------------------------------------------------------------------------------------------------------------------
Net interest income after provision 2004 192,754 160 - 192,914
for loan losses 2003 174,138 234 - 174,372
- --------------------------------------------------------------------------------------------------------------------------
Non-interest income 2004 79,371 296,659 (4,738) (c) 371,292
2003 79,889 265,266 (3,856) (c) 341,299
- --------------------------------------------------------------------------------------------------------------------------
Non-interest expense 2004 153,597 242,393 (4,738) (c) 391,252
2003 147,587 212,943 (3,856) (c) 356,674
- --------------------------------------------------------------------------------------------------------------------------
Income before income taxes 2004 118,528 54,426 (6,852) (d) 166,102
2003 106,440 52,557 (6,529) (d) 152,468
- --------------------------------------------------------------------------------------------------------------------------
Income tax expense 2004 42,486 18,475 - 60,961
2003 37,993 18,108 - 56,101
- --------------------------------------------------------------------------------------------------------------------------
Net income 2004 76,042 35,951 (6,852) (d) 105,141
2003 68,447 34,449 (6,529) (d) 96,367
- --------------------------------------------------------------------------------------------------------------------------
Total assets 2004 22,627,410 1,030,839 (98,033) (e) 23,560,216
2003 20,212,311 882,819 (30,643) (e) 21,064,487
- --------------------------------------------------------------------------------------------------------------------------
(a) Includes equity in income of joint ventures which is included in
non-interest income.
(b) Primarily interest on TSYS' cash deposits with the Financial Services
segment and on TSYS' line of credit with a Synovus affiliate bank.
(c) Principally, electronic payment processing services provided by TSYS to the
Financial Services segment.
(d) Minority interest in TSYS and GP Network Corporation (a TSYS subsidiary).
(e) For 2004, primarily TSYS' cash deposits with the Financial Services
segment. For 2003, balance consists primarily of a TSYS loan from a Synovus
banking affiliate.
11
Segment information for the changes in the carrying amount of goodwill for the
six months ended June 30, 2004 is shown in the following table:
- ----------------------------------------------------------------------------------------------------------------------
Financial
(In thousands) Services TSYS Total
- ----------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 2003 $ 219,242 29,626 248,868
Goodwill acquired during period <f1> 132,191 - 132,191
Impairment losses - - -
------------------- ------------------- ----------------
Balance as of June 30, 2004 $ 351,433 29,626 381,059
=================== =================== ================
<FN>
<f1> See Note 5 for information regarding goodwill relating to acquisitions
completed during the six months ended June 30, 2004.
</FN>
Intangible assets (excluding goodwill) as of June 30, 2004 and December 31, 2003
are presented in the table below.
- ----------------------------------------------------------------------------------------------------------------------
(In thousands) June 30, 2004 December 31, 2003
- ----------------------------------------------------------------------------------------------------------------------
Purchased trust revenues $ 3,345 3,485
Core deposit premiums 23,290 20,380
Employment contracts / non-competition
Agreements 327 388
Acquired customer contracts 5,837 6,478
Intangibles associated with the acquisition
of minority interest in TSYS 2,514 2,656
Other 495 583
---------------------------- -------------------------
Total Carrying Value $ 35,808 33,970
============================ =========================
Note 7 - Dividends per Share
- ----------------------------
Dividends declared per share for the quarter ended June 30, 2004 were $0.1733,
up 5.0% from $0.1650 for the second quarter of 2003. For the six months ended
June 30, 2004, dividends declared per share were $.3466, up 5.0% from $.3300 for
the same period a year ago.
Note 8 - Derivative Instruments
- -------------------------------
Synovus accounts for its derivative financial instruments under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended. SFAS
No. 133 requires recognition of all derivatives as either assets or liabilities
in the balance sheet and requires measurement of those instruments at fair value
through adjustments to either accumulated other comprehensive income, current
earnings, or both, as appropriate. As part of its overall interest rate risk
management activities, Synovus utilizes derivative instruments to manage its
exposure to various types of interest rate risks. These derivative instruments
consist primarily of commitments to sell fixed-rate mortgage loans and interest
rate swaps. The interest rate lock commitments made to prospective mortgage loan
customers also represent derivative instruments since it is intended that such
loans will be sold.
12
Interest rate swap transactions generally involve the exchange of fixed-rate and
floating-rate interest payment obligations without the exchange of the
underlying principal amounts. Entering into 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.
A summary of interest rate swap contracts utilized for interest rate risk
management at June 30, 2004 is shown in the following table.
- ----------------------------------------------------------------------------------------------------------------------
Weighted Average Unrealized
------------------------------------ ---------------------
Maturity Net
Notional Receive Pay In Unrealized
(Dollars in thousands) Amount Rate Rate(*) Months Gains Losses Gains
(Losses)
- -----------------------------------------------------------------------------------------------------------------------
Receive fixed swaps:
Fair value hedges $ 427,500 4.26% 1.30% 99 104 (10,152) (10,048)
Cash flow hedges 500,000 5.12% 4.25% 19 433 (3,691) (3,258)
------------ -------- ------------ --------------
Total $ 927,500 4.72% 2.89% 56 537 (13,843) (13,306)
============ ======== ============ ==============
(*) Variable pay rate based upon contract rates in effect at June 30, 2004.
At June 30, 2004, Synovus had commitments to fund fixed-rate mortgage loans to
customers in the amount of $159.0 million. The fair value of these commitments
was ($343,734).
At June 30, 2004, outstanding commitments to sell fixed-rate mortgage loans
amounted to approximately $211.6 million. Such commitments are entered into to
reduce the 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 for resale. The
commitments to sell mortgage loans are at fixed prices and are scheduled to
settle at specified dates that generally do not exceed 90 days. The fair value
of outstanding commitments to sell mortgage loans at June 30, 2004 was ($1.5
million).
Synovus also enters into derivative financial instruments to meet the financing
and interest rate risk management needs of its customers. Upon entering into
these instruments to meet customer needs, Synovus enters into offsetting
positions in order to minimize the risk to Synovus. These derivative financial
instruments are reported at fair value with any resulting gain or loss recorded
in current period earnings. As of June 30, 2004, the notional amount of customer
related derivative financial instruments was $352.5 million.
Note 9 - Recent Accounting Pronouncements
- -----------------------------------------
On November 13, 2003, the Emerging Issues Task Force (EITF) issued EITF Issue
No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments." This new guidance is to be applied in other-than-temporary
impairment evaluations performed in reporting periods beginning after June 15,
2004. Disclosures are effective in annual financial statements for fiscal years
ending after December 15, 2003, for investments accounted for under Financial
Accounting Standards Board (FASB) Statements No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," and No. 124, "Accounting for Certain
Investments Held by Not-for-Profit Organizations." The disclosure
13
requirements for all other investments are effective in annual financial
statements for fiscal years ending after June 15, 2004. Synovus anticipates that
the adoption of EITF 03-1 will not have a material impact on its financial
statements.
On March 31, 2004, the FASB issued an Exposure Draft titled "Share-Based
Payments, an amendment of FASB Statements No. 123 and 95," that addresses
accounting for equity based compensation arrangements. The proposed statement
would eliminate the ability to account for share-based compensation transactions
using Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" and replace some of the existing requirements under FASB Statement
No. 123, "Accounting for Stock-Based Compensation." The proposed statement would
require that such arrangements be accounted for using the fair-value-based
method of accounting and the related cost expensed over the corresponding
service period. It is anticipated that the final statement will be issued in the
fourth quarter of 2004 and may be effective for the first quarter of 2005.
Synovus provides proforma disclosures related to stock-based compensation in
Note 4.
On March 9, 2004, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 105 (SAB 105), "Application of Accounting Principles to
Loan Commitments." SAB 105 summarizes the views of the SEC staff regarding the
application of generally accepted accounting principles to loan commitments
accounted for as derivative instruments. Synovus adopted the provisions of SAB
105 effective April 1, 2004 on a prospective basis. Upon adoption of SAB 105,
Synovus modified the way in which it values its loan commitments to fund
mortgage loans. The impact of the adoption of SAB 105 resulted in mortgage
revenues being approximately $1.2 million less than what would have been
recognized under the former method of accounting.
Note 10 - Other
- ---------------
Certain amounts in 2003 have been reclassified to conform to the presentation
adopted in 2004.
Note 11 - Subsequent Event: Clarity Payment Solutions, Inc. Acquisition
- -----------------------------------------------------------------------
On August 3, 2004, TSYS announced the acquisition of Clarity Payment Solutions,
Inc. (Clarity) for $53.0 million. TSYS has started the process of completing the
purchase price allocation to the respective assets acquired and liabilities
assumed. It is expected that such purchase price allocation will be completed in
the third quarter of 2004. Clarity is a leading provider of prepaid card
solutions that utilize the Visa, MasterCard, EFT and ATM networks for Fortune
500 companies as well as domestic and international financial institutions. TSYS
has merged its existing prepaid division with Clarity and has branded the
combined entity as TSYS Prepaid, Inc.
14
ITEM 2 - MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Executive Summary
The following financial review provides a discussion of Synovus' financial
condition, changes in financial condition, and results of operations as well as
a summary of Synovus' critical accounting policies.
About Our Business
Synovus is a diversified financial services holding company, based in
Columbus, Georgia, with more than $23 billion in assets. Synovus operates two
business segments: the Financial Services and the Transaction Processing
Services (TSYS) segments. The Financial Services segment provides integrated
financial services including banking, financial management, insurance, mortgage
and leasing services through 40 decentralized affiliate banks and other Synovus
offices in five southeastern states. At June 30, 2004, our affiliate banks
ranged in size from $24 million to $4.7 billion in total assets. The TSYS
segment provides electronic payment processing services through our 81% owned
subsidiary Total System Services, Inc. (TSYS), the world's largest third party
processor of international payments. Our ownership in TSYS gives us a unique
business mix: for the first six months of 2004, 51% of our consolidated revenues
and 27% of our net income came from TSYS.
Our Key Financial Performance Indicators
In terms of how we measure success in our business, the following are
our key financial performance indicators:
Financial Services
* Net Interest Margin * Credit Quality
* Loan Growth * Fee Income Growth
* Deposit Growth * Expense Management
TSYS
* Revenue Growth * Expense Management
2004 Financial Performance vs. 2003
Consolidated
* Net income of $105.1 million, up 9.1% and $209.3 million, up 12.4%
for the three and six months ended June 30, 2004,
respectively, as compared to the same periods in 2003
* Diluted EPS of $0.34, up 7.7% and $0.68, up 11.8% for the three
and six months ended June 30, 2004, respectively, as compared to the
same periods in 2003
Financial Services
* Net interest margin: 4.24% for the three and six months ended
June 30, 2004 as compared to 4.25% and 4.28% for the same periods in
2003
* Loan growth: 14.2% increase from June 30, 2003 (11.6% excluding
acquisitions and divestitures)
* Credit quality: Ended the second quarter of 2004 in a very positive
15
fashion:
* Nonperforming assets ratio of .52%, down from .73%
at June 30, 2003, and
* Past dues over 90 days as a percentage of total loans of
.15% compared to .20% for the second quarter of 2003, and
* Net charge-off ratio of .22%, compared to .32% for the
second quarter of 2003 and .19%, compared to .34% for
the first six months of 2003.
* Deposit Growth: 11.9% increase from a year ago (9.1% excluding
acquisitions and divestitures).
* Fee income growth: unchanged for the quarter and up 10.3% for the
first six months of 2004 over the corresponding periods in the prior
year.
* Net overhead ratio: Improved to 1.37% from 1.39% in
the second quarter of 2003 and improved to 1.31% from 1.37% for
the first six months of 2003.
* Net income growth: 11.1% and 15.9% for the three and six months
ended June 30, 2004 over the corresponding periods in the prior year.
TSYS
* Revenue growth before reimbursable items: 15.1% and 15.7% for
the three and six months ended June 30, 2004 over the corresponding
periods in the prior year.
* Net income growth: 4.6% and 3.6% for the three and six months
ended June 30, 2004 over the corresponding periods in the prior year.
Our financial performance for the quarter was driven by excellent credit quality
and strong loan growth, along with stability in the net interest margin, while
our expense management remained on track. Additionally, TSYS' financial
performance was in line with expectations.
Synovus continues with its strategic market repositioning. During the six months
ended June 30, 2004, we completed the acquisition of Peoples Bank in Palm
Harbor, Florida and Trust One Bank in Memphis, Tennessee. We also entered the
Savannah, Georgia market and opened our first de novo bank, Synovus Bank of
Jacksonville, in the second quarter of 2004. Additionally, during the first
quarter of 2004, we exited one market with the sale of our bank in Quincy,
Florida. This transaction resulted in a $9.7 million after-tax gain recorded in
the first quarter.
On July 7, 2004, TSYS and J. P. Morgan & Co. (Chase) announced that they were
engaged in exclusive negotiations for TSYS to provide processing services for
the combined Bank One and Chase card portfolios. Both companies expect to reach
a definitive agreement in the near future. Though no definitive agreement has
been signed by TSYS and Chase covering the combined portfolio and no conversion
schedule has been agreed upon for the prior Chase portfolio, TSYS continues to
provide processing services for the Circuit City private label portfolio for
Chase and is proceeding with the scheduled conversion of the Bank One portfolio
to the TSYS, with such conversion scheduled to take place in the third and
fourth quarters of 2004.
Critical Accounting Policies
The accounting and financial reporting policies of Synovus conform to
accounting principles generally accepted in the United States of America and to
general practices within the banking and electronic payment processing
industries. Following is a description of the accounting policies applied by
Synovus which are deemed "critical." In determining which accounting policies
are critical in nature, Synovus has identified the policies that require
significant judgment or involve complex estimates. The application of these
policies has a
16
significant impact on Synovus' financial statements. Synovus' financial results
could differ significantly if different judgments or estimates are applied in
the application of these policies.
Allowance for Loan Losses
The allowance for loan losses is determined based on an analysis which
assesses the risk within the loan portfolio. The two most significant judgments
or estimates made in the determination of the allowance for loan losses are the
risk ratings for loans in the commercial loan portfolio and the valuation of the
collateral for loans that are classified as impaired loans.
Commercial Loans - Risk Ratings
Commercial loans are assigned a risk rating on a 9 point scale. For
commercial loans that are not considered impaired, the allocated allowance for
loan losses is determined based upon the loss percentage factors that correspond
to each risk rating. The rating process is subject to certain subjective factors
and estimates. Synovus uses a well-defined risk rating methodology, and has
established policies that require "checks and balances" to manage the risks
inherent in estimating loan losses.
The risk ratings are based on the borrowers' credit risk profile,
considering factors such as debt service history and capacity, inherent risk in
the credit (e.g., based on industry type and source of repayment), and
collateral position. Ratings 6 through 9 are modeled after the bank regulatory
classifications of special mention, substandard, doubtful, and loss. Loss
percentage factors are based on historical loss rates, bank regulatory guidance,
and Synovus' assessment of losses within each risk rating. The occurrence of
certain events could result in changes to the loss factors. Accordingly, these
loss factors are reviewed periodically and modified as necessary.
Each loan is assigned a risk rating during the approval process. This
process begins with a rating recommendation from the loan officer responsible
for originating the loan. The rating recommendation is subject to approvals from
other members of management and/or loan committees depending on the size and
type of credit. Ratings are re-evaluated at least every twelve months in
connection with the loan review process at each affiliate bank. Additionally, an
independent holding company credit review function evaluates each affiliate
bank's risk rating process at least every twelve to eighteen months.
Collateral Valuation
A majority of our impaired loans are collateral dependent. The
allowance for loan losses on these loans is determined based upon fair value
estimates (net of selling costs) of the respective collateral. The actual losses
on these loans could differ significantly if the fair value of the collateral is
different from the estimates used by Synovus in determining the allocated
allowance. Most of our collateral-dependent impaired loans are secured by real
estate. The fair value of these real estate properties is generally determined
based upon appraisals performed by a certified or licensed appraiser. Management
also considers other factors or recent developments which could result in
adjustments to the collateral value estimates indicated in the appraisals.
Loss Factors
The allocated allowance for retail loans is generally determined by
segregating the retail loan portfolio into pools of homogeneous loan categories.
Loss factors applied to these pools are generally based on average historical
losses for the previous two years and current delinquency trends. The occurrence
of certain events could result in changes to the loss factors. Accordingly,
these loss factors are reviewed periodically and modified as necessary.
17
Other
Certain economic and interest rate factors could have a material impact
on the determination of the allowance for loan losses and corresponding credit
costs. The depth, duration, and dispersion of any economic recession all have an
impact on the credit risk profile of the loan portfolio. Additionally, a rapidly
rising interest rate environment could as well have a material impact on certain
borrowers' ability to pay.
Revenue Recognition
TSYS' electronic payment processing revenues are derived from long-term
processing contracts with financial and nonfinancial institutions and are
recognized as the services are performed. Electronic payment processing revenues
are generated primarily from charges based on the number of accounts on file,
transactions and authorizations processed, statements mailed, and other
processing services for cardholder accounts on file. Most of these contracts
have prescribed annual revenue minimums. The original terms of processing
contracts generally range from three to ten years in length.
On March 3, 2003, TSYS announced that Bank One selected TSYS to upgrade
its credit card processing. Under the long-term software licensing and services
agreement, TSYS will provide electronic payment processing services to Bank
One's credit card accounts for at least two years starting in 2004 (excluding
statement and card production services), and then TSYS will license a modified
version of its TS2 consumer and commercial software to Bank One under a
perpetual license with a six year payment term. TSYS uses the
percentage-of-completion accounting method for its agreement with Bank One and
recognizes revenues in proportion to cost incurred.
TSYS recognizes software license revenue in accordance with Statement
of Position No. (SOP) 97-2, "Software Revenue Recognition," and SOP 98-9,
"Modification of SOP 97-2, Software Revenue Recognition With Respect to Certain
Transactions." For software licenses for which any services rendered are not
considered essential to the functionality of the software, revenue is recognized
upon delivery of the software, provided (1) there is evidence of an arrangement,
(2) collection of the fee is considered probable, (3) the fee is fixed or
determinable, and (4) vendor specific objective evidence (VSOE) exists to
allocate revenue to the undelivered elements of the arrangement.
When services are considered essential to the functionality of the
software licensed, revenues are recognized over the period that such services
will be performed using the percentage-of-completion method in accordance with
SOP 81-1, "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts." Progress during the period services are performed is
measured by the percentage of costs incurred to date to estimated total costs
for each arrangement. Provisions for estimated losses on incomplete contracts
are made in the period in which such losses are determined. For license
arrangements in which the fee is not fixed or determinable, the license revenue
is recognized as payments become due.
TSYS' other service revenues are derived from recovery collections
work, bankruptcy process management, legal account management, skip tracing,
commercial printing activities and customer relationship management services,
such as call center activities for card activation and balance transfer
requests. The contract terms for these services are generally shorter term in
nature as compared with TSYS' long-term processing contracts. Revenue is
recognized on these other services either on a per unit or a fixed price basis.
TSYS uses the percentage-of-completion method of accounting for its fixed price
contracts, and progress is measured by the percentage of costs incurred to date
to estimated total costs for each arrangement. Provisions for estimated losses
on incomplete contracts are made in the period in which such losses are
determined.
18
Contract Acquisition Costs
TSYS capitalizes contract acquisition costs related to signing or
renewing long-term contracts. These costs, primarily consisting of cash payments
for rights to provide processing services and internal conversion costs are
amortized using the straight-line method over the contract term beginning when
the client's cardholder accounts are converted and producing revenues. All costs
incurred prior to a signed agreement are expensed as incurred.
The amortization of contract acquisition costs associated with cash
payments is recorded as a reduction of electronic payment processing services
revenues in the consolidated statements of income. The amortization of contract
acquisition costs associated with conversion activity is recorded as other
operating expenses in the consolidated statements of income. TSYS evaluates the
carrying value of contract acquisition costs for impairment for each customer on
the basis of whether these costs are fully recoverable from expected
undiscounted net operating cash flows of the related contract. The determination
of expected undiscounted net operating cash flows requires management to make
estimates.
These costs may become impaired with the loss of a contract, the
financial decline of a client, termination of conversion efforts after a
contract is signed, diminished prospects for current clients, or if TSYS' actual
results differ from its estimates of future cash flows.
Software Development Costs
In accordance with Financial Accounting Standards Board (FASB)
Statement No. 86, "Computer Software to be Sold, Leased or otherwise Marketed,"
software development costs are capitalized once technological feasibility of the
software product has been established. Costs incurred prior to establishing
technological feasibility are expensed as incurred. Technological feasibility is
established when TSYS has completed a detailed program design and has determined
that a product can be produced to meet its design specifications, including
functions, features, and technical performance requirements. Capitalization of
costs ceases when the product is generally available to clients. TSYS evaluates
the unamortized capitalized costs of software development as compared to the net
realizable value of the software product which is determined by future
undiscounted net operating cash flows. The amount by which the unamortized
software development costs exceed the net realizable value is written off in the
period that such determination is made. Software development costs are amortized
using the greater of (1) the straight-line method over its estimated useful
life, which ranges from three to ten years, or (2) the ratio of current revenues
to total anticipated revenue over its useful life.
TSYS also develops software that is used internally. These software
development costs are capitalized based upon the provisions of Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use". Internal-use software development costs are
capitalized once (a) the preliminary project stage is completed, (b) management
authorizes and commits to funding a computer software project, and (c) it is
probable that the project will be completed and the software will be used to
perform the function intended. Costs incurred prior to meeting these
qualifications are expensed as incurred. Capitalization of costs ceases when the
project is substantially complete and ready for its intended use. Internal-use
software development costs are amortized using an estimated useful life of three
to seven years.
Software development costs may become impaired in situations where
development efforts are abandoned due to the viability of the planned project
becoming doubtful or due to technological obsolescence of the planned software
product.
19
Transaction Processing Provisions
TSYS has recorded estimates to accrue for contract contingencies
(performance penalties) and processing errors. A significant number of TSYS'
contracts with large clients contain service level agreements, which can result
in TSYS incurring performance penalties if contractually required service levels
are not met. When providing these accruals, TSYS takes into consideration such
factors as the prior history of performance penalties and processing errors
incurred, actual contractual penalties inherent in its contracts, progress
towards milestones, and known processing errors not covered by insurance.
These accruals are included in other liabilities in the accompanying
consolidated balance sheets. Increases and decreases in transaction processing
provisions are charged to other non-interest expense in the consolidated
statements of income, and payments or credits for performance penalties and
processing errors are charged against the accrual.
Business Combinations
Refer to Note 5 of the Notes to Consolidated Financial Statements for a
discussion of business combinations.
Balance Sheet
During the first six months of 2004, total assets increased $1.9 billion. Loans,
net of unearned income, increased by $1.6 billion, mortgage loans held for sale
increased by $27.2 million, and investment securities available for sale
increased by $75.5 million. Goodwill increased by $132.2 million. Providing the
necessary funding for the balance sheet growth during the first six months of
2004, the deposit base grew $1.5 billion, long-term debt increased $156.7
million, and shareholders' equity increased $241.1 million.
Loans
Compared to June 30, 2003, total loans grew by 14.2%. Excluding the impact of
acquisitions and divestitures, year-over-year loan growth was 11.6% and
sequential quarter annualized loan growth was $745 million or 17.3%.
The table on page 23 illustrates the composition of the loan portfolio
(classified by loan purpose) as of June 30, 2004. The commercial real estate
portfolio totals $10.3 billion, which represents 57.0% of the total loan
portfolio. Loans for the purpose of financing investment properties total $3.2
billion, which is only 17.5% of the total loan portfolio, or less than one-third
of the total commercial real estate portfolio. Included in the investment
properties loan category is $389.3 million in loans in the Atlanta market. This
amount represents 2.2% of the total loan portfolio, or 3.8% of the total
commercial real estate portfolio. The primary source of repayment on investment
property loans is the income from the underlying property (e.g., hotels, office
buildings, shopping centers, and apartment units' rental income), with the
collateral as the secondary source of repayment. Additionally, in almost all
cases, these loans are made on a recourse basis, which provides another source
of repayment. From an underwriting standpoint, these loans are evaluated by
determining the impact of higher interest rates, as well as lower occupancy
rates, on the borrower's ability to service debt.
Commercial loans for the purpose of financing 1-4 family properties represent
$2.6 billion or 14.5% of the total loan portfolio, and one-fourth of the total
commercial real estate portfolio. The 1-4 family properties category
20
includes $863.2 million in loans in the Atlanta market, which is 4.7% of the
total loan portfolio, or 32.9% of the 1-4 family properties category. Included
in total commercial real estate loans are $3.6 billion in commercial and
industrial related real estate loans. These loans are categorized as
owner-occupied and other property loans on the table shown on page 23. These
loans represent 20.1% of the total loan portfolio, or 35.3% of the total
commercial real estate portfolio. The primary source of repayment on these loans
is revenue generated from products or services offered by the business or
organization (e.g., accounting; legal and medical services; retailers;
manufacturers and wholesalers). These loans typically carry the personal
guarantees of the principals of the business.
Commercial and industrial loans represent $4.8 billion or 26.7% of the total
loan portfolio at June 30, 2004. These loans are diversified by geography,
industry, and loan type. Consumer loans at June 30, 2004 total $3.0 billion,
representing 16.5% of the total loan portfolio.
Asset Quality
The nonperforming assets ratio declined for the third consecutive quarter,
ending the quarter at 0.52%, the lowest level in 12 quarters. A year ago, the
nonperforming assets ratio was at 0.73%. The quality of our commercial real
estate portfolio remains strong with a nonperforming loan ratio of only 0.24% of
total commercial real estate loans at June 30, 2004. This compares to an overall
nonperforming loan ratio for the total loan portfolio of .37%. The net
charge-off ratio for the second quarter was 0.22%, down from 0.32% for the
second quarter of 2003. The net charge-off ratio for the six months ended June
30, 2004 was 0.19% down from 0.34% for the same period in 2003. Net charge-offs
for the first quarter of 2004 include a $1.0 million recovery on one credit that
was charged off prior to 2003. We believe that the net charge-off ratio for the
year will be less than 0.30%.
Past due levels remained very favorable, with total past dues at 0.61% of loans.
Loans 90 days past due and still accruing at June 30, 2004 were $27.5 million,
or 0.15% of total loans, compared to 0.13% at year-end 2003. 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.
The allowance for loan losses is $248.6 million, or 1.38% of net loans, at June
30, 2004 compared to $226.1 million, or 1.37% of net loans, at December 31,
2003. The allowance to non-performing loans coverage was 368% at June 30, 2004,
up from 335% at December 31, 2003.
The provision for loan losses was $17.5 million for the second quarter of 2004
compared to $16.6 million for the second quarter of 2003. For the first six
months of 2004, the provision for loan losses was $33.3 million as compared to
$36.9 million for the same period a year ago. Lower net charge-offs in 2004 have
impacted the provision levels as compared to the 2003 levels. For the first six
months of 2004, total provision expense covered net charge-offs by 2 times
compared to 1.4 times for the same period a year ago.
21
- --------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) June 30, 2004 December 31, 2003
- --------------------------------------------------------------------------------------------------------------------
Nonperforming loans $ 67,489 $ 67,442
Other real estate 26,972 28,422
-------------------------- ------------------------
Nonperforming assets $ 94,461 $ 95,864
========================== ========================
Loans 90 days past due and still accruing $ 27,453 $ 21,138
Allowance for loan losses $ 248,585 $ 226,059
Allowance for loan losses as a % of loans 1.38 % 1.37 %
As a % of loans and other real estate:
Nonperforming loans 0.37 % 0.41 %
Other real estate 0.15 0.17
-------------------------- ------------------------
Nonperforming assets 0.52 % 0.58 %
========================== ========================
Allowance to nonperforming loans 368.34 % 335.19 %
Management continuously monitors nonperforming 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. Management believes nonperforming assets include all
material loans in which doubts exist as to the collectibility of amounts due
according to the contractual terms of the loan agreement.
22
The following table shows the composition of the loan portfolio and
nonperforming loans (classified by loan purpose) as of June 30, 2004.
- --------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) % of
Total Total
% of Non- Non-
Total Loans Total Loans performing performing
Loan Type Outstanding Loans Loans
- --------------------------------------------------------------------------------------------------------------------------
Commercial Real
Estate
Multi-Family $ 571,693 3.2 % $ 1,248 1.8 %
Hotels 810,839 4.5 7,871 11.7
Office Buildings 713,577 3.9 7 -
Shopping Centers 548,173 3.0 1,849 2.7
Commercial Development 527,712 2.9 - -
--------------- ----------------- ---------------- ----------------
Total Investment Properties 3,171,994 17.5 10,975 16.3
--------------- ----------------- ---------------- ----------------
1-4 Family Construction 972,974 5.4 624 0.9
1-4 Family Perm
/Mini-Perm 756,963 4.2 3,201 4.7
Residential Development 895,535 5.0 1 -
--------------- ----------------- ---------------- ----------------
Total 1-4 Family
Properties 2,625,472 14.5 3,826 5.7
Land Acquisition 867,539 4.8 85 0.1
--------------- ----------------- ---------------- ----------------
Total Investment-Related Real
Estate 6,665,005 36.9 14,886 22.1
--------------- ----------------- ---------------- ----------------
Owner-Occupied 2,069,066 11.4 7,196 10.7
Other Property 1,564,211 8.7 2,200 3.3
--------------- ----------------- ---------------- ----------------
Total Commercial
Real Estate 10,298,282 57.0 24,282 36.0
Commercial &
Industrial 4,826,581 26.7 37,774 56.0
Consumer 2,986,648 16.5 5,433 8.0
Unearned Income (36,504) (0.2) - -
--------------- ----------------- ---------------- ----------------
Total $ 18,075,007 100.00 % $ 67,489 100.00 %
=============== ================= ================ ================
23
Deposits
Total deposits at June 30, 2004 were $17.5 billion, a $1.5 billion increase from
December 31, 2003. This change reflects an increase of $566.0 million relating
to deposits added in conjunction with the acquisitions of Peoples Bank and Trust
One and a decrease of $97.3 million in deposits relating to the sale of our bank
in Quincy, Florida. Compared to a year ago, total deposits grew by 11.9%.
Excluding the impact of acquisitions and divestitures, core deposits (total
deposits excluding certificates of deposits over $100,000) grew by 8.9% over the
prior year. This growth was led by strong increases in both demand deposit and
money market accounts, with increases of 11.8% and 21.4%, respectively.
Capital Resources and Liquidity
Synovus has always placed great emphasis on maintaining a strong capital base
and continues to exceed regulatory capital requirements. 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 $2.801 billion at June 30, 2004, compared to $2.618
billion at December 31, 2003. The ratio of total risk-based capital to
risk-weighted assets was 12.75% at June 30, 2004 compared to 13.06% at December
31, 2003. The leverage ratio was 10.10% at June 30, 2004 compared to 10.09% at
December 31, 2003.
The equity-to-assets ratio was 10.55% at June 30, 2004 compared to 10.38% at
year-end 2003. The equity-to-assets ratio, exclusive of net unrealized gains
(losses) on investment securities available for sale, was 10.63% at June 30,
2004, compared to 10.24% at year-end 2003.
Synovus' management actively analyzes and manages the liquidity position in
coordination with the appropriate committees at subsidiary banks. 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. Subsidiary banks have access to overnight Federal
funds lines with various financial institutions, which total approximately $3.3
billion and can be drawn upon for short-term liquidity needs. Banking liquidity
and sources of funds have not changed significantly since December 31, 2003.
The Parent Company requires cash for various operating needs including dividends
to shareholders, acquisitions, 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. As a short-term liquidity source, the Parent Company has access to a $25
million line of credit with an unaffiliated banking organization. The Parent
Company enjoys an excellent reputation and credit standing in the capital
markets and has the ability to raise substantial amounts of funds in the form of
either short-term or long-term borrowings.
The consolidated statements of cash flows detail cash flows from operating,
investing, and financing activities. For the six months ended June 30, 2004,
operating activities provided net cash of $314.1 million, investing activities
used $1.3 billion, and financing activities provided $1.1 billion, resulting in
an increase in cash and due from banks of $60.5 million.
24
Earning Assets, Sources of Funds, and Net Interest Income
Average total assets for the first six months of 2004 were $22.3 billion, up
12.0% over the first six months of 2003. Excluding the impact of acquisitions
and divestitures in both years, average assets increased 9.1%. Average earning
assets were up 11.5% in the first six months of 2004 over the same period last
year, and represented 89.7% 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 repurchase agreements increased $400.2
million, average long-term debt increased $10.7 million, and average
shareholders' equity increased $222.9 million. This growth provided the funding
for $1.8 billion growth in average net loans, $333.6 million growth in average
investments, and $52.7 million growth in average Federal funds sold and
securities purchased under resale agreements.
For the six months ended June 30, 2004, net interest income was $413.2 million,
up $40.7 million, or 10.9%, over $372.5 million for the same period a year ago.
For the three months ended June 30, 2004, net interest income, on a
tax-equivalent basis, increased $19.5 million, or 10.1%, over the same period in
2003.
The net interest margin was 4.24% for the six months ended June 30, 2004, down 4
basis points from the six months ended June 30, 2003. This decrease resulted
from a 48 basis point decrease in the yield on earning assets, which was
partially offset by a 44 basis point decrease in the effective cost of funds.
The decreased yield on earning assets was largely due to a 24 basis point
decrease in the average Prime rate and lower realized yields on securities as
compared to the prior year-to-date period. Significant growth in floating-rate
loans also contributed to the decline in total loan yields. The decreased
effective cost of funds was due to lower average rates paid on interest-bearing
funding.
On a sequential quarter basis, net interest income increased by $7.7 million,
while the net interest margin remained at 4.24%. The yield on earning assets
declined by 5 basis points which was offset by a 5 basis point decrease in the
effective cost of funds. The earning asset yield decline was primarily due to
the impact of continued strong variable rate loan growth on overall loan yields.
Solid growth in variable rate deposit accounts and continued downward repricing
of fixed rate deposits were the primary drivers of the reduction in funding
costs.
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.
- ------------------------------------------------------------------------------------------------------------------
Six Months Ended Three Months Ended
June 30, June 30,
(In thousands) 2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------------------------
Interest income $ 546,957 530,499 277,266 270,742
Taxable-equivalent adjustment 3,547 3,723 1,747 1,853
---------------- ---------------- ---------------- -------------
Interest income,
Taxable-equivalent 550,504 534,222 279,013 272,595
Interest expense 133,747 157,979 66,804 79,805
---------------- ---------------- ---------------- -------------
Net interest income,
Taxable-equivalent $ 416,757 376,243 212,209 192,790
================ ================ ================ =============
25
Non-Interest Income
Total non-interest income during the first six months of 2004 increased $81.8
million, or 12.3%, over the same period a year ago. For the three months ended
June 30, 2004, total non-interest income increased $30.0 million, or 8.8% over
the same period in 2003. For the first six months of 2004, excluding
reimbursable items, the increase in non-interest income was 10.1%, over the
first six months of 2003. For the second quarter of 2004, excluding reimbursable
items, the increase was 14.2% over the same period in 2003.
Financial Services:
Total non-interest income for the Financial Services segment for the three and
six months ended June 30, 2004 was $79.4 million, down 0.6% and $169.8 million,
up 10.3%, respectively, as compared to the same periods a year ago. The decline
in mortgage revenues has significantly impacted these comparisons. Total
mortgage revenues are down $12.5 million, or 68% for the quarter and $21.3
million, or 63% for the six months ended June 30, 2004, compared to the same
periods a year ago. The second quarter 2004 results include a $1.2 million
deferral (reduction) in mortgage banking revenue as a result of the adoption of
Staff Accounting Bulletin No. 105, effective April 1, 2004. Additionally, the
2004 results include the $15.8 million pre-tax gain from the sale of a banking
location recorded in the first quarter of 2004. Lastly, acquisitions and
divestitures resulted in a net increase of non-interest income of $126 thousand
and $1.8 million for the second quarter and first six months of 2004,
respectively, when compared to the same periods in 2003. Excluding mortgage
revenues, the gain on sale of a banking location, as well as the impact of
acquisitions and divestitures, the non-interest income growth is 19.4% for the
second quarter and 16.4% for the first six months of 2004, as compared to the
same periods in 2003.
Reported service charges on deposits, the single largest component of Financial
Services fee income, are up 17.8% for the quarter and 16.5% for the first six
months of 2004. Excluding the impact of acquisitions and divestitures, service
charges on deposits grew by 18% for the quarter and 14% for the first six months
of 2004, as compared to the same periods in 2003.
Credit card fees are up 19.2% for the quarter and 12.8% for the first six months
of 2004.
Financial Management Services revenues increased 8.0% for the quarter and 10%
for the first six months of 2004, as compared to the same periods in 2003.
Excluding the impact of divestitures, the increase was 14.1% for the quarter and
13.8% for the first six months of 2004.
Transaction Processing Services:
TSYS' revenues are derived from providing electronic payment processing and
related services to financial and nonfinancial institutions, generally under
long-term processing contracts. TSYS' services are provided primarily through
its cardholder systems, TS2 and TS1, to financial institutions and other
organizations throughout the United States, Mexico, Canada, Honduras, the
Caribbean, and Europe. TSYS currently offers merchant services to financial
institutions and other organizations in Japan through its majority owned
subsidiary, GP Network Corporation (GP Net), and in the United States through
its joint venture, Vital Processing Services L.L.C. (Vital).
26
Electronic Payment Processing Services
Electronic payment processing services revenues increased $17.0 million, or
9.7%, for the three months ended June 30, 2004, compared to the same period in
2003. Revenues from electronic payment processing services increased $35.2
million, or 10.3% for the six months ended June 30, 2004, compared to the same
period in 2003. Electronic payment processing revenues are generated primarily
from charges based on the number of accounts on file, transactions and
authorizations processed, statements mailed, credit bureau reports, cards
embossed and mailed, and other processing services for cardholder accounts on
file. Cardholder accounts on file include active and inactive consumer credit,
retail, debit, stored value, student loan, and commercial card accounts. Due to
the number of cardholder accounts processed by TSYS and the expanding use of
cards, as well as increases in the scope of services offered to clients,
revenues relating to electronic payment processing services have continued to
grow.
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 or declines in card
portfolios of existing clients, the conversion of cardholder accounts of new
clients to TSYS' processing platforms, and the loss of cardholder accounts
impact the results of operations from period to period. Another factor which may
affect TSYS' revenues and results of operations from time to time, is the sale
by a client 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 either the financial services or retail
industries, a change in the economic environment in the retail sector, or a
change in the mix of payments between cash and cards could favorably or
unfavorably impact TSYS' financial condition, results of operations, and cash
flows in the future.
Processing contracts with large clients, representing a significant portion of
TSYS' total revenues, generally provide for discounts on certain services based
on the size and activity of clients' portfolios. Therefore, electronic payment
processing revenues and the related margins are influenced by the client mix
relative to the size of client card portfolios, as well as the number and
activity of individual cardholder accounts processed for each client.
Consolidation among financial institutions has resulted in an increasingly
concentrated client base, which results in a changing client mix toward larger
clients and increasing pressure on TSYS' net profit margins.
Based upon available market share data that includes cards processed in-house,
TSYS believes it has a 20% market share of the domestic consumer card processing
arena; an 83% share of the Visa and MasterCard domestic commercial card
processing market; a 15% share of the domestic retail card processing market;
and a 4% market share of the U.S. off-line debit processing market. TSYS
believes it has significant growth opportunities as in-house processors and
issuers processed by competitors realize the potential for reduced costs and
better portfolio performance offered through TSYS' processing solutions.
TSYS provides services to its clients including processing consumer, retail,
commercial, debit and stored-value cards, as well as student loan account
processing. Average cardholder accounts on file for the six months ended June
30, 2004 were 281.6 million, an increase of 9.8% over the average of 256.4
million for the same period in 2003. Cardholder accounts on file at June 30,
2004 were 287.0 million, a 9.4% increase compared to the 262.5 million accounts
on file at June 30, 2003. The change in cardholder accounts on file from June
2003 to June 2004 included the deconversion and purging of 11.7 million
accounts, the addition of approximately 29.6 million
27
accounts attributable to the internal growth of existing clients, and
approximately 6.6 million accounts from new clients.
On March 3, 2003, TSYS announced that Bank One had selected TSYS to upgrade its
credit card processing. Under the long-term software licensing and services
agreement, TSYS will provide electronic payment processing services to Bank
One's credit card accounts for at least two years starting in 2004 (excluding
statement and card production services). Following the provision of processing
services, TSYS will license a modified version of its TS2 consumer and
commercial software to Bank One under a perpetual license with a six-year
payment term. TSYS uses the percentage-of-completion accounting method for its
agreement with Bank One and recognizes revenues in proportion to costs incurred.
TSYS' revenues from Bank One were approximately 5.1% of TSYS' total revenues for
the six months ended June 30, 2004.
On January 14, 2004, J.P. Morgan Chase & Co. (Chase) and Bank One announced an
agreement to merge. On January 20, 2004, Circuit City Stores, Inc. (Circuit
City) announced an agreement to sell its private-label credit card business to
Bank One. TSYS has a long-term agreement with Circuit City until April 2006. On
July 1, 2004 Bank One and Chase merged under the name of Chase.
On July 7, 2004, TSYS and Chase announced that they were engaged in exclusive
negotiations for TSYS to provide processing services for the combined Bank One
and Chase card portfolios. Both companies expect to reach a definitive agreement
in the near future. Though no definitive agreement has been signed by TSYS and
Chase covering the combined portfolio and no conversion schedule has been agreed
upon for the preexisting Chase portfolio, TSYS continues to provide processing
services for the Circuit City private label portfolio for Chase and is
proceeding with the scheduled conversion of the Bank One portfolio to TSYS, with
such conversion scheduled to take place in the third and fourth quarters of
2004. The impact of the yet unsigned definitive agreement between TSYS and Chase
for the combined Bank One and Chase portfolios on the financial position,
results of operations and cash flows of TSYS cannot be determined at this time.
In October 2003, Circuit City announced that it had sold its Visa and MasterCard
portfolio, which includes credit card receivables and related cash reserves, to
FleetBoston. On March 31, 2004, Bank of America merged with FleetBoston. TSYS
has been informed by Bank of America that it will continue to process the
Circuit City portfolio acquired by FleetBoston, and that FleetBoston will be
converting its card portfolio to TSYS in March 2005.
TSYS anticipates it will execute an amendment to its processing agreement with
Bank of America to encompass the processing of the FleetBoston portfolio,
including the Circuit City portfolio acquired by FleetBoston. The impact of the
yet unsigned amendment between TSYS and Bank of America on the financial
position, results of operations and cash flows of TSYS cannot be determined at
this time.
In July 2003, Sears and Citigroup announced an agreement for the sale by Sears
to Citigroup of the Sears credit card and financial services businesses. Sears
and Citigroup are both clients of TSYS, and TSYS considers its relationships
with both companies to be very positive.
TSYS and Sears are parties to a 10-year agreement, which was renewed in January
of 2000, under which TSYS provides transaction processing for more than 83.0
million Sears accounts.
28
For the six months ended June 30, 2004, TSYS' revenues from the TSYS/Sears
agreement represented 5.7% of TSYS' revenues. The agreement includes provisions
for termination for convenience prior to its expiration upon the payment of a
termination fee. The TSYS/Sears agreement also grants to Sears the one-time
right to market test TSYS' pricing and functionality after May 1, 2004.
Potential results of such market test, in which TSYS would be a participant,
include continuation of the processing agreement under its existing terms,
continuation of the processing agreement under mutually agreed modified terms,
or termination of the processing agreement after May 1, 2006 without a
termination fee. The impact of the transaction between Sears and Citigroup on
the financial position, results of operations, and cash flows of TSYS cannot be
determined at this time.
TSYS provides processing services to its clients worldwide and plans to continue
to expand its service offerings internationally in the future.
Total revenues from clients based in Mexico were $2.9 million for the three
months ended June 30, 2004, a 68.7% decrease compared to the $9.1 million for
the same period last year. Total revenues from clients based in Mexico were $5.8
million for the six months ended June 30, 2004, a 66.0% decrease compared to the
$17.1 million for the same period last year. During 2003, the Company's largest
client in Mexico notified TSYS that it would be utilizing its internal global
platform and deconverted in the fourth quarter of 2003. This client represented
approximately 70% of TSYS' revenues from Mexico. Another Mexican client notified
TSYS of its intentions to deconvert in mid-2004. This client represented
approximately 21% of TSYS' revenues from Mexico prior to the deconversion of
TSYS' largest client in Mexico. As a result, management expects that electronic
payment processing revenues for 2004 from Mexico will decrease significantly
when compared to electronic payment processing revenues from Mexico for 2003.
TSYS' electronic payment processing services revenues are also impacted by the
use of optional value added products and services of TSYS' processing systems.
For the three months ended June 30, 2004 and 2003, value added products and
services represented 12.9% and 13.9%, respectively, of TSYS' revenues. Revenues
from these products and services, which include some reimbursable items paid to
third-party vendors, increased 3.7%, or $1.3 million, for the three months ended
June 30, 2004 compared to the same period last year.
For the six months ended June 30, 2004 and 2003, value added products and
services represented 13.3% and 14.0%, respectively, of TSYS' revenues. Revenues
from these products and services, which include some reimbursable items paid to
third-party vendors, increased 6.9%, or $4.9 million, for the six months ended
June 30, 2004 compared to the same period last year.
Revenues associated with ProCard are included in electronic payment processing
services. These services include providing customized, Internet, Intranet and
client/server software solutions for commercial card management programs.
Revenues from these services increased 19.5% to $7.0 million for the three
months ended June 30, 2004, compared to $5.9 million for the same period last
year. For the six months ended, June 30, 2004, revenues from these services
increased 20.9% to $13.3 million compared to $11.0 million for the same period
last year.
Other Transaction Processing Services Revenue
Other transaction processing services revenue increased $13.9 million or 54.1%
for the three months ended June 30, 2004, compared to the same period in 2003.
Other transation processing services revenues services increased $27.9 million,
or 54.9%, for the six months ended June 30, 2004, compared to the same period
in 2003.
29
The increase was primarily a result of increased debt collection services
performed by TSYS Total Debt Management, Inc. and the revenues associated with
Enhancement Services Corporation (ESC).
On April, 28, 2003, TSYS completed the acquisition of ESC for $36.0 million in
cash. ESC provides targeted loyalty consulting and travel, as well as gift card
and merchandise rewards programs to more than 40 national and regional financial
institutions in the United States. For the three months ended June 30, 2004,
TSYS' revenues included $4.7 million related to ESC's revenues and are included
in other transaction processing services revenues, compared to $3.1 million for
the same period in 2003. For the six months ended June 30, 2004, TSYS' revenues
included $9.6 million of ESC's revenues, compared to $3.1 million for the same
period in 2003.
Major Customers
A significant amount of TSYS' revenues is derived from long-term contracts with
large clients, including certain major customers. For the three months ended
June 30, 2004, TSYS had two major customers, which accounted for approximately
27.9%, or $80.7 million, of TSYS' revenues. For the three months ended June 30,
2003, TSYS had two major customers that accounted for 30.2%, or $77.7 million,
of TSYS revenues.
For the six months ended June 30, 2004 and 2003, TSYS had two major customers.
The major customers for the six months ended June 30, 2004 accounted for
approximately 28.0%, or $161.0 million of TSYS' revenues as compared to 30.1%,
or $153.0 million, of TSYS' revenues, for the same period in 2003. The loss of
one of TSYS' major customers, or other significant clients, could have a
material adverse effect on TSYS' financial position, results of operations, and
cash flows.
Equity in Income from Joint Ventures
TSYS' share of income from its equity in joint ventures was $6.7 million and
$4.8 million for the three months ended June 30, 2004 and 2003, respectively.
TSYS' share of income from equity in joint ventures was $12.3 million and $9.0
million for the six months ended June 30, 2004 and 2003 respectively. The
increase for the quarter is attributable to the increase in Vital's operating
results as a result of increased volumes. These amounts are reflected as a
component of other non-interest income in the accompanying consolidated
statements of income.
Non-Interest Expense
For the six months ended June 30, 2004, total non-interest expense increased
$87.9 million, or 12.6%. Excluding reimbursable items, the increase was 14.5%.
For the three months ended June 30, 2004, total non-interest expense increased
$33.5 million, or 11.1%, over the same period in 2003. Management analyzes
non-interest expense in two separate components: Financial Services and
Transaction Processing Services.
30
The following table summarizes non-interest expense for the six months ended
June 30, 2004 and 2003.
- --------------------------------------------------------------------------------------------------------------------
Six months ended Six months ended
(In thousands) June 30, 2004(*) June 30, 2003(*)
- --------------------------------------------------------------------------------------------------------------------
Transaction Transaction
Financial Processing Financial Processing
Services Services Services Services
------------- ---------------- ------------- ----------------
Salaries and other personnel expense $ 188,282 173,663 170,979 162,890
Net occupancy and equipment expense 39,695 124,879 36,556 102,027
Other operating expenses 81,565 69,052 75,856 43,099
Reimbursable items -- 116,580 -- 113,112
------------- ---------------- ------------- ----------------
Total non-interest expense $ 309,542 484,174 283,391 421,128
============= ================ ============= ================
The following table summarizes non-interest expense for the three months ended
June 30, 2004 and 2003.
- --------------------------------------------------------------------------------------------------------------------
Three Months Ended Three Months Ended
(In thousands) June 30, 2004(*) June 30, 2003(*)
- -------------------------------------------------------------------------------------- -----------------------------
Transaction Transaction
Financial Processing Financial Processing
Services Services Services Services
------------- ----------------------------- ----------------
Salaries and other personnel expense $ 91,283 83,877 89,883 85,118
Net occupancy and equipment expense 20,004 66,180 18,640 50,407
Other operating expenses 42,310 36,386 39,064 22,780
Reimbursable items -- 55,948 -- 54,638
------------- ---------------- ------------ ----------------
Total non-interest expense $ 153,597 242,391 147,587 212,943
============= ================ ============ ================
(*) The added totals are greater than the consolidated totals due to
inter-segment balances which are eliminated in consolidation.
Financial Services:
Financial Services' non-interest expense increased on a reported basis 4.1% for
the second quarter and 9.2% for the six months ended June 30, 2004, compared to
the same periods a year ago. The comparisons are impacted by
acquisitions/divestitures, a decrease in mortgage unit-related employment
expenses, as well as higher levels of incentive pay in 2004.
Acquisitions and divestitures accounted for $1.6 million and $7.3 million of the
increase for the three and six months ended June 30, 2004, respectively, as
compared to the same periods in 2003. The decrease in total mortgage unit
personnel expenses (compared to the same periods a year ago) was $3.8 million
for the second quarter and $6.1 million for the first six months of 2004.
Additionally, the year-to-date results reflect incentive pay (retirement
benefits and management bonuses) that is $9.4 million higher than in the first
half of 2003. Excluding the impact of acquisitions/divestitures, mortgage unit
personnel expenses, and incentive pay, Financial Services' non-interest expense
is up 4.4 % for the quarter and 6.0% for the first six months of 2004 compared
to the same periods a year ago. Our non-interest expense growth
31
continues to be primarily in the sales and production areas of the
highest growth banking markets.
Our goal this year is to grow our Financial Services segment without expansion
in total headcount, and we are on track to attain this goal. Total headcount for
the Financial Services segment at June 30, 2004 was 6,523. Excluding the impact
of acquisitions, divestitures, and de novo banks/branches, our total headcount
has decreased by 40 since December 31, 2003.
Transaction Processing Services:
Total non-interest expense increased 15.0% for the six months ended June 30,
2004, compared to the same period in 2003. Excluding reimbursable items, total
non-interest expense increased 19.3% for the six months ended June 30, 2004,
compared to the same period in 2003. The increases are due to changes in each of
the expense categories as described below.
Salaries and other personnel expenses decreased $1.2 million, or 1.5%, for the
three months ended June 30, 2004 compared to the same periods in 2003. For the
six months ended June 30, 2004, salaries and other personnel expenses increased
$10.8 million, or 6.6% compared to the same period in 2003. The change in
employment expenses is associated with normal salary increases and related
benefits, as well as lower levels of employment costs categorized as software
development and contract acquisition costs. These increases were offset with a
reduction in the accrual for performance-based incentive benefits. The average
number of employees decreased at June 30, 2004 when compared to June 30, 2003
as a result of the workforce reduction announced in February 2004. During the
second quarter of 2003, TSYS added approximately 220 employees associated with
the ESC acquisition and the creation of a wholly-owned subsidiary named TSYS
Technology Center, Inc. (TTC) in Boise, Idaho. Initially employing 77 team
members, the TTC team members will support technology efforts throughout TSYS,
including government services, customer care, programming, and systems
development.
Net occupancy and equipment expense increased $15.8 million, or 31.3% for the
three months ended June 30, 2004 over the same period in 2003. For the six
months ended June 30, 2004, net occupancy and equipment expense increased $22.9
million, or 22.4%, over the same period in 2003. Due to rapidly changing
technology in computer equipment, TSYS' equipment needs are achieved to a large
extent through operating leases. Computer equipment and software rentals, which
represent the largest component of net occupancy and equipment expense,
increased approximately $3.2 million and $3.6 million for the three and six
months ended June 30, 2004, respectively, compared to the same periods in 2003.
Depreciation and amortization increased $1.9 million and $3.4 million during the
three and six months ended June 30, 2004, respectively, compared to the same
periods in 2003. Repairs and maintenance expenses increased $175,000 and $4.8
million for the three months and six months ended June 30, 2004, respectively,
compared to the same periods a year ago.
During the second quarter of 2004, TSYS decided to change its approach for entry
into the Asia-Pacific market. As a result, TSYS recognized a $10.1 million
charge to net occupancy and equipment expense for the write-off of the
double-byte software development project.
Other operating expenses for the three and six months ended June 30, 2004
increased $13.6 million and $26.0 million, or 59.7% and 60.2%, respectively, as
compared to the same periods in 2003. Other operating expenses include, among
other things, amortization of conversion costs, professional advisory fees, and
court costs associated with TSYS' debt collection business. TSYS' amortization
of conversion costs increased $1.3 million and $2.7 million for the three and
32
six months ended June 30, 2004, as compared to the same periods in 2003. As a
result of a new debt-collection agreement with an existing client signed in the
third quarter of 2003, TSYS recognized $8.2 million and $18.0 million of
attorney court costs and commissions in other expenses, for the three and six
months ended June 30, 2004, respectively, which TSYS expects to recover in
future periods. TSYS anticipates that these debt collection costs will continue.
Other operating expenses also includes charges for processing errors,
contractual commitments, and bad debt expense. TSYS' evaluation of the adequacy
of its transaction processing reserves and allowance for doubtful accounts is
based on a formal analysis which assesses the probability of losses related to
contractual contingencies, processing errors, and uncollectible accounts.
Increases and decreases in transaction processing provisions and charges for bad
debt expense are reflected in other operating expenses. For the three and six
months ended June 30, 2004, TSYS' transaction processing expenses increased $2.2
million and $2.9 million, respectively, compared to the same periods in 2003.
Income Tax Expense
For the six months ended June 30, 2004, income tax expense was $121.3 million
compared to $106.6 million for the same period in 2003. For the second quarter
of 2004, income tax expense was $61.0 million compared to $56.1 million for the
second quarter of 2003. The effective tax rate for the six months of 2004 was
36.7%, compared to 36.4% for the same period in 2003. For the second quarter of
2004, the effective tax rate was 36.7%, compared to 36.8% for the second quarter
of 2003.
Legal Proceedings
TSYS has received notification from the United States Attorneys' Office for the
Northern District of California that the United States Department of Justice is
investigating whether the Company and/or one of its large credit card processing
clients violated the False Claims Act, 31 U.S.C. ss.ss.3729-33, in connection
with mailings made on behalf of the client from July 1997 through November 2001.
The subject matter of the investigation relates to the U.S. Postal Service's
Move Update Requirements. In general, the Postal Service's Move Update
Requirements are designed to reduce the volume of mail that is returned to
sender as undeliverable as addressed. In effect, these requirements provide,
among other things, various procedures that may be utilized to maintain the
accuracy of mailing lists in exchange for discounts on postal rates. TSYS has
received a subpoena from the Office of the Inspector General of the U.S. Postal
Service, and has produced documents responsive to the subpoena, and expects to
provide further documentation to the government in connection with this
investigation. TSYS intends to fully cooperate with the Department of Justice in
the investigation and there can be no assurance as to the timing or outcome of
the investigation, including whether the investigation will result in any
criminal or civil fines, penalties, judgments or treble damage or other claims
against TSYS. TSYS is not in a position to estimate whether or not any loss may
arise out of this investigation. As a result, no reserve or accrual has been
recorded in TSYS' financial statements relating to this matter.
33
2004 Earnings Outlook
Synovus expects its earnings per share growth for 2004 to be within the
8-10% range, based in part upon the following assumptions:
* Continued improvement in credit quality, resulting in a net charge-off
ratio of less than 0.30% for the year and a non-performing assets
ratio in the 0.45-0.55% range by year end.
* The net interest margin will remain stable for the year.
* Loan growth of 10-12%.
* TSYS' net income growth of 5% to 7%.
Share Repurchase Plan
On April 14, 2003, the Synovus board of directors approved a $200
million share repurchase plan. Through June 30, 2004, 5.5 million shares have
been purchased under this plan at a total cost of $112.7 million (there have
been no share repurchases under this plan during the six months ended June 30,
2004). Consistent with the expectation at the inception of the plan, Synovus
repurchased one-half of the total authorization during the first 90 days after
the plan was approved. The pace of future repurchases under this two-year plan
will depend on various factors including price, market conditions, acquisitions,
and the general financial position of Synovus.
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, TSYS' expectation that it will reach a
definitive agreement with JP Morgan Chase in the near future; TSYS' scheduled
conversion of the Bank One portfolio; management's belief with respect to the
net charge-off ratio for the year; management's belief with respect to the
impact of the resolution of certain loan delinquencies on nonperforming assets
and the inclusion of all material loans in which doubt exists as to
collectibility in nonperforming assets; TSYS' belief with respect to its current
market share and its growth opportunities; TSYS' anticipated execution of an
amendment to its processing agreement with Bank of America to encompass the
processing of the FleetBoston portfolio; any matter that might arise out of the
United States Department of Justice's investigation of TSYS; and Synovus'
expected growth in earnings per share for 2004 and the assumptions underlying
such statements, including, with respect to Synovus' expected increase in
earnings per share for 2004; continued improvement in credit quality, resulting
in a net charge-off ratio of less than 0.30% for the year and a non-performing
assets ratio in the 0.45-0.55% range by year end; a stable net interest margin
for the year; loan growth of 10-12% in 2004; and TSYS net income growth for 2004
within the 5-7% range. 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,"
34
"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 in this filing. Many of these factors are beyond
Synovus' ability to control or predict. These factors include, but are not
limited to: (i) Synovus' inability to achieve a net charge-off ratio of less
than 0.30%, a non-performing assets ratio in the 0.45-0.55% range by year end
2004, a stable net interest margin for the year and loan growth of 10-12% in
2004; (ii) TSYS' inability to achieve its net income goals for 2004; (iii) the
strength of the U.S. economy in general and the strength of the local economies
in which operations are conducted; (iv) the effects of and changes in trade,
monetary and fiscal policies, and laws, including interest rate policies of the
Federal Reserve Board; (v) inflation, interest rate, market and monetary
fluctuations; (vi) the timely development of and acceptance of new products and
services and perceived overall value of these products and services by users;
(vii) changes in consumer spending, borrowing, and saving habits; (viii)
technological changes are more difficult or expensive than anticipated; (ix)
acquisitions are more difficult to integrate than anticipated; (x) the ability
to increase market share and control expenses; (xi) 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;
(xii) 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; (xiii) changes in Synovus' organization,
compensation, and benefit plans; (xiv) the costs and effects of litigation or
adverse facts and developments related thereto; (xv) a deterioration in credit
quality or a reduced demand for credit; (xvi) Synovus' inability to successfully
manage any impact from slowing economic conditions or consumer spending; (xvii)
the occurrence of catastrophic events that could impact Synovus or TSYS or its
major customers' operating facilities, communication systems and technology or
that have a material negative impact on current economic conditions or levels of
consumer spending; (xviii) successfully managing the potential both for patent
protection and patent liability in the context of rapidly developing legal
framework for expansive software patent protection; (xix) TSYS and JP Morgan
Chase are not able to satisfactorily conclude negotiations with respect to a
definitive agreement; (xx) TSYS does not convert the Bank One portfolio as
scheduled; (xxi) the merger of TSYS clients with entities that are not TSYS
clients or the sale of portfolios by TSYS clients to entities that are not TSYS
clients, including the acquisition by Citigroup of the Sears portfolio and the
merger of FleetBoston with Bank of America; (xxii) hostilities increase in the
Middle East or elsewhere; and (xxiii) 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.
35
ITEM 3 - QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
During the first six months of 2004, Synovus continued to maintain an asset
sensitive interest rate risk position which would be expected to have a
beneficial impact on net interest income in a rising interest rate environment.
This position is being maintained due to market expectations of rising short
term interest rates. Synovus has held this rate sensitivity position at
approximately the same level as measured at December 31, 2003. Synovus has
sought to limit any further significant increases in its asset sensitivity,
primarily through closely matching the interest rate characteristics of both its
earning asset and funding growth.
Synovus measures its sensitivity to changes in market interest rates through the
use of a simulation model. Synovus uses this simulation model to determine a
baseline net interest income forecast and the sensitivity of this forecast to
changes in interest rates. These simulations include all of Synovus' earning
assets, liabilities, and derivative instruments. Forecasted balance sheet
changes, primarily reflecting loan and deposit growth forecasts, are included in
the periods modeled.
Synovus models its baseline net interest income forecast assuming an unchanged
or flat interest rate environment. Synovus has modeled the impact of a gradual
increase and decrease in short-term rates of 100 basis points to determine the
sensitivity of net interest income for the next twelve months. In the gradual
100 basis point decrease scenario, net interest income is expected to decrease
by approximately 1.6%, as compared to an unchanged interest rate environment. In
the gradual 100 basis point increase scenario, net interest income is expected
to increase by approximately 2.6%, as compared to an unchanged interest rate
environment. While these estimates are reflective of the general interest rate
sensitivity of Synovus, local market conditions and their impact on loan and
deposit pricing would be expected to have a significant impact on the realized
level of net interest income. Actual realized balance sheet growth and mix would
also impact the realized level of net interest income.
36
ITEM 4 - CONTROLS AND PROCEDURES
We have evaluated the effectiveness of the design and operation of our
disclosure controls and procedures as of the end of the period covered by this
quarterly report as required by Rule 13a-15 of the Securities Exchange Act of
1934, as amended. This evaluation was carried out under the supervision and with
the participation of our management, including our chief executive officer and
chief financial officer. Based on this evaluation, these officers have concluded
that our disclosure controls and procedures are effective in timely alerting
them to material information relating to Synovus (including its consolidated
subsidiaries) required to be included in our periodic SEC filings. No change in
Synovus' internal control over financial reporting occurred during the period
covered by this report that materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
37
PART II - OTHER INFORMATION
ITEM 2 - CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER
PURCHASES OF EQUITY SECURITIES
On April 14, 2003, the Synovus board of directors approved a $200
million share repurchase plan. Through June 30, 2004, 5.5 million shares have
been purchased under this plan at a total cost of $112.7 million (there have
been no share repurchases under this plan during the six months ended June 30,
2004). Consistent with the expectation at the inception of the plan, Synovus
repurchased one-half of the total authorization during the first 90 days after
the plan was approved. The pace of future repurchases under this two-year plan
will depend on various factors including price, market conditions, acquisitions,
and the general financial position of Synovus.
The following table sets forth information regarding Synovus' purchases of its
common stock on a monthly basis during the three months ended June 30, 2004.
- ------------------------------------------------------------------------------------------------------------------------------
Total Number of Shares Maximum Number of
Purchased as Part of Shares That May Yet
Total Number of Average Price Paid per Announced Plans or Be Purchased Under
Period Shares Purchased Share Programs the Plans or Programs
- ------------------------------------------------------------------------------------------------------------------------------
April 2004 117 <f1> $ 24.43 -- 3,449,628 <f2>
May 2004 -- -- -- 3,449,628 <f2>
June 2004 179,715 <f1> 25.04 -- 3,449,628 <f2>
- ------------------------- ---------------------- -------------------------- -------------------------- -----------------------
Total 179,832 <f1> $ 25.04 -- 3,449,628 <f2>
========================= ====================== ========================== ========================== =======================
<FN>
<f1> Consists of delivery of previously owned shares to Synovus in payment of the
exercise price of stock options.
<f2> Based on Synovus stock price of $25.32 at
June 30, 2004.
</FN>
38
PART II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual shareholders' meeting was held on April 22, 2004. Following is a
summary of the proposals that were submitted to the shareholders for approval.
Proposal I
The proposal was to reelect seven directors (James H. Blanchard, C. Edward
Floyd, Gardiner W. Garrard, Jr., V. Nathaniel Hansford, Alfred W. Jones
III, H. Lynn Page and James D. Yancey) as Class I directors of Synovus to
serve until the 2007 Annual Meeting of Shareholders. In addition, five
directors were nominated for election (Frank W. Brumley, Elizabeth W. Camp,
T. Michael Goodrich, J. Neal Purcell and William B. Turner, Jr.) as Class
III directors of Synovus to serve until the 2006 Annual Meeting of
Shareholders. The directors named below were elected by the number of
affirmative votes set forth opposite their names below, with the number of
votes withholding authority to vote for such nominees also being shown. As
the election of each of the directors for directors was approved by a
plurality of the total votes entitled to be cast by the holders of shares
represented at the meeting, each of the nominees for director was elected.
- ---------------------------------------- -------------------------------------- --------------------------------------
Nominee Votes For Withheld Authority to Vote
- ---------------------------------------- -------------------------------------- --------------------------------------
James H. Blanchard 1,768,694,007 33,788,621
C. Edward Floyd, M.D. 1,791,926,948 10,555,680
Gardiner W. Garrard, Jr. 1,764,793,561 37,689,067
V. Nathaniel Hansford 1,788,530,983 13,951,645
Alfred W. Jones III 1,754,350,885 48,131,743
H. Lynn Page 1,709,654,488 92,828,140
James D. Yancey 1,781,280,120 21,202,508
Frank W. Brumley 1,757,169,604 45,313,024
Elizabeth W. Camp 1,792,783,743 9,698,885
T. Michael Goodrich 1,793,162,402 9,320,226
J. Neal Purcell 1,787,281,298 15,201,330
William B. Turner, Jr. 1,752,177,806 50,304,822
- ---------------------------------------- -------------------------------------- --------------------------------------
Proposal II
The proposal was to ratify the appointment of KPMG LLP as the independent
auditor to audit the consolidated financial statements of Synovus and its
subsidiaries for the fiscal year ended December 31, 2004.
- ----------------------------------------------------------------------------------------------------------------------
For Against Abstain
- ----------------------------------------------------------------------------------------------------------------------
Votes 1,750,075,918 49,540,297 2,863,951
- ------------------------ --------------------------- ------------------------------ ----------------------------------
39
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(31.1) Certification of Chief Executive Officer
(31.2) Certification of Chief Financial Officer
(32) Certification of Periodic Report
(b) Reports on Form 8-K
The following report on Form 8-K was filed during the second quarter of
2004.
The report filed on April 19, 2004, included the following
event:
On April 19, 2004, Synovus issued a press release and held an investor
conference call and webcast with respect to its first quarter 2004 earnings.
The following report on Form 8-K was filed subsequent to the second
quarter of 2004.
The report filed on July 21, 2004, included the
following event:
On July 21, 2004, Synovus issued a press release and held an investor
conference call and webcast with respect to its second quarter 2004 earnings.
40
SIGNATURES
Pursuant to the requirements of the Securities 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: August 6, 2004 BY: /s/ Thomas J. Prescott
-------------- ----------------------
Thomas J. Prescott
Executive Vice President and
Chief Financial Officer
41
INDEX TO EXHIBITS
Exhibit Number Description
- -------------- -----------
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32 Certification of Periodic Report
42