UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
Commission File Number 1-10312
SYNOVUS FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
GEORGIA 58-1134883
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1111 Bay Avenue, Suite #500
P. O. Box 120
Columbus, Georgia 31902
(Address of principal executive offices)
(706) 649-2401
(Registrants' telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
------ -------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES X NO
------ -------
Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of the latest practicable date.
Class October 31, 2004
- ----------------------------------- ---------------------------
Common Stock, $1.00 Par Value 309,650,848 shares
SYNOVUS FINANCIAL CORP.
INDEX
Page
Part I. Financial Information: Number
------
Item 1. Unaudited Financial Statements
Consolidated Balance Sheets
September 30, 2004 and December 31, 2003 3
Consolidated Statements of Income
Nine and Three Months Ended September 30, 2004 and 2003 4
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2004 and 2003 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 35
Item 4. Controls and Procedures 36
Part II. Other Information:
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 37
Item 6. Exhibits 38
Signature Page 39
Exhibit Index 40
2
PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
SYNOVUS FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
(unaudited)
September 30, December 31,
(In thousands, except share and per share data) 2004 2003
------------------ ------------------
ASSETS
Cash and due from banks $ 757,380 696,030
Interest earning deposits with banks 4,140 4,423
Federal funds sold and securities purchased under resale agreements 122,130 172,922
Mortgage loans held for sale 126,099 133,306
Investment securities available for sale 2,621,120 2,529,257
Loans, net of unearned income 18,871,056 16,464,914
Allowance for loan losses (257,647) (226,059)
------------------ ------------------
Loans, net 18,613,409 16,238,855
------------------ ------------------
Premises and equipment, net 629,738 578,710
Contract acquisition costs and computer software, net 364,382 383,562
Goodwill, net 419,323 248,868
Other intangible assets, net 43,819 33,970
Costs in excess of billings on uncompleted contracts 7,272 -
Other assets 680,681 612,726
------------------ ------------------
Total assets $ 24,389,493 21,632,629
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing $ 3,202,214 2,833,567
Interest bearing 14,572,170 13,108,042
------------------ ------------------
Total deposits 17,774,384 15,941,609
Federal funds purchased and securities sold under repurchase agreements 1,671,239 1,354,887
Long-term debt 1,740,103 1,575,777
Billings in excess of costs on uncompleted contracts - 17,573
Other liabilities 468,141 355,906
------------------ ------------------
Total liabilities 21,653,867 19,245,752
------------------ ------------------
Minority interest in consolidated subsidiaries 158,912 141,838
Shareholders' equity:
Common stock - $1.00 par value; Authorized 600,000,000 shares; issued
315,200,085 in 2004 and 307,748,133 in 2003; outstanding
309,538,462 in 2004 and 302,090,128 in 2003 315,200 307,748
Surplus 619,734 442,931
Treasury stock - 5,661,623 shares in 2004 and 5,658,005 shares in 2003 (113,944) (113,940)
Unearned compensation (146) (266)
Accumulated other comprehensive income 18,513 29,509
Retained earnings 1,737,357 1,579,057
------------------ ------------------
Total shareholders' equity 2,576,714 2,245,039
------------------ ------------------
Total liabilities and shareholders' equity $ 24,389,493 21,632,629
================== ==================
See accompanying Notes to Consolidated Financial Statements.
3
SYNOVUS FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Nine Months Ended Three Months Ended
September 30, September 30,
------------------------- ----------------------
(In thousands, except per share data) 2004 2003 2004 2003
------------ ---------- --------- ---------
Interest income:
Loans, including fees $ 765,849 712,542 272,547 239,349
Investment securities 74,341 71,455 24,952 22,203
Mortgage loans held for sale 5,092 11,514 1,729 4,324
Federal funds sold and securities purchased
under resale agreements 1,404 1,216 510 367
Interest earning deposits with banks 18 20 9 5
------------ ---------- --------- ---------
Total interest income 846,704 796,747 299,747 266,248
------------ ---------- --------- ---------
Interest expense:
Deposits 151,756 168,337 55,646 52,533
Federal funds purchased and securities sold
under repurchase agreements 12,430 9,007 4,995 2,503
Long-term debt 45,875 53,770 15,672 18,099
------------ ---------- --------- ---------
Total interest expense 210,061 231,114 76,313 73,135
------------ ---------- --------- ---------
Net interest income 636,643 565,633 223,434 193,113
Provision for losses on loans 54,464 51,977 21,192 15,108
------------ ---------- --------- ---------
Net interest income after provision
for losses on loans 582,179 513,656 202,242 178,005
------------ ---------- --------- ---------
Non-interest income:
Electronic payment processing services 577,897 519,906 204,340 177,580
Other transaction processing services revenue 125,681 81,735 43,006 30,927
Service charges on deposit accounts 90,877 77,877 31,257 26,710
Fees for trust services 23,946 21,925 7,948 7,189
Brokerage revenue 16,387 15,108 5,012 5,338
Mortgage banking income 19,527 51,991 6,861 18,021
Credit card fees 21,646 19,117 8,097 7,110
Securities gains(losses), net (89) 1,336 (24) 755
Other fee income 21,573 17,335 7,451 6,039
Other non-interest income 62,730 38,557 14,035 11,776
------------ ---------- --------- ---------
Non-interest income before reimbursable items 960,175 844,887 327,982 291,445
Reimbursable items 172,499 168,852 56,309 55,740
------------ ---------- --------- ---------
Total non-interest income 1,132,674 1,013,739 384,291 347,185
------------ ---------- --------- ---------
Non-interest expense:
Salaries and other personnel expense 556,210 505,091 194,624 171,525
Net occupancy and equipment expense 244,650 208,872 80,073 70,289
Other operating expenses 216,921 174,538 74,699 63,134
------------ ---------- --------- ---------
Non-interest expense before reimbursable items 1,017,781 888,501 349,396 304,948
Reimbursable items 172,499 168,852 56,309 55,740
------------ ---------- --------- ---------
Total non-interest expense 1,190,280 1,057,353 405,705 360,688
------------ ---------- --------- ---------
Minority interest in subsidiaries' net income 20,581 19,453 7,480 6,780
Income before income taxes 503,992 450,589 173,349 157,722
Income tax expense 185,681 164,303 64,341 57,722
------------ ---------- --------- ---------
Net income $ 318,311 286,286 109,008 100,000
============ ========== ========= =========
Net income per share:
Basic $ 1.04 0.95 0.35 0.33
============ ========== ========= =========
Diluted 1.03 0.94 0.35 0.33
============ ========== ========= =========
Weighted average shares outstanding:
Basic 306,435 302,067 309,448 301,366
============ ========== ========= =========
Diluted 309,348 304,574 312,343 304,514
============ ========== ========= =========
Dividends declared per share $ 0.52 0.50 0.17 0.17
============ ========== ========= =========
See accompanying Notes to Consolidated Financial Statements.
4
SYNOVUS FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
--------------------------------
(In thousands) 2004 2003
--------------- ------------
Cash flows from operating activities:
Net Income $ 318,311 286,286
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for losses on loans 54,464 51,977
Depreciation, amortization, and accretion, net 60,449 90,383
(Increase) decrease in interest receivable (6,397) 6,278
Decrease in interest payable (4,076) (4,854)
Minority interest in subsidiaries' net income 20,581 19,453
Decrease in mortgage loans held for sale 7,378 6,872
(Decrease) increase in billings in excess of costs
on uncompleted contracts (24,845) 24,074
Gain on sale of banking locations (15,849) -
Impairment of developed software 10,059 -
Other, net 110,556 (16,956)
--------------- ------------
Net cash provided by operating activities 530,632 463,513
--------------- ------------
Cash flows from investing activities:
Net cash paid for acquisitions (36,655) (66,155)
Net decrease in interest earning deposits with banks 83 629
Net decrease (increase) in federal funds sold
and securities purchased under resale agreements 47,797 (13,504)
Proceeds from maturities and principal collections of
investment securities available for sale 1,176,661 1,147,308
Proceeds from sales of investment securities available for sale 42,036 130,753
Purchases of investment securities available for sale (1,214,494) (1,437,466)
Net cash received on sale of banking locations 25,069 -
Net increase in loans (2,017,350) (862,928)
Purchases of premises and equipment (88,706) (160,127)
Proceeds from disposals of premises and equipment 1,836 2,152
Increase in contract acquisition costs (22,441) (17,904)
Additions to licensed computer software from vendors (19,237) (35,682)
Additions to internally developed computer software (3,996) (13,945)
--------------- ------------
Net cash used by investing activities (2,109,397) (1,326,869)
--------------- ------------
Cash flows from financing activities:
Net increase in demand and savings deposits 946,556 895,730
Net increase in certificates of deposit 442,482 9,303
Net increase (decrease) in federal funds purchased
and securities sold under repurchase agreements 270,929 (159,100)
Principal repayments on long-term debt (370,993) (101,908)
Proceeds from issuance of long-term debt 491,139 419,400
Dividends paid to shareholders (156,973) (144,397)
Proceeds from issuance of common stock 16,975 20,718
Treasury stock purchased - (111,453)
--------------- ------------
Net cash provided by financing activities 1,640,115 828,293
--------------- ------------
Increase (decrease) in cash and due from banks 61,350 (35,063)
Cash and due from banks at beginning of period 696,030 741,092
--------------- ------------
Cash and due from banks at end of period $ 757,380 706,029
=============== ============
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 nine months ended September 30, 2004 and 2003, Synovus paid income taxes
(net of refunds received) of $120.7 million and $142.6 million, respectively.
For the nine months ended September 30, 2004 and 2003, Synovus paid interest of
$212.7 million and $233.0 million, respectively.
Noncash investing activities consisted of loans of approximately $9.8 million
and $14.1 million, which were foreclosed and transferred to other real estate
during the nine months ended September 30, 2004 and 2003, respectively. The more
significant non-cash items for the nine months ended September 30, 2004 related
to the acquisitions of Peoples Florida Banking Corporation and Trust One Bank
and consist of $500.4 million in net loans, $127.8 million in investment
securities available for sale, and $546.2 million in deposits. The more
significant non-cash items for the nine months ended September 30, 2003 related
to the acquisitions of United Financial Holdings, Inc. and FNB Newton
Bancshares, Inc. and consist of $620.1 million in net loans, $64.2 million in
investment securities available for sale, and $690.2 million in deposits.
Note 3 - Comprehensive Income
- -----------------------------
Other comprehensive income (loss) consists of net unrealized gains (losses) on
securities available for sale, net unrealized gains (losses) on cash flow
hedges, and foreign currency translation adjustments. Comprehensive income
consists of net income plus other comprehensive income (loss). Comprehensive
income for the nine months ended September 30, 2004 and 2003 was $307.3 million
and $273.0 million, respectively. For the three months ended September 30, 2004
and 2003, comprehensive income was $136.2 million and $86.7 million,
respectively.
Note 4 - Stock-Based Compensation
- ---------------------------------
Synovus accounts for its fixed stock-based compensation in accordance with the
provisions set forth in Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. In
accordance with APB Opinion No. 25, compensation expense is recorded on the
grant date only to the extent that the current market price of the underlying
stock exceeds the exercise price on the grant date.
6
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," established accounting and disclosure requirements
using a fair value based method of accounting for stock-based compensation
plans. As allowed by SFAS No. 123, Synovus has elected to apply the accounting
method prescribed under APB Opinion No. 25, and has adopted the disclosure
requirements of SFAS No. 123, as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure."
If Synovus had determined compensation expense based on the fair value at the
grant date for its stock options granted under SFAS No. 123, net income and
earnings per share for the three and nine months ended September 30, 2004 and
2003 would have been reduced to the pro forma amounts indicated in the following
tables.
For the nine months ended September 30, 2004 and 2003:
- -------------------------------------------------------------------------- ----- ---------------- -----------------
(In thousands, except per share data) 2004 2003
- -------------------------------------------------------------------------- ----- ---------------- -----------------
Net income as reported $ 318,311 286,286
Total stock-based employee compensation expense determined under fair
value based method for all awards, net of related tax effects
(9,763) (10,110)
---------------- -----------------
Net income - pro forma $ 308,548 276,176
================ =================
Earnings per share:
Basic - as reported $ 1.04 0.95
Basic - pro forma 1.01 0.91
Diluted - as reported 1.03 0.94
Diluted - pro forma 1.00 0.91
For the three months ended September 30, 2004 and 2003:
(In thousands, except per share data) 2004 2003
- -------------------------------------------------------------------------- ----- ---------------- -----------------
Net income as reported $ 109,008 100,000
Total stock-based employee compensation expense determined under fair
value based method for all awards, net of related tax effects
(3,649) (3,407)
---------------- -----------------
Net income - pro forma $ 105,359 96,593
================ =================
Earnings per share:
Basic - as reported $ 0.35 0.33
Basic - pro forma 0.34 0.32
Diluted - as reported 0.35 0.33
Diluted - pro forma 0.34 0.32
7
Note 5 - Business Combinations
- ------------------------------
On January 30, 2004, Synovus acquired all the issued and outstanding common
shares of Peoples Florida Banking Corporation (Peoples Bank), the parent company
of Peoples Bank, headquartered in Palm Harbor, Florida. The acquisition was
accounted for using the purchase method of accounting, and accordingly, the
results of operations of Peoples Bank have been included in the consolidated
financial statements beginning February 1, 2004.
The aggregate purchase price was $78.4 million, consisting of 1,636,827 shares
of Synovus common stock valued at $43.7 million, $32.1 million in cash, and
stock options valued at $2.6 million. The value of the common stock issued was
determined based on the average market price of Synovus' common stock over the
2-day period before and after the terms of the acquisition were agreed to and
announced. The fair value of the stock options was determined based on the
Black-Scholes option pricing model.
Of the $58.9 million of acquired intangible assets, $53.6 million was allocated
to goodwill. The goodwill will not be deductible for tax purposes. The
identifiable intangible asset consists of the core deposit premium, which has an
estimated fair value of $5.3 million and a weighted average useful life of 10
years.
Synovus is in the process of completing the purchase price allocation relating
to the Peoples Bank acquisition. The purchase price allocation has been
preliminarily determined as follows:
-----------------------------------------------------------------------------------------
(In thousands) At January 31, 2004
-----------------------------------------------------------------------------------------
Cash and due from banks $ 15,449
Investment securities available for sale 47,844
Federal funds sold 3,454
Loans, net 185,931
Premises and equipment 8,274
Core deposit premium 5,349
Goodwill 53,563
Other assets 4,125
---------------------------
Total assets acquired 323,989
---------------------------
Deposits 199,979
Federal funds purchased 28,765
Notes payable 15,237
Other liabilities 1,608
---------------------------
Total liabilities assumed 245,589
---------------------------
Net assets acquired $ 78,400
===========================
On June 1, 2004, Synovus acquired all the issued and outstanding common shares
of Trust One Bank (Trust One) in Memphis, Tennessee. Trust One has six branches
serving east Shelby County, Tennessee, which includes Germantown, Cordova,
Collierville and east Memphis. The acquisition was accounted for using the
purchase method of accounting, and accordingly, the results of operations of
Trust One have been included in the consolidated financial statements beginning
June 1, 2004.
8
The aggregate purchase price was $111.0 million, consisting of 3,841,302 shares
of Synovus common stock valued at $107.7 million, approximately $3,000 in cash,
stock options valued at $3.2 million and $126 thousand in direct acquisition
costs (which consist primarily of external legal fees and accounting fees). The
value of the common stock issued was determined based on the average market
price of Synovus' common stock over the 2-day period before and after the terms
of the acquisition were agreed to and announced. The fair value of the stock
options was determined based on the Black-Scholes option pricing model.
Of the $81.0 million of acquired intangible assets, $73.1 million was allocated
to goodwill. The goodwill will not be deductible for tax purposes. The
identifiable intangible asset consists of the core deposit premium, which has an
estimated fair value of $7.9 million and a weighted average useful life of 10
years.
Synovus is in the process of completing the purchase price allocation relating
to the Trust One acquisition. The purchase price allocation has been
preliminarily determined as follows:
(In thousands) At June 1, 2004
-----------------------------------------------------------------------------------------
Cash and due from banks $ 13,877
Investment securities available for sale 79,952
Federal funds sold 500
Mortgage loans held for resale 171
Loans, net 314,465
Premises and equipment 5,328
Core deposit premium 7,869
Goodwill 73,054
Other assets 17,436
---------------------------
Total assets acquired 512,652
---------------------------
Deposits 346,192
Federal funds purchased 16,658
Notes payable 29,903
Other liabilities 8,860
---------------------------
Total liabilities assumed 401,612
---------------------------
Net assets acquired $ 111,040
===========================
On August 2, 2004, TSYS completed the acquisition of Clarity Payment
Solutions, Inc. (Clarity) for $53.0 million, in cash. The acquisition was
accounted for using the purchase method of accounting and accordingly, the
results of operations of Clarity have been included in the consolidated
financial results beginning August 2, 2004. TSYS is in the process of finalizing
the purchase price allocation and has preliminarily allocated approximately
$43.8 million to goodwill, approximately $10.9 million to other intangibles and
the remaining amount to the assets and liabilities acquired. Clarity is a
leading provider of prepaid card solutions that utilize the Visa, MasterCard,
EFT and ATM networks for Fortune 500 companies as well as domestic and
international financial institutions. TSYS will merge its existing prepaid
division with Clarity and has branded the combined entity as TSYS Prepaid, Inc.
TSYS believes the acquisition of TSYS Prepaid, Inc. enhances TSYS' processing
services by adding enhanced functionality and distinct value differentiation for
TSYS and its clients.
Proforma information related to the impact of these acquisitions on Synovus'
consolidated financial statements, assuming such acquisitions had occurred at
the beginning of the periods
9
reported, is not presented as such impact is not significant.
Note 6 - Operating Segments
- ---------------------------
Synovus has two reportable segments: Financial Services and TSYS. The Financial
Services segment provides financial services including banking, financial
management, insurance, mortgage and leasing services through 40 affiliate banks
and other Synovus offices in Georgia, Alabama, South Carolina, Florida, and
Tennessee. Through online accounting and electronic payment processing systems,
TSYS provides electronic payment processing services and other related services
to card-issuing institutions in the United States, Mexico, Canada, Honduras,
Europe, and the Caribbean. The significant accounting policies of the segments
are described in the summary of significant accounting policies in the 2003
annual report previously filed on Form 10-K. All inter-segment services provided
are charged at the same rates as those charged to unaffiliated customers. Such
services are included in the results of operations of the respective segments
and are eliminated to arrive at consolidated totals.
10
Segment information as of and for the nine months ended September 30, 2004 and
2003 is presented in the following table:
Nine months ended September 30, 2004 and 2003
Financial
(In thousands) Services TSYS (a) Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------------
Interest income 2004 $846,704 648 (648) (b) $ 846,704
2003 796,776 649 (678) (b) 796,747
- --------------------------------------------------------------------------------------------------------------------------
Interest expense 2004 210,556 153 (648) (b) 210,061
2003 231,726 66 (678) (b) 231,114
- --------------------------------------------------------------------------------------------------------------------------
Net interest income 2004 636,148 495 - 636,643
2003 565,050 583 - 565,633
- --------------------------------------------------------------------------------------------------------------------------
Provision for loan losses 2004 54,464 - - 54,464
2003 51,977 - - 51,977
- --------------------------------------------------------------------------------------------------------------------------
Net interest income after provision 2004 581,684 495 - 582,179
for loan losses 2003 513,073 583 - 513,656
- --------------------------------------------------------------------------------------------------------------------------
Total non-interest income 2004 246,520 900,134 (13,980) (c) 1,132,674
2003 234,978 790,707 (11,946) (c) 1,013,739
- --------------------------------------------------------------------------------------------------------------------------
Total non-interest expense 2004 467,093 737,167 (13,980) (c) 1,190,280
2003 430,955 638,344 (11,946) (c) 1,057,353
- --------------------------------------------------------------------------------------------------------------------------
Income before income taxes 2004 361,111 163,462 (20,581) (d) 503,992
2003 317,096 152,946 (19,453) (d) 450,589
- --------------------------------------------------------------------------------------------------------------------------
Income tax expense 2004 130,047 55,634 - 185,681
2003 113,173 51,130 - 164,303
- --------------------------------------------------------------------------------------------------------------------------
Net income 2004 231,064 107,828 (20,581) (d) 318,311
2003 203,923 101,816 (19,453) (d) 286,286
- --------------------------------------------------------------------------------------------------------------------------
Total assets 2004 23,337,175 1,127,997 (75,679) (e) 24,389,493
2003 20,149,986 893,753 (20,345) (e) 21,023,394
- --------------------------------------------------------------------------------------------------------------------------
11
Segment information as of and for the three months ended September 30, 2004 and
2003 is presented in the following table:
Three months ended September 30, 2004 and 2003
Financial
(In thousands) Services TSYS (a) Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------------
Interest income 2004 $ 299,749 272 (274) (b) $ 299,747
2003 266,268 57 (77) (b) 266,248
- --------------------------------------------------------------------------------------------------------------------------
Interest expense 2004 76,503 84 (274) (b) 76,313
2003 73,176 36 (77) (b) 73,135
- --------------------------------------------------------------------------------------------------------------------------
Net interest income 2004 223,246 188 - 223,434
2003 193,092 21 - 193,113
- --------------------------------------------------------------------------------------------------------------------------
Provision for loan losses 2004 21,192 - - 21,192
2003 15,108 - - 15,108
- --------------------------------------------------------------------------------------------------------------------------
Net interest income after provision 2004 202,054 188 - 202,242
for loan losses 2003 177,984 21 - 178,005
- --------------------------------------------------------------------------------------------------------------------------
Non-interest income 2004 76,699 312,432 (4,840) (c) 384,291
2003 81,061 270,216 (4,092) (c) 347,185
- --------------------------------------------------------------------------------------------------------------------------
Non-interest expense 2004 157,551 252,994 (4,840) (c) 405,705
2003 147,564 217,216 (4,092) (c) 360,688
- --------------------------------------------------------------------------------------------------------------------------
Income before income taxes 2004 121,202 59,627 (7,480) (d) 173,349
2003 111,481 53,021 (6,780) (d) 157,722
- --------------------------------------------------------------------------------------------------------------------------
Income tax expense 2004 43,935 20,406 - 64,341
2003 40,214 17,508 - 57,722
- --------------------------------------------------------------------------------------------------------------------------
Net income 2004 77,267 39,221 (7,480) (d) 109,008
2003 71,267 35,513 (6,780) (d) 100,000
- --------------------------------------------------------------------------------------------------------------------------
Total assets 2004 23,337,175 1,127,997 (75,679) (e) 24,389,493
2003 20,149,986 893,753 (20,345) (e) 21,023,394
(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.
(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.
12
Segment information for the changes in the carrying amount of goodwill for the
nine months ended September 30, 2004 is shown in the following table:
Financial
(In thousands) Services TSYS Total
- ----------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 2003 $ 219,242 29,626 248,868
Goodwill acquired during period126,617 43,838 170,455
Impairment losses - - -
------------------- ------------------- ----------------
Balance as of September 30, 2004 $ 345,859 73,464 419,323
=================== =================== ================
See Note 5 for information regarding goodwill relating to acquisitions
completed during the nine months ended September 30, 2004.
Intangible assets (excluding goodwill) as of September 30, 2004 and December 31,
2003 are presented in the table below.
(In thousands) September 30, 2004 December 31, 2003
- ----------------------------------------------------------------------------------------------------------------------
Purchased trust revenues $ 3,274 3,485
Core deposit premiums 29,571 20,380
Employment contracts/non-competition
Agreements 863 388
Acquired customer contracts 5,517 6,478
Intangibles associated with the acquisition
of minority interest in TSYS 2,442 2,656
Customer relationships 1,700 --
Other 452 583
---------------------------- -------------------------
Total Carrying Value $ 43,819 33,970
============================ =========================
Note 7 - Dividends per Share
- ----------------------------
Dividends declared per share for the quarter ended September 30, 2004 were
$0.1733, up 5.0% from $0.1650 for the third quarter of 2003. For the nine months
ended September 30, 2004, dividends declared per share were $.5199, up 5.0% from
$.4950 for the same period a year ago.
Note 8 - Derivative Instruments
- -------------------------------
Synovus accounts for its derivative financial instruments under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended. SFAS
No. 133 requires recognition of all derivatives as either assets or liabilities
in the balance sheet and requires measurement of those instruments at fair value
through adjustments to either accumulated other comprehensive income, current
earnings, or both, as appropriate. As part of its overall interest rate risk
management activities, Synovus utilizes derivative instruments to manage its
exposure to various types of interest rate risks. These derivative instruments
consist primarily of commitments to sell fixed-rate mortgage loans and interest
rate swaps. The interest rate lock commitments made to prospective mortgage loan
customers also represent derivative instruments since it is intended that such
loans will be sold.
13
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 September 30, 2004 is shown in the following table.
Weighted Average Unrealized
------------------------------------ --------------------
Maturity Net
Notional Receive Pay In Unrealized
(Dollars in thousands) Amount Rate Rate(*) Months Gains Losses Gains (Losses)
- ---------------------------- --- ------------ ----------- ----------- ------------ --------- ---------- --------------
Receive fixed swaps:
Fair value hedges $ 427,500 4.33% 1.76% 96 2,991 (4,504) (1,513)
Cash flow hedges 500,000 5.12% 4.75% 16 563 (2,426) (1,863)
------------ --------- ---------- --------------
Total $ 927,500 4.75% 3.37% 53 3,554 (6,930) (3,376)
============ ========= ========== ==============
(*) Variable pay rate based upon contract rates in effect at September 30, 2004.
At September 30, 2004, Synovus had commitments to fund fixed-rate mortgage loans
to customers in the amount of $145.6 million. The fair value of these
commitments was $35,921.
At September 30, 2004, outstanding commitments to sell fixed-rate mortgage loans
amounted to approximately $159.3 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 September 30, 2004 was
($1.4 million).
Synovus also enters into derivative financial instruments to meet the financing
and interest rate risk management needs of its customers. Upon entering into
these instruments to meet customer needs, Synovus enters into offsetting
positions in order to minimize the risk to Synovus. These derivative financial
instruments are reported at fair value with any resulting gain or loss recorded
in current period earnings. As of September 30, 2004, the notional amount of
customer related derivative financial instruments was $347.5 million.
Note 9 - Recent Accounting Pronouncements
- -----------------------------------------
On November 13, 2003, the Emerging Issues Task Force (EITF) issued EITF Issue
No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments." This guidance was to be applied in other-than-temporary
impairment evaluations performed in reporting periods beginning after June 15,
2004. Disclosures are effective in annual financial statements for fiscal years
ending after December 15, 2003, for investments accounted for under Financial
Accounting Standards Board (FASB) Statements No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," and No. 124, "Accounting
14
for Certain Investments Held by Not-for-Profit Organizations." The
disclosure requirements for all other investments are effective in annual
financial statements for fiscal years ending after June 15, 2004. In September
2004, the FASB issued FASB Staff Position (FSP) EITF Issue 03-1-1 which delays
the effective date for the measurement and recognition guidance set forth in
paragraphs 10-20 of EITF Issue No. 03-1 until additional implementation guidance
is issued by the FASB. Synovus anticipates that the full adoption of EITF 03-1
will not have a material impact on its financial statements.
On March 31, 2004, the FASB issued an Exposure Draft titled "Share-Based
Payments, an amendment of FASB Statements No. 123 and 95," that would be called
"FAS 123r," that addresses accounting for equity based compensation
arrangements. The proposed statement would eliminate the ability to account for
share-based compensation transactions using Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" and replace some of the
existing requirements under FASB Statement No. 123, "Accounting for Stock-Based
Compensation." The proposed statement would require that such arrangements be
accounted for using the fair-value-based method of accounting and the related
cost expensed over the corresponding service period. It is anticipated that the
final statement will be issued in the fourth quarter of 2004. On October 13,
2004, the FASB announced that the proposed standard would be adopted by public
companies the first fiscal quarter beginning after June 15, 2005. Synovus
provides proforma disclosures related to stock-based compensation in Note 4.
On March 9, 2004, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 105 (SAB 105), "Application of Accounting Principles to
Loan Commitments." SAB 105 summarizes the views of the SEC staff regarding the
application of generally accepted accounting principles to loan commitments
accounted for as derivative instruments. Synovus adopted the provisions of SAB
105 effective April 1, 2004 on a prospective basis. Upon adoption of SAB 105,
Synovus modified the way in which it values its loan commitments to fund
mortgage loans. The impact of the adoption of SAB 105 resulted in mortgage
revenues being approximately $1.2 million less than what would have been
recognized under the former method of accounting during the second quarter of
2004.
Note 10 - Other
- ---------------
Certain amounts in 2003 have been reclassified to conform to the presentation
adopted in 2004.
15
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.
About Our Business
Synovus is a diversified financial services holding company, based in
Columbus, Georgia, with more than $24 billion in assets. Synovus operates two
business segments: the Financial Services and the Transaction Processing
Services (TSYS) segments. The Financial Services segment provides integrated
financial services including banking, financial management, insurance, mortgage
and leasing services through 40 decentralized affiliate banks and other Synovus
offices in five southeastern states. At September 30, 2004, our affiliate banks
ranged in size from $37.4 million to $4.8 billion in total assets. The TSYS
segment provides electronic payment processing services through our 81% owned
subsidiary Total System Services, Inc. (TSYS), the world's largest third party
processor of international payments. Our ownership in TSYS gives us a unique
business mix: for the first nine months of 2004, 49% of our consolidated
revenues and 29% of our net income came from TSYS.
Our Key Financial Performance Indicators
In terms of how we measure success in our business, the following are
our key financial performance indicators:
Financial Services
* Net Interest Margin * Credit Quality
* Loan Growth * Fee Income Growth
* Deposit Growth * Expense Management
TSYS
* Revenue Growth * Expense Management
2004 Financial Performance vs. 2003
Consolidated
* Net income of $109.0 million, up 9.0% and $318.3 million, up 11.2%
for the three and nine months ended September 30, 2004, respectively,
as compared to the same periods
in 2003
* Diluted EPS of $0.35, up 6.2% and $1.03, up 9.4% for the three and
nine months ended September 30, 2004, respectively, as compared to
the same periods in 2003
Financial Services
* Net interest margin: 4.25% for the three and nine months ended
September 30, 2004 as compared to 4.22% and 4.26%, respectively, for
the same periods in 2003
* Loan growth: 18.5% increase from September 30, 2003 (15.7% excluding
acquisitions and divestitures)
16
* Credit quality: Ended the third quarter of 2004 in a very positive
fashion:
* Nonperforming assets ratio of .56%, down from .73%
at September 30, 2003, and
* Past dues over 90 days as a percentage of total loans of
.12% compared to .15% at September 30, 2003, and
* Net charge-off ratio of .26% compared to .32% for the third
quarter of 2003, and .22% compared to .34% for the first
nine months of 2003
* Deposit growth: 14.5% increase from a year ago (11.6%
excluding acquisitions and divestitures)
* Fee income growth: down 5.4% for the quarter and up 4.9% for the
first nine months
of 2004 over the corresponding periods in the prior year
* General and administrative expenses up by 6.8% for the quarter and up
8.4% for the first nine months of 2004 over the corresponding periods
in the prior year. Headcount was down 115 (excluding new markets and
divestitures) as compared
to December 31, 2003
* Net income growth: 8.4% and 13.3% for the three and nine
months ended September 30, 2004 over the corresponding periods
in the prior year
TSYS
* Revenue growth before reimbursable items: 18.1% and 16.6% for
the three and nine months ended September 30, 2004 over the
corresponding periods in the prior year
* Net income growth: 10.5% and 5.9% for the three months and
nine months ended September 30, 2004 over the
corresponding periods in the prior year
Our financial performance for the quarter was driven by excellent credit quality
and strong loan growth, along with stability in the net interest margin, while
our expense management remained on track. Additionally, TSYS' financial
performance was in line with expectations.
Synovus continues with its strategic market repositioning. During the nine
months ended September 30, 2004, we completed the acquisition of Peoples Bank in
Palm Harbor, Florida and Trust One Bank in Memphis, Tennessee. We also entered
the Savannah, Georgia market and opened our first de novo bank, Synovus Bank of
Jacksonville, in the second quarter of 2004. Additionally, during the first
quarter of 2004, we exited one market with the sale of our bank in Quincy,
Florida. This transaction resulted in a $9.7 million after-tax gain recorded in
the first quarter.
On October 13, 2004, TSYS finalized a definitive agreement with JPMorgan
Chase & Co. (Chase) to service the combined card portfolios of Chase Card
Services and to upgrade its card-processing technology. The agreement extends a
relationship that started with TSYS and the former Bank One Corp. (Bank One) in
March 2003. Pursuant to the revised agreement, the first phase of the project
was executed successfully and Bank One's remaining accounts will be converted to
the TS2(R) processing platform during the fourth quarter of 2004, according to
the project's original schedule. Chase is expected to convert its consumer and
commercial accounts to TS2 in the second half of 2005, after which TSYS expects
to maintain the card-processing functions of Chase Card Services for at least
two years. Chase Card Services then has the option to migrate the portfolio
in-house, under a perpetual license of TS2 with a six-year payment term.
17
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.
Synovus has identified certain of its accounting policies as "critical
accounting policies." 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.
Synovus' critical accounting policies are described in the "Financial Review"
section of Synovus' 2003 Annual Report on Form 10-K. There have been no material
changes to Synovus' critical accounting policies, estimates, and assumptions, or
the judgments affecting the application of these estimates and assumptions in
2004.
Business Combinations
Refer to Note 5 of the Notes to Consolidated Financial Statements for a
discussion of business combinations.
Balance Sheet
During the first nine months of 2004, total assets increased $2.8 billion.
Loans, net of unearned income, increased by $2.4 billion, and investment
securities available for sale increased by $91.9 million. Goodwill increased by
$170.5 million. Providing the necessary funding for the balance sheet growth
during the first nine months of 2004, the deposit base grew $1.8 billion,
federal funds purchased and securities sold under repurchase agreements
increased $316.4 million, long-term debt increased $164.3 million, and
shareholders' equity increased $331.7 million.
Loans
Compared to September 30, 2003, total loans grew by 18.5%. Excluding the impact
of acquisitions and divestitures, year-over-year loan growth was 15.7%. The loan
growth was broad-based across our geographic markets, with two-thirds of our
banks increasing at a double-digit rate. On a sequential quarter basis, total
loans outstanding grew by $796 million or 17.5% annualized. The sequential
quarter annualized loan growth by portfolio types was as follows: commercial
real estate 22.4%, commercial and industrial 9.0%, and consumer 14.7%.
The table on page 21 illustrates the composition of the loan portfolio
(classified by loan purpose) as of September 30, 2004. The commercial real
estate portfolio totals $10.9 billion, which represents 57.6% of the total loan
portfolio. Loans for the purpose of financing investment properties total $3.3
billion, which is only 17.5% of the total loan portfolio, or less than one-third
of the total commercial real estate portfolio. The investment properties loan
category includes $459.2 million in loans in the Atlanta market. This amount
represents 2.4% of the total loan portfolio, or 4.2% 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,
18
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
$2.9 billion or 15.4% of the total loan portfolio, and one-fourth of the total
commercial real estate portfolio. The 1-4 family properties category includes
$943.9 million in loans in the Atlanta market, which is 5.0% of the total loan
portfolio, or 32.5% of the 1-4 family properties category.
Included in total commercial real estate loans are $3.8 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 21. These
loans represent 20.0% of the total loan portfolio, or 34.8% of the total
commercial real estate portfolio. The primary source of repayment on these loans
is revenue generated from products or services offered by the business or
organization (e.g., accounting; legal and medical services; retailers;
manufacturers and wholesalers). These loans typically carry the personal
guarantees of the principals of the business.
Commercial and industrial loans represent $4.9 billion or 26.2% of the total
loan portfolio at September 30, 2004. These loans are diversified by geography,
industry, and loan type. Consumer loans at September 30, 2004 total $3.1
billion, representing 16.4% of the total loan portfolio.
Asset Quality
Asset quality continued to be at excellent levels. The non-performing assets
ratio was 0.56% at September 30, 2004 compared to 0.58% at December 31, 2003.
The quality of our commercial real estate portfolio remains strong with a
nonperforming loan ratio of only 0.21% of total commercial real estate loans at
September 30, 2004. This compares to an overall nonperforming loan ratio for the
total loan portfolio of 0.42%. The net charge-off ratio for the third quarter
was 0.26%, down from 0.32% for the third quarter of 2003. The net charge-off
ratio for the nine months ended September 30, 2004 was 0.22% down from 0.34% for
the same period in 2003. We believe that the net charge-off ratio for the year
will be less than 0.30%.
Past due levels remained very favorable, with total loans past due (and still
accruing interest) at 0.63% of loans. Loans 90 days past due and still accruing
interest at September 30, 2004 were $23.2 million, or 0.12% of total loans,
compared to 0.13% at year-end 2003. These loans are in the process of
collection, and management believes that sufficient collateral value securing
these loans exists to cover contractual interest and principal payments on the
loans. Management further believes the resolution of these delinquencies will
not cause a material increase in nonperforming assets.
The allowance for loan losses is $257.6 million, or 1.37% of net loans, at
September 30, 2004 compared to $226.1 million, or 1.37% of net loans, at
December 31, 2003. The allowance to non-performing loans coverage was 323% at
September 30, 2004, compared to 335% at December 31, 2003.
The provision for loan losses was $21.2 million for the third quarter of 2004
compared to $15.1 million for the third quarter of 2003. For the first nine
months of 2004, the provision for loan losses was $54.5 million as compared to
$52.0 million for the same period a year ago. Lower net charge-offs in 2004 had
a lowering impact on the 2004 provision expense when compared to 2003. This
impact has been offset by the additional provision expense levels required by
the strong loan growth in 2004. For the first nine months of 2004, total
provision expense covered net charge-offs by 1.91 times compared to 1.34 times
for the same period a year ago.
19
(Dollars in thousands) September 30, 2004 December 31, 2003
- -----------------------------------------------------------------------------------------------------------------
Nonperforming loans $ 79,776 $ 67,442
Other real estate 25,424 28,422
--------------------------- ------------------------
Nonperforming assets $ 105,200 $ 95,864
=========================== ========================
Loans 90 days past due and still accruing $ 23,178 $ 21,138
Allowance for loan losses $ 257,647 $ 226,059
Allowance for loan losses as a % of loans 1.37 % 1.37 %
As a % of loans and other real estate:
Nonperforming loans 0.42 % 0.41 %
Other real estate 0.14 0.17
--------------------------- ------------------------
Nonperforming assets 0.56 % 0.58 %
=========================== ========================
Allowance to nonperforming loans 322.96 % 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.
20
The following table shows the composition of the loan portfolio and
nonperforming loans (classified by loan purpose) as of September 30, 2004.
(Dollars in thousands) % of
Total Total
% of Non- Non-
Total Loans Total Loans performing performing
Loan Type Outstanding Loans Loans
- --------------------------------------------------------------------------------------------------------------------------
Commercial Real
Estate
Multi-Family $ 563,195 3.0 % $ 931 1.2 %
Hotels 788,160 4.2 1,541 1.9
Office Buildings 724,883 3.8 769 1.0
Shopping Centers 565,994 3.0 2,738 3.4
Commercial Development
659,350 3.5 60 0.1
--------------- ----------------- ---------------- ----------------
Total Investment Properties
3,301,582 17.5 6,039 7.6
--------------- ----------------- ---------------- ----------------
1-4 Family Construction
1,093,713 5.8 1,235 1.5
1-4 Family Perm
/Mini-Perm 828,892 4.4 5,427 6.8
Residential Development
985,318 5.2 - -
--------------- ----------------- ---------------- ----------------
Total 1-4 Family
Properties 2,907,923 15.4 6,662 8.3
Land Acquisition 886,014 4.7 212 0.3
--------------- ----------------- ---------------- ----------------
Total Investment-Related Real
Estate 7,095,519 37.6 12,913 16.2
--------------- ----------------- ---------------- ----------------
Owner-Occupied 2,180,811 11.5 6,405 8.0
Other Property 1,602,199 8.5 3,791 4.8
--------------- ----------------- ---------------- ----------------
Total Commercial
Real Estate 10,878,529 57.6 23,109 29.0
Commercial &
Industrial 4,935,646 26.2 48,977 61.4
Consumer 3,097,262 16.4 7,690 9.6
Unearned Income (40,381) (0.2) - -
--------------- ----------------- ---------------- ----------------
Total $ 18,871,056 100.00 % $ 79,776 100.00 %
=============== ================= ================ ================
21
Deposits
Total deposits at September 30, 2004 were $17.8 billion, a $1.8 billion increase
from December 31, 2003. This change reflects an increase of $553.5 million
relating to deposits added in conjunction with the acquisitions of Peoples Bank
and Trust One and a decrease of $97.3 million in deposits relating to the sale
of our bank in Quincy, Florida. Compared to a year ago, total deposits grew by
14.5%. Excluding the impact of acquisitions and divestitures, core deposits
(total deposits excluding certificates of deposits over $100,000) grew by 8.9%
over the prior year. This growth was led by strong increases in both demand
deposit and money market accounts, with increases of 10.7% and 20.8%,
respectively.
Capital Resources and Liquidity
Synovus has always placed great emphasis on maintaining a strong capital base
and continues to exceed regulatory capital requirements. Additionally, based on
internal calculations and previous regulatory exams, each of the subsidiary
banks is currently in compliance with regulatory capital guidelines. Total
risk-based capital was $2.837 billion at September 30, 2004, compared to $2.618
billion at December 31, 2003. The ratio of total risk-based capital to
risk-weighted assets was 12.40% at September 30, 2004 compared to 13.06% at
December 31, 2003. The leverage ratio was 9.77% at September 30, 2004 compared
to 10.09% at December 31, 2003.
The equity-to-assets ratio was 10.56% at September 30, 2004 compared to 10.38%
at year-end 2003. The equity-to-assets ratio, exclusive of net unrealized gains
(losses) on investment securities available for sale, was 10.52% at September
30, 2004, compared to 10.24% at year-end 2003.
Synovus' management actively analyzes and manages the liquidity position in
coordination with the appropriate committees at subsidiary banks. Management
must ensure that adequate liquidity, at a reasonable cost, is available to meet
the cash flow needs of depositors, borrowers, and creditors. Management
constantly monitors and maintains appropriate levels of assets and liabilities
so as to provide adequate funding sources to meet estimated customer withdrawals
and future loan requests. Subsidiary banks have access to overnight federal
funds lines with various financial institutions, which total approximately $3.4
billion and can be drawn upon for short-term liquidity needs. Banking liquidity
and sources of funds have not changed significantly since December 31, 2003.
The Parent Company requires cash for various operating needs including dividends
to shareholders, acquisitions, capital infusions into subsidiaries, the
servicing of debt, and the payment of general corporate expenses. The primary
source of liquidity for the Parent Company is dividends from the subsidiary
banks. As a short-term liquidity source, the Parent Company has access to a $25
million line of credit with an unaffiliated banking organization. The Parent
Company enjoys an excellent reputation and credit standing in the capital
markets and has the ability to raise substantial amounts of funds in the form of
either short-term or long-term borrowings.
The consolidated statements of cash flows detail cash flows from operating,
investing, and financing activities. For the nine months ended September 30,
2004, operating activities provided net cash of $530.6 million, investing
activities used $2.1 billion, and financing activities provided $1.6 billion,
resulting in an increase in cash and due from banks of $61.4 million.
22
Earning Assets, Sources of Funds, and Net Interest Income
Average total assets for the first nine months of 2004 were $22.8 billion, up
12.9% over the first nine months of 2003. Excluding the impact of acquisitions
and divestitures in both years, average assets increased 9.8%. Average earning
assets were up 12.6% in the first nine months of 2004 over the same period last
year, and represented 89.5% of average total assets. When compared to the same
period last year, average deposits increased $1.8 billion, average federal funds
purchased and securities sold under repurchase agreements increased $401.1
million, average long-term debt increased $26.0 million, and average
shareholders' equity increased $277.2 million. This growth provided the funding
for $2.1 billion growth in average net loans, $327.2 million growth in average
investments, and $52.8 million growth in average federal funds sold and
securities purchased under resale agreements.
For the nine months ended September 30, 2004, net interest income was $636.6
million, up $71.0 million, or 12.6%, over $565.6 million for the same period a
year ago. Net interest income was $223.4 million for the three months ended
September 30, 2004, up $30.3 million, or 15.7%, over the $193.1 million reported
for the three months ended September 30, 2003. For the nine months ended
September 30, 2004, net interest income, on a tax equivalent basis, increased
$70.7 million, or 12.4%, over the same period in 2003. For the three months
ended September 30, 2004, net interest income, on a tax-equivalent basis,
increased $30.2 million, or 15.5%, over the same period in 2003.
The net interest margin was 4.25% for the nine months ended September 30,
2004, down 1 basis point from the nine months ended September 30, 2003. This
decrease resulted from a 35 basis point decrease in the yield on earning assets,
which was partially offset by a 34 basis point decrease in the effective cost of
funds. The decreased yield on earning assets was largely due to a 34 basis point
decline in loan yields. This decline was primarily due to strong variable rate
loan growth and scheduled payments and prepayments on higher rate fixed rate
loans. Lower realized yields on investment securities also contributed to the
earning asset yield decline. The decreased effective cost of funds was due to
lower average rates paid on interest-bearing funding which has driven by the
downward repricing of fixed rate certificates of deposits and other borrowings.
On a sequential quarter basis, net interest income increased by $13.0 million,
while the net interest margin was 4.25%, up 1 basis point from the second
quarter. The yield on earning assets increased by 11 basis points, which was
primarily due to an increase in loan yields resulting from a 42 basis point
increase in the average prime rate for the quarter. The effective cost of funds
increased by 10 basis points. This increase was driven by higher rates on
variable rate wholesale funding as well as modest increases in variable rate
deposit accounts.
23
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.
Nine Months Ended Three Months Ended
September 30, September 30,
(In thousands) 2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------------------------
Interest income $ 846,704 796,747 299,747 266,248
Taxable-equivalent adjustment 5,257 5,554 1,710 1,831
---------------- ---------------- ---------------- -------------
Interest income,
Taxable-equivalent 851,961 802,301 301,457 268,079
Interest expense 210,061 231,114 76,313 73,135
---------------- ---------------- ---------------- -------------
Net interest income,
Taxable-equivalent $ 641,900 571,187 225,144 194,944
================ ================ ================ =============
During the third quarter of 2004, Synovus reassessed the standard loan
origination costs and methodology used in conjunction with its accounting for
loan origination fees and costs. As part of this assessment, Synovus will change
its methodology and will recognize these costs netted against origination fees
over the life of the respective loans as an adjustment of yield (interest
income). Synovus has previously recognized fee income over the life of its loans
after recognizing a portion of fee income upon loan origination to offset
origination costs. The new methodology will be implemented on a prospective
basis during the fourth quarter of 2004. The change is not expected to be
material to Synovus' financial position, results of operations, or cash flows.
The new methodology will however result in a decrease in general and
administrative expenses with a corresponding decrease in interest income and the
net interest margin.
Non-Interest Income
Total non-interest income during the first nine months of 2004 increased $118.9
million, or 11.7%, over the same period a year ago. For the three months ended
September 30, 2004, total non-interest income increased $37.1 million, or 10.7%
over the same period in 2003. For the first nine months of 2004, excluding
reimbursable items, the increase in non-interest income was 13.6%, over the
first nine months of 2003. For the third quarter of 2004, excluding reimbursable
items, the increase was 12.5% over the same period in 2003.
Financial Services:
Total non-interest income for the Financial Services segment for the three
and nine months ended September 30, 2004 was $76.7 million, down 5.4% and $246.5
million, up 4.9%, respectively, as compared to the same periods a year ago. The
decline in mortgage banking income has significantly impacted these comparisons.
Total mortgage banking income are down $11.2 million, or 62% for the quarter and
$32.5 million, or 62% for the nine months ended September 30, 2004, compared to
the same periods a year ago. The 2004 results include the $15.8 million pre-tax
gain from the sale of a banking location recorded in the first quarter of 2004.
Additionally, acquisitions and divestitures resulted in a net increase in
non-interest income of $174 thousand and $873 thousand for the third quarter and
first nine months of 2004, respectively, when compared to the same periods in
2003. Excluding mortgage banking income, the gain on sale of the banking
location, as well as the impact of acquisitions and divestitures,
24
the non-interest income growth is 12.0% for the third quarter and 16.0% for
the first nine months of 2004, as compared to the same periods in 2003.
Reported service charges on deposit accounts, the single largest component
of Financial Services fee income, are up 17.0% for the quarter and 16.7% for the
first nine months of 2004. Excluding the impact of acquisitions and
divestitures, service charges on deposit accounts grew by 17.3% for the quarter
and 15.4% for the first nine months of 2004, as compared to the same periods in
2003.
Credit card fees are up 13.9% for the quarter and 13.2% for the first nine
months of 2004.
Financial Management Services revenues increased 2.9% for the quarter and 7.6%
for the first nine months of 2004, as compared to the same periods in 2003.
Excluding the impact of divestitures, the increase was 3.5% for the quarter and
10.2% for the first nine months of 2004.
Financial Management Services added $1.4 billion in new assets under management
during the first nine months of 2004 and we now have $15.0 billion in assets
under management at September 30, 2004.
Transaction Processing Services:
TSYS' revenues are derived from providing electronic payment processing and
related services to financial and nonfinancial institutions, generally under
long-term processing contracts. TSYS' services are provided primarily through
its cardholder systems, TS2 and TS1, to financial institutions and other
organizations throughout the United States, Mexico, Canada, Honduras, the
Caribbean, and Europe. TSYS currently offers merchant services to financial
institutions and other organizations in Japan through its majority owned
subsidiary, GP Network Corporation (GP Net). TSYS also provides back-end
processing services for its joint venture, Vital Processing Services L.L.C.
(Vital), to support merchant processing in the United States.
Electronic Payment Processing Services
Electronic payment processing services revenues increased $26.8 million, or
15.1%, for the three months ended September 30, 2004, compared to the same
period in 2003. Revenues from electronic payment processing services increased
$58.0 million, or 11.2% for the nine months ended September 30, 2004, compared
to the same period in 2003. Electronic payment processing revenues are generated
primarily from charges based on the number of accounts on file, transactions and
authorizations processed, statements mailed, credit bureau reports, cards
embossed and mailed, and other processing services for cardholder accounts on
file. Cardholder accounts on file include active and inactive consumer credit,
retail, debit, stored value, student loan, and commercial card accounts. Due to
the number of cardholder accounts processed by TSYS and the expanding use of
cards, as well as increases in the scope of services offered to clients,
revenues relating to electronic payment processing services have continued to
grow.
Due to the somewhat seasonal nature of the credit card industry, TSYS' revenues
and results of operations have generally increased in the fourth quarter of each
year because of increased transaction and authorization volumes during the
traditional holiday shopping season. Furthermore, growth or declines in card
portfolios of existing clients, the conversion of cardholder accounts of new
clients to TSYS' processing platforms, and the loss of cardholder accounts
impact the results of operations from period to period. Another factor which may
affect TSYS' revenues and results of operations from time to time is the sale by
a client of its business, its card portfolio or a segment of its accounts to a
party which processes cardholder accounts
25
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 position,
results of operations, and cash flows in the future.
A significant amount of TSYS' revenues is derived from long-term contracts with
large clients, including certain major customers. 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' operating profit margins.
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 nine months
ended September 30, 2004 were 289.3 million, an increase of 11.5% over the
average of 259.6 million for the same period in 2003. Total accounts on file at
September 30, 2004 were 315.3 million, an 17.7% increase compared to the 267.9
million accounts on file at September 30, 2003. The change in accounts on file
from September 2003 to September 2004 included the deconversion and purging of
4.5 million accounts, the addition of approximately 33.0 million accounts
attributable to the internal growth of existing clients, and approximately 18.9
million accounts from new clients.
On March 3, 2003, TSYS announced that Bank One had selected TSYS to upgrade its
credit card processing. Under the long-term software licensing and services
agreement, TSYS is to 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 is to license a modified version of its TS2 consumer and
commercial software to Bank One through a perpetual license with a six-year
payment term. This agreement has been superseded by the agreement with Chase
described below. TSYS used the percentage-of-completion accounting method for
its agreement with Bank One and recognized revenues in proportion to costs
incurred. TSYS' revenues from Bank One were approximately 6.3% of TSYS' total
revenues for the nine months ended September 30, 2004.
On January 14, 2004, Chase and Bank One announced an agreement to merge. On
January 20, 2004, Circuit City Stores, Inc. (Circuit City) announced an
agreement to sell its private-label credit card business to Bank One. TSYS has a
long-term agreement with Circuit City until April 2006. On July 1, 2004 Bank One
and Chase merged under the name of Chase.
On October 13, 2004, TSYS finalized a definitive agreement with Chase to service
the combined card portfolios of Chase Card Services and to upgrade its
card-processing technology. The agreement extends a relationship that started
with TSYS and the former Bank One Corp. in March 2003. Pursuant to the revised
agreement, the first phase of the project was executed successfully and Bank
One's remaining accounts will be converted to the TS2 processing
platform during the fourth quarter of 2004, according to the project's original
schedule. Chase is expected to convert its consumer and commercial accounts to
TS2 in the second half of 2005, after which TSYS expects to maintain the
card-processing functions of Chase Card Services for at least two years. Chase
Card Services then has the option to migrate the portfolio in-house, under a
perpetual license of TS2 with a six-year payment term.
26
As a result of the revised agreement with Chase, TSYS will discontinue its use
of the percentage of completion accounting method for its original agreement
with Bank One. The revised agreement will be accounted for in accordance with
Emerging Issues Task Force (EITF) 00-21, "Accounting for Revenue Arrangements
with Multiple Deliverables", and other applicable guidance.
In October 2003, Circuit City announced that it had sold its Visa and MasterCard
portfolio, which includes credit card receivables and related cash reserves, to
FleetBoston. On March 31, 2004, Bank of America merged with FleetBoston. TSYS
has been informed by Bank of America that TSYS will continue to process the
Circuit City portfolio acquired by FleetBoston, and that FleetBoston will be
converting its card portfolio to TSYS in March 2005.
TSYS anticipates it will execute an amendment to its processing agreement with
Bank of America to encompass the processing of the FleetBoston portfolio,
including the Circuit City portfolio acquired by FleetBoston. The impact of the
yet unsigned amendment between TSYS and Bank of America on the financial
position, results of operations and cash flows of TSYS cannot be determined at
this time.
In July 2003, Sears and Citigroup announced an agreement for the sale by Sears
to Citigroup of the Sears credit card and financial services businesses. Sears
and Citigroup are both clients of TSYS, and TSYS considers its relationships
with both companies to be very positive. TSYS and Sears are parties to a 10-year
agreement, which was renewed in January of 2000, under which TSYS provides
transaction processing for more than 84.4 million Sears accounts. For the nine
months ended September 30, 2004, TSYS' revenues from the TSYS/Sears agreement
represented 5.7% of TSYS' revenues. The agreement includes provisions for
termination for convenience prior to its expiration upon the payment of a
termination fee. The TSYS/Sears agreement also grants to Sears the one-time
right to market test TSYS' pricing and functionality after May 1, 2004.
Potential results of such market test, in which TSYS would be a participant,
include continuation of the processing agreement under its existing terms,
continuation of the processing agreement under mutually agreed modified terms,
or termination of the processing agreement after May 1, 2006 without a
termination fee. The impact of the transaction between Sears and Citigroup on
the financial position, results of operations, and cash flows of TSYS cannot be
determined at this time.
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 10.5% to $6.9 million for the three
months ended September 30, 2004, compared to $6.2 million for the same period
last year. For the nine months ended, September 30, 2004, revenues from these
services increased 17.2% to $20.2 million compared to $17.2 million for the same
period last year.
On August 2, 2004, TSYS completed the acquisition of Clarity Payment
Solutions, Inc. (Clarity) for $53.0 million, in cash. TSYS in in the process of
finalizing the purchase price allocation and has preliminary allocated
approximately $43.8 million to goodwill, approximately $10.9 million to other
intangibles and the remaining amount to the assets and liabilities acquired.
Clarity is a leading provider of prepaid card solutions that utilize the Visa,
MasterCard, EFT and ATM networks for Fortune 500 companies as well as domestic
and international financial institutions. TSYS will merge its existing prepaid
division with Clarity and has branded the combined entity as TSYS Prepaid, Inc.
TSYS believes the acquisition of TSYS Prepaid, Inc. enhances TSYS' processing
services by adding enhanced functionality and distinct value
27
differentiation for TSYS and its clients. For the three and nine months
ended September 30, 2004, TSYS' revenues include $2.8 million of Clarity's
revenues.
Total revenues from clients based in Mexico were $3.3 million for the three
months ended September 30, 2004, a 68.7% decrease compared to the $10.7 million
for the same period last year. Total revenues from clients based in Mexico were
$9.2 million for the nine months ended September 30, 2004, a 67.0% decrease
compared to the $27.8 million for the same period last year. During 2003, TSYS'
largest client in Mexico notified TSYS that the client 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 utilize its internal global
platform and 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, electronic payment processing revenues for 2004 from Mexico
have decreased significantly when compared to electronic payment processing
revenues from Mexico for 2003.
Value Added Products and Services
TSYS' revenues are also impacted by the use of optional value added
products and services of TSYS' processing systems. Value added products and
services are included mainly in electronic payment processing services revenues.
For both the three months ended September 30, 2004 and 2003, value added
products and services represented 14.0% of TSYS' revenues. Revenues from these
products and services, which include some reimbursable items paid to third-party
vendors, increased 14.8%, or $5.5 million, for the three months ended September
30, 2004 compared to the same period last year.
For the nine months ended September 30, 2004 and 2003, value added products and
services represented 13.5% and 14.0%, respectively, of TSYS' revenues. Revenues
from these products and services increased 9.6%, or $10.4 million, for the nine
months ended September 30, 2004 compared to the same period last year.
Other Transaction Processing Services Revenue
Other transaction processing services revenue increased $12.1 million or 39.1%
for the three months ended September 30, 2004, compared to the same period in
2003. Other transaction processing services revenues increased $43.9 million, or
53.8%, for the nine months ended September 30, 2004, compared to the same period
in 2003. The increase was primarily a result of increased debt collection
services performed by TSYS Total Debt Management, Inc. and the revenues
associated with Enhancement Services Corporation (ESC).
On April, 28, 2003, TSYS completed the acquisition of ESC for $36.0 million in
cash. ESC provides targeted loyalty consulting and travel, as well as gift card
and merchandise rewards programs to more than 40 national and regional financial
institutions in the United States. For the three months ended September 30,
2004, TSYS' revenues included $5.4 million related to ESC's revenues and are
included in other transaction processing services revenues, compared to $4.1
million for the same period in 2003. For the nine months ended September 30,
2004, TSYS' revenues included $14.9 million of ESC's revenues, compared to $7.2
million for the same period in 2003.
Major Customers
A significant amount of TSYS' revenues is derived from long-term contracts with
large clients, including certain major customers. For the three months ended
September 30, 2004, TSYS had
28
two major customers, which accounted for approximately 25.6%, or $78.3
million, of TSYS' revenues. For the three months ended September 30, 2003, TSYS
had two major customers that accounted for 27.4%, or $72.8 million, of TSYS
revenues.
For the nine months ended September 30, 2004 and 2003, TSYS had two major
customers. The major customers for the nine months ended September 30, 2004
accounted for approximately 27.2%, or $239.3 million of TSYS' revenues as
compared to 29.1%, or $225.8 million, of TSYS' revenues, for the same period in
2003. The loss of one of TSYS' major customers, or other significant clients,
could have a material adverse effect on TSYS' financial position, results of
operations, and cash flows.
Equity in Income from Joint Ventures
TSYS' share of income from its equity in joint ventures was $6.9 million and
$3.9 million for the three months ended September 30, 2004 and 2003,
respectively. TSYS' share of income from equity in joint ventures was $19.2
million and $12.9 million for the nine months ended September 30, 2004 and 2003,
respectively. The increase for the quarter and the first nine months of 2004 is
primarily attributable to the improvement 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 nine months ended September 30, 2004, total non-interest expense
increased $132.9 million, or 12.6%. Excluding reimbursable items, the increase
was 14.6%. For the three months ended September 30, 2004, total non-interest
expense increased $45.0 million, or 12.5%, over the same period in 2003.
Management analyzes non-interest expense in two separate components: Financial
Services and Transaction Processing Services.
The following table summarizes non-interest expense for the nine months ended
September 30, 2004 and 2003.
Nine months ended Nine months ended
(In thousands) September 30, 2004(*) September 30, 2003(*)
- --------------------------------------------------------------------------------------------------------------------
Transaction Transaction
Financial Processing Financial Processing
Services Services Services Services
------------- ---------------- ------------- ----------------
Salaries and other personnel expense $ 281,913 274,883 259,873 245,661
Net occupancy and equipment expense 60,851 183,799 55,800 153,070
Other operating expenses 124,329 105,345 115,282 70,761
Reimbursable items -- 173,140 -- 168,852
------------- ---------------- ------------- ----------------
Total non-interest expense $ 467,093 737,167 430,955 638,344
============= ================ ============= ================
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The following table summarizes non-interest expense for the three months ended
September 30, 2004 and 2003.
Three Months Ended Three Months Ended
(In thousands) September 30, 2004(*) September 30, 2003(*)
- -------------------------------------------------------------------------------------- -----------------------------
Transaction Transaction
Financial Processing Financial Processing
Services Services Services Services
------------- ----------------------------- ----------------
Salaries and other personnel expense $ 93,631 101,220 88,894 82,771
Net occupancy and equipment expense 21,156 58,920 19,244 51,043
Other operating expenses 42,764 36,294 39,426 27,662
Reimbursable items -- 56,560 -- 55,740
------------- ---------------- ------------ ----------------
Total non-interest expense $ 157,551 252,994 147,564 217,216
============= ================ ============ ================
(*) The added totals are greater than the consolidated totals due to
inter-segment balances which are eliminated in consolidation.
Financial Services:
Financial Services' non-interest expense increased on a reported basis 6.8% for
the third quarter and 8.4% for the nine months ended September 30, 2004,
compared to the same periods a year ago. The comparisons are impacted by
acquisitions/divestitures, a decrease in mortgage unit-related employment
expenses, as well as higher levels of incentive pay in 2004.
Acquisitions and divestitures accounted for $3.3 million and $10.6 million
of the increase for the three months and nine months ended September 30, 2004,
respectively, as compared to the same periods in 2003. The decrease in total
mortgage unit personnel expenses (compared to the same periods a year ago) was
$3.2 million for the third quarter and $9.4 million for the first nine months of
2004. Additionally, total incentive compensation expense was $2.6 million higher
for the third quarter and $12.0 million higher for the first nine months of 2004
compared to the same periods a year ago. Excluding the impact of
acquisitions/divestitures, mortgage unit personnel expenses, and incentive pay,
Financial Services' non-interest expense is up 5.5% for the quarter and 5.8%
for the first nine months of 2004 compared to the same periods a year ago. Our
non-interest expense growth continues to be primarily in the sales and
production areas of the highest growth banking markets.
Our goal this year is to grow our Financial Services segment without expansion
in total headcount, and we are on track to attain this goal. Total headcount for
the Financial Services segment at September 30, 2004 was 6,432. Excluding the
impact of acquisitions, divestitures, and new markets, our total headcount has
decreased by 115 since December 31, 2003.
Transaction Processing Services:
Total non-interest expense increased 16.5% and 15.5% for the three and nine
months ended September 30, 2004, compared to the same period in 2003. Excluding
reimbursable items, total non-interest expense increased 21.7% and 20.1% for the
three and nine months ended September 30, 2004, compared to the same period in
2003. The increases are due to changes in each of the expense categories as
described below.
30
Salaries and other personnel expenses increased $18.4 million, or 22.3%, for the
three months ended September 30, 2004 compared to the same period in 2003. For
the nine months ended September 30, 2004, salaries and other personnel expenses
increased $29.2 million, or 11.9% compared to the same period in 2003. The
change in employment expenses is associated with normal salary increases and
related benefits, as well as lower levels of employment costs categorized as
software development and contract acquisition costs. The growth in employment
expenses also included an increase in the accrual for performance-based
incentive benefits. The number of employees decreased at September 30, 2004 when
compared to September 30, 2003 as a result of the workforce reduction announced
in February 2004.
During the third quarter of 2004, TSYS added 67 employees associated with
the TSYS Prepaid, Inc. acquisition. During the second quarter of 2003, TSYS
added approximately 220 employees associated with the ESC acquisition and the
creation of a wholly-owned subsidiary named TSYS Technology Center, Inc. (TTC)
in Boise, Idaho. The TTC team members support technology efforts throughout
TSYS, including government services, customer care, programming, and systems
development.
Net occupancy and equipment expense increased $7.9 million, or 15.4% for
the three months ended September 30, 2004 over the same period in 2003. For the
nine months ended September 30, 2004, net occupancy and equipment expense
increased $30.7 million, or 20.1%, over the same period in 2003. Due to rapidly
changing technology in computer equipment, TSYS' equipment needs are met to a
large extent through operating leases. Computer equipment and software rentals,
which represent the largest component of net occupancy and equipment expense,
increased approximately $1.2 million and $4.8 million for the three and nine
months ended September 30, 2004, respectively, compared to the same periods in
2003. Depreciation and amortization increased $397,000 and $3.8 million during
the three and nine months ended September 30, 2004, respectively, compared to
the same periods in 2003, mainly the result of increased amortization of
licensed software from vendors. Repairs and maintenance expenses for software
and equipment increased $5.1 million and $9.9 million for the three months and
nine months ended September 30, 2004, respectively, compared to the same periods
a year ago.
During the second quarter of 2004, TSYS decided to change its approach for entry
into the Asia-Pacific market. As a result, TSYS recognized a $10.1 million
charge to net occupancy and equipment expense for the write-off of the
double-byte software development project.
Other operating expenses for the three and nine months ended September 30,
2004 increased $8.6 million and $34.6 million, or 31.2% and 48.9%, respectively,
as compared to the same periods in 2003. Other operating expenses include, among
other things, amortization of conversion costs, professional advisory fee and
court costs associated with TSYS' debt collection business. Amortization of
conversion costs increased $589,000 and $3.3 million for the three and nine
months ended September 30, 2004, as compared to the same periods in 2003. As a
result of a new debt-collection agreement with an existing client signed in the
third quarter of 2003, TSYS recognized $8.3 million and $3.7 million of attorney
court costs and commissions in other operating expenses, for the three months
ended September 30, 2004 and 2003, respectively. TSYS recognized $26.3 million
and $3.7 million of attorney court costs and commissions in other operating
expenses for the nine months ended September 30, 2004 and 2003, respectively.
31
Other operating expenses also include charges for processing errors,
contractual commitments, and bad debt expense. TSYS' evaluation of the adequacy
of its transaction processing reserves and allowance for doubtful accounts is
based on a formal analysis which assesses the probability of losses related to
contractual contingencies, processing errors, and uncollectible accounts.
Increases and decreases in transaction processing provisions and charges for bad
debt expense are reflected in other operating expenses. For the three
months ended September 30, 2004, transaction processing expenses decreased
$411,000, compared to the same period in 2003. For the nine months ended
September 30, 2004, transaction processing expenses increased $2.5 million
compared to the same period in 2003.
Income Tax Expense
For the nine months ended September 30, 2004, income tax expense was $185.7
million compared to $164.3 million for the same period in 2003. For the third
quarter of 2004, income tax expense was $64.3 million compared to $57.7 million
for the third quarter of 2003. The effective tax rate for the first nine months
of 2004 was 36.8%, compared to 36.5% for the same period in 2003. For the third
quarter of 2004, the effective tax rate was 37.1%, compared to 36.6% for the
third quarter of 2003.
Legal Proceedings
TSYS has received notification from the United States Attorneys' Office for the
Northern District of California that the United States Department of Justice is
investigating whether TSYS and/or one of its large credit card processing
clients violated the False Claims Act, 31 U.S.C. ss.ss.3729-33, in connection
with mailings made on behalf of the client from July 1997 through November 2001.
The subject matter of the investigation relates to the U.S. Postal Service's
Move Update Requirements. In general, the Postal Service's Move Update
Requirements are designed to reduce the volume of mail that is returned to
sender as undeliverable as addressed. In effect, these requirements provide,
among other things, various procedures that may be utilized to maintain the
accuracy of mailing lists in exchange for discounts on postal rates. TSYS has
received a subpoena from the Office of the Inspector General of the U.S. Postal
Service, and has produced documents responsive to the subpoena, and expects to
provide further documentation to the government in connection with this
investigation. TSYS intends to fully cooperate with the Department of Justice in
the investigation, and there can be no assurance as to the timing or outcome of
the investigation, including whether the investigation will result in any
criminal or civil fines, penalties, judgments or treble damages 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
We previously disclosed that we expected our earnings per share growth for 2004
to be in the 8-10% range. We now expect earnings per share growth for 2004 to be
10%.
Share Repurchase Plan
On April 14, 2003, the Synovus board of directors approved a $200 million share
repurchase plan. Through September 30, 2004, 5.5 million shares have been
purchased under this plan at a total cost of $112.7 million (there have been no
share repurchases under this plan during the nine months ended September 30,
2004). Consistent with the expectation at the inception of the plan,
32
Synovus repurchased one-half of the total authorization during the first 90
days after the plan was approved. The pace of future repurchases under this
two-year plan will depend on various factors including price, market conditions,
acquisitions, and the general financial position of Synovus.
Forward-Looking Statements
Certain statements contained in this filing which are not statements of
historical fact constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act (the "Act"). These forward-looking
statements include, among others, TSYS' expected conversions of the Chase Card
Services portfolios in the fourth quarter of 2004 and the second half of 2005;
TSYS' expectation that it will maintain the card processing functions of Chase
Card Services for at least two years; 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' anticipated execution of an
amendment to its processing agreement with Bank of America to encompass the
processing of the FleetBoston portfolio; Synovus' expectations with respect to
the financial impact resulting from changes in methodology and standard costs
related to its accounting for loan origination fees and costs; any matter that
might arise out of the United States Department of Justice's investigation of
TSYS; and Synovus' expected growth in earnings per share for 2004 and the
assumptions underlying such statements. In addition, certain statements in
future filings by Synovus with the Securities and Exchange Commission, in press
releases, and in oral and written statements made by or with the approval of
Synovus which are not statements of historical fact constitute forward-looking
statements within the meaning of the Act. Examples of forward-looking statements
include, but are not limited to: (i) projections of revenues, income or loss,
earnings or loss per share, the payment or non-payment of dividends, capital
structure, efficiency ratios and other financial terms; (ii) statements of plans
and objectives of Synovus or its management or Board of Directors, including
those relating to products or services; (iii) statements of future economic
performance; and (iv) statements of assumptions underlying such statements.
Words such as "believes," "anticipates," "expects," "intends," "targeted," and
similar expressions are intended to identify forward-looking statements but are
not the exclusive means of identifying such statements.
Prospective investors are cautioned that any such forward-looking statements are
not guarantees of future performance and involve risks and uncertainties, and
that actual results may differ materially from those contemplated by such
forward-looking statements. A number of factors could cause actual results to
differ materially from those contemplated by the forward-looking statements in
this filing. Many of these factors are beyond Synovus' ability to control or
predict. These factors include, but are not limited to: (i) the strength of the
U.S. economy in general and the strength of the local economies in which
operations are conducted; (ii) the effects of and changes in trade, monetary and
fiscal policies, and laws, including interest rate policies of the Federal
Reserve Board; (iii) inflation, interest rate, market and monetary fluctuations;
(iv) the timely development of and acceptance of new products and services and
perceived overall value of these products and services by users; (v) changes in
consumer spending, borrowing, and saving habits; (vi) technological changes are
more difficult or expensive than anticipated; (vii) acquisitions are more
difficult to integrate than anticipated; (viii) the ability to increase market
share and control expenses; (vix) the effect of changes in laws and regulations
(including laws and regulations concerning taxes, banking, securities, and
insurance) with which Synovus and its subsidiaries must comply; (x) the effect
of changes in accounting policies and practices, as may be adopted by the
regulatory agencies, the Financial Accounting Standards Board, or other
33
authoritative bodies; (xi) changes in Synovus' organization, compensation, and
benefit plans; (xii) the costs and effects of litigation or adverse facts and
developments related thereto; (xiii) a deterioration in credit quality or a
reduced demand for credit; (xiv) Synovus' inability to successfully manage any
impact from slowing economic conditions or consumer spending; (xv) 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; (xvi) successfully managing the potential both for patent
protection and patent liability in the context of rapidly developing legal
framework for expansive software patent protection; (xvii) TSYS does not convert
the Chase Card services portfolios as expected; (xviii) TSYS does not process
the Chase Card Services portfolios for at least two years as expected; (xix) the
merger of TSYS clients with entities that are not TSYS clients or the sale of
portfolios by TSYS clients to entities that are not TSYS clients, including the
acquisition by Citigroup of the Sears portfolio (xx) hostilities increase in the
Middle East or elsewhere; and (xxi) 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.
34
ITEM 3 - QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
During the first nine months of 2004, Synovus has maintained 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 as of September 30, 2004 due to market
expectation of rising short-term interest rates.
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 2.8%, 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 2.7%, 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.
35
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.
36
PART II - OTHER INFORMATION
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On April 14, 2003, the Synovus board of directors approved a $200
million share repurchase plan. Through September 30, 2004, 5.5 million shares
have been purchased under this plan at a total cost of $112.7 million (there
have been no share repurchases under this plan during the nine months ended
September 30, 2004). Consistent with the expectation at the inception of the
plan, Synovus repurchased one-half of the total authorization during the first
90 days after the plan was approved. The pace of future repurchases under this
two-year plan will depend on various factors including price, market conditions,
acquisitions, and the general financial position of Synovus.
The following table sets forth information regarding Synovus' purchases of its
common stock on a monthly basis during the three months ended September 30,
2004:
Maximum Number of
Total Number of Shares Shares That May Yet
Purchased as Part of Be Purchased Under
Announced Plans or the Plans or Programs
Total Number of Average Price Paid per Programs
Period Shares Purchased Share
- ------------------------- ---------------------- -------------------------- -------------------------- -----------------------
July 2004 -- $ -- -- 3,340,137
August 2004 -- -- -- 3,340,137
September 2004 -- -- 3,340,137
---------------------- -------------------------- -------------------------- -----------------------
-- $ -- -- 3,340,137
Total
========================= ====================== ========================== ========================== =======================
Based on Synovus stock price of $26.15 at September 30, 2004.
37
ITEM 6 - EXHIBITS
(a) Exhibits Description
-------------------- -------------------------------------------------
(10.1) Form of Stock Option Agreement for the :
(1) Synovus Financial Corp. 1994 Long-Term
Incentive Plan, which plan was previously filed as
Exhibit 10.16 of Synovus' Annual Report on Form
10-K for the fiscal year ended December 31, 1994;
(2) Synovus Financial Corp. 2000 Long-Term
Incentive Plan, which plan was previously filed as
Exhibit 10.22 of Synovus' Annual Report on Form
10-K for the fiscal year ended December 31, 1999;
and (3) Synovus Financial Corp. 2002 Long-Term
Incentive Plan, which plan was previously filed as
Exhibit 10.4 of Synovus' Annual Report on Form
10-K for the fiscal year ended December 31, 2001.
(31.1) Certification of Chief Executive Officer
(31.2) Certification of Chief Financial Officer
(32) Certification of Periodic Report
38
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: November 9, 2004 BY: /s/ Thomas J. Prescott
---------------- ----------------------
Thomas J. Prescott
Executive Vice President and
Chief Financial Officer
39
INDEX TO EXHIBITS
Exhibit Number Description
- -------------- -------------
10.1 Form of Stock Option Agreement for the: (1)
Synovus Financial Corp. 1994 Long-Term
Incentive Plan, which plan was previously
filed as Exhibit 10.16 of Synovus' Annual
Report on Form 10-K for the fiscal year ended
December 31, 1994; (2) Synovus Financial
Corp. 2000 Long-Term Incentive Plan, which
plan was previously filed as Exhibit 10.22 of
Synovus' Annual Report on Form 10-K for the
fiscal year ended December 31, 1999; and (3)
Synovus Financial Corp. 2002 Long-Term
Incentive Plan, which plan was previously
filed as Exhibit 10.4 of Synovus' Annual
Report on Form 10-K for the fiscal year ended
December 31, 2001.
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32 Certification of Periodic Report
49