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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 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
incorporation or organization) Identification No.)
901 Front Avenue
P. O. Box 120
Columbus, Georgia 31902
(Address of principal executive offices)
(706) 649-2401
(Registrants' telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
------------ -----------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES X NO
------------ -----------
At April 30, 2004, 304,776,438 shares of the Registrant's Common Stock, $1.00
par value, were outstanding.
SYNOVUS FINANCIAL CORP.
INDEX
Page
Part I. Financial Information Number
------
Item 1. Unaudited Financial Statements
Consolidated Balance Sheets
March 31, 2004 and December 31, 2003 3
Consolidated Statements of Income
Three Months Ended March 31, 2004 and 2003 4
Consolidated Statements of Cash Flows
Three months Ended March 31, 2004 and 2003 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 31
Item 4. Controls and Procedures 32
Part II. Other Information
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities 33
Item 6. Exhibits and Reports on Form 8-K 33
Signature Page 34
Exhibit Index 35
(31.1) Certification of Chief Executive Officer
(31.2) Certification of Chief Financial Officer
(32) Certification of Periodic Report
2
PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
SYNOVUS FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
(In thousands, except share and per share data) 2004 2003
--------------------- --------------------
ASSETS
Cash and due from banks $ 622,896 696,030
Interest earning deposits with banks 4,124 4,423
Federal funds sold and securities purchased under resale agreements 154,859 172,922
Mortgage loans held for sale 152,672 133,306
Investment securities available for sale 2,621,576 2,529,257
Loans, net of unearned income 17,012,828 16,464,914
Allowance for loan losses (236,056) (226,059)
--------------------- --------------------
Loans, net 16,776,772 16,238,855
--------------------- --------------------
Premises and equipment, net 849,266 791,439
Contract acquisition costs and computer software, net 376,002 383,562
Goodwill, net 248,870 248,868
Other intangible assets, net 32,474 33,970
Other assets 446,836 399,997
--------------------- --------------------
Total assets $ 22,286,347 21,632,629
===================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing $ 2,957,681 2,833,567
Interest bearing 13,256,627 13,108,042
--------------------- --------------------
Total deposits 16,214,308 15,941,609
Federal funds purchased and securities sold under repurchase agreements 1,503,133 1,354,887
Long-term debt 1,641,856 1,575,777
Billings in excess of costs and profit on uncompleted contracts 10,824 17,573
Other liabilities 409,959 355,906
--------------------- --------------------
Total liabilities 19,780,080 19,245,752
--------------------- --------------------
Minority interest in consolidated subsidiaries 147,843 141,838
Shareholders' equity:
Common stock - $1.00 par value; Authorized 600,000,000 shares; issued
310,094,074 in 2004 and 307,748,133 in 2003; outstanding
304,436,069 in 2004 and 302,090,128 in 2003 310,094 307,748
Surplus 494,670 442,931
Treasury stock - 5,658,005 shares in 2004 and 2003 (113,940) (113,940)
Unearned compensation (226) (266)
Accumulated other comprehensive income 37,418 29,509
Retained earnings 1,630,408 1,579,057
--------------------- --------------------
Total shareholders' equity 2,358,424 2,245,039
--------------------- --------------------
Total liabilities and shareholders' equity $ 22,286,347 21,632,629
===================== ====================
See accompanying notes to consolidated financial statements.
3
SYNOVUS FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
------------------------------------
(In thousands, except per share data) 2004 2003
--------------- ---------------
Interest income:
Loans, including fees $ 242,856 230,850
Investment securities 24,948 25,301
Mortgage loans held for sale 1,407 3,194
Federal funds sold and securities purchased
under resale agreements 476 404
Interest earning deposits with banks 4 8
--------------- ---------------
Total interest income 269,691 259,757
--------------- ---------------
Interest expense:
Deposits 47,963 57,732
Federal funds purchased and securities sold
under repurchase agreements 3,655 3,718
Long-term debt 15,326 16,724
--------------- ---------------
Total interest expense 66,944 78,174
--------------- ---------------
Net interest income 202,747 181,583
Provision for losses on loans 15,724 20,304
--------------- ---------------
Net interest income after provision
for losses on loans 187,023 161,279
--------------- ---------------
Non-interest income:
Electronic payment processing services 184,800 166,628
Other transaction processing services revenue 38,998 25,053
Service charges on deposit accounts 28,432 24,683
Fees for trust services 8,091 6,652
Brokerage revenue 5,759 4,937
Mortgage banking income 6,894 15,688
Credit card fees 6,040 5,710
Securities gains(losses), net (65) 60
Other fee income 6,920 5,725
Other non-interest income 30,776 11,645
--------------- ---------------
Non-interest income before reimbursable items 316,645 266,781
Reimbursable items 60,445 58,474
--------------- ---------------
Total non-interest income 377,090 325,255
--------------- ---------------
Non-interest expense:
Salaries and other personnel expense 186,631 158,641
Net occupancy and equipment expense 78,390 69,537
Other non-interest expense 67,857 53,339
--------------- ---------------
Non-interest expense before reimbursable items 332,878 281,517
Reimbursable items 60,445 58,474
--------------- ---------------
Total non-interest expense 393,323 339,991
--------------- ---------------
Minority interest in subsidiaries' net income 6,249 6,144
Income before income taxes 164,541 140,399
Income tax expense 60,379 50,480
--------------- ---------------
Net income $ 104,162 89,919
=============== ===============
Net income per share :
Basic $ 0.34 0.30
=============== ===============
Diluted 0.34 0.30
=============== ===============
Weighted average shares outstanding:
Basic 303,644 302,067
=============== ===============
Diluted 306,812 304,017
=============== ===============
Dividends declared per share $ 0.17 0.17
=============== ===============
See accompanying notes to consolidated financial statements.
4
SYNOVUS FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
--------------------------------------------
(In thousands) 2004 2003
------------------- -------------------
Operating Activities
Net Income $ 104,162 89,919
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for losses on loans 15,724 20,304
Depreciation, amortization, and accretion, net 30,869 27,812
Increase in interest receivable (769) (2,923)
(Decrease) increase in interest payable (5,857) 5,504
Minority interest in subsidiaries' net income 6,249 6,144
Increase in mortgage loans held for sale (19,366) (133,042)
(Decrease) increase in billings in excess of costs
and profit on uncompleted contracts (6,749) 29,722
Gain on sale of banking locations (15,849) -
Other, net 39,065 (2,652)
------------------- -------------------
Net cash provided by operating activities 147,478 40,788
------------------- -------------------
Investing Activities
Net cash paid for acquisitions (16,626) (39,355)
Net decrease in interest earning deposits with banks 99 598
Net decrease (increase) in federal funds sold
and securities purchased under resale agreements 14,568 (64,717)
Proceeds from maturities and principal collections of
investment securities available for sale 545,252 409,809
Proceeds from sales of investment securities available for sale 9,904 27,588
Purchases of investment securities available for sale (608,655) (451,007)
Net cash received on sale of banking locations 25,069 -
Net increase in loans (456,712) (471,299)
Purchases of premises and equipment (31,140) (39,151)
Proceeds from disposals of premises and equipment 721 730
Increase in contract acquisition costs (1,857) (8,765)
Additions to purchased computer software (7,370) (11,502)
Additions to internally developed computer software (1,982) (3,954)
------------------- -------------------
Net cash used by investing activities (528,729) (651,025)
------------------- -------------------
Financing Activities
Net increase in demand and savings deposits 206,560 281,610
Net (decrease) increase in certificates of deposit (30,467) 316,597
Net increase (decrease) in federal funds purchased
and securities sold under repurchase agreements 119,481 (308,401)
Principal repayments on long-term debt (67,684) (5,286)
Proceeds from issuance of long-term debt 122,289 371,930
Dividends paid to shareholders (49,890) (44,319)
Proceeds from issuance of common stock 7,828 2,531
------------------- -------------------
Net cash provided by financing activities 308,117 614,662
------------------- -------------------
(Decrease) increase in cash and due from banks (73,134) 4,425
Cash and due from banks at beginning of period 696,030 741,092
------------------- -------------------
Cash and due from banks at end of period $ 622,896 745,517
=================== ===================
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 three months ended March 31, 2004 and 2003, Synovus paid income taxes
(net of refunds received) of $1.3 million and $6.0 million, respectively. For
the three months ended March 31, 2004 and 2003, Synovus paid interest of $72.2
million and $72.2 million, respectively.
Cash used by TSYS for contract acquisition costs for the three months ended
March 31, 2004 and 2003 are summarized as follows:
(In thousands) March 31, 2004 March 31, 2003
- --------------------------------------------------------------------------------------------------------------------
Conversion costs $ 1,857 5,765
Payments for processing rights - 3,000
--------------------------------------------------------------
Total $ 1,857 8,765
==============================================================
Noncash investing activities consisted of loans of approximately $2.3 million
and $5.3 million, which were foreclosed and transferred to other real estate
during the three months ended March 31, 2004 and 2003, respectively. The more
significant non-cash items related to the acquisition of Peoples Florida Banking
Corporation consist of $185.7 million in net loans, $47.8 million in investment
securities available for sale, and $199 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 three months ended March 31, 2004 and 2003 was $112.1 million and
$84.2 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
6
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.
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 months ended March 31, 2004 and 2003 would have
been reduced to the pro forma amounts indicated in the following tables.
(In thousands, except per share data) 2004 2003
- -------------------------------------------------------------------------- ----- ---------------- -----------------
Net income as reported $ 104,162 89,919
Total stock-based employee compensation expense determined under fair
value based method for all awards, net of related tax effects
(2,882) (2,152)
---------------- -----------------
Net income - pro forma $ 101,280 87,767
================ =================
Earnings per share:
Basic - as reported $ 0.34 0.30
Basic - pro forma 0.33 0.29
Diluted - as reported 0.34 0.30
Diluted - pro forma 0.33 0.29
Note 5 - Business Combinations
- ------------------------------
On January 30, 2004, Synovus acquired all the issued and outstanding common
shares of Peoples Florida Banking Corporation (Peoples), a $256 million asset
bank holding company with a net book value of approximately $20.3 million and
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 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.
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 the purchase price allocation will be completed in the second
quarter, and will result in the majority of the excess purchase price being
recorded as goodwill.
7
Proforma information relating to the impact of this acquisition on Synovus'
consolidated financial statements, assuming such acquisition had occurred at the
beginning of the periods reported, is not presented as such impact is not
significant.
On December 17, 2003, Synovus announced the signing of a definitive agreement to
acquire the $423.5 million asset Trust One Bank (Trust One) in Memphis,
Tennessee in a tax free exchange of shares of common stock. Trust One has six
branches serving east Shelby County, Tennessee, which includes Germantown,
Cordova, Collierville and east Memphis. The merger is subject to approval by the
shareholders of Trust One and is expected to be completed during the second
quarter of 2004.
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. TSYS primarily 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.
8
Segment information as of and for the three months ended March 31, 2004 and 2003
is presented in the following table:
Three months ended March 31, 2004 and 2003
Financial
(In thousands) Services TSYS (a) Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------------
Interest income 2004 $ 269,691 202 (202) (b) $ 269,691
2003 259,757 340 (340) (b) 259,757
- --------------------------------------------------------------------------------------------------------------------------
Interest expense 2004 67,090 56 (202) (b) 66,944
2003 78,502 12 (340) (b) 78,174
- --------------------------------------------------------------------------------------------------------------------------
Net interest income 2004 202,601 146 - 202,747
2003 181,255 328 - 181,583
- --------------------------------------------------------------------------------------------------------------------------
Provision for loan losses 2004 15,724 - - 15,724
2003 20,304 - - 20,304
- --------------------------------------------------------------------------------------------------------------------------
Net interest income after provision 2004 186,877 146 - 187,023
for loan losses 2003 160,951 328 - 161,279
- --------------------------------------------------------------------------------------------------------------------------
Total non-interest income 2004 90,450 291,044 (4,404) (c) 377,090
2003 74,028 255,225 (3,998) (c) 325,255
- --------------------------------------------------------------------------------------------------------------------------
Total non-interest expense 2004 155,944 241,783 (4,404) (c) 393,323
2003 135,804 208,185 (3,998) (c) 339,991
- --------------------------------------------------------------------------------------------------------------------------
Income before income taxes 2004 121,383 49,407 (6,249) (d) 164,541
2003 99,175 47,368 (6,144) (d) 140,399
- --------------------------------------------------------------------------------------------------------------------------
Income tax expense 2004 43,625 16,754 - 60,379
2003 34,966 15,514 - 50,480
- --------------------------------------------------------------------------------------------------------------------------
Net income 2004 77,758 32,653 (6,249) (d) 104,162
2003 64,209 31,854 (6,144) (d) 89,919
- --------------------------------------------------------------------------------------------------------------------------
Total assets 2004 21,345,053 1,011,393 (70,099) (e) 22,286,347
2003 19,890,450 824,328 (110,977) (e) 20,603,801
- --------------------------------------------------------------------------------------------------------------------------
(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) Primarily TSYS' cash deposits with the Financial Services segment.
9
Segment information for the changes in the carrying amount of goodwill for the
three months ended March 31, 2004 is shown in the following table:
Transaction
Financial Processing
(In thousands) Services Services Total
- --------------------------------------------------------- --- ------------------- ------------------- ----------------
Balance as of December 31, 2003 $ 219,242 29,626 248,868
Goodwill acquired during period (1) - - -
Impairment losses - - -
Other (2) - 2 2
------------------- ------------------- ----------------
Balance as of March 31, 2004 $ 219,242 29,628 248,870
=================== =================== ================
(1) See Note 5 for information regarding goodwill relating to the first quarter
2004 acquisition.
(2) Consists of foreign currency translation adjustments for
GP Network Corporation.
Intangible assets (excluding goodwill) as of March 31, 2004 and December 31,
2003 are presented in the table below.
(In thousands) March 31, 2004 December 31, 2003
- ----------------------------------------------------------- --- ---------------------------- -------------------------
Purchased trust revenues $ 3,415 3,485
Core deposit premiums 19,419 20,380
Employment contracts / non-competition
agreements 358 388
Acquired customer contracts 6,158 6,478
Intangibles associated with the acquisition
of minority interest in TSYS 2,585 2,656
Other 539 583
---------------------------- -------------------------
Total Carrying Value $ 32,474 33,970
============================ =========================
Note 7 - Dividends per Share
- -----------------------------
Dividends declared per share for the quarter ended March 31, 2004 were $0.1733,
up 5.0% from $0.1650 for the first quarter of 2003.
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 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.
10
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 March 31, 2004 is shown in the following table.
Weighted Average Unrealized
-------------------------------- ----------------- Net
Maturity Unrealized
Notional Receive Pay In Gains
(Dollars in thousands) Amount Rate Rate(*) Months Gains Losses (Losses)
- ----------------------------- --- ------------ ----------- ---------- ------------ ---------- ---------- -------------
Receive fixed swaps:
Fair value hedges $ 342,500 4.53% 1.14% 108 6,239 (898) 5,341
Cash flow hedges 545,000 5.42% 4.00% 20 6,039 (293) 5,746
------------ ---------- ---------- -------------
Total $ 887,500 5.08% 2.90% 54 12,278 (1,191) 11,087
============ ========== ========== =============
(*) Variable pay rate based upon contract rates in effect at March 31, 2004.
At March 31, 2004, Synovus had commitments to fund fixed-rate mortgage loans to
customers in the amount of $174.0 million. The fair value of these commitments
was $1.0 million.
At March 31, 2004, outstanding commitments to sell fixed-rate mortgage loans
amounted to approximately $163.0 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 March 31, 2004 was ($1.2)
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 has entered 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 March 31, 2004, the notional amount of
customer related derivative financial instruments was $346.5 million.
Note 9 - Recent Accounting Pronouncements
- -----------------------------------------
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51". In December 2003,
the FASB issued Interpretation No.46R, a revision of Interpretation No. 46.
Interpretation No. 46R addresses the consolidation by business enterprises of
variable interest entities as defined in the interpretation. The interpretation
applies to variable interests in variable interest entities that are special
purpose entities for periods ending after December 15, 2003. For all other types
of variable interest entities, application of Interpretation No. 46R is required
for periods ending after March 15, 2004. For TSYS, which had a variable interest
in a variable interest entity that was a special
11
purpose entity, the interpretation would have applied in the first reporting
period ended after December 15, 2003. On June 30, 2003, TSYS terminated the
operating lease agreement and purchased the corporate campus for $93.5 million
with a combination of $73.3 million in cash and funds from a long-term line of
credit with a Synovus affiliate bank. Accordingly, the interpretation does not
directly impact Synovus' financial statements.
In April 2003, the FASB issued Statement No. 149 (SFAS No. 149), "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities". SFAS No. 149
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under SFAS No. 133. SFAS No. 149 is
generally effective for contracts entered into or modified after June 30, 2003,
and for hedging relationships designated after June 30, 2003. The adoption of
SFAS No. 149 did not have a material impact on Synovus' financial statements.
In May 2003, the FASB issued Statement No. 150 (SFAS No. 150), "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity". SFAS No. 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires than an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. SFAS No. 150 was
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise was effective at the beginning of the first interim period
beginning after June 15, 2003.
Note 10 - Other
- ---------------
Certain amounts in 2003 have been reclassified to conform to the presentation
adopted in 2004.
12
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 $22 billion in assets. Synovus operates two
business segments: the Financial Services and the Transaction Processing
Services 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 March 31, 2004, our affiliate banks
ranged in size from $100 million to $4 billion in total assets. The Transaction
Processing Services 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 quarter of 2004, 49% of our
consolidated revenues and 25% 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 * Fee Income Growth
* Loan Growth * Expense Management
* Credit Quality
TSYS
* Revenue Growth * Expense Management
First Quarter 2004 Financial Performance vs. First Quarter 2003
Consolidated
* Net income $104.2 million, up 15.8%
* Diluted EPS $0.34, up 14.7%
Financial Services
* Net interest margin: 4.24% compared to 4.31% in 2003
* Loan growth: 9.4% (8.8% excluding acquisitions and divestitures)
* Credit quality: Ended the first quarter of 2004 in a very positive
fashion:
* Nonperforming assets ratio of .56%, down from .72%
at March 31, 2003, and
* Past dues over 90 days as a percentage of total loans of
.14% compared to .16% for the first quarter of 2003, and
* Net charge-off ratio of .16%, compared to .37% for the
first quarter of 2003.
13
* Fee income growth: 22.2%
* Net overhead ratio: Improved to 1.26% from 1.35% in
the first quarter of 2003
* Net income growth: 21.1%
TSYS
* Revenue growth before reimbursable items: 16.4%
* Net income growth: 2.6%
Our financial performance for the quarter was driven by excellent credit
quality, strong loan growth, and a stable net interest margin, while our expense
management remained on track. Additionally, TSYS' financial results were
slightly ahead of expectations.
Synovus continues with its strategic market repositioning. During the quarter,
we completed the acquisition of Peoples Bank in Palm Harbor, Florida. We also
entered the Savannah, Georgia market and obtained regulatory approval to open
our first de novo bank, Synovus Bank of Jacksonville, in the second quarter of
2004. Additionally, during the first quarter, 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.
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 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
14
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.
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 beginning in the second half
of 2004 (excluding statement and card production services), and then TSYS will
license a modified version of its TS2 consumer and commercial card 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.
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,
15
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.
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 detail 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
16
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.
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 three months of 2004, total assets increased $654 million.
Loans, net of unearned income, increased by $547.9 million, mortgage loans held
for sale increased by $19.4 million, and investment securities available for
sale increased by $92.3 million. Providing the necessary funding for the balance
sheet growth during the first three months of 2004, the deposit base grew $272.7
million, long-term debt increased $66.1 million, federal funds purchased and
securities sold under repurchase agreements increased $148.2 million, and
shareholders' equity increased $113.4 million.
17
Loans
Compared to March 31, 2003, total loans grew by 9.4%. Excluding the impact of
acquisitions and divestitures, year-over-year loan growth was 8.8% and
sequential quarter annualized loan growth was $450.7 million or 10.9%.
The table on page 20 illustrates the composition of the loan portfolio
(classified by loan purpose) as of March 31, 2004. The commercial real estate
portfolio totals $9.6 billion, which represents 56.2% of the total loan
portfolio. Loans for the purpose of financing investment properties total $2.9
billion, which is only 17.3% 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 $370.8 million in loans in the Atlanta market. This
amount represents 2.2% of the total loan portfolio, or 3.9% 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
$2.4 billion or 14.1% of the total loan portfolio, and one-fourth of the total
commercial real estate portfolio. The 1-4 family properties category includes
$806.9 million in loans in the Atlanta market, which is 4.7% of the total loan
portfolio, or 33.8% of the 1-4 family properties category.
Included in total commercial real estate loans are $3.4 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 20. These
loans represent 20.2% of the total loan portfolio, or 35.9% 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). The secondary source of repayment on these loans
is the real estate collateral.
Commercial and industrial loans represent $4.7 billion or 27.4% of the total
loan portfolio at March 31, 2004. These loans are diversified by geography,
industry, and loan type. Consumer loans at March 31, 2004 total $2.8 billion,
representing 16.5% of the total loan portfolio.
Asset Quality
The nonperforming assets ratio declined for the second quarter in a row, ending
the quarter at 0.56%, the lowest level in 7 quarters. A year ago, the
nonperforming assets ratio was at 0.72%. The quality of our commercial real
estate portfolio remains strong with a nonperforming loan ratio of only 0.28% of
total commercial real estate at March 31, 2004. This compares to an overall
nonperforming loan ratio for the total loan portfolio of .41%. The net
charge-off ratio for the first quarter was 0.16%, down from 0.37% for the first
quarter of 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 approximately 0.30%.
Past due levels remained very favorable, with total past dues at 0.76% of loans.
Loans 90 days past due and still accruing at March 31, 2004 were $23.3 million,
or 0.14% of total loans, compared to 0.13% at year-end 2003. These loans are in
the process of collection, and
18
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 $236.1 million, or 1.39% of net loans, at March
31, 2004 compared to $226.1 million, or 1.37% of net loans, at December 31,
2003. The allowance to non-performing loans coverage was 337% at March 31, 2004
compared to 335% at December 31, 2003. For the three months ended March 31,
2004, the provision for losses on loans was $15.7 million, down 22.6% from $20.3
million for the same period a year ago. The decrease is primarily due to lower
net charge-offs.
(Dollars in thousands) March 31, 2004 December 31, 2003
- ----------------------------------------------------------------------------------------------------------------
Nonperforming loans $ 70,007 $ 67,442
Other real estate 26,061 28,422
------------------------- ------------------------
Nonperforming assets $ 96,068 $ 95,864
========================= ========================
Loans 90 days past due and still accruing $ 23,295 $ 21,138
Allowance for loan losses $ 236,056 $ 226,059
Allowance for loan losses as a % of loans 1.39 % 1.37 %
As a % of loans and other real estate:
Nonperforming loans 0.41 % 0.41 %
Other real estate 0.15 0.17
------------------------- ------------------------
Nonperforming assets 0.56 % 0.58 %
========================= ========================
Allowance to nonperforming loans 337.19 % 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.
19
The following table shows the composition of the loan portfolio and
nonperforming loans (classified by loan purpose) as of March 31, 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 $ 559,342 3.3 % $ 863 1.2 %
Hotels 769,834 4.5 7,903 11.3
Office Buildings 652,866 3.8 1,305 1.9
Shopping Centers 505,278 3.0 807 1.2
Commercial Development
462,046 2.7 - -
--------------- ----------------- ---------------- ----------------
Total Investment Properties
2,949,366 17.3 10,878 15.6
--------------- ----------------- ---------------- ----------------
1-4 Family Construction
905,431 5.3 1,581 2.3
1-4 Family Perm
/Mini-Perm 709,741 4.2 2,823 4.0
Residential Development
774,940 4.6 1,129 1.6
--------------- ----------------- ---------------- ----------------
Total 1-4 Family
Properties 2,390,112 14.1 5,533 7.9
Land Acquisition 802,206 4.7 160 0.2
--------------- ----------------- ---------------- ----------------
Total Investment-Related Real
Estate 6,141,684 36.1 16,571 23.7
--------------- ----------------- ---------------- ----------------
--------------- ----------------- ---------------- ----------------
Owner-Occupied 1,962,634 11.5 8,005 11.4
Other Property 1,469,086 8.6 1,941 2.8
--------------- ----------------- ---------------- ----------------
Total Commercial
Real Estate 9,573,404 56.2 26,517 37.9
Commercial &
Industrial 4,668,595 27.4 36,548 52.2
Consumer 2,803,938 16.5 6,942 9.9
Unearned Income (33,109) (0.2) - -
--------------- ----------------- ---------------- ----------------
Total $ 17,012,828 100.00 % $ 70,007 100.00 %
=============== ================= ================ ================
20
Deposits
Total deposits at March 31, 2004 were $16.2 billion, a $272.7 million increase
from December 31, 2003. This change reflects an increase of $216.1 million
relating to deposits added in conjunction with the acquisition of Peoples Bank
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 6.6%. Excluding
the impact of acquisitions and divestitures, core deposits (total deposits
excluding certificates of deposits over $100,000) grew by 7.6% over the prior
year. This growth was led by strong increases in both demand deposit and money
market accounts, with increases of 16.1% and 15.4% respectively. Average core
deposits, excluding acquisitions and divestitures, increased 10.5% for the first
quarter of 2004 as compared to the first quarter of 2003.
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 $2.685 billion at March 31, 2004, compared to $2.618
billion at December 31, 2003. The ratio of total risk-based capital to
risk-weighted assets was 12.92% at March 31, 2004 compared to 13.06% at December
31, 2003. The leverage ratio at March 31, 2004 was 9.97% compared to 10.09% at
December 31, 2003.
The equity-to-assets ratio was 10.58% at March 31, 2004 compared to 10.40% at
year-end 2003. The equity-to-assets ratio, exclusive of net unrealized gains
(losses) on investment securities available for sale, was 10.41% at March 31,
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. Operating activities provided net cash of
$147.5 million during the first three months of 2004. Investing activities used
$528.7 million, and financing activities provided $308.1 million, resulting in a
decrease in cash and due from banks of $73.1 million.
21
Earning Assets, Sources of Funds, and Net Interest Income
Average total assets for the first three months of 2004 were $21.9 billion, up
13.4% over the first three months of 2003. Excluding the impact of acquisitions
and divestitures in both years, average assets increased 8.9%. Average earning
assets were up 12.6% in the first three months of 2004 over the same period last
year, and represented 88.4% of average total assets. When compared to the same
period last year, average deposits increased $1.9 billion, average Federal funds
purchased and securities sold under repurchase agreements increased $273.7
million, average long-term debt increased $124.3 million, and average
shareholders' equity increased $214.7 million. This growth provided the funding
for $1.9 billion growth in average net loans, $362.8 million growth in average
investments, and $73.3 million growth in average Federal funds sold and
securities purchased under resale agreements.
For the three months ended March 31, 2004, net interest income was $202.7
million, up $21.1 million, or 11.7%, over the $181.6 million for the same period
a year ago. For the three months ended March 31, 2004, net interest income, on a
tax-equivalent basis, increased $21.0 million, or 11.5%, over the same period in
2003.
The net interest margin was 4.24% for the three months ended March 31, 2004,
down 7 basis points from the three months ended March 31, 2003. This decrease
resulted from a 52 basis point decrease in the yield on earning assets, which
was partially offset by a 45 basis point decrease in the effective cost of
funds. The decreased yield on earning assets was largely due to a 25 basis point
decrease in the average Prime rate and lower reinvestment 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 $5.3 million,
while the net interest margin decreased by 2 basis points. The yield on earning
assets declined by 6 basis points which was largely offset by a 4 basis point
decrease in the effective cost of funds. The earning assets 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 as well as
incremental growth in federal funds purchased helped match this loan growth and
reduce the cost of interest bearing funding.
The tax-equivalent adjustment that is required in making yields on tax-exempt
loans and investment securities comparable to taxable loans and investment
securities is shown in the following table. The taxable-equivalent adjustment is
based on a 35% Federal income tax rate.
Three months ended
March 31,
(In thousands) 2004 2003
- -------------------------------------------------------------------------------
Interest income $ 269,691 259,757
Taxable-equivalent adjustment 1,800 1,870
---------------- ----------------
Interest income,
taxable-equivalent 271,491 261,627
Interest expense 66,944 78,174
---------------- ----------------
Net interest income,
taxable-equivalent $ 204,547 183,453
================ ================
22
Non-Interest Income
Total non-interest income during the first three months of 2004 increased $51.8
million, or 15.9%, over the same period a year ago. For the first quarter of
2004, total non-interest income excluding reimbursable items increased $49.9
million, or 18.7%, over the same period in 2003.
Financial Services:
Total non-interest income for the Financial Services segment was $90.5 million
for the first quarter of 2004, up 22.2% over the first quarter of 2003. This
comparison is impacted by the gain from the sale of banking locations ($15.8
million pre-tax for the first quarter of 2004) and divestitures, as well as the
$8.8 million or 56.1% decrease in mortgage revenues. Excluding the impact of
these items, non-interest income for the first quarter increased 16.2% over the
first quarter of 2003.
Service charges on deposits increased 15.2%, while Financial Management Services
(FMS) revenues were $17.3 million, a 12.1% increase over the first quarter of
2003. During the first quarter, our FMS unit added $281 million in new assets.
At March 31, 2004, total assets under management were $14.9 billion.
Mortgage revenues for the first quarter were down 56.1% vs. the first quarter of
2003. Total mortgage production for the first quarter was $318 million compared
to $671 million for the first quarter of 2003. For the first quarter of 2004,
53% of the total mortgage production volume was for refinancings compared to 72%
of the total volume for the full year in 2003.
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).
Electronic Payment Processing Services
Electronic payment processing services revenues increased $18.2 million, or
10.9%, for the three months ended March 31, 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
23
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 three months ended March
31, 2004 were 278.2 million, an increase of 10.3% over the average of 252.2
million for the same period in 2003. Cardholder accounts on file at March 31,
2004 were 280.4 million, a 10.3% increase compared to the 254.2 million accounts
on file at March 31, 2003. The change in cardholder accounts on file from March
2003 to March 2004 included the deconversion and purging of 15.9 million
accounts, the addition of approximately 28.9 million accounts attributable to
the internal growth of existing clients, and approximately 13.2 million accounts
from new clients.
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 81.8
million Sears accounts. For the three months ended March 31, 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
24
Sears and Citigroup on the financial position, results of operations, and cash
flows of TSYS cannot be determined at this time.
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). 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 4.6% of TSYS' total revenues for
the first three months of 2004.
On January 14, 2004, J.P. Morgan Chase & Co. (JPM) and Bank One announced that
they have agreed to merge. Based on discussions with executive management of
Bank One after the merger announcement by JPM and Bank One, TSYS and Bank One
are proceeding with their efforts to complete the Bank One conversion according
to schedule. However, there are no assurances that the Bank One conversion will
be completed on schedule or that Bank One and JPM may not elect to terminate the
Bank One agreement with TSYS prior to the conversion. The impact of the
transaction between Bank One and JPM on the financial position, results of
operations and cash flows of TSYS cannot be determined at this time.
In October 2003, Circuit City Stores, Inc. announced that it had sold its Visa
and MasterCard portfolio, which includes credit card receivables and related
cash reserves to FleetBoston Financial. On January 20, 2004, 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 Stores until April 2006.
TSYS' revenues from Circuit City were approximately 2.7% of TSYS' revenues for
the three months ended March 31, 2004. The impact of the transactions between
Circuit City and FleetBoston Financial and Circuit City and Bank One 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 $3.0 million for the first
three months of 2004, a 62.9% decrease compared to the $8.0 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 March 31, 2004 and 2003, value added products and
services represented 13.7% and 14.1%, respectively, of TSYS' revenues. Revenues
from these products and services, which include some reimbursable items paid to
third-party vendors, increased
25
10.1%, or $3.6 million, for the three months ended March 31, 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 24.3% to $6.2 million for the three
months ended March 31, 2004, compared to $5.0 million for the same period last
year.
Other Transaction Processing Services Revenue
Other transaction processing services revenue increased $13.9 million or 55.7%
for the first quarter of 2004 compared to the first quarter of 2003. The
increase was primarily a result of increased debt collection services performed
by TSYS Total Debt Management, Inc. as well as $4.8 million in revenues from
Enhancement Services Corporation (ESC). TSYS acquired ESC on April 28, 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
March 31, 2004, TSYS had two major customers, which accounted for approximately
28.2%, or $80.4 million, of TSYS' revenues. For the three months ended March 31,
2003, TSYS had two major customers that accounted for 29.9%, or $75.3 million,
of TSYS revenues. 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 $5.6 million and
$4.2 million for the three months ended March 31, 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 three months ended March 31, 2004, total non-interest expense increased
$53.3 million, or 15.7%. Total non-interest expense excluding reimbursable items
for the three months ended March 31, 2004 increased $51.4 million, or 18.2%,
over the same period in 2003. Management analyzes non-interest expense in two
separate components: Financial Services and Transaction Processing Services.
26
The following table summarizes non-interest expense for the three months ended
March 31, 2004 and 2003.
Three months ended Three months ended
(In thousands) March 31, 2004(*) March 31, 2003(*)
- --------------------------------------------------------------------------------------------------------------------
Transaction Transaction
Financial Processing Financial Processing
Services Services Services Services
------------- ---------------- ------------- ----------------
Salaries and other personnel expenses $ 96,999 89,786 81,096 77,772
Net occupancy and equipment expenses 19,691 58,699 17,917 51,620
Other non-interest expense 39,254 32,666 36,791 20,319
Reimbursable items -- 60,632 -- 58,474
------------- ---------------- ------------- ----------------
Total non-interest expense $ 155,944 241,783 135,804 208,185
============= ================ ============= ================
(*) The added totals are greater than the consolidated totals due to
inter-segment balances which are eliminated in consolidation.
Financial Services:
Total non-interest expense for the Financial Services segment during the first
three months of 2004 increased $20.1 million or 14.8% compared to the same
period a year ago. Significant items which impacted the growth in non-interest
expense include acquisitions and higher levels of incentive pay expenses in
2004. Acquisitions accounted for $5.6 million of the increase. Additionally, the
current quarter reflects incentive pay that is $7.0 million higher than in the
first quarter of 2003. Excluding the impact of acquisitions and incentive pay,
the non-interest expense increase over the first quarter of 2003 was 5.3%.
Non-interest expense growth continues to be primarily in the sales and
production areas of the highest growth banking markets.
Total full time equivalent (FTE) employees at March 31, 2004 were 6,030 up 97 or
1.6% from March 31, 2003. Compared to December 31, 2003, and excluding the
impact of acquisitions and divestitures, total FTE's decreased by 24.
Transaction Processing Services:
Total non-interest expense increased 16.1% for the three months ended March 31,
2004, compared to the same period in 2003. Excluding reimbursable items, total
non-interest expense increased 21.0% for the three months ended March 31, 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 increased $12.0 million, or 15.5%, for the
three months ended March 31, 2004, compared to the same period in 2003. The
change in employment expenses is associated with the growth in the number of
employees, 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 during the quarter with a reduction in the
accrual for performance-based incentive benefits. The average number of
employees in the first quarter of 2004 was 5,617, which increased 5.9% compared
to 5,305 in the same period in 2003. During the second quarter of 2003, TSYS
added approximately 220
27
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.
For the three months ended March 31, 2004, net occupancy and equipment expense
increased $7.1 million, or 13.7%, 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, decreased approximately $0.4 million for the three months ended March
31, 2004 compared to the same period in 2003. Depreciation and amortization
increased $1.6 million during the three months ended March 31, 2004 compared to
the same period in 2003. Repairs and maintenance expenses increased $4.1 million
for the first three months of 2004, compared to the same period last year.
Other non-interest expense for the three months ended March 31, 2004 increased
$12.3 million, or 60.8% as compared to the same period in 2003. Other
non-interest expense includes, 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 $1.4
million for the three months ended March 31, 2004, as compared to the same
period last year. As a result of a new debt-collection agreement with an
existing client signed in the third quarter of 2003, TSYS recognized $9.8
million of attorney court costs and commissions in other non-interest expense
which TSYS expects to recover in future periods. TSYS anticipates that these
debt collection costs will continue.
Other non-interest expense 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 are
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 non-interest expense. For the three months
ended March 31, 2004, TSYS' transaction processing expenses increased $0.7
million compared to the same period in 2003.
Income Tax Expense
For the first quarter of 2004, income tax expense was $60.4 million compared to
$50.5 million for the first quarter of 2003. The effective tax rate for the
first three months of 2004 was 36.7%, compared to 36.0% for the same period in
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.
Although the exact scope of the investigation is not clear, TSYS believes that
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
28
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.
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 approximately 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 in a flat rate
environment.
* 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 March 31, 2004, 5.5 million shares have
been purchased under this plan at a total cost of $112.7 million (there were no
share repurchases under this plan during the first quarter of 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, statements regarding any matter that might
arise out of the United States Department of Justice's investigation of TSYS;
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; 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 approximately 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 in a flat rate environment; 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
29
within the meaning of the Act. Examples of forward-looking statements include,
but are not limited to: (i) projections of revenues, income or loss, earnings or
loss per share, the payment or non-payment of dividends, capital structure,
efficiency ratios and other financial terms; (ii) statements of plans and
objectives of Synovus or its management or Board of Directors, including those
relating to products or services; (iii) statements of future economic
performance; and (iv) statements of assumptions underlying such statements.
Words such as "believes," "anticipates," "expects," "intends," "targeted," and
similar expressions are intended to identify forward-looking statements but are
not the exclusive means of identifying such statements.
Prospective investors are cautioned that any such forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties, and that actual results may differ materially from those
contemplated by such forward-looking statements. A number of factors could cause
actual results to differ materially from those contemplated by the
forward-looking statements 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 0.30%, a
non-performing assets ratio in the 0.45-0.55% range by year end 2004, a stable
net interest margin for 2004 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) hostilities increase
in the Middle East or elsewhere; and (xx) 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.
30
ITEM 3 - QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
During the first quarter 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 an eventual rise
in 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 2.7%, 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 2.1%, 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.
31
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.
32
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 March 31, 2004, 5.5 million shares have
been purchased under this plan at a total cost of $112.7 million (there were no
share repurchases under this plan during the first quarter of 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.
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 first quarter of
2004.
The report filed on January 21, 2004, included the following
event:
On January 21, 2004, Synovus issued a press release and held an
investor call and webcast with respect to its earnings for the year ended
December 31, 2003.
The following report on Form 8-K was filed subsequent to the first
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.
33
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: May 6, 2004 BY: /s/ Thomas J. Prescott
----------- ----------------------
Thomas J. Prescott
Executive Vice President and
Chief Financial Officer
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