SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
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240.14a-12
Synovus Financial Corp.
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[LOGO](R)
SYNOVUS(R)
James H. Blanchard
Chief Executive Officer
March 17, 2004
Dear Shareholder:
You are cordially invited to attend our Annual Meeting of Shareholders at
10:00 a.m. on Thursday, April 22, 2004, at the RiverCenter for the Performing
Arts, 900 Broadway, Columbus, Georgia 31901. Enclosed with this Proxy Statement
are your proxy card and the 2003 Annual Report.
We hope that you will be able to be with us and let us give you a review of
2003. If you are unable to attend the meeting, you can listen to it live and
view the slide presentation over the Internet. You can access the meeting by
going to our website at www.synovus.com. Additionally, we will maintain copies
of the slides and audio of the presentation to the 2004 Annual Meeting on the
website for reference after the meeting.
Whether you own a few or many shares of stock and whether or not you plan
to attend in person, it is important that your shares be voted on matters that
come before the meeting. To make sure your shares are represented, we urge you
to vote promptly.
Thank you for helping us make 2003 a good year. We look forward to your
continued support in 2004 and another good year.
Sincerely yours,
/s/James H. Blanchard
James H. Blanchard
Synovus Financial Corp. Post Office Box 120 Columbus, Georgia 31902-0120
SYNOVUS(R)
NOTICE OF THE 2004 ANNUAL MEETING OF SHAREHOLDERS
TIME............... 10:00 a.m. E.T.
Thursday, April 22, 2004
PLACE.............. RiverCenter for the Performing Arts
900 Broadway
Columbus, Georgia 31901
ITEMS OF BUSINESS.. (1) To elect seven directors to serve until the Annual
Meeting of Shareholders in 2007 and five directors
to serve until the Annual Meeting of Shareholders
in 2006.
(2) To ratify the appointment of KPMG LLP as our
independent auditor for the year 2004.
(3) To transact such other business as may properly
come before the meeting and any adjournment thereof.
WHO MAY VOTE....... You can vote if you were a shareholder of record on
February 17, 2004.
ANNUAL REPORT...... A copy of the Annual Report is enclosed.
PROXY VOTING....... Your vote is important. Please vote in one of these ways:
(1) Use the toll-free telephone number shown on the
proxy card;
(2) Visit the website listed on your proxy card;
(3) Mark, sign, date and promptly return the enclosed
proxy card in the postage-paid envelope provided; or
(4) Submit a ballot at the Annual Meeting.
/s/G. Sanders Griffith, III
G. Sanders Griffith, III
Secretary
Columbus, Georgia
March 17, 2004
YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL
MEETING, PLEASE VOTE YOUR SHARES PROMPTLY.
TABLE OF CONTENTS
Voting Information.............................................................1
Corporate Governance and Board Matters.........................................3
Director Compensation and Stock
Ownership Guidelines.......................................................7
Proposals to Be Voted On:
Proposal 1: Election of Directors..........................................8
Proposal 2: Ratification of Appointment of the Independent Auditor........11
Executive Officers............................................................11
Stock Ownership of Directors and Executive Officers...........................12
Audit Committee Report........................................................13
Executive Compensation........................................................15
Stock Performance Graph.......................................................18
Compensation Committee Report on Executive Compensation.......................18
Compensation Committee Interlocks and
Insider Participation....................................................21
Transactions With Management..................................................22
Principal Shareholders........................................................24
Relationships Between Synovus, CB&T, TSYS and
Certain of Synovus' Subsidiaries and Affiliates..........................24
Section 16(a) Beneficial Ownership Reporting Compliance.......................27
Shareholder Proposals and Nominations.........................................27
General Information:
Financial Information.....................................................28
Solicitation of Proxies...................................................28
Householding..............................................................28
Appendix A: Audit Committee Charter..........................................A-1
Financial Appendix...........................................................F-1
PROXY STATEMENT
VOTING INFORMATION
PURPOSE
This Proxy Statement and the accompanying proxy card are being mailed to
Synovus shareholders beginning March 17, 2004. The Synovus Board of Directors is
soliciting proxies to be used at the 2004 Annual Meeting of Synovus Shareholders
which will be held on April 22, 2004, at 10:00 a.m., at the RiverCenter for the
Performing Arts, 900 Broadway, Columbus, Georgia. Proxies are solicited to give
all shareholders of record an opportunity to vote on matters to be presented at
the Annual Meeting. In the following pages of this Proxy Statement, you will
find information on matters to be voted upon at the Annual Meeting of
Shareholders or any adjournment of that meeting.
WHO CAN VOTE
You are entitled to vote if you were a shareholder of record of Synovus
stock as of the close of business on February 17, 2004. Your shares can be voted
at the meeting only if you are present or represented by a valid proxy.
QUORUM AND SHARES OUTSTANDING
A majority of the votes entitled to be cast by the holders of the
outstanding shares of Synovus stock must be present, either in person or
represented by proxy, in order to conduct the Annual Meeting of Synovus
Shareholders. On February 17, 2004, 302,516,262 shares of Synovus stock were
outstanding.
PROXY CARD
The Board has designated two individuals to serve as proxies to vote the
shares represented by proxies at the Annual Meeting of Shareholders. If you sign
the proxy card but do not specify how you want your shares to be voted, your
shares will be voted by the designated proxies FOR the election of all of the
director nominees and FOR the ratification of the appointment of KPMG LLP as
Synovus' independent auditor for the year 2004. The designated proxies will vote
in their discretion on any other matter that may properly come before the
meeting. At the date the Proxy Statement went to press, we did not anticipate
that any other matters would be raised at the Annual Meeting.
VOTING OF SHARES
Holders of Synovus stock are entitled to ten votes on each matter submitted
to a vote of shareholders for each share of Synovus stock owned on February 17,
2004 which: (i) has had the same owner since February 17, 2000; (ii) was
acquired by reason of participation in a dividend reinvestment plan offered by
Synovus and is held by the same owner who acquired it under such plan; (iii) is
held by the same owner to whom it was issued as a result of an acquisition of a
company or business by Synovus where the resolutions adopted by Synovus' Board
of Directors approving the acquisition specifically grant ten votes per share;
(iv) was acquired under any employee, officer and/or director benefit plan
maintained for one or more employees, officers and/or directors of Synovus
and/or its subsidiaries, and is held by the same owner for whom it was acquired
under any such plan; (v) is held by the same owner to whom it was issued by
Synovus, or to whom it was transferred by Synovus from treasury shares, and the
resolutions adopted by Synovus' Board of Directors approving such issuance
and/or transfer specifically grant ten votes per share; (vi) was acquired as a
direct result of a stock split, stock dividend or other type of share
distribution if the share as to which it was distributed was acquired prior to,
and has been held by the same owner since, February 17, 2000; (vii) has been
owned continuously by the same shareholder for a period of 48 consecutive months
prior to the record date of any meeting of shareholders at which the share is
eligible to be voted; or (viii) is owned by a holder who, in addition to shares
which are owned under the provisions of (i)-(vii) above, is the owner of
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less than 1,139,063 shares of Synovus stock (which amount has been appropriately
adjusted to reflect stock splits and with such amount to be appropriately
adjusted to properly reflect any other change in Synovus stock by means of a
stock split, a stock dividend, a recapitalization or otherwise). Shareholders of
shares of Synovus stock not described above are entitled to one vote per share
for each share. The actual voting power of each holder of shares of Synovus
stock will be based on information possessed by Synovus at the time of the
Annual Meeting.
As Synovus stock is registered with the Securities and Exchange Commission
and is traded on the New York Stock Exchange, Synovus stock is subject to the
provisions of an NYSE rule which, in general, prohibits a company's common stock
and equity securities from being authorized or remaining authorized for trading
on the NYSE if the company issues securities or takes other corporate action
that would have the effect of nullifying, restricting or disparately reducing
the voting rights of existing shareholders of the company. However, the rule
contains a "grandfather" provision, under which Synovus' ten vote provision
falls, which, in general, permits grandfathered disparate voting rights plans to
continue to operate as adopted. The number of votes that each shareholder will
be entitled to exercise at the Annual Meeting will depend upon whether each
share held by the shareholder meets the requirements which entitle one share of
Synovus stock to ten votes on each matter submitted to a vote of shareholders.
Shareholders of Synovus stock must complete the Certification on the proxy in
order for any of the shares represented by the proxy to be entitled to ten votes
per share. All shares entitled to vote and represented in person or by properly
completed proxies received before the polls are closed at the Annual Meeting,
and not revoked or superseded, will be voted in accordance with instructions
indicated on those proxies.
SHAREHOLDERS WHO DO NOT CERTIFY ON THEIR PROXY CARDS THAT THEY ARE ENTITLED TO
TEN VOTES PER SHARE WILL BE ENTITLED TO ONLY ONE VOTE PER SHARE.
Synovus Dividend Reinvestment and Direct Stock Purchase Plan: If you
participate in this Plan, your proxy card represents shares held in the Plan, as
well as shares you hold directly in certificate form registered in the same
name.
REQUIRED VOTES
Directors are elected by a plurality of the votes, which means the twelve
nominees who receive the largest number of properly executed votes will be
elected as directors. Cumulative voting is not permitted. Shares that are
represented by proxies which are marked "withhold authority" for the election of
one or more director nominees will not be counted in determining the number of
votes cast for those persons.
The affirmative vote of a majority of the votes cast (in person or by proxy
and entitled to vote at the Annual Meeting) is needed to ratify the appointment
of KPMG LLP as Synovus' independent auditor for 2004.
TABULATION OF VOTES
Under certain circumstances, brokers are prohibited from exercising
discretionary authority for beneficial owners who have not returned proxies to
the brokers (so-called "broker non-votes"). In these cases, and in cases where
the shareholder abstains from voting on a matter, those shares will be counted
for the purpose of determining if a quorum is present, but will not be included
in the vote totals with respect to those matters and, therefore, will have no
effect on the vote. In addition, if a broker indicates on the proxy card that
it does not have discretionary authority on other matters considered at the
meeting, those shares will not be counted in determining the number of votes
cast with respect to those matters.
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HOW YOU CAN VOTE
You may vote by proxy or in person at the meeting. To vote by proxy, you
may select one of the following options:
Vote By Telephone:
You can vote your shares by telephone by calling the toll-free telephone
number (at no cost to you) shown on your proxy card. Telephone voting is
available 24 hours a day, seven days a week. Easy-to-follow voice prompts allow
you to vote your shares and confirm that your instructions have been properly
recorded. Our telephone voting procedures are designed to authenticate the
shareholder by using individual control numbers. If you vote by telephone, you
do NOT need to return your proxy card.
Vote By Internet:
You can also choose to vote on the Internet. The website for Internet
voting is shown on your proxy card. Internet voting is available 24 hours a day,
seven days a week. You will be given the opportunity to confirm that your
instructions have been properly recorded, and you can consent to view future
proxy statements and annual reports on the Internet instead of receiving them in
the mail. If you vote on the Internet, you do NOT need to return your proxy
card.
Vote By Mail:
If you choose to vote by mail, simply mark your proxy card, date and sign
it, sign the Certification and return it in the postage-paid envelope provided.
REVOCATION OF PROXY
If you vote by proxy, you may revoke that proxy at any time before it is
voted at the meeting. You may do this by (a) signing another proxy card with a
later date and returning it to us prior to the meeting, (b) voting again by
telephone or on the Internet prior to the meeting, or (c) attending the meeting
in person and casting a ballot.
CB&T AND TOTAL SYSTEM SERVICES, INC.
Synovus is the owner of all of the issued and outstanding shares of common
stock of Columbus Bank and Trust Company (R)("CB&T"). CB&T owns individually
81.1% of the outstanding shares of Total System Services, Inc.(R) ("TSYS(R)"),
an electronic transaction processing company.
CORPORATE GOVERNANCE AND BOARD MATTERS
CORPORATE GOVERNANCE PHILOSOPHY
The business affairs of Synovus are managed under the direction of the
Board of Directors in accordance with the Georgia Business Corporation Code, as
implemented by Synovus' Articles of Incorporation and bylaws. The role of the
Board of Directors is to effectively govern the affairs of Synovus for the
benefit of its shareholders and other constituencies. The Board strives to
ensure the success and continuity of business through the election of qualified
management. It is also responsible for ensuring that Synovus' activities are
conducted in a responsible and ethical manner. Synovus is committed to having
sound corporate governance principles.
INDEPENDENCE
The Board has determined that a majority of its members are "independent"
as defined by the listing standards of the New York Stock Exchange and Synovus'
Corporate Governance Guidelines. Synovus' Board has determined that the
following directors are independent: Daniel P. Amos, Richard Y. Bradley, Frank
W. Brumley, Elizabeth W. Camp, C. Edward Floyd, T. Michael Goodrich, V.
Nathaniel Hansford, John P. Illges, III, Mason H. Lampton, Elizabeth C. Ogie, H.
3
Lynn Page, J. Neal Purcell and Melvin T. Stith. The standards set and used by
the Board to determine the independence of directors and committee members
(which are incorporated within our Corporate Governance Guidelines) are
available in the Corporate Governance section of our website at
www.synovus.com/governance. All independent directors of Synovus meet the
standards for independence set by the Board.
ATTENDANCE AT MEETINGS
The Board of Directors held four meetings in 2003. All directors attended
at least 75% of Board and committee meetings held during their tenure during
2003 except Daniel P. Amos who attended 63%. The average attendance by directors
at the aggregate number of Board and committee meetings they were scheduled to
attend was 95%. Although Synovus has no formal policy with respect to Board
members' attendance at its annual meetings, it is customary for all Board
members to attend as there is a Board meeting immediately preceding the annual
meeting. Seventeen of our then eighteen directors attended the 2003 Annual
Meeting of Shareholders.
COMMITTEES OF THE BOARD
Synovus' Board of Directors has four principal standing committees -- an
Executive Committee, an Audit Committee, a Corporate Governance and Nominating
Committee and a Compensation Committee. Each committee has a written charter
that complies with the listing standards of the NYSE pertaining to corporate
governance. Copies of the committee charters are available in the Corporate
Governance section of our website at www.synovus.com/governance. The Board has
determined that each member of the Audit, Corporate Governance and Nominating
and Compensation Committees is an "independent" director as defined by the
listing standards of the NYSE and our Corporate Governance Guidelines.
The following table shows the membership of the various committees.
--------------------------------------------------------------------------------------------------------------------------
Executive Audit Corporate Governance and Nominating Compensation
----------- ----- ----------------------------------- ----------------------------
V. Nathaniel Hansford, Chair John P. Illges, III,Chair Richard Y. Bradley, Chair V. Nathaniel Hansford, Chair
James H. Blanchard H. Lynn Page Daniel P. Amos Mason H. Lampton
Richard Y. Bradley Melvin T. Stith Frank W. Brumley
Gardiner W. Garrard, Jr. C. Edward Floyd
John P. Illges, III Elizabeth C. Ogie
Mason H. Lampton
James D. Yancey
--------------------------------------------------------------------------------------------------------------------------
Executive Committee. Synovus' Executive Committee held six meetings in
2003. During the intervals between meetings of Synovus' Board of Directors,
Synovus' Executive Committee possesses and may exercise any and all of the
powers of Synovus' Board of Directors in the management and direction of the
business and affairs of Synovus with respect to which specific direction has not
been previously given by Synovus' Board of Directors.
Audit Committee. Synovus' Audit Committee held nine meetings in 2003. Its
Report begins on page 13. A copy of the Audit Committee charter, which
contains a detailed list of the Committee's functions, is attached to this Proxy
Statement as Appendix A. The Board has determined that all three members of the
Committee are financially literate under the rules of the NYSE and that H. Lynn
Page is an "audit committee financial expert" as defined by the rules of the
Securities and Exchange Commission. The primary functions to be engaged in by
Synovus' Audit Committee include:
. Monitoring the integrity of Synovus' financial statements, Synovus'
systems of internal controls and Synovus' compliance with regulatory
and legal requirements;
. Monitoring the independence, qualifications and performance of
Synovus' independent auditor and internal auditing activities; and
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. Providing an avenue of communication among the independent auditor,
management, internal audit and the Board of Directors.
Corporate Governance and Nominating Committee. Synovus' Corporate
Governance and Nominating Committee held four meetings in 2003. The primary
functions to be engaged in by Synovus' Corporate Governance and Nominating
Committee include:
. Identifying qualified individuals to become Board members;
. Recommending to the Board the director nominees for each annual
meeting of shareholders and director nominees to be elected
by the Board to fill interim director vacancies;
. Overseeing the annual review and evaluation of the performance of the
Board and its committees; and
. Developing and recommending to the Board corporate governance
guidelines.
Compensation Committee. Synovus' Compensation Committee held four meetings
in 2003. Its Report on Executive Compensation begins on page 18. The primary
functions to be engaged in by Synovus' Compensation Committee include:
. The design and oversight of Synovus' executive compensation program;
. The design and oversight of all compensation and benefit programs in
which employees and officers of Synovus are eligible to participate;
and
. Performing an annual evaluation of the Chief Executive Officer.
CONSIDERATION OF DIRECTOR CANDIDATES
Shareholder Candidates. The Corporate Governance and Nominating Committee
will consider candidates for nomination as a director submitted by shareholders.
Although the Committee does not have a separate policy that addresses the
consideration of director candidates recommended by shareholders, the Board does
not believe that such a separate policy is necessary as Synovus' bylaws permit
shareholders to nominate candidates and as one of the duties set forth in the
Corporate Governance and Nominating Committee charter is to review and consider
director candidates submitted by shareholders. The Committee will consider
individuals recommended by shareholders for nomination as directors in
accordance with Synovus' bylaws and in accordance with the procedures described
under "Shareholder Proposals and Nominations" on page 27.
Director Qualifications. Synovus' Corporate Governance Guidelines contain
Board membership criteria considered by the Corporate Governance and Nominating
Committee in recommending nominees for a position on Synovus' Board. The
Committee believes that, at a minimum, a director candidate must possess
personal and professional integrity, sound judgment and forthrightness. A
director candidate must also have sufficient time and energy to devote to the
affairs of Synovus, be free from conflicts of interest with Synovus, must not
have reached the retirement age for Synovus directors and be willing to make,
and financially capable of making, the required investment in Synovus' stock
pursuant to Synovus' Director Stock Ownership Guidelines. The Committee also
considers the following criteria when reviewing a director candidate:
.. The extent of the director's/potential director's business acumen and
experience;
.. Whether the director/potential director assists in achieving a mix of Board
members that represents a diversity of background and experience, including
with respect to age, gender, race, place of residence and specialized
experience;
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.. Whether the director/potential director meets the independence requirements
of the listing standards of the NYSE;
.. Whether the director/potential director would be considered a "financial
expert" or "financially literate" as defined in the listing standards of
the NYSE;
.. Whether the director/potential director, by virtue of particular technical
expertise, experience or specialized skill relevant to Synovus' current or
future business, will add specific value as a Board member; and
.. Whether the director/potential director possesses a willingness to
challenge and stimulate management and the ability to work as part of a
team in an environment of trust.
IDENTIFYING AND EVALUATING NOMINEES
The Corporate Governance and Nominating Committee has two primary methods
for identifying director candidates (other than those proposed by Synovus'
shareholders, as discussed above). First, on a periodic basis, the Committee
solicits ideas for possible candidates from a number of sources including
members of the Board, Synovus executives and individuals personally known to the
members of the Board. Second, the Committee is authorized to use its authority
under its charter to retain at Synovus' expense one or more search firms to
identify candidates (and to approve such firms' fees and other retention terms).
The Committee will consider all director candidates identified through the
processes described above, and will evaluate each of them, including incumbents,
based on the same criteria. The director candidates are evaluated at regular or
special meetings of the Committee and may be considered at any point during the
year. If based on the Committee's initial evaluation a director candidate
continues to be of interest to the Committee, the Chair of the Committee will
interview the candidate and communicate his evaluation to the other Committee
members and executive management. Additional interviews are conducted, if
necessary, and ultimately the Committee will meet to finalize its list of
recommended candidates for the Board's consideration.
Five nominees for election as directors have not previously served as
directors of Synovus. Mr. Brumley was recommended to the Committee for
consideration as a director nominee by a non-management director and the chief
executive officer; Ms. Camp by an executive officer (other than the chief
executive officer); Mr. Goodrich by an executive officer and an emeritus Board
member; and Mr. Purcell and William B. Turner, Jr. by the chief executive
officer.
MEETINGS OF NON-MANAGEMENT DIRECTORS
The non-management directors of Synovus meet separately at least four times
a year after each regularly scheduled meeting of the Board of Directors. V.
Nathaniel Hansford, Synovus' Lead Director, presides at the meetings of
non-management directors.
COMMUNICATING WITH THE BOARD
Synovus' Board provides a process for shareholders to communicate with the
Board. Shareholders may communicate with the Board by writing the Board of
Directors, Synovus Financial Corp., c/o General Counsel's Office, 901 Front
Avenue, Suite 301, Columbus, Georgia 31901. Additional procedures by which
shareholders can communicate with the non-management directors are available in
the Corporate Governance section of our website at www.synovus.com/governance.
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ADDITIONAL INFORMATION ABOUT CORPORATE GOVERNANCE
Synovus has adopted Corporate Governance Guidelines which are regularly
reviewed by the Corporate Governance and Nominating Committee. We have also
adopted a Code of Business Conduct and Ethics which is applicable to all
directors, officers and employees. In addition, we maintain procedures for the
confidential, anonymous submission of any complaints or concerns about Synovus,
including complaints regarding accounting, internal accounting controls or
auditing matters. Shareholders may access Synovus' Corporate Governance
Guidelines, Code of Business Conduct and Ethics, each committee's current
charter, procedures for shareholders to communicate with the non-management
directors and procedures for reporting complaints and concerns about Synovus,
including complaints concerning accounting, internal accounting controls and
auditing matters in the Corporate Governance section of our website at
www.synovus.com/governance.
DIRECTOR COMPENSATION AND STOCK OWNERSHIP GUIDELINES
COMPENSATION
Directors of Synovus receive the following compensation:
Annual retainer........................................$25,000
Annual retainer for committee chair,
excluding executive ..............................$ 2,000
Attendance fee for each Board meeting..................$ 1,800
Attendance fee for each Executive Committee meeting,
including the chairman............................$ 1,800
Attendance fee for each committee meeting chaired,
other than executive..............................$ 1,200
Attendance fee for committee meetings,
other than executive..............................$ 750
Directors may elect to defer all or a portion of their cash compensation.
Deferred amounts are deposited into one or more investment funds chosen by the
director. All deferred fees are payable only in cash.
DIRECTOR STOCK PURCHASE PLAN
Synovus' Director Stock Purchase Plan is a nontax-qualified, contributory
stock purchase plan pursuant to which qualifying Synovus directors can purchase,
with the assistance of contributions from Synovus, presently issued and
outstanding shares of Synovus stock. Under the terms of the Director Stock
Purchase Plan, qualifying directors can elect to contribute up to $5,000 per
calendar quarter to make purchases of Synovus stock, and Synovus contributes an
additional amount equal to 50% of the directors' cash contributions.
Participants in the Director Stock Purchase Plan are fully vested in, and may
request the issuance to them of, all shares of Synovus stock purchased for their
benefit under the Plan.
CONSULTING SERVICES
Joe E. Beverly, a director and former Vice Chairman of the Board of
Synovus, Commercial Bank, a banking subsidiary of Synovus, and Synovus are
parties to a Retirement Agreement pursuant to which Mr. Beverly was paid $63,000
by Commercial Bank for serving as its Chairman and pursuant to which Mr. Beverly
was paid $24,000 by Synovus for providing consulting and advisory services
relating to Synovus' affiliate banks during 2003.
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STOCK OWNERSHIP GUIDELINES
Under Synovus' stock ownership guidelines for directors, all directors are
required to accumulate over time shares of Synovus stock equal in value to at
least three times the value of the annual retainer.
PROPOSALS TO BE VOTED ON
PROPOSAL 1: ELECTION OF DIRECTORS
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" ALL
NOMINEES.
NUMBER
At the date of this Proxy Statement, the Board of Directors of Synovus
consists of 20 members, which is the number authorized by Synovus' shareholders.
The Board is divided into three classes whose terms are staggered so that the
term of one class expires at each Annual Meeting of Shareholders. The terms of
office of the Class I directors expire at the 2004 Annual Meeting, the terms of
office of the Class II directors expire at the 2005 Annual Meeting and the terms
of office of the Class III directors expire at the 2006 Annual Meeting. Proxies
cannot be voted at the 2004 Annual Meeting for a greater number of persons than
the number of nominees named.
NOMINEES
There are seven directors, James H. Blanchard, C. Edward Floyd, Gardiner W.
Garrard, Jr., V. Nathaniel Hansford, Alfred W. Jones III, H. Lynn Page and James
D. Yancey, who have been nominated by the Corporate Governance and Nominating
Committee and approved by the Board for submission to the shareholders for
reelection for terms expiring in 2007. In addition, there are five directors,
Frank W. Brumley, Elizabeth W. Camp, T. Michael Goodrich, J. Neal Purcell and
William B. Turner, Jr., who have been nominated to stand for election as
directors for terms expiring in 2006. These directors were each elected by
Synovus' Board to fill vacant Board seats and are being submitted to Synovus'
shareholders as nominees for the first time at the 2004 Annual Meeting.
The Board believes that each director nominee will be able to stand for
election. If any nominee becomes unable to stand for election, proxies in favor
of that nominee will be voted in favor of the remaining nominees and in favor of
any substitute nominee named by the Board upon the recommendation of the
Corporate Governance and Nominating Committee. If you do not wish your shares
voted for one or more of the nominees, you may so indicate on the proxy.
MEMBERS OF THE BOARD OF DIRECTORS
Following is the principal occupation, age and certain other information
for each director nominee and other directors serving unexpired terms.
---------------------------------------------------------------------------------------------------------
Synovus Year
Director First
Classifi- Elected Principal Occupation
Name Age cation Director and Other Information
------------------------- ----- -------- ---------- -------------------------------------
Daniel P. Amos 52 II 2001 Chief Executive Officer and Director,
AFLAC Incorporated (Insurance Holding
Company); Director, Southern Company
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Richard E. Anthony 57 II 1993 President and Chief Operating Officer,
Synovus Financial Corp.
Joe E. Beverly 62 II 1983 Chairman of the Board, Commercial
Bank, Thomasville, Georgia
(Banking Subsidiary of Synovus);
Director, Flowers Foods, Inc.
James H. Blanchard 62 I 1972 Chief Executive Officer, Synovus Financial
Corp.; Chairman of the Executive
Committee, Total System Services,
Inc.; Director, BellSouth Corporation
Richard Y. Bradley 65 III 1991 Partner, Bradley & Hatcher (Law
Firm); Director, Total System
Services, Inc.
Frank W. Brumley 63 III 2004 President, Daniel Island Company
(Planned Community Development)
Elizabeth W. Camp 52 III 2003 President and Chief Executive Officer,
DF Management, Inc. (Investment and
Management of Commercial Real Estate)
C. Edward Floyd, M.D. 69 I 1995 Vascular Surgeon
Gardiner W. Garrard, Jr. 63 I 1972 President, The Jordan Company
(Real Estate Development); Director,
Total System Services, Inc.
T. Michael Goodrich 58 III 2004 Chairman and Chief Executive
Officer, BE&K, Inc. (Engineering and
Construction Company); Director,
Energen Corporation
V. Nathaniel Hansford 60 I 1985 President, North Georgia College
and State University
John P. Illges, III 69 III 1997 Senior Vice President and Financial
Consultant, Retired, The Robinson-Humphrey
Company, Inc. (Stockbroker);
Director, Total System Services, Inc.
Alfred W. Jones III 46 I 2001 Chairman of the Board and Chief Executive
Officer, Sea Island Company (Real Estate
Development and Management); Director,
Total System Services, Inc.
Mason H. Lampton 56 II 1993 President and Chief Executive Officer,
Standard Concrete Products
(Construction Company);
Director, Total System Services, Inc.
9
Elizabeth C. Ogie 53 II 1993 Private Investor
H. Lynn Page 63 I 1978 Director, Total System Services, Inc.
J. Neal Purcell 62 III 2003 Vice Chairman, Retired, KPMG LLP
(Professional Services Provider);
Director, Southern Company and
Kaiser Permanente
Melvin T. Stith 57 II 1998 Dean, College of Business, Florida
State University; Director,
Correctional Services Corp.
William B. Turner, Jr. 52 III 2003 Vice Chairman of the Board and President,
W.C. Bradley Co. (Metal Manufacturer and
Real Estate)
James D. Yancey(7) 62 I 1978 Chairman of the Board, Synovus
Financial Corp. and Columbus Bank
and Trust Company; Director,
Total System Services, Inc.
-------------
Mr. Amos previously served as a director of Synovus from 1991 until 1998,
when he resigned as a director as required by federal banking regulations
to join the board of a company affiliated with a Japanese bank.
Richard E. Anthony was elected President and Chief Operating Officer of
Synovus in October 2003. From 1995 until 2003, Mr. Anthony served as Vice
Chairman of Synovus.
James H. Blanchard was elected Chairman of the Board and Chief Executive
Officer of Synovus in April 1986 and continues to serve as Chief Executive
Officer. From 1969 until 1986, Mr. Blanchard served in various
capacities with Synovus, CB&T and/or TSYS, including President of both
Synovus and CB&T.
Elizabeth W. Camp was elected as President and Chief Executive Officer of
DF Management, Inc. in November 2000. Prior to 2000, Ms. Camp served as
President and Chief Executive Officer of Camp Oil Company.
V. Nathaniel Hansford was elected President of North Georgia College and
State University in July 1999. Prior to 1999, Mr. Hansford served as
Professor and Dean Emeritus of the University of Alabama School of Law.
Mr. Hansford serves as Lead Director of the Synovus Board.
Elizabeth C. Ogie is William B. Turner, Jr.'s first cousin.
James D. Yancey was elected Chairman of the Board of Synovus in October
2003. From 1959 until 2003, Mr. Yancey served in various capacities with
Synovus and/or CB&T, including Vice Chairman of the Board and
President of both Synovus and CB&T.
10
PROPOSAL 2: RATIFICATION OF
APPOINTMENT OF THE INDEPENDENT AUDITOR
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" RATIFICATION OF THE
APPOINTMENT OF KPMG LLP AS THE INDEPENDENT AUDITOR.
The Audit Committee has appointed the firm of KPMG LLP as the independent
auditor to audit the consolidated financial statements of Synovus and its
subsidiaries for the fiscal year ending December 31, 2004. Representatives of
KPMG will be present at the Annual Meeting with the opportunity to make a
statement if they desire to do so and will be available to respond to
appropriate questions from shareholders present at the meeting. Although
shareholder ratification of the appointment of Synovus' independent auditor is
not required by our bylaws or otherwise, we are submitting the selection of KPMG
to our shareholders for ratification to permit shareholders to participate in
this important corporate decision. If not ratified, the Audit Committee will
reconsider the selection, although the Audit Committee will not be required to
select a different independent auditor for Synovus.
EXECUTIVE OFFICERS
The following table sets forth the name, age and position with Synovus of
each executive officer of Synovus.
Name Age Position with Synovus
----------------------- --- ------------------------------------------------
James H. Blanchard 62 Chief Executive Officer
James D. Yancey 62 Chairman of the Board
Richard E. Anthony 57 President and Chief Operating Officer
Walter M. Deriso, Jr. 57 Vice Chairman
Frederick L. Green, III 45 Vice Chairman
Elizabeth R. James 42 Vice Chairman and Chief Information
Officer
G. Sanders Griffith, III 50 Senior Executive Vice President, General
Counsel and Secretary
Thomas J. Prescott 49 Executive Vice President and
Chief Financial Officer
Mark G. Holladay 48 Executive Vice President and
Chief Credit Officer
Calvin Smyre 56 Executive Vice President, Corporate Affairs
Messrs. Blanchard, Yancey and Anthony are directors of Synovus. Walter M.
Deriso, Jr. was elected Vice Chairman of Synovus in January 1997. From 1991
until 1997, Mr. Deriso served as President of Security Bank and Trust Company, a
banking subsidiary of Synovus, and continues to serve as Chairman of the Board
of Security Bank and Trust Company. Frederick L. Green, III was elected Vice
Chairman of Synovus in December 2003. From 1991 until 2003, Mr. Green served in
various capacities with The National Bank of South Carolina, a banking
subsidiary of Synovus, including President of The National Bank of South
Carolina. Mr. Green continues to serve as Chairman of the Board of The National
Bank of South Carolina. Elizabeth R. James was elected Vice Chairman of Synovus
in May 2000. From 1986 until 2000, Ms. James served in various capacities with
Synovus, CB&T and/or TSYS, including Chief Information Officer of Synovus. G.
Sanders Griffith, III was elected Senior Executive Vice President, General
Counsel and Secretary of Synovus in October 1995. From 1988 until 1995, Mr.
Griffith served in various capacities with Synovus, including Executive Vice
President, General Counsel and Secretary. Thomas J. Prescott was elected
Executive Vice President and Chief Financial Officer of Synovus in December
1996. From 1987 until 1996, Mr. Prescott served in various capacities with
Synovus, including Executive Vice President and Treasurer. Mark G. Holladay was
elected Executive Vice President and Chief Credit Officer of Synovus in April
2000. From 1974 until 2000, Mr. Holladay served in various capacities with CB&T,
including Executive Vice President. Calvin Smyre was
11
elected Executive Vice President of Synovus in November 1996. From 1976 until
1996, Mr. Smyre served in various capacities with CB&T and/or Synovus, including
Senior Vice President of Synovus.
STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth ownership of shares of Synovus stock by each
director, by each executive officer named in the Summary Compensation Table on
page 15 and by all directors and executive officers as a group as of December
31, 2003.
Shares of Shares of Shares of
Synovus Stock Synovus Stock Synovus Stock Total Percentage of
Beneficially Beneficially Beneficially Shares of Outstanding
Owned with Owned with Owned with Synovus Shares of
Sole Voting Shared Voting Sole Voting Stock Synovus Stock
and Invest- and Invest- but no Invest- Beneficially Beneficially
ment Power ment Power ment Power Owned as of Owned as of
Name as of 12/31/03 as of 12/31/03 as of 12/31/03 12/31/03 12/31/03
---------------------- --------------- -------------- ------------- ------------- -------------
Daniel P. Amos 48,705 408,803 --- 457,508 *
Richard E. Anthony 522,146 192,694 2,785 1,012,652 *
Joe E. Beverly 399,220 29,100 --- 463,320 *
James H. Blanchard 1,174,935 204,415 59,784 2,897,163 1.0
Richard Y. Bradley 23,681 84,887 --- 108,568 *
Frank W. Brumley 743 222,642 --- 223,385 *
Elizabeth W. Camp 22,827 --- --- 22,827 *
Walter M. Deriso, Jr. 40,217 589 --- 264,094 *
C. Edward Floyd, M.D. 843,838 269,365 --- 1,113,203 *
Gardiner W. Garrard, Jr. 204,147 879,211 --- 1,083,358 *
T. Michael Goodrich 213,747 36,821 --- 250,568 *
G. Sanders Griffith, III 102,254 3,250 60,330 634,986 *
V. Nathaniel Hansford 130,102 417,436 --- 547,538 *
John P. Illges, III 280,704 441,429 --- 722,133 *
Alfred W. Jones III 7,496 --- --- 7,496 *
Mason H. Lampton 94,458 278,981 --- 373,439 *
Elizabeth C. Ogie 489,553 2,728,436 --- 3,217,989 1.1
H. Lynn Page 746,826 11,515 --- 758,341 *
J. Neal Purcell 2,000 --- --- 2,000 *
Melvin T. Stith 5,607 107 --- 5,714 *
William B. Turner, Jr. 444,221 2,568,824 --- 3,013,045 1.0
James D. Yancey 1,062,101 90,090 --- 2,136,125 *
Directors and Executive
Officers as a Group
(27 persons) 7,062,950 6,299,771 122,899 17,474,501 5.7
* Less than one percent of the outstanding shares of Synovus stock.
---------------------------
The totals shown for the following directors and executive officers of
Synovus include the number of shares of Synovus stock that each
individual, as of December 31, 2003, had the right to acquire within
60 days through the exercise of stock options:
12
Person Number of Shares
------ ----------------
Richard E. Anthony 295,027
Joe E. Beverly 35,000
James H. Blanchard 1,458,029
Walter M. Deriso, Jr. 223,288
G. Sanders Griffith, III 469,152
James D. Yancey 983,934
In addition, the other executive officers of Synovus had rights to acquire
an aggregate of 524,451 shares of Synovus stock within 60 days through
the exercise of stock options.
Includes 36,821 shares of Synovus stock held in trusts for which
Mr. Goodrich is not the trustee. Mr. Goodrich disclaims beneficial
ownership of such shares.
Includes 276,187 shares of Synovus stock held in a trust for which
Mr. Lampton is not the trustee. Mr. Lampton disclaims beneficial ownership
of such shares.
Includes 2,568,824 shares of Synovus stock held by a charitable
foundation of which Mrs. Ogie and Mr. Turner are among the trustees.
For a detailed discussion of the beneficial ownership of TSYS stock
by Synovus' named executive officers and directors and by all directors and
executive officers of Synovus as a group, see "TSYS Stock Ownership of
Directors and Management" on page 25.
AUDIT COMMITTEE REPORT
The Audit Committee of the Board of Directors is comprised of three
directors, each of whom the Board has determined to be an "independent director"
as defined by the listing standards of the New York Stock Exchange. The duties
of the Audit Committee are summarized in this Proxy Statement under "Committees
of the Board" on page 4 and are more fully described in the Audit Committee
charter adopted by the Board of Directors which is attached to this Proxy
Statement as Appendix A.
As more fully described in its charter, one of the Audit Committee's
primary responsibilities is to assist the Board in its oversight responsibility
regarding the integrity of Synovus' financial statements and systems of internal
controls. Management is responsible for Synovus' accounting and financial
reporting processes, internal controls and the preparation and integrity of
Synovus' consolidated financial statements. KPMG LLP, Synovus' independent
auditor, is responsible both for performing an independent audit of Synovus'
consolidated financial statements in accordance with auditing standards
generally accepted in the United States and for issuing an opinion as to whether
those financial statements are presented fairly in conformity with accounting
principles generally accepted in the United States. The Audit Committee is
directly responsible for the compensation, appointment and oversight of KPMG
LLP. The function of the Audit Committee is not to duplicate the activities of
management or the independent auditor, but to monitor and oversee Synovus'
financial reporting process.
In discharging its responsibilities regarding the financial reporting
process, the Audit Committee:
. Reviewed and discussed with management Synovus' audited financial
statements as of and for the year ended December 31, 2003;
. Discussed with KPMG LLP the matters required to be discussed by
Statement on Auditing Standards No. 61 (Communication with Audit
Committees); and
13
. Received from KPMG LLP the written disclosures and the letter required
by Independence Standards Board Standard No. 1 (Independence
Discussions with Audit Committees) and has discussed with KPMG LLP
their independence.
Based upon the review and discussions referred to in the preceding
paragraph, the Audit Committee recommended to the Board of Directors that the
audited financial statements referred to above be included in Synovus' Annual
Report on Form 10-K for the year ended December 31, 2003, for filing with the
Securities and Exchange Commission.
This Audit Committee Report shall not be deemed incorporated by reference
in any document previously or subsequently filed with the Securities and
Exchange Commission that incorporates by reference all or any portion of this
Proxy Statement, except to the extent Synovus specifically requests that the
Report be specifically incorporated by reference.
The Audit Committee
John P. Illges, III, Chair
H. Lynn Page
Melvin T. Stith
KPMG LLP FEES AND SERVICES
The following table presents fees for professional audit services rendered
by KPMG LLP for the audit of Synovus' annual financial statements for the years
ended December 31, 2003 and December 31, 2002 and fees billed for other services
rendered by KPMG during those periods. All amounts include fees for services
provided to TSYS by KPMG.
2003 2002
---- ----
Audit Fees $ 1,241,000 $ 902,000
Audit Related Fees 205,000 246,000
Tax Fees 727,000 213,000
All Other Fees 592,000 581,000
----------- ----------
Total $ 2,765,000 $ 1,942,000
=========== ==========
---------------------
Audit fees represent fees for professional services provided
in connection with the audit of Synovus' financial statements,
reviews of quarterly financial statements, issuance of comfort letters
and other SEC filing matters and audit or attestation services
provided in connection with other statutory or regulatory filings.
Audit related fees consisted principally of fees for certain agreed
upon procedures engagements, employee benefit plan audits and due
diligence services related to acquisitions.
Tax fees consisted of fees for tax compliance/preparation ($477,000
in 2003) and tax consultation ($250,000 in 2003) services.
All other fees consisted principally of assurance related services
associated with data center reviews as well as certain agreed upon
procedures related to computer security.
POLICY ON AUDIT COMMITTEE PRE-APPROVAL
The Audit Committee has the responsibility for appointing, setting the
compensation for and overseeing the work of Synovus' independent auditor. In
recognition of this responsibility, the Audit Committee has established a policy
to pre-approve all audit and permissible non-audit services provided by the
independent auditor in order to assure that the provision of these services does
not impair the independent auditor's independence. Synovus' Audit Committee
Pre-Approval Policy addresses services included within the four categories of
audit and permissible non-audit services, which include Audit Services, Audit
Related Services, Tax Services and All Other Services.
14
The annual audit services engagement terms and fees are subject to the
specific pre-approval of the Audit Committee. In addition, the Audit Committee
must specifically approve permissible non-audit services classified as All Other
Services.
Prior to engagement, management submits to the Committee for approval a
detailed list of the Audit Services, Audit Related Services and Tax Services
that it recommends the Committee engage the independent auditor to provide for
the fiscal year. Each specified service is allocated to the appropriate category
and accompanied by a budget estimating the cost of that service. The Committee
will, if appropriate, approve both the list of Audit Services, Audit Related
Services and Tax Services and the budget for such services.
The Committee is informed at each Committee meeting as to the services
actually provided by the independent auditor pursuant to the Pre-Approval
Policy. Any proposed service that is not separately listed in the Pre-Approval
Policy or any service exceeding the pre-approved fee levels must be specifically
pre-approved by the Committee. The Audit Committee has delegated pre-approval
authority to the Chairman. The Chairman must report any pre-approval decisions
made by him to the Committee at its next scheduled meeting.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table summarizes the cash and noncash compensation for each
of the last three fiscal years for the chief executive officer of Synovus and
for the other four most highly compensated executive officers of Synovus.
--------------------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation Awards
-------------------------------------------------------- --------------------------------
Other Securities All
Annual Restricted Underlying Other
Name and Compen- Stock Options/ Compen-
Principal Position Year Salary Bonus sation Award(s) SARs sation
--------------------- -------- ------------- ------------ ------------- ------------- ------------ ------------
James H. Blanchard 2003 $765,000 $ -0- $ 5,000 -0- -0- $179,457
Chief Executive 2002 746,500 388,180 10,000 -0- 61,811 259,408
Officer 2001 714,000 571,200 15,000 -0- 72,489 266,637
James D. Yancey 2003 579,000 -0- 20,000 -0- -0- 155,882
Chairman of the 2002 565,000 293,800 20,000 -0- 46,783 208,090
Board 2001 540,500 432,400 20,000 -0- 45,737 178,419
Richard E. Anthony 2003 441,606 66,092 10,000 -0- -0- 81,806
President and Chief 2002 420,500 153,062 10,000 -0- 23,208 129,657
Operating Officer 2001 397,500 236,513 10,000 106,688 12,778 118,085
Walter M. Deriso, Jr. 2003 393,750 53,747 10,000 -0- -0- 75,681
Vice Chairman 2002 382,292 86,971 9,167 -0- 19,811 84,806
2001 342,500 71,925 10,000 -0- 22,238 82,617
G. Sanders Griffith, III 2003 360,000 49,140 -0- -0- -0- 44,774
Senior Executive Vice 2002 350,625 127,628 -0- -0- 19,316 79,915
President, General 2001 333,125 198,209 -0- -0- 21,574 68,490
Counsel and Secretary
---------------------
Amount for 2003 includes matching contributions under the Synovus Director
Stock Purchase Plan of $10,000 for each of Messrs. Yancey, Anthony and
Deriso and matching contributions under the TSYS Director Stock Purchase
Plan of $10,000 for Mr. Yancey and $5,000 for Mr. Blanchard. Perquisites
and other personal benefits are excluded because the aggregate amount does
not exceed the lesser of $50,000 or 10% of annual salary and bonus for
the named executives.
15
As of December 31, 2003, Mr. Anthony held 4,718 restricted shares with a
value of $136,445. Dividends are paid on all restricted shares.
The 2003 amount includes director fees of $74,200, $76,000, $27,200 and
$27,200 for Messrs. Blanchard, Yancey, Anthony and Deriso,
respectively, in connection with their service as directors of Synovus and
certain of its subsidiaries; contributions or other allocations to defined
contribution plans of $18,100 for each executive; allocations pursuant to
defined contribution excess benefit agreements of $86,263, $60,888,
$35,717, $25,405 and $26,030 for each of Messrs. Blanchard, Yancey,
Anthony, Deriso and Griffith, respectively; premiums paid for life
insurance coverage of $894, $894, $789, $704 and $644 for each of Messrs.
Blanchard, Yancey, Anthony, Deriso and Griffith, respectively;
and the dollar value of the benefit of premiums paid for
split-dollar life insurance policies (unrelated to term life insurance
coverage) projected on an actuarial basis of $4,272 for Mr. Deriso.
STOCK OPTION EXERCISES AND GRANTS
The following tables provide certain information regarding stock options
granted and exercised in the last fiscal year and the number and value of
unexercised options at the end of the fiscal year.
------------------------------------------------------------------------------------------------------------------
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants
------------------------------------------------
% of Total Potential
Options/ Realized Value at
SARs Exercise Assumed Annual Rates of
Options/ Granted to or Stock Price Appreciation
SARs Employees Base For Option Term
Granted in Fiscal Price Expiration ---------------------
Name (#) Year ($/Share) Date 5%($) 10% ($)
------------------------------ ------------ -------------- -------------- --------------- ---------- ---------
James H. Blanchard -0- ---% $--- --- $--- $---
James D. Yancey -0- --- --- --- --- ---
Richard E. Anthony -0- --- --- --- --- ---
Walter M. Deriso, Jr. -0- --- --- --- --- ---
G. Sanders Griffith, III -0- --- --- --- --- ---
-----------
As described in the Compensation Committee Report on Executive
Compensation, there were no option/SAR grants to Synovus' executive
officers in 2003.
-----------------------------------------------------------------------------------------------------------------
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END
OPTION/SAR VALUES
Number of Securities Value of
Underlying Unexercised Unexercised In-the-Money
Shares Value Options/SARs at FY-End (#) Options/SARs at FY-End ($)
Acquired on Realized -------------------------- -------------------------------
Name Exercise (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
------------------------ ------------ --------- --------------------------- -------------------------------
James H. Blanchard 179,649 $3,118,347 1,458,029 / 1,561,811 $17,565,190 / $15,961,950
James D. Yancey 104,144 1,653,973 983,934 / 546,783 11,700,509 / 5,729,465
Richard E. Anthony 52,074 836,725 295,027 / 423,208 3,087,181 / 4,549,163
Walter M. Deriso, Jr. 12,150 198,547 223,288 / 419,811 1,984,268 / 4,540,943
G. Sanders Griffith, III 50,070 784,036 469,152 / 419,316 5,630,331 / 4,539,745
----------
Market value of underlying securities at exercise or year-end, minus the
exercise or base price.
16
EMPLOYMENT CONTRACTS AND CHANGE IN CONTROL ARRANGEMENTS
Employment Agreement with Mr. Blanchard. Synovus entered into an Employment
Agreement with Mr. Blanchard, Chief Executive Officer of Synovus, effective
September 13, 1999. Under the Employment Agreement, Mr. Blanchard agreed to
serve as CEO of Synovus for five years, and to remain employed by Synovus for
seven years. Under this Agreement, Mr. Blanchard receives a base salary that is
determined on an annual basis by the Synovus Compensation Committee. During
2003, Synovus paid Mr. Blanchard a base salary of $765,000 under this Employment
Agreement. The Employment Agreement with Mr. Blanchard also provides that Mr.
Blanchard will receive deferred compensation totaling $468,000 over a 10 to 15
year period following his death, disability or other termination of employment.
This deferred compensation may be forfeited in the event Synovus terminates his
employment for cause, he violates a two year covenant not to compete, or in the
event of his death by suicide.
Employment Agreement with Mr. Yancey. Synovus has entered into an
Employment Agreement with Mr. Yancey, Chairman of the Board of Synovus. Mr.
Yancey's Employment Agreement automatically renews every year and may be
terminated upon 30 days prior written notice. Under this Agreement, Mr. Yancey
receives a base salary that is determined on an annual basis by the Synovus
Compensation Committee. During 2003, Synovus paid Mr. Yancey a base salary of
$579,000 under this Employment Agreement. The Employment Agreement with Mr.
Yancey also provides that Mr. Yancey will receive deferred compensation totaling
$375,000 over a 10 to 15 year period following his death, disability or other
termination of employment. This deferred compensation may be forfeited in the
event Synovus terminates his employment for cause, he violates a two year
covenant not to compete, or in the event of his death by suicide.
Long-Term Incentive Plans. Under the terms of Synovus' 1992, 1994, 2000 and
2002 Long-Term Incentive Plans, all awards become automatically vested in the
event of a Change of Control, as defined below, unless otherwise determined by
the Committee at grant. Awards under the Plans may include stock options,
restricted stock, stock appreciation rights and performance awards. Messrs.
Blanchard, Yancey, Anthony, Deriso and Griffith each have received restricted
stock and stock options under the Long-Term Incentive Plans.
Change of Control Agreements. Synovus has entered into Change of Control
Agreements with Messrs. Blanchard, Yancey, Anthony, Deriso and Griffith,
and certain other executive officers. In the event of a Change of Control, an
executive would receive the following:
* Three times the executive's current base salary and bonus (bonus is
defined as the average bonus over the past three years measured as a
percentage multiplied by the executive's current base salary).
* Three years of medical, life, disability and other welfare benefits.
* A pro rata bonus through the date of termination for the separation
year.
* A cash amount in lieu of a long-term incentive award for the year of
separation equal to 1.5 times the normal market grant, if the
executive received a long-term incentive award in the year of
separation, or 2.5 times the market grant if not.
In order to receive these benefits, an executive must be actually or
constructively terminated within one year following a Change of Control, or the
executive may voluntarily or involuntarily terminate employment during the
thirteenth month following a Change of Control. A Change of Control under these
agreements is defined as: (i) the acquisition of 20% or more of the "beneficial
ownership" of Synovus' outstanding voting stock, with certain exceptions for
Turner family members; (ii) the persons serving as directors of Synovus as of
January 1, 1996, and their replacements or additions, ceasing to comprise at
least two-thirds of the Board members; (iii) a merger, consolidation,
reorganization or sale
17
of Synovus' assets unless the prior owners of Synovus own more than two-thirds
of the new company, no person owns more than 20% of the new company, and
two-thirds of the new company's Board members are prior Board members of
Synovus; or (iv) a triggering event occurs as defined in the Synovus Rights
Agreement. In the event an executive is impacted by the Internal Revenue Service
excise tax that applies to certain Change of Control arrangements, the executive
would receive additional payments so that he or she would be in the same
position as if the excise tax did not apply. The Change of Control Agreements do
not provide for any retirement benefits or perquisites.
STOCK PERFORMANCE GRAPH
The following graph compares the yearly percentage change in cumulative
shareholder return on Synovus stock with the cumulative total return of the
Standard & Poor's 500 Index and the Keefe, Bruyette & Woods 50 Bank Index for
the last five fiscal years (assuming a $100 investment on December 31, 1998 and
reinvestment of all dividends).
[Omitted Stock Performance Graph is represented by the following table.]
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
SYNOVUS FINANCIAL CORP., S&P 500 AND KBW 50 BANK INDEX
1998 1999 2000 2001 2002 2003
---- ---- ---- ----- ----- -----
Synovus $100 $ 84 $117 $111 $ 88 $135
S&P 500 $100 $121 $110 $ 97 $ 76 $ 97
KBW 50 $100 $ 96 $116 $111 $103 $138
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of Synovus is responsible for the design and
oversight of the Synovus executive compensation program, as well as the
compensation and other benefit plans in
18
which officers and employees of Synovus and its subsidiaries participate. The
Committee has designed its compensation program to attract and retain highly
motivated and well-trained executives in order to create superior shareholder
value for Synovus shareholders.
Elements of Executive Compensation. The four elements of executive
compensation at Synovus are:
* Base Salary
* Annual Bonus
* Long-Term Incentives
* Other Benefits
The Committee believes that a substantial portion (though not a majority)
of an executive's compensation should be at risk based upon performance, both in
the short-term (through the annual bonus and the Synovus/TSYS Profit Sharing
Plan and the Synovus/TSYS 401(k) Savings Plan) and long-term (through long-term
incentives such as stock options and restricted stock awards). The remainder of
each executive's compensation is primarily based upon the competitive practices
of banks similar in size to Synovus, with a premium added to reflect the past
performance of Synovus and the technology component of TSYS' business ("similar
companies"). The Committee believes that this approach is the most appropriate
market data to use for determining the compensation of Synovus executives. The
companies used for comparison under this approach are not the same companies
included in the peer group index appearing in the Stock Performance Graph on
page 18. Each element of executive compensation is discussed in detail below.
Base Salary. Base salary is an executive's annual rate of pay without
regard to any other elements of compensation. The primary consideration used by
the Committee to determine an executive's base salary is a market comparison of
comparable positions within similar companies based upon the executive's level
of responsibility and experience. Base salaries are targeted in the median level
of similar companies. In addition to market comparisons, individual performance
is also considered in determining an executive's base salary, although it does
not weigh heavily. During 2003, the Committee did not change the base salary of
Mr. Blanchard or the base salaries of Messrs. Yancey, Deriso or Griffith. The
Committee increased the base salary of Mr. Anthony during 2003 to reflect his
new responsibilities as President and Chief Operating Officer of Synovus.
Annual Bonus. The Committee awards annual bonuses under two different
plans, the Synovus Executive Bonus Plan (which was approved by Synovus
shareholders in 2001) and the Synovus Incentive Bonus Plan. The Committee
selects the participants in each Plan from year to year. For 2003, the Committee
selected Messrs. Blanchard and Yancey to participate in the Executive Bonus Plan
while Messrs. Anthony, Deriso and Griffith were selected to participate
in the Incentive Bonus Plan. Under the terms of the Plans, bonus amounts are
paid as a percentage of base pay based on the achievement of performance goals
that are established each year by the Committee. The performance goals may be
chosen by the Committee from among the following measurements:
* Return on assets;
* Net income;
* Operating income;
* Non-performing assets and/or loans as a percentage of total assets
and/or loans;
* Return on capital compared to cost of capital;
* Earnings per share and/or earnings per share growth;
* Return on equity;
* Non-interest expense as a percentage of total expense;
19
* Net loan charge-offs as a percentage of average loans;
* Productivity and expense control;
* Number of cardholder, merchant and/or other customer accounts
processed and/or converted by TSYS;
* Successful negotiation or renewal of contracts with new and/or
existing customers by TSYS;
* Stock price; and
* Asset growth.
The Committee established a payout matrix based on attainment of growth in
diluted earnings per share goals during 2003 for Mr. Blanchard and Synovus'
other executive officers. The maximum percentage payouts under the Plans for
2003 were 100% for Messrs. Blanchard and Yancey and 70% for Messrs. Anthony,
Deriso and Griffith. Synovus' financial performance and each executive's
individual performance can reduce the bonus awards determined by the attainment
of the goals. Based upon a recommendation from Synovus' management, the
Committee exercised downward discretion and lowered the bonus amounts that would
otherwise have been payable based upon Synovus' attainment of its earnings per
share growth goal for 2003. Messrs. Blanchard and Yancey decided to forego any
bonus for 2003. Messrs. Anthony, Deriso and Griffith were awarded the bonus
amounts set forth in the Summary Compensation Table based upon Synovus' 2003
earnings per share growth and the exercise of downward discretion discussed
above.
Long-Term Incentives. The Committee has awarded long-term incentives in the
form of stock options and restricted stock awards to executives. Restricted
stock awards are designed to focus executives on the long-term performance of
Synovus. Stock options provide executives with the opportunity to buy and
maintain an equity interest in Synovus and to share in its capital appreciation.
The Committee has established a payout matrix for long-term grants that uses
total shareholder return measured by Synovus' performance (stock price increases
plus dividends) and how Synovus' total shareholder return compares to the return
of the peer group of companies appearing in the Stock Performance Graph on page
18. For the 2003 long-term incentive awards, total shareholder return and peer
comparisons were measured during the 2000 to 2002 performance period. Based upon
Synovus' performance as measured by the payout matrix during the performance
period, the Committee did not make any long-term incentive awards to Mr.
Blanchard or to Synovus' other executive officers in 2003.
Effective January 1, 2004, the Committee adopted Executive Stock Ownership
Guidelines to align the interests of Synovus' executive officers to that of
Synovus' shareholders. For the named executive officers, the Guideline is a
number of shares equal to five (for Messrs. Blanchard and Yancey), four (for Mr.
Anthony), or three (for Messrs. Deriso and Griffith) times the executive's base
salary as of January 1, 2004, divided by the average closing price of Synovus
stock for the 2003 calendar year. The Guideline is recalculated at the
beginning of each calendar year after 2004. Executives have a five year grace
period to fully achieve the Guideline, with an interim three year grace period
to attain a specified percentage of the Guideline. Until the Guideline is
achieved, executives are required to retain all net shares received upon the
exercise of stock options, excluding shares used to pay the option's exercise
price and any taxes due upon exercise. The Guidelines permit the development of
an alternative ownership plan by the Chairman of the Board and Chairman of the
Compensation Committee in the event of an executive's severe financial hardship.
Other Benefits. Executives receive other benefits that serve a different
purpose than the elements of compensation discussed above. In general, these
benefits provide retirement income and protection against catastrophic events
such as illness, disability and death. Executives generally receive the same
benefits offered to the employee population, with the only exceptions designed
to promote tax efficiency or to replace other benefits lost due to regulatory
limits. The Synovus/TSYS Profit Sharing Plan and the Synovus/TSYS 401(k) Savings
Plan, including an excess benefit plan which replaces benefits lost due to
regulatory limits (collectively the "Plan"), is the largest component of
Synovus' benefits package for executives. The Plan is directly related
20
to the performance of Synovus because the contributions to the Plan, up to a
maximum of 14% of an executive's compensation, depend upon Synovus'
profitability. For 2003, Mr. Blanchard and Synovus' other executive officers
received a Plan contribution of 2.05% of their compensation. The remaining
benefits provided to executives are primarily based upon the competitive
practices of similar companies.
The Internal Revenue Code limits the deductibility for federal income tax
purposes of annual compensation paid by a publicly held corporation to its chief
executive officer and four other highest paid executives for amounts in excess
of $1 million, unless certain conditions are met. Because the Committee seeks to
maximize shareholder value, the Committee has taken steps to ensure that any
compensation paid to its executives in excess of $1 million is deductible. When
necessary to meet the requirements for deductibility under the Internal Revenue
Code, members of the Committee may abstain from voting on performance based
compensation. For 2003, Messrs. Blanchard, Yancey, Anthony and Griffith would
have been affected by this provision, but for the steps taken by the Committee.
The Committee reserves the ability to make awards which do not qualify for full
deductibility under the Internal Revenue Code, however, if the Committee
determines that the benefits of doing so outweigh full deductibility.
The Committee believes that its executive compensation program serves the
best interests of the shareholders of Synovus. As described above, a substantial
portion of the compensation of Synovus' executives is directly related to
Synovus' performance. The Committee believes that the performance of Synovus to
date validates its compensation philosophy.
The Compensation Committee
V. Nathaniel Hansford, Chair
Mason H. Lampton
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Gardiner W. Garrard, Jr., Alfred W. Jones III, Mason H. Lampton and V.
Nathaniel Hansford served as members of Synovus' Compensation Committee during
2003. Mr. Garrard and Mr. Jones no longer serve as members of the Committee. No
member of the Committee is a current or former officer of Synovus or its
subsidiaries.
On May 18, 2000, Synovus, Garrard & Jordan Investments, LLC and Gardiner W.
Garrard, III, together with an unrelated individual, formed Total Technology
Ventures, LLC ("TTV"), a Georgia limited liability company, for the purpose of
providing certain administrative services to TTP Fund, L.P., a venture capital
fund formed in the first quarter of 2001 (the "Fund"). Garrard & Jordan
Investments, LLC was formed by The Jordan Company to invest in TTV. Gardiner W.
Garrard, Jr., a director of Synovus, TSYS and CB&T, owns 71.19% of the
outstanding stock of The Jordan Company and serves as its President, and his
wife and son, Gardiner W. Garrard, III, each own 7.2% of its outstanding stock.
Pursuant to the organizational documents of TTV, Synovus, Garrard & Jordan
Investments, LLC and Gardiner W. Garrard, III made initial capital commitments
to TTV in the respective amounts of $1,200,000, $400,000 and $200,000. As of the
date hereof, 75% of the total capital commitments to TTV have been funded.
Synovus, Garrard & Jordan Investments, LLC and Gardiner W. Garrard, III hold the
following percentage interests in TTV: 60%, 20% and 10%, respectively. Synovus
serves as the manager of TTV. Gardiner W. Garrard, III is President and Chief
Executive Officer of TTV and has responsibility for the day-to-day operations of
TTV and management of TTP Fund, L.P. Mr. Garrard received $150,000 in
compensation for his services during 2003.
21
Synovus has made a capital commitment of $30 million to the Fund, which
currently represents an approximately 80% interest in the Fund, and Synovus will
receive a 5% carried interest in the Fund. As of January 31, 2004, Synovus had
funded approximately 61% of its capital commitment to the Fund through capital
contributions of approximately $18,292,000. The Fund is managed by Total
Technology Partners, LLC, its general partner (the "General Partner"), an entity
in which Gardiner W. Garrard, III and Garrard and Jordan Investments, LLC each
own an approximately 33% capital interest. The General Partner will receive a
15% carried interest in the Fund. The General Partner entered into an agreement
with TTV pursuant to which TTV provides certain administrative services to the
General Partner. The fee payable quarterly by the General Partner to TTV for
such services equals the management fee received quarterly by the General
Partner from the Fund, subject to certain adjustments and reductions. The fee
payable for such services during 2003 was $646,000.
During 2003, CB&T purchased a parcel of land in Columbus, Georgia for use
as a bank branch from Columbus Park East LLC for $690,000. Gardiner W. Garrard,
Jr. is a member of and holds a 50% equity interest in the company which owns
100% of Columbus Park East. The purchase price for the property was based
upon the results of an independent third party appraisal.
During 2003, the Sea Island Company paid Synovus Securities, Inc., a
subsidiary of Synovus, $562,142 for the provision of investment banking and
related services. Alfred W. Jones III, a director of Synovus and TSYS, is an
officer, director and shareholder of the Sea Island Company. James H. Blanchard,
Chief Executive Officer of Synovus, Chairman of the Executive Committee of TSYS
and a director of CB&T, is a director of the Sea Island Company. The charges
for these services are comparable to charges to similarly situated unrelated
third parties for similar services.
During 2003, James D. Yancey, Chairman of the Board of Synovus and CB&T and
a director of TSYS, served as a member of the compensation committee of W.C.
Bradley Co. William B. Turner, Jr., a director of Synovus and CB&T, is Vice
Chairman of the Board and President of W.C. Bradley Co. Mr. Yancey no longer
serves as a member of the compensation committee of W.C. Bradley Co.
TRANSACTIONS WITH MANAGEMENT
During 2003, the subsidiary banks of Synovus had outstanding loans directly
to or indirectly accruing to the benefit of certain of the then directors and
executive officers of Synovus, and their related interests. These loans were
made in the ordinary course of business and were made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with others. In the opinion of Synovus' management,
such loans do not involve more than normal risks of collectibility or present
other unfavorable features. In the future, the subsidiary banks of Synovus
expect to have banking transactions in the ordinary course of business with
Synovus' directors, executive officers and their related interests.
Synovus leased various properties in Columbus, Georgia from W.C. Bradley
Co. for office space and storage during 2003. The rent paid for the space, which
is approximately 35,400 square feet, was $102,366. During 2003, TSYS leased
office space in Columbus, Georgia from W.C. Bradley Co. for lease payments of
$196,241. Also during 2003, Synovus entered into a 10 year agreement to lease
additional office space in Columbus, Georgia from W.C. Bradley Co. beginning in
April of 2004. The rent to be paid for the space by Synovus, which is
approximately 37,500 square feet, will be approximately $787,500 during the
first year of the lease. The terms of the lease agreements are comparable to
those provided for between similarly situated unrelated third parties in
similar transactions.
22
CB&T and W.C.B. Air L.L.C. are parties to a Joint Ownership Agreement
pursuant to which they jointly own or lease aircraft. W. C. Bradley Co. owns all
of the limited liability company interests of W.C.B. Air. CB&T and W.C.B. Air
have each agreed to pay fixed fees for each hour they fly the aircraft owned
and/or leased pursuant to the Joint Ownership Agreement. CB&T paid an aggregate
sum of $2,441,614 for use of the aircraft during 2003 pursuant to the terms of
the Joint Ownership Agreement. This amount represents the charges incurred by
CB&T and its affiliated corporations for use of the aircraft, and includes
$1,163,922 for TSYS' use of the aircraft, for which CB&T was reimbursed by TSYS.
James H. Blanchard, Chief Executive Officer of Synovus, Chairman of the
Executive Committee of TSYS and a director of CB&T, is a director of W.C.
Bradley Co. James D. Yancey, Chairman of the Board of Synovus and CB&T and a
director of TSYS, is a director of W.C. Bradley Co. William B. Turner, Jr., Vice
Chairman of the Board and President of W.C. Bradley Co., is a director of
Synovus and CB&T. John T. Turner, William B. Turner, Jr.'s brother, is a
director of W.C. Bradley Co. and a director of TSYS and CB&T.
During 2003, a banking subsidiary of Synovus leased office space in Daniel
Island, South Carolina from DIBS Holdings, LLC for $170,203. Frank W. Brumley, a
director of Synovus, is managing member of and holds a 30% equity interest in
DIBS Holdings, LLC. The terms of the lease agreement are comparable to those
provided for between similarly situated unrelated third parties in similar
transactions.
During 2003, Synovus and its wholly owned subsidiaries and TSYS paid to
Communicorp, Inc. $425,020 and $377,631, respectively, for printing, marketing
and promotional services provided by Communicorp, Inc. Communicorp, Inc. is a
wholly owned subsidiary of AFLAC Incorporated. Daniel P. Amos, a director of
Synovus, is Chief Executive Officer and a director of AFLAC Incorporated.
The payments for these services are comparable to payments between similarly
situated unrelated third parties for similar services.
William Russell Blanchard, a son of James H. Blanchard, Chief Executive
Officer of Synovus, was employed by a subsidiary of Synovus as a commercial
lender during 2003. William Russell Blanchard received $81,057 in compensation
for his services during the year. William Fray McCormick, the son-in-law of
director Richard Y. Bradley, was employed by a subsidiary of Synovus as a trust
officer during 2003. Mr. McCormick received $83,916 in compensation for his
services during the year. Walter Mabry Deriso, III, a son of Walter M. Deriso,
Jr., Vice Chairman of Synovus, was employed by a subsidiary of Synovus as a
trust officer during 2003. Walter Mabry Deriso, III received $87,515 in
compensation for his services during the year. James Kimbrough Sheek, IV, the
son-in-law of director H. Lynn Page, was employed by a subsidiary of Synovus as
a trust officer during 2003. Mr. Sheek received $121,473 in compensation for his
services during the year. Roderick Cowan Hunter, the son-in-law of James D.
Yancey, Chairman of the Board of Synovus, was employed by a subsidiary of
Synovus as a director of sales and marketing during 2003. Mr. Hunter received
$107,169 in compensation for his services during the year. The compensation
received by the employees listed above is determined under the standard
compensation practices of Synovus.
For information about transactions with entities that are affiliates of
Gardiner W. Garrard, Jr. and Alfred W. Jones III, directors of Synovus, see
"Compensation Committee Interlocks and Insider Participation" immediately above.
23
PRINCIPAL SHAREHOLDERS
The following table sets forth the number of shares of Synovus stock
held by the only known holders of more than 5% of the outstanding shares of
Synovus stock as of December 31, 2003.
Percentage of
Shares of Outstanding Shares of
Synovus Stock Synovus Stock
Name and Address of Beneficially Owned Beneficially Owned
Beneficial Owner as of 12/31/03 as of 12/31/03
----------------------- ----------------------- ----------------------
Synovus Trust Company, N.A. 47,925,740 16.0%
1148 Broadway
Columbus, Georgia 31901
-----------------------------------
24
The shares of Synovus stock held by Synovus Trust Company are voted by
the President of Synovus Trust Company.
As of December 31, 2003, the banking, brokerage, investment advisory and
trust company subsidiaries of Synovus, including CB&T through its wholly
owned subsidiary, Synovus Trust Company, held in various fiduciary or
advisory capacities a total of 48,459,111 shares of Synovus stock as to
which they possessed sole or shared voting or investment power. Of this
total, Synovus Trust Company held 47,122,243 shares as to which it
possessed sole investment power, 43,529,625 shares as to which it possessed
sole voting power, 735,654 shares as to which it possessed shared voting
power and 1,115,270 shares as to which it possessed shared investment
power. The other banking, brokerage, investment advisory and trust
subsidiaries of Synovus held 304,818 shares as to which they possessed sole
voting power, 208,180 shares as to which they possessed sole investment
power, 122,012 shares as to which they possessed shared voting power and
80,729 shares as to which they possessed shared investment power. In
addition, as of December 31, 2003, Synovus Trust Company and the banking,
brokerage, investment advisory and trust subsidiaries of Synovus held in
various agency or non-advisory capacities an additional 9,193,620 and
251,885 shares, respectively (a total of 9,445,505), of Synovus stock as to
which they possessed no voting or investment power. Synovus and its
subsidiaries disclaim beneficial ownership of all shares of Synovus stock
which are held by them in various fiduciary, advisory, non-advisory or
agency capacities.
RELATIONSHIPS BETWEEN SYNOVUS, CB&T, TSYS AND CERTAIN OF
SYNOVUS' SUBSIDIARIES AND AFFILIATES
BENEFICIAL OWNERSHIP OF TSYS STOCK BY CB&T
The following table sets forth, the number of shares of TSYS stock
beneficially owned by CB&T, the only known beneficial owner of more
than 5% of the issued and outstanding shares of TSYS stock, as of
December 31, 2003.
--------------------------------------------------------------------------------
Percentage of
Shares of Outstanding Shares of
TSYS Stock TSYS Stock
Name and Address of Beneficially Owned Beneficially Owned
Beneficial Owner as of 12/31/03 as of 12/31/03
----------------------- ------------------------ ------------------------------
Columbus Bank
and Trust Company 159,630,980 81.1%
1148 Broadway
Columbus, Georgia 31901
-----------------
CB&T individually owns these shares.
As of December 31, 2003, Synovus Trust Company, N.A. and the other banking,
brokerage, investment advisory and trust company subsidiaries of Synovus
held in various fiduciary or advisory capacities a total of 2,864,909
shares (1.45%) of TSYS stock. Of this total, Synovus Trust Company held
2,629,111 shares as to which it possessed sole voting power, 2,581,444
shares as to which it possessed sole investment power, 204,714 shares as to
which it possessed shared voting power and 220,606 shares as to which it
possessed shared investment power. The other banking, brokerage, investment
advisory and trust subsidiaries of Synovus held 18,500 shares as to which
they possessed sole investment power. In addition, as of December 31, 2003,
Synovus Trust Company held in various agency capacities an additional
3,083,785 shares of TSYS stock as to which it possessed no voting or
investment power. Synovus and its subsidiaries disclaim beneficial
ownership of all shares of TSYS stock which are held by them in various
fiduciary, advisory, non-advisory and agency capacities.
CB&T, by virtue of its ownership of 159,630,980 shares, or 81.1%
of the outstanding shares of TSYS stock on December 31, 2003, presently controls
TSYS. Synovus presently controls CB&T.
INTERLOCKING DIRECTORATES OF SYNOVUS, CB&T and TSYS
Six of the members of and nominees to serve on Synovus' Board of Directors
also serve as members of the Boards of Directors of TSYS and CB&T. They are
James H. Blanchard, Richard Y. Bradley, Gardiner W. Garrard, Jr., John P.
Illges, III, H. Lynn Page and James D. Yancey. Richard E. Anthony, William B.
Turner, Jr. and Elizabeth C. Ogie serve as members of the Board of Directors of
CB&T and Alfred W. Jones III serves as a member of the Board of Directors of
TSYS. Mason H. Lampton serves on the Board of Directors of TSYS and as an
Advisory Director of CB&T.
TSYS STOCK OWNERSHIP OF DIRECTORS AND MANAGEMENT
The following table sets forth the number of shares of TSYS stock
beneficially owned by each of Synovus' directors, by each executive officer
named in the Summary Compensation Table on page 15 and by all directors and
executive officers as a group as of December 31, 2003.
----------------------------------------------------------------------------------------------------------
Shares of Shares of
TSYS Stock TSYS Stock Percentage of
Beneficially Beneficially Total Outstanding
Owned with Owned with Shares of Shares of
Sole Voting Shared Voting TSYS Stock TSYS Stock
and Investment and Investment Beneficially Beneficially
Power as of Power as of Owned as of Owned as of
Name 12/31/03 12/31/03 12/31/03 12/31/03
--------------------------- ------------------- --------------------- ------------------- -------------
Daniel P. Amos --- 820,800 820,800 *
Richard E. Anthony --- --- --- ---
Joe E. Beverly --- --- --- ---
James H. Blanchard 790,792 360,480 1,151,272 *
Richard Y. Bradley 24,737 5,000 29,737 *
Frank W. Brumley --- --- --- ---
Elizabeth W. Camp --- --- --- ---
Walter M. Deriso, Jr. 3,829 4,737 8,566 *
C. Edward Floyd, M.D. 20,000 --- 20,000 *
Gardiner W. Garrard, Jr. 19,675 --- 19,675 *
T. Michael Goodrich --- --- --- ---
G. Sanders Griffith, III 19,422 --- 19,422 *
V. Nathaniel Hansford 1,571 --- 1,571 *
John P. Illges, III 105,125 81,750 186,875 *
Alfred W. Jones III 3,762 --- 3,762 *
Mason H. Lampton 83,503 59,426 142,929 *
Elizabeth C. Ogie 7,200 47,160 54,360 *
25
H. Lynn Page 398,713 132,606 531,319 *
J. Neal Purcell 200 --- 200 *
Melvin T. Stith --- --- --- ---
William B. Turner, Jr. --- 576,000 576,000 *
James D. Yancey 702,160 44,493 746,653 *
Directors and Executive
Officers as a Group
(27 persons) 2,199,717 2,132,452 4,332,169 2.2
*Less than one percent of the outstanding shares of TSYS stock.
-------------------
Includes 16,734 shares of TSYS stock with respect to which Mr.
Griffith has no investment power.
Includes 28,800 shares of TSYS stock held in a trust for which Mr.
Lampton is not the trustee. Mr. Lampton disclaims beneficial ownership of
such shares.
TRANSACTIONS AND AGREEMENTS BETWEEN SYNOVUS, CB&T, TSYS AND
CERTAIN OF SYNOVUS' SUBSIDIARIES
The terms of the transactions set forth below are comparable to those
provided for between similarly situated unrelated third parties in similar
transactions.
During 2003, CB&T and certain of Synovus' other banking subsidiaries
received electronic payment processing services from TSYS. The electronic
payment processing agreement between CB&T and TSYS can be terminated by CB&T
upon 60 days prior written notice to TSYS or terminated by TSYS upon 180 days
prior written notice to CB&T. During 2003, TSYS derived $4,325,774 in revenues
from CB&T and certain of Synovus' other banking subsidiaries for the performance
of electronic payment processing services and $5,457,656 in revenues from
Synovus and its subsidiaries for the performance of other data processing,
software and business process management services.
TSYS and Synovus are parties to a Lease Agreement pursuant to which
Synovus leased from TSYS office space for lease payments aggregating $684,922
during 2003. Synovus also paid TSYS $2,075 during 2003 for data processing
services.
Synovus and TSYS are parties to Management Agreements pursuant to which
Synovus provided certain management services to TSYS. During 2003, these
services included human resource services, maintenance services, security
services, communication services, corporate education services, travel services,
investor relations services, corporate governance services, legal services,
regulatory and statutory compliance services, executive management services
performed on behalf of TSYS by certain of Synovus' officers and financial
services. As compensation for management services provided during 2003, TSYS
paid Synovus aggregate management fees of $8,038,296. Management fees are
subject to future adjustments based upon charges at the time by unrelated third
parties for comparable services.
During 2003, Synovus Trust Company served as trustee of various employee
benefit plans of TSYS. During 2003, TSYS paid Synovus Trust Company trustee's
fees under these plans of
26
$544,726. Also during 2003, Synovus Investment Advisors, Inc., a subsidiary of
Synovus, provided advisory services to various employee benefit plans of TSYS
for advisory fees of $31,772.
During 2003, CB&T paid TSYS Total Debt Management, Inc., a subsidiary of
TSYS, $164,970 for debt collection services.
During 2003, Columbus Depot Equipment Company, a wholly owned subsidiary of
TSYS, and Synovus, CB&T and two of Synovus' other subsidiaries were parties to
Lease Agreements pursuant to which Synovus, CB&T and two of Synovus' other
subsidiaries leased from Columbus Depot Equipment Company computer related
equipment for bankcard and bank data processing services for lease payments
aggregating $18,265.
During 2003, Synovus and CB&T paid TSYS an aggregate of $1,284,921
for miscellaneous reimbursable items, such as data links, network services and
postage, primarily related to processing services provided by TSYS.
During 2003, Synovus, CB&T and other Synovus subsidiaries paid to
Columbus Productions, Inc., a wholly owned subsidiary of TSYS, $731,299 for
printing services.
During 2003, CB&T leased office space from TSYS for lease payments of
$39,405. In addition, TSYS leased furniture and equipment from CB&T during 2003
for lease payments of $318,940. Also during 2003, TSYS and its subsidiaries were
paid $582,056 of interest by CB&T in connection with deposit accounts with, and
commercial paper purchased from, CB&T. Furthermore, during 2003 TSYS paid CB&T
interest of $29,257 in connection with a line of credit and fees of $124,376 for
the provision of other banking services.
TSYS has entered into an agreement with CB&T with respect to the use of
aircraft owned or leased by CB&T and W.C.B. Air L.L.C. CB&T and W.C.B. Air are
parties to a Joint Ownership Agreement pursuant to which they jointly own or
lease aircraft. TSYS paid CB&T $1,163,922 for its use of the aircraft
during 2003.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires Synovus'
officers and directors, and persons who own more than ten percent of Synovus
stock, to file reports of ownership and changes in ownership on Forms 3, 4
and 5 with the Securities and Exchange Commission and the New York Stock
Exchange. Officers, directors and greater than ten percent shareholders are
required by SEC regulations to furnish Synovus with copies of all Section 16(a)
forms they file.
To Synovus' knowledge, based solely on its review of the copies of such
forms received by it, and written representations from certain reporting persons
that no Forms 5 were required for those persons, Synovus believes that during
the fiscal year ended December 31, 2003 all Section 16(a) filing requirements
applicable to its officers, directors and greater than ten percent beneficial
owners were complied with, except for the following. Mr. Lampton, Mr. Smyre
and Mr. Green each reported one transaction late on one late report. Mr.
Holladay and Mr. Beverly each reported two transactions late on one late
report. Mrs. Camp reported two transactions late on two late reports, and
reported one holding of 477 shares for her son late.
SHAREHOLDER PROPOSALS AND NOMINATIONS
In order for a shareholder proposal to be considered for inclusion in
Synovus' Proxy Statement for the 2005 Annual Meeting of Shareholders, the
written proposal must be received by the Corporate Secretary of Synovus at the
address below. The Corporate Secretary must
27
receive the proposal no later than November 17, 2004. The proposal will also
need to comply with the SEC's regulations under Rule 14a-8 regarding the
inclusion of shareholder proposals in company sponsored proxy materials.
Proposals should be addressed to:
Corporate Secretary
Synovus Financial Corp.
901 Front Avenue, Suite 301
Columbus, Georgia 31901
For a shareholder proposal that is not intended to be included in Synovus'
Proxy Statement, or if you want to nominate a person for election as a director,
you must provide written notice to the Corporate Secretary at the address above.
The Secretary must receive this notice not earlier than December 17, 2004 and
not later than January 31, 2005. The notice of a proposed item of business must
provide information as required in the bylaws of Synovus which, in general,
require that the notice include for each matter a brief description of the
matter to be brought before the meeting; the reason for bringing the matter
before the meeting; your name, address, and number of shares you own; and any
material interest you have in the proposal.
The notice of a proposed director nomination must provide information as
required in the bylaws of Synovus which, in general, require that the notice of
a director nomination include your name, address and the number of shares you
own; the name, age, business address, residence address and principal occupation
of the nominee; and the number of shares beneficially owned by the nominee. It
must also include the information that would be required to be disclosed in the
solicitation of proxies for the election of a director under federal securities
laws. You must submit the nominee's consent to be elected and to serve. A copy
of the bylaw requirements will be provided upon request to the Corporate
Secretary at the address above.
GENERAL INFORMATION
FINANCIAL INFORMATION
Consolidated financial statements for Synovus and its subsidiaries are
attached as a Financial Appendix to this Proxy Statement and are included in the
Annual Report on Form 10-K as filed with the Securities and Exchange Commission,
450 Fifth Street, N.W., Washington, D.C. 20549. A copy of the 2003 Form 10-K
(excluding exhibits) will be furnished, without charge, by writing to the
Corporate Secretary, Synovus Financial Corp., 901 Front Avenue, Suite 301,
Columbus, Georgia 31901. The Form 10-K is also available on Synovus' home
page on the Internet at www.synovus.com. Click on "Investor Relations,"
"Financial Info." and "SEC Filings."
SOLICITATION OF PROXIES
Synovus will pay the cost of soliciting proxies. Proxies may be solicited
on behalf of Synovus by directors, officers or employees by mail, in person or
by telephone, facsimile or other electronic means. Synovus will reimburse
brokerage firms, nominees, custodians, and fiduciaries for their out-of-pocket
expenses for forwarding proxy materials to beneficial owners.
HOUSEHOLDING
The Securities and Exchange Commission recently adopted amendments to
its proxy rules which permit companies and intermediaries, such as brokers and
banks, to satisfy delivery requirements for proxy statements with respect to two
or more shareholders sharing the same address by delivering a single proxy
statement to those shareholders. This method of delivery, often referred to as
householding, should reduce the amount of duplicate information that
shareholders receive and lower printing and mailing costs for companies. Synovus
is not householding proxy materials for its shareholders of record in connection
with its 2004 Annual Meeting. However, we have been notified that certain
intermediaries will household proxy materials. If you hold your shares of
Synovus stock through a broker or bank that has determined to household proxy
materials:
28
. Only one annual report and proxy statement will be delivered
to multiple shareholders sharing an address unless you notify
your broker or bank to the contrary;
. You can contact Synovus by calling (706) 649-5220 or by
writing Director of Investor Relations, Synovus Financial
Corp., P.O. Box 120, Columbus, Georgia 31902 to request a
separate copy of the annual report and proxy statement for the
2004 Annual Meeting and for future meetings or you can contact
your bank or broker to make a similar request; and
. You can request delivery of a single copy of annual reports or
proxy statements from your bank or broker if you share the
same address as another Synovus shareholder and your bank or
broker has determined to household proxy materials.
The above Notice of Annual Meeting and Proxy Statement are sent by order of
the Synovus Board of Directors.
/s/James H. Blanchard
James H. Blanchard
Chief Executive Officer
March 17, 2004
29
Appendix A
Synovus Financial Corp.
Audit Committee Charter
PURPOSE
-------
The Audit Committee is appointed by the Board of Directors of the Company to
assist the Board in fulfilling its oversight responsibilities for the Company's
accounting and financial reporting processes and audits of the financial
statements of the Company, by monitoring:
* The integrity of the Company's financial statements;
* The independence and qualifications of its independent auditor;
* The Company's system of internal controls;
* The performance of the Company's internal audit function and
independent auditor; and
* The Company's compliance with legal and regulatory requirements.
The Committee shall also prepare an audit committee report as required by the
Securities and Exchange Commission ("SEC") to be included in the Company's
annual proxy statement.
AUTHORITY
---------
The Committee has authority to conduct or authorize examinations into any
matters within its scope of responsibility. It has sole authority to:
* Appoint, compensate, retain, evaluate, terminate and directly oversee
the work of the Company's independent auditor (subject to shareholder
ratification if applicable). The independent auditor will report
directly to the Audit Committee;
* Resolve any disagreements between management and the auditor regarding
financial reporting; and
* Pre-approve all audit services and permitted non-audit services
provided to the Company by its independent auditor to the extent
required by and in a manner consistent with applicable law.
It also has authority to:
* Retain outside advisors, including counsel, as it determines necessary
to carry out its duties;
* Seek any information it requires from employees--all of whom are
directed to cooperate with the Committee's requests--or
external parties;
* Meet with Company officers, independent auditor, or outside counsel,
as necessary;
* Form and delegate to subcommittees consisting of one or more members
when appropriate, including the authority to grant pre-approvals of
audit services and permitted non-audit services, provided that
decisions of such subcommittee to grant pre-approvals shall be
presented to the full Committee at its next scheduled meeting; and
* Establish detailed pre-approval policies for permitted non-audit
services.
A-1
The Company shall provide appropriate funding, as determined by the Committee,
for payment of compensation to any registered public accounting firm engaged for
the purpose of rendering or issuing an audit report or related work or
performing other audit, review or attest services for the Company and to any
advisors employed by the Committee.
COMPOSITION
-----------
The Committee will consist of at least three members of the Board of Directors.
The Board will appoint Committee members and the Committee Chair after taking
into consideration the recommendation of the Company's Corporate Governance and
Nominating Committee. Committee members may be replaced by the Board of
Directors.
Each Committee member shall meet the independence and experience requirements of
the New York Stock Exchange, Section 10A(m)(3) of the Securities Exchange Act of
1934 ("Exchange Act"), and the rules and regulations of the SEC. At least one
member shall satisfy the definition of, and be designated as, a "financial
expert", as defined by the SEC; provided, however, that if no member of the
Committee satisfies such definition, the Committee shall direct the Company to
include appropriate disclosures in SEC filings as required by SEC rules and
regulations then in effect. No Committee member shall serve simultaneously on
the Audit Committees of more than two other public companies without the
approval of the Board. Any such approval will be disclosed in the proxy
statement.
MEETINGS
--------
The Committee will meet as often as it determines is appropriate, but not less
frequently than quarterly. All Committee members are expected to attend each
meeting, in person or via tele- or videoconference. The Committee periodically
will hold private meetings with management, the chief audit executive and the
independent auditor. The Committee may invite any officer or employee of the
Company, the independent auditor, counsel or others to attend meetings and
provide pertinent information. Meeting agendas will be prepared by the chief
audit executive in consultation with the Chairman of the Committee and provided
in advance to members, along with appropriate briefing materials.
RESPONSIBILITIES
----------------
The Committee will carry out the following responsibilities:
Financial Statements
* Review and discuss with management and the independent auditor
significant accounting and financial reporting issues, including
complex or unusual transactions and judgments concerning significant
estimates or significant changes in the Company's selection or
application of accounting principles, and recent professional,
accounting and regulatory pronouncements and initiatives, and
understand their impact on the Company's financial statements.
* Review with management and the independent auditor the results of the
audit, including any difficulties encountered in the course of the
audit work, any restrictions on the scope of activities or access to
requested information and any significant disagreements with
management.
* Review and discuss with management and the independent auditor the
annual audited consolidated financial statements, including disclosures
made in management's discussion and analysis, and recommend to the
Board of Directors whether they should be included in the Company's
Form 10-K.
A-2
* Review and discuss with management and the independent auditor the
disclosure required by the SEC to be included in the Company's proxy
statement with respect to the independent auditor's fees.
* Review and discuss with management and the independent auditor interim
financial statements, including the results of the independent
auditor's review of the quarterly financial statements, before filing
the Company's Form 10-Q with the SEC.
* Review disclosures made to the Committee by the Company's CEO and CFO
during their certification process for the Form 10-K and Forms 10-Q
about any significant deficiencies in the design or operation of
internal controls or material weaknesses therein and any fraud
involving management or other employees who have a significant role in
the Company's internal controls.
* At least annually prior to the filing of the Company's Form 10-K with
the SEC (and more frequently if appropriate), review and discuss
written and verbal reports from the independent auditor on: (1) all
critical accounting policies and practices to be used; (2) all
alternative treatments within generally accepted accounting principles
that have been discussed with management, including ramifications of
the use of such alternative disclosures and treatments and the
treatment preferred by the independent auditor; and (3) other material
written communications between the external auditor and management,
such as any management letter or schedules of unadjusted differences.
* Review with management and the independent auditor all matters required
to be communicated by the independent auditor to the Committee under
generally accepted auditing standards, including matters required to be
discussed by Statement on Auditing Standards No. 61 and No. 90 relating
to conduct of the audit.
* Discuss with management the Company's earnings press releases,
including the use of any non-GAAP information, as well as financial
information and earnings guidance provided to analysts and rating
agencies. Such discussion may be done generally (consisting of
discussing the types of information to be disclosed and the types of
presentations to be made).
Internal Controls and Risk Management
* Consider the effectiveness of the Company's internal control systems,
including information technology security and control.
* Meet with management to review the Company's major financial risk
exposures and the steps management has taken to monitor and control
such exposures, including the Company's risk assessment and risk
management policies.
* Understand the scope of Internal Audit's and the independent auditor's
reviews of internal control over financial reporting, and obtain
reports on significant findings and recommendations, together with
management's responses.
Internal Audit
* Review with management, the independent auditor and the chief audit
executive the plans, activities, staffing and organizational structure
of the Internal Audit function, and any recommended changes thereto, as
well as staff qualifications.
* Review significant reports to management prepared by Internal Audit and
management's responses.
* Ensure there are no unjustified restrictions or limitations on the
chief audit executive's scope of activities or access to information,
and review and concur in the appointment, replacement, or dismissal of
the chief audit executive.
* On a regular basis, meet separately with the chief audit executive to
discuss any matters that the Committee or Internal Audit believes
should be discussed privately.
A-3
* Have the chief audit executive report to the Committee.
External Audit
* Have the independent auditor report directly to the Committee.
* Meet with the independent auditor to discuss the independent auditor's
proposed audit planning, scope, staffing and approach, including
coordination of its effort with Internal Audit. This discussion shall
include a review of, and concurrence by the Committee with, the
appointment by the independent auditor of the lead (or coordinating)
audit partner having primary responsibility for the Company's audit.
* Obtain and review annually a report from the independent auditor
regarding its quality control procedures, and material issues raised by
the most recent internal quality control review, or peer review, of the
firm or by any inquiry or investigation by governmental or professional
authorities within the preceding five years respecting one or more of
the independent audits carried out by the firm, and any steps taken to
deal with any such issues and all relationships between the independent
auditor and the Company.
* Evaluate, and present to the Board of Directors its conclusions
regarding, the qualifications, performance and independence of the
independent auditor, including considering whether the auditor's
quality controls are adequate and permitted non-audit services are
compatible with maintaining the auditor's independence, and taking into
account the opinions of management and the Internal Auditors.
* Ensure the rotation of the audit partners as required by law and
consider whether in order to assure continuing auditor independence it
is appropriate to adopt a policy of rotating the external audit firm on
a regular basis.
* Establish policies concerning the Company's hiring of employees or
former employees of the independent auditor, as required by law and by
NYSE listing standards.
* On a regular basis, meet separately with the independent auditor to
discuss any matters that the Committee or independent auditor believes
should be discussed privately.
Compliance
* Review the effectiveness of the system for monitoring compliance with
laws and regulations. The results of management's investigation and
follow-up (including disciplinary action) of any instances of
noncompliance should also be reviewed.
* Obtain from the independent auditor any information with respect to
illegal acts in accordance with Section 10A(b) of the Exchange Act.
* Establish procedures for the receipt, retention and treatment of
complaints received by the Company regarding accounting, internal
accounting controls or auditing matters and the confidential, anonymous
submission by employees of concerns regarding questionable accounting
or auditing matters.
* Review and discuss with management and the independent auditor any
correspondence with, or the findings of any examinations by, regulatory
agencies and any published reports or auditor observations that raise
significant issues regarding the Company's financial statements or
accounting policies.
* Obtain regular updates from management and Company counsel regarding
compliance matters and legal matters that may have a significant impact
on the financial statements and related disclosures or the Company's
compliance policies.
A-4
Reporting Responsibilities
* Regularly report to the Board of Directors about Committee activities,
issues and related recommendations.
* Provide an open avenue of communication between Internal Audit, the
independent auditor and the Board of Directors.
* Review any other reports the Company issues that relate to Committee
responsibilities.
Other Responsibilities
* Perform other activities related to this charter as requested by the
Board of Directors.
* Institute and oversee special investigations as needed.
* Review and assess the adequacy of the Committee charter annually,
request Board approval for proposed changes and ensure appropriate
disclosure as may be required by law or regulation.
* Annually review the Committee's own performance, including a review of
the compliance of the Committee with this charter.
A-5
FINANCIAL APPENDIX [LOGO]
Consolidated Balance Sheets as of December 31, 2003 and 2002 .............................. F-2
Consolidated Statements of Income for the Years ended December 31, 2003, 2002, and 2001.... F-3
Consolidated Statements of Changes In Shareholders' Equity
for the Years ended December 31, 2003, 2002, and 2001 ................................ F-4
Consolidated Statements of Cash Flows
for the Years ended December 31, 2003, 2002, and 2001 ................................. F-5
Notes to Consolidated Financial Statements ................................................ F-6
Report of Financial Responsibility ........................................................ F-27
Independent Auditors' Report .............................................................. F-28
Selected Financial Data ................................................................... F-29
Financial Review .......................................................................... F-30
Summary of Quarterly Financial Data, Unaudited ............................................ F-53
F-1
CONSOLIDATED BALANCE SHEETS [LOGO]
(In thousands, except share data)
DECEMBER 31,
---------------------------
2003 2002
------------ -----------
ASSETS
Cash and due from banks, including $10,720 and $5,017 in 2003 and 2002,
respectively, on deposit to meet Federal Reserve requirements ............................. $ 696,030 741,092
Interest earning deposits with banks .......................................................... 4,423 5,055
Federal funds sold and securities purchased under resale agreements ........................... 172,922 92,709
Mortgage loans held for sale .................................................................. 133,306 245,858
Investment securities available for sale (note 3) ............................................. 2,529,257 2,237,725
Loans, net of unearned income (note 4) ........................................................ 16,464,914 14,463,909
Allowance for loan losses (note 4) ............................................................ (226,059) (199,841)
------------ ----------
Loans, net ....................................................................... 16,238,855 14,264,068
------------ ----------
Premises and equipment, net ................................................................... 791,439 616,355
Contract acquisition costs and computer software, net (note 5) ................................ 383,562 324,026
Goodwill, net (notes 2 and 17) ................................................................ 248,868 99,108
Other intangible assets, net (notes 2 and 6) .................................................. 33,970 16,869
Other assets (note 6) ......................................................................... 399,997 393,381
------------ ----------
Total assets ..................................................................... $ 21,632,629 19,036,246
============ ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing .................................................................. $ 2,833,567 2,303,375
Interest bearing (note 7) ............................................................. 13,108,042 11,625,459
------------ ----------
Total deposits ................................................................... 15,941,609 13,928,834
Federal funds purchased and securities sold
under repurchase agreements (note 8) ..................................................... 1,354,887 1,275,084
Long-term debt (note 8) ................................................................... 1,575,777 1,336,200
Billings in excess of costs and profit on uncompleted contracts ........................... 17,573 --
Other liabilities (note 16) ............................................................... 355,906 338,176
------------ ----------
Total liabilities ................................................................ 19,245,752 16,878,294
------------ ----------
Minority interest in consolidated subsidiaries ................................................ 141,838 117,099
Shareholders' equity (notes 2, 12, and 14):
Common stock-- $1.00 par value. Authorized 600,000,000 shares;
issued 307,748,133 in 2003 and 300,573,027 in 2002; outstanding
302,090,128 in 2003 and 300,397,763 in 2002 .............................................. 307,748 300,573
Surplus ................................................................................... 442,931 305,718
Treasury stock - 5,658,005 shares and 175,264 shares in 2003 and 2002, respectively ....... (113,940) (1,285)
Unearned compensation ..................................................................... (266) (146)
Accumulated other comprehensive income .................................................... 29,509 46,113
Retained earnings ......................................................................... 1,579,057 1,389,880
------------ ----------
Total shareholders' equity ....................................................... 2,245,039 2,040,853
------------ ----------
Commitments and contingencies (note 11)
Total liabilities and shareholders' equity ....................................... $ 21,632,629 19,036,246
============ ==========
See accompanying notes to consolidated financial statements.
F-2
CONSOLIDATED STATEMENTS OF INCOME [LOGO]
(In thousands, except per share data)
YEARS ENDED DECEMBER 31,
------------------------------------------
2003 2002 2001
---- ---- ----
Interest income:
Loans, including fees .................................................. $ 951,584 923,628 989,352
Investment securities:
U.S. Treasury and U.S. Government agencies ........................... 50,959 56,944 69,316
Mortgage-backed securities ........................................... 29,345 42,519 38,331
State and municipal .................................................. 11,248 11,478 11,649
Other investments .................................................... 3,423 4,225 3,415
Mortgage loans held for sale ........................................... 13,361 14,657 14,216
Federal funds sold and securities purchased under resale agreements .... 1,547 1,538 4,397
Interest earning deposits with banks ................................... 25 51 212
---------- --------- ---------
Total interest income ....................................... 1,061,492 1,055,040 1,130,888
---------- --------- ---------
Interest expense:
Deposits (note 7) ...................................................... 217,561 260,656 404,661
Federal funds purchased and securities sold under repurchase agreements 11,830 18,639 42,643
Long-term debt ......................................................... 69,037 58,241 53,793
---------- --------- ---------
Total interest expense ...................................... 298,428 337,536 501,097
---------- --------- ---------
Net interest income ......................................... 763,064 717,504 629,791
Provision for losses on loans (note 4) ................................... 71,777 65,327 51,673
---------- --------- ---------
Net interest income after provision for losses on loans ..... 691,287 652,177 578,118
---------- --------- ---------
Non-interest income:
Electronic payment processing services ................................. 702,712 612,817 567,679
Other transaction processing services revenue .......................... 118,795 106,086 86,588
Service charges on deposit accounts .................................... 107,404 93,969 86,539
Fees for trust services ................................................ 30,009 28,069 26,509
Brokerage revenue ...................................................... 20,461 18,840 16,363
Mortgage banking income ................................................ 58,633 41,323 38,272
Credit card fees ....................................................... 26,044 22,469 21,184
Securities gains, net (note 3) ......................................... 2,491 2,638 1,722
Other fee income ....................................................... 23,682 20,494 17,199
Other operating income (note 19) ....................................... 53,933 65,373 69,596
---------- --------- ---------
Non-interest income before reimbursable items
and impairment loss on private equity investment ....................... 1,144,164 1,012,078 931,651
Reimbursable items ..................................................... 225,165 231,099 232,566
Impairment loss on private equity investment ........................... -- (8,355) --
---------- --------- ---------
Total non-interest income ................................... 1,369,329 1,234,822 1,164,217
---------- --------- ---------
Non-interest expense:
Salaries and other personnel expense (notes 13 and 14) ................. 672,248 607,865 566,084
Net occupancy and equipment expense (note 11) .......................... 281,688 244,176 235,652
Other operating expenses (note 19) ..................................... 243,042 216,330 198,181
---------- --------- ---------
Non-interest expense before reimbursable items ........................... 1,196,978 1,068,371 999,917
Reimbursable items ..................................................... 225,165 231,099 232,566
---------- --------- ---------
Total non-interest expense .................................. 1,422,143 1,299,470 1,232,483
---------- --------- ---------
Minority interest in subsidiaries' net income ............................ 26,972 23,649 19,859
Income before income taxes .................................. 611,501 563,880 489,993
Income tax expense (note 16) ............................................. 222,576 198,533 178,377
---------- --------- ---------
Net income .................................................. $ 388,925 365,347 311,616
========== ========= =========
Net income per share (notes 1 and 10):
Basic .................................................................. $ 1.29 1.23 1.07
========== ========= =========
Diluted ................................................................ 1.28 1.21 1.05
========== ========= =========
Weighted average shares outstanding (note 10):
Basic .................................................................. 302,010 297,325 290,304
========== ========= =========
Diluted ................................................................ 304,928 301,197 295,850
========== ========= =========
See accompanying notes to consolidated financial statements.
F-3
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY [LOGO]
(In thousands, except per share data)
SHARES COMMON TREASURY
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 ISSUED STOCK SURPLUS STOCK
--------------------------------------------- ------ --------- ------- --------
Balance at December 31, 2000 ......................................... 284,818 $ 284,818 107,652 (1,285)
Net income ........................................................... -- -- -- --
Other comprehensive income, net of tax (note 9):
Net unrealized gain on cash flow hedges ...................... -- -- -- --
Change in unrealized gains/losses on investment securities
available for sale, net of reclassification adjustment ..... -- -- -- --
Loss on foreign currency translation ......................... -- -- -- --
Other comprehensive income ................................... -- -- -- --
Comprehensive income ................................................. -- -- -- --
Issuance of common stock for acquisitions (note 2) ................... 7,666 7,666 26,588 --
Cash dividends declared - $.51 per share ............................. -- -- -- --
Amortization of restricted stock (note 14) ........................... -- -- -- --
Stock options exercised (note 14) .................................... 2,365 2,365 20,923 --
Stock option tax benefit ............................................. -- -- 16,363 --
Ownership change at majority-owned subsidiary ........................ -- -- (269) --
------- --------- ------- --------
Balance at December 31, 2001 ......................................... 294,849 294,849 171,257 (1,285)
Net income ........................................................... -- -- -- --
Other comprehensive income, net of tax (note 9):
Net unrealized loss on cash flow hedges ...................... -- -- -- --
Change in unrealized gains/losses on
investment securities available for sale,
net of reclassification adjustment ........................ -- -- -- --
Gain on foreign currency translation ......................... -- -- -- --
Other comprehensive income ................................... -- -- -- --
Comprehensive income ................................................. -- -- -- --
Issuance of common stock for acquisitions (note 2) ................... 3,768 3,768 102,140 --
Cash dividends declared - $.59 per share ............................. -- -- -- --
Amortization of restricted stock (note 14) ........................... -- -- -- --
Stock options exercised (note 14) .................................... 1,949 1,949 17,098 --
Issuance of restricted stock ......................................... 7 7 171 --
Stock option tax benefit ............................................. -- -- 10,414 --
Ownership change at majority-owned subsidiary ........................ -- -- 261 --
Impact on minority interest for ProCard sale to TSYS ................. -- -- 4,377 --
------- --------- ------- --------
BALANCE AT DECEMBER 31, 2002 ......................................... 300,573 300,573 305,718 (1,285)
NET INCOME ........................................................... -- -- -- --
OTHER COMPREHENSIVE LOSS, NET OF TAX (NOTE 9):
NET UNREALIZED LOSS ON CASH FLOW HEDGES ...................... -- -- -- --
CHANGE IN UNREALIZED GAINS/LOSSES ON
INVESTMENT SECURITIES AVAILABLE FOR SALE,
NET OF RECLASSIFICATION ADJUSTMENT ........................ -- -- -- --
GAIN ON FOREIGN CURRENCY TRANSLATION ......................... -- -- -- --
OTHER COMPREHENSIVE LOSS ..................................... -- -- -- --
COMPREHENSIVE INCOME ................................................. -- -- -- --
ISSUANCE OF COMMON STOCK FOR ACQUISITIONS (NOTE 2) ................... 4,641 4,641 95,835 --
CASH DIVIDENDS DECLARED - $.66 PER SHARE ............................. -- -- -- --
AMORTIZATION OF RESTRICTED STOCK (NOTE 14) ........................... -- -- -- --
STOCK OPTIONS EXERCISED (NOTE 14) .................................... 2,534 2,534 25,536 --
STOCK OPTION TAX BENEFIT ............................................. -- -- 12,348 --
OWNERSHIP CHANGE AT MAJORITY-OWNED SUBSIDIARY ........................ -- -- 3,494 --
TREASURY STOCK PURCHASES ............................................. -- -- -- (112,655)
ISSUANCE OF STOCK OPTIONS IN CONNECTION WITH ACQUISITION ............. -- -- -- --
------- --------- ------- --------
BALANCE AT DECEMBER 31, 2003 ......................................... 307,748 $ 307,748 442,931 113,940
======= ========= ======= ========
ACCUMULATED
OTHER
UNEARNED COMPREHENSIVE RETAINED
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 COMPENSATION INCOME (LOSS) EARNINGS TOTAL
--------------------------------------------- ------------ ------------- -------- -----
Balance at December 31, 2000 ......................................... (381) 5,936 1,020,431 1,417,171
Net income ........................................................... -- -- 311,616 311,616
Other comprehensive income, net of tax (note 9):
Net unrealized gain on cash flow hedges ...................... -- 6,081 -- 6,081
Change in unrealized gains/losses on investment securities
available for sale, net of reclassification adjustment ..... -- 18,341 -- 18,341
Loss on foreign currency translation ......................... -- (1,488) -- (1,488)
--------- ---------
Other comprehensive income ................................... -- 22,934 -- 22,934
---------
Comprehensive income ................................................. -- -- -- 334,550
Issuance of common stock for acquisitions (note 2) ................... -- 468 17,371 52,093
Cash dividends declared - $.51 per share ............................. -- -- (148,549) (148,549)
Amortization of restricted stock (note 14) ........................... 299 -- -- 299
Stock options exercised (note 14) .................................... -- -- -- 23,288
Stock option tax benefit ............................................. -- -- -- 16,363
Ownership change at majority-owned subsidiary ........................ -- -- -- (269)
------- --------- --------- ---------
Balance at December 31, 2001 ......................................... (82) 29,338 1,200,869 1,694,946
Net income ........................................................... -- -- 365,347 365,347
Other comprehensive income, net of tax (note 9):
Net unrealized loss on cash flow hedges ...................... -- (991) -- (991)
Change in unrealized gains/losses on
investment securities available for sale,
net of reclassification adjustment ........................ -- 14,113 -- 14,113
Gain on foreign currency translation ......................... -- 3,653 -- 3,653
--------- ---------
Other comprehensive income ................................... -- 16,775 -- 16,775
---------
Comprehensive income ................................................. -- -- -- 382,122
---------
Issuance of common stock for acquisitions (note 2) ................... -- -- -- 105,908
Cash dividends declared - $.59 per share ............................. -- -- (176,336) (176,336)
Amortization of restricted stock (note 14) ........................... 114 -- -- 114
Stock options exercised (note 14) .................................... -- -- -- 19,047
Issuance of restricted stock ......................................... (178) -- -- --
Stock option tax benefit ............................................. -- -- -- 10,414
Ownership change at majority-owned subsidiary ........................ -- -- -- 261
Impact on minority interest for ProCard sale to TSYS ................. -- -- -- 4,377
------- --------- --------- ---------
BALANCE AT DECEMBER 31, 2002 ......................................... (146) 46,113 1,389,880 2,040,853
NET INCOME ........................................................... -- -- 388,925 388,925
OTHER COMPREHENSIVE LOSS, NET OF TAX (NOTE 9):
NET UNREALIZED LOSS ON CASH FLOW HEDGES ...................... -- (2,773) -- (2,773)
CHANGE IN UNREALIZED GAINS/LOSSES ON
INVESTMENT SECURITIES AVAILABLE FOR SALE,
NET OF RECLASSIFICATION ADJUSTMENT ........................ -- (19,724) -- (19,724)
GAIN ON FOREIGN CURRENCY TRANSLATION ......................... -- 5,893 -- 5,893
--------- ---------
OTHER COMPREHENSIVE LOSS ..................................... -- (16,604) -- (16,604)
--------- ---------
COMPREHENSIVE INCOME ................................................. -- -- -- 372,321
---------
ISSUANCE OF COMMON STOCK FOR ACQUISITIONS (NOTE 2) ................... -- -- -- 100,476
CASH DIVIDENDS DECLARED - $.66 PER SHARE ............................. -- -- (199,748) (199,748)
AMORTIZATION OF RESTRICTED STOCK (NOTE 14) ........................... 55 -- -- 55
STOCK OPTIONS EXERCISED (NOTE 14) .................................... -- -- -- 28,070
STOCK OPTION TAX BENEFIT ............................................. -- -- -- 12,348
OWNERSHIP CHANGE AT MAJORITY-OWNED SUBSIDIARY ........................ -- -- -- 3,494
TREASURY STOCK PURCHASES ............................................. -- -- -- (112,655)
ISSUANCE OF STOCK OPTIONS IN CONNECTION WITH ACQUISITION ............. (175) -- -- (175)
------- --------- --------- ---------
BALANCE AT DECEMBER 31, 2003 ......................................... (266) 29,509 1,579,057 2,245,039
======= ========= ========= =========
See accompanying notes to consolidated financial statements.
F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS [LOGO]
(In thousands) YEARS ENDED DECEMBER 31,
-----------------------------------------
2003 2002 2001
---- ---- ----
OPERATING ACTIVITIES
Net income ........................................................................... $ 388,925 365,347 311,616
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for losses on loans ...................................................... 71,777 65,327 51,673
Depreciation, amortization, and accretion, net ..................................... 112,012 97,011 87,200
Deferred income tax expense ........................................................ 26,779 7,863 11,342
Decrease in interest receivable .................................................... 1,466 8,842 25,914
Decrease in interest payable ....................................................... (4,783) (15,657) (23,448)
Minority interest in subsidiaries' net income ...................................... 26,972 23,649 19,859
Decrease (increase) in mortgage loans held for sale ................................ 112,552 152,598 (289,706)
Billings in excess of costs and profit on uncompleted contracts .................... 17,573 -- --
Gain on sales of banking locations ................................................. -- (15,388) (3,743)
Other, net ......................................................................... (28,228) 51,562 3,167
----------- ---------- ----------
Net cash provided by operating activities .......................................... 725,045 741,154 193,874
----------- ---------- ----------
INVESTING ACTIVITIES
Net cash (paid for) received from acquisitions ....................................... (66,204) 14,722 17,906
Net decrease (increase) in interest earning deposits with banks ...................... 632 (1,171) (65)
Net (increase) decrease in federal funds sold and securities purchased
under resale agreements ............................................................. (47,978) (56,439) 375,542
Proceeds from maturities and principal collections of investment
securities available for sale ....................................................... 1,429,904 784,445 896,836
Proceeds from sales of investment securities available for sale ...................... 207,124 137,137 212,395
Purchases of investment securities available for sale ................................ (1,900,237) (973,246) (1,017,514)
Net cash received (paid) on sales of banking locations ............................... -- 11,020 (11,037)
Net increase in loans ................................................................ (1,426,471) (1,832,284) (1,326,774)
Purchases of premises and equipment .................................................. (184,226) (145,008) (146,663)
Proceeds from disposals of premises and equipment .................................... 2,681 11,165 14,194
Additions to contract acquisition costs .............................................. (18,129) (44,044) (27,194)
Additions to purchased computer software ............................................. (47,312) (37,020) (36,818)
Additions to internally developed computer software .................................. (17,689) (29,451) (18,304)
----------- ---------- ----------
Net cash used in investing activities ........................................... (2,067,905) (2,160,174) (1,067,496)
----------- ---------- ----------
FINANCING ACTIVITIES
Net increase in demand and savings deposits .......................................... 1,290,526 1,343,074 734,795
Net increase (decrease) in certificates of deposit ................................... 32,029 203,924 (131,891)
Net increase (decrease) in federal funds purchased and securities
sold under repurchase agreements..................................................... 79,803 (70,192) 293,948)
Principal repayments on long-term debt ............................................... (337,160) (27,946) (3,006)
Proceeds from issuance of long-term debt ............................................. 511,362 213,133 185,438
Treasury stock purchased ............................................................. (112,655) -- --
Dividends paid to shareholders ....................................................... (194,177) (169,107) (142,083)
Proceeds from issuance of common stock ............................................... 28,070 19,047 26,546
----------- ---------- ----------
Net cash provided by financing activities ........................................ 1,297,798 1,511,933 963,747
----------- ---------- ----------
(Decrease) increase in cash and due from banks ....................................... (45,062) 92,913 90,125
Cash and due from banks at beginning of year ......................................... 741,092 648,179 558,054
----------- ---------- ----------
Cash and due from banks at end of year ............................................... $ 696,030 741,092 648,179
=========== ========== ==========
See accompanying notes to consolidated financial statements.
F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [LOGO]
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS OPERATIONS
The consolidated financial statements of Synovus include the accounts
of Synovus Financial Corp. (Parent Company) and its consolidated subsidiaries,
all but one of which were wholly-owned at December 31, 2003. Synovus provides
integrated financial services including banking, financial management,
insurance, mortgage, and leasing services through 40 wholly-owned affiliate
banks and other Synovus offices in Georgia, Alabama, South Carolina, Florida,
and Tennessee. TSYS, an 81% owned subsidiary, provides electronic payment
processing and related services to banks and other card-issuing institutions
located in the United States, Mexico, Canada, Honduras, the Caribbean and
Europe. TSYS offers merchant processing services to financial institutions and
other organizations in Japan through its majority owned subsidiary, GP Network
Corporation (GP Net), and in the United States through its joint venture, Vital
Processing Services L.L.C. (Vital).
BASIS OF PRESENTATION
In preparing the consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities as of the date of the balance sheet and the reported
amounts of revenues and expenses for the period. Actual results could differ
significantly from those estimates.
Material estimates that are particularly susceptible to significant
change relate to the determination of the allowance for loan losses; the
valuation of other real estate; the valuation of long-lived assets, goodwill,
and other intangible assets; and the disclosures for contingent assets and
liabilities. In connection with the determination of the allowance for loan
losses and the valuation of other real estate, management obtains independent
appraisals for significant properties and properties collateralizing impaired
loans.
The accounting and reporting policies of Synovus conform to accounting
principles generally accepted in the United States of America and to general
practices within the banking and electronic payment processing industries. All
significant intercompany accounts and transactions have been eliminated in
consolidation. The following is a description of the more significant of those
policies.
CASH FLOW INFORMATION
For the years ended December 31, 2003, 2002, and 2001, income taxes of
$235 million, $207 million, and $224 million, and interest of $298 million, $352
million, and $525 million, respectively, were paid.
Loans receivable of approximately $23 million, $17 million, and $15
million were transferred to other real estate during 2003, 2002, and 2001,
respectively.
FEDERAL FUNDS SOLD, FEDERAL FUNDS PURCHASED, SECURITIES PURCHASED UNDER RESALE
AGREEMENTS, AND SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
Federal funds sold, federal funds purchased, securities purchased under
resale agreements, and securities sold under repurchase agreements generally
mature in one day.
MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale are carried at the lower of aggregate cost
or fair value and adjusted for changes in fair value of forward sales
commitments accounted for as hedges to the extent effective. Fair values are
based upon quoted prices from secondary market investors and forward commitments
to sell. No valuation allowances were required at December 31, 2003 or 2002.
The cost of mortgage loans held for sale is the mortgage note amount
plus certain net origination costs less fees collected.
INVESTMENT SECURITIES
Available for sale securities are recorded at fair value. Fair value is
determined at a specific point in time, based on quoted market prices.
Unrealized gains and losses on securities available for sale, net of the related
tax effect, are excluded from earnings and are reported as a separate component
of shareholders' equity, within accumulated other comprehensive income, until
realized.
A decline in the market value of any available for sale security below
cost that is deemed other than temporary results in a charge to earnings and the
establishment of a new cost basis for the security.
Premiums and discounts are amortized or accreted over the life of the
related security as an adjustment to the yield using the effective interest
method and prepayment assumptions. Dividend and interest income are recognized
when earned. Realized gains and losses for securities classified as available
for sale are included in earnings and are derived using the specific
identification method for determining the amortized cost of securities sold.
Gains and losses on sales of investment securities are recognized on
the settlement date, based on the amortized cost of the specific security. The
financial statement impact of settlement date accounting versus trade date
accounting is immaterial.
LOANS AND INTEREST INCOME
Loans are reported at principal amounts outstanding less unearned
income, net deferred fees, and the allowance for loan losses.
Interest income on consumer loans, made on a discount basis, is
recognized in a manner which approximates the level yield method. Interest
income on substantially all other loans is recognized on a level yield basis.
Loans on which the accrual of interest has been discontinued are
designated as nonaccrual loans. Accrual of interest on loans is discontinued
when reasonable doubt exists as to the full collection of interest or principal,
or when they become contractually in default for 90 days or more as to either
interest or principal, unless they are both well-secured and in the process of
collection. When a loan is placed on nonaccrual status, previously accrued and
uncollected interest is charged to interest income on loans, unless management
believes that the accrued interest is recoverable through the liquidation of
collateral. Interest payments received on nonaccrual loans are applied as a
reduction of principal. Loans are returned to accruing status when they are
brought fully current with respect to interest and principal and when, in the
judgment of management, the loans are estimated to be fully collectible as to
both principal and interest. Interest is accrued on impaired loans as long as
such loans do not meet the criteria for nonaccrual classification.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through provisions for
loan losses charged to operations. Loans are charged against the allowance for
loan losses when management believes that the collection of principal is
unlikely. Subsequent recoveries are added to the allowance. Management's
evaluation of the adequacy of the allowance for loan losses is based on a formal
analysis which assesses the risk within the loan portfolio. This analysis
includes consideration of historical performance, current economic conditions,
level of nonperforming loans, loan concentrations, and review of certain
individual loans.
Management believes that the allowance for loan losses is adequate.
While management uses available information to recognize
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [LOGO]
losses on loans, future additions to the allowance for loan losses may be
necessary based on changes in economic conditions. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the subsidiary banks' allowances for loan losses. Such
agencies may require the subsidiary banks to recognize additions to the
allowance for loan losses based on their judgments about information available
to them at the time of their examination.
Management, considering current information and events regarding a
borrowers' ability to repay its obligations, considers a loan to be impaired
when the ultimate collectibility of all amounts due, according to the
contractual terms of the loan agreement, is in doubt. When a loan is considered
to be impaired, the amount of impairment is measured based on the present value
of expected future cash flows discounted at the loan's effective interest rate.
If the loan is collateral-dependent, the fair value of the collateral less
estimated selling costs is used to determine the amount of impairment.
Impairment losses are included in the allowance for loan losses through a charge
to the provision for losses on loans. Subsequent recoveries are added to the
allowance for loan losses.
The accounting for impaired loans described above applies to all loans,
except for large pools of smaller-balance, homogeneous loans that are
collectively evaluated for impairment, loans that are measured at fair value or
at the lower of cost or fair value, and debt securities. The allowance for loan
losses for loans not considered impaired and for large pools of smaller-balance,
homogeneous loans is established through consideration of such factors as
changes in the nature and volume of the portfolio, overall portfolio quality,
individual risk ratings, adequacy of the underlying collateral, loan
concentrations, historical charge-off trends, and economic conditions that may
affect the borrowers' ability to pay.
PREMISES AND EQUIPMENT
Premises and equipment, including leasehold improvements and purchased
internal-use software, are reported at cost, less accumulated depreciation and
amortization which are computed using the straight-line method over the
estimated useful lives of the related assets.
CONTRACT ACQUISITION COSTS
TSYS capitalizes contract acquisition costs related to signing or
renewing long-term contracts. These costs, primarily consisting of cash payments
for rights to provide processing services and internal conversion costs, are
amortized using the straight line method over the contract term beginning when
the client's cardholder accounts are converted and producing revenues. All costs
incurred prior to a signed agreement are expensed as incurred.
The amortization of contract acquisition costs associated with cash
payments is recorded as a reduction of electronic payment processing services
revenues in the consolidated statements of income. The amortization of contract
acquisition costs associated with conversion activity is recorded as other
operating expenses in the consolidated statements of income. TSYS evaluates the
carrying value of contract acquisition costs for impairment for each customer on
the basis of whether these costs are fully recoverable from expected
undiscounted net operating cash flows of the related contract. The determination
of expected undiscounted net operating cash flows requires management to make
estimates.
These costs may become impaired with the loss of a contract, the
financial decline of a client, termination of conversion efforts after a
contract is signed, diminished prospects for current clients, or if TSYS' actual
results differ from its estimates of future cash flows.
COMPUTER SOFTWARE
Purchased Computer Software:
TSYS purchases software that is used in providing electronic payment
processing and other services to clients. Purchased software is obtained through
perpetual licenses and site licenses, and through agreements based on processing
capacity (called "MIPS agreements"). Perpetual and site licenses are amortized
using the straight-line method over their estimated useful lives which range
from three to five years. Software purchased under MIPS agreements is amortized
using a units-of-production basis over the estimated useful life of the
software, generally not to exceed ten years. TSYS evaluates impairment losses on
long-lived assets used in operations in accordance with the provisions of
Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets."
Software Development Costs:
TSYS develops software that is used in providing electronic payment
processing and other services to clients. Software development costs are
capitalized once technological feasibility of the software product has been
established. Costs incurred prior to establishing technological feasibility are
expensed as incurred. Technological feasibility is established when TSYS has
completed a detail program design and has determined that a product can be
produced to meet its design specifications, including functions, features, and
technical performance requirements. Capitalization of costs ceases when the
product is generally available to clients. TSYS evaluates the unamortized
capitalized costs of software development as compared to the net realizable
value of the software product which is determined by future undiscounted net
cash flows. The amount by which the unamortized software development costs
exceed the net realizable value is written off in the period that such
determination is made. Software development costs are amortized using the
greater of (1) the straight-line method over its estimated useful life, which
ranges from three to ten years, or (2) the ratio of current revenues to total
anticipated revenue over its useful life.
Synovus also develops software that is used internally. These software
development costs are capitalized based upon the provisions of Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use". Internal-use software development costs are
capitalized once (a) the preliminary project stage is completed, (b) management
authorizes and commits to funding a computer software project, and (c) it is
probable that the project will be completed and the software will be used to
perform the function intended. Costs incurred prior to meeting these
qualifications are expensed as incurred. Capitalization of costs ceases when the
project is substantially complete and ready for its intended use. Internal-use
software development costs are amortized using an estimated useful life of three
to seven years.
Software development costs may become impaired in situations where
development efforts are abandoned due to the viability of the planned project
becoming doubtful or due to technological obsolescence of the planned software
product.
TRANSACTION PROCESSING PROVISIONS
TSYS has recorded estimates to accrue for contract contingencies
(performance penalties) and processing errors. A significant number of TSYS'
contracts with large clients contain service level agreements which can result
in TSYS incurring performance penalties if contractually required service levels
are not met. When providing these accruals, TSYS takes into consideration such
factors as the prior history of performance penalties and processing errors
incurred, actual contractual penalties inherent in its contracts, progress
towards milestones, and known processing errors not covered by insurance.
These accruals are included in other liabilities in the consolidated
balance sheets. Increases and decreases in transaction processing provisions are
charged to other operating expenses in the consolidated statements of income,
and payments or credits for performance penalties and processing errors are
charged against the accrual.
F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [LOGO]
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and certain identifiable intangible assets are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. With the exception of
goodwill, recoverability of the intangible assets described below is measured by
a comparison of the carrying amount of the asset to future undiscounted cash
flows expected to be generated by the asset. If such assets are considered
impaired, the amount of impairment to be recognized is measured by the amount by
which the carrying value of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying value or fair
value less costs to sell.
Goodwill, which represents the excess of cost over the fair value of
net assets acquired of purchased companies, was amortized using the
straight-line method over periods of 5 to 40 years, until January 1, 2002.
Synovus adopted Statement of Financial Accounting Standards No. 142 (SFAS No.
142), "Goodwill and Other Intangible Assets" on January 1, 2002. SFAS No. 142
requires that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead tested for impairment at least annually.
Synovus began annual tests of its goodwill for impairment during fiscal
year 2002. To test for goodwill impairment, Synovus identifies its reporting
units and determines the carrying value of each reporting unit by assigning the
assets and liabilities, including the existing goodwill and intangible assets,
to those reporting units. Synovus then compares the carrying value of each unit
to its fair value to determine whether impairment exists. No impairment losses
have been recorded as a result of Synovus' transitional and annual goodwill
impairment analyses during the years ended December 31, 2003 and 2002.
At December 31, 2003 and 2002, Synovus had net unamortized goodwill of
$248.9 million and $99.1 million. Synovus recorded amortization expense relating
to such goodwill in the pre-tax amount of approximately $3.0 million for the
year ended December 31, 2001. The following table shows a summary of net income
and earnings per share for the year ended December 31, 2003, 2002, and 2001, as
reported and on a pro forma basis excluding goodwill amortization expense.
Goodwill amortization expense is shown net of any related tax effects.
(In thousands, except per share data)
2003 2002 2001
---- ---- ----
Net income as reported ....... $ 388,925 365,347 311,616
Add back: goodwill
amortization ................. -- -- 2,800
----------- ------- -------
Net income - pro forma ....... $ 388,925 365,347 314,416
=========== ======= =======
Earnings per share:
Basic-as reported .......... $ 1.29 1.23 1.07
Basic-pro forma ............ 1.29 1.23 1.08
Diluted-as reported ........ 1.28 1.21 1.05
Diluted-pro forma .......... 1.28 1.21 1.06
Identifiable intangible assets relate primarily to core deposit premiums,
resulting from the valuation of core deposit intangibles acquired in business
combinations or in the purchase of branch offices and customer contract premiums
resulting from the acquisition of investment advisory businesses. These
identifiable intangible assets are amortized using accelerated methods over
periods not exceeding the estimated average remaining life of the existing
customer deposits or customer contracts acquired. Amortization periods range
from 10 to 18 years. Amortization periods for intangible assets are monitored to
determine if events and circumstances require such periods to be reduced.
OTHER ASSETS
Other assets include interest receivable on loans, investment
securities, and other interest-bearing balances. The accounting for other
significant balances included in other assets is described below.
Investments in Company-Owned Life Insurance Programs:
Premiums paid for company-owned life insurance programs are recorded at
the net realizable value of the underlying insurance contracts. The change in
contract value during the period is recorded as an adjustment of premiums paid
in determining the expense or income to be recognized under the contract during
the period. Income or expense from company-owned life insurance programs is
included as a component of other operating income.
Investments in Joint Ventures:
TSYS' 49% investment in Total System Services de Mexico, S.A. de C.V.
(TSYS de Mexico), an electronic payment processing support operation located in
Mexico, is accounted for using the equity method of accounting, as is TSYS' 50%
investment in Vital, a merchant processing operation headquartered in Tempe,
Arizona.
Other Real Estate:
Other real estate, consisting of properties obtained through
foreclosure or in satisfaction of loans, is reported at the lower of cost or
fair value, determined on the basis of current appraisals, comparable sales, and
other estimates of value obtained principally from independent sources, adjusted
for estimated selling costs. At the time of foreclosure, any excess of the loan
balance over the fair value of the real estate held as collateral is treated as
a loan charge-off. Gain or loss on sale and any subsequent adjustments to the
value are recorded as a component of non-interest expense.
DERIVATIVE INSTRUMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." In
June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activity, an Amendment of SFAS 133, "Accounting
for Derivative Instruments and Hedging Activities". SFAS No. 133 and SFAS No.
138 require that all derivative instruments be recorded on the balance sheet at
their respective fair values. Synovus adopted SFAS No. 133 and SFAS No. 138 on
January 1, 2001. In accordance with the transition provisions of SFAS No. 133,
Synovus recorded a net-of-tax cumulative effect gain of $.8 million in
accumulated other comprehensive income to recognize at fair value all derivative
instruments that are designated as cash flow hedges. Upon adoption of SFAS No.
133, gains and losses on derivatives that were previously deferred as
adjustments to the carrying amounts of hedged items were not adjusted.
The accounting for changes in fair value (i.e., gains or losses) of a
derivative instrument depends on whether it has been designated and qualifies as
part of a hedging relationship and if so, on the reason for holding it. If
certain conditions are met, entities may elect to designate a derivative
instrument as a hedge of exposures to changes in fair values, cash flows, or
foreign currencies. If the hedged exposure is a fair value exposure, the gain or
loss on the derivative instrument is recognized in earnings in the period of
change, together with the offsetting loss or gain on the hedged item
attributable to the risk being hedged. If the hedged exposure is a cash flow
exposure, the effective portion of the gain or loss on the
F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [LOGO]
derivative instrument is reported initially as a component of accumulated other
comprehensive income (outside earnings), and subsequently reclassified into
earnings when the forecasted transaction affects earnings. Any amounts excluded
from the assessment of hedge effectiveness, as well as the ineffective portion
of the gain or loss, are reported in earnings immediately. If the derivative
instrument is not designated as a hedge, the gain or loss is recognized in
earnings in the period of change.
As part of its overall interest rate risk management activities,
Synovus utilizes interest rate related derivatives to manage its exposure to
various types of interest rate risks. With the exception of commitments to fund
and sell fixed-rate mortgage loans and derivatives utilized to meet the
financing and interest rate management needs of its customers, all derivatives
utilized by Synovus to manage its interest rate sensitivity are designed as
either a hedge of a recognized fixed-rate asset or liability (a fair value
hedge), or a hedge of a forecasted transaction or of the variability of future
cash flows of a floating rate asset or liability (cash flow hedge). Synovus does
not speculate using derivative instruments.
Synovus' risk management policies emphasize the management of interest
rate risk within acceptable guidelines. Synovus' objective in maintaining these
policies is to achieve consistent growth in net interest income while limiting
volatility arising from changes in interest rates. Risks to be managed include
both fair value and cash flow risks. Utilization of derivative financial
instruments provides a valuable tool to assist in the management of these risks.
Synovus utilizes interest rate swap agreements to hedge the fair value
risk of fixed-rate balance sheet liabilities, primarily deposit liabilities.
Fair value risk is measured as the volatility in the value of these liabilities
as interest rates change. Interest rate swaps entered into to manage this risk
are designed to have the same notional value, as well as similar interest rates
and interest calculation methods. These agreements entitle Synovus to receive
fixed-rate interest payments and pay floating-rate interest payments based on
the notional amount of the swap agreements. Swap agreements structured in this
manner allow Synovus to effectively hedge the fair value risks of these
fixed-rate liabilities.
Synovus is potentially exposed to cash flow risk due to its holding of
loans whose interest payments are based on floating rate indices. Synovus
monitors changes in these exposures and their impact on its risk management
activities and uses interest rate swap agreements to hedge the cash flow risk.
These agreements, whose terms are for up to five years, entitle Synovus to
receive fixed-rate interest payments and pay floating-rate interest payments.
The maturity date of the last agreement is November 10, 2006. These agreements
allow Synovus to offset the variability of floating rate loan interest with the
variable interest payments due on the interest rate swaps.
By using derivatives to hedge fair value and cash flow risks, Synovus
exposes itself to potential credit risk. This potential credit risk is equal to
the fair or replacement values of the swaps if the counterparty fails to perform
on its obligations under the swap agreements. This credit risk is normally a
very small percentage of the notional amount and fluctuates as interest rates
change. Synovus minimizes this risk by subjecting the transaction to the same
approval process as other credit activities, by dealing with highly rated
counterparties, and by obtaining collateral agreements for exposures above
predetermined limits.
Synovus also holds derivative instruments which consist of commitments
to fund fixed-rate mortgage loans to customers and forward commitments to sell
mortgage-backed securities and individual fixed-rate mortgage loans. Synovus'
objective in obtaining the forward commitments is to mitigate the interest rate
risk associated with the commitments to fund the fixed-rate mortgage loans and
the mortgage loans that are held for sale. Both the interest rate lock
commitments and the forward commitments are reported at fair value, with
adjustments being recorded in current period earnings. Certain forward sales
commitments are accounted for as hedges of mortgage loans held for sale.
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 will ordinarily
enter 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.
BILLINGS IN EXCESS OF COSTS AND PROFIT ON UNCOMPLETED CONTRACTS
When provisions for progress payments exist on long-term contracts
accounted for under the percentage-of-completion method, TSYS includes amounts
for contract billings that exceed accumulated contract revenues in billings in
excess of costs and profit on uncompleted contracts.
ELECTRONIC PAYMENT PROCESSING REVENUES
TSYS' electronic payment processing revenues are derived from long-term
processing contracts with financial and non-financial institutions and are
recognized as the services are performed. Electronic payment processing revenues
are generated primarily from charges based on the number of accounts on file,
transactions and authorizations processed, statements mailed, and other
processing services for cardholder accounts on file. Most of these contracts
have prescribed annual revenue minimums. The original terms of processing
contracts generally range from three to ten years.
REIMBURSABLE ITEMS
On January 1, 2002, Synovus adopted the provisions of the FASB's
Emerging Issues Task Force (EITF) Issue No. 01-14, "Income Statement
Characterization of Reimbursements Received for 'Out of Pocket' Expenses
Incurred." EITF Issue No. 01-14 requires that reimbursements received for
out-of-pocket expenses be characterized as revenue. Historically, Synovus had
not reflected such reimbursements in its consolidated statements of income as
revenue. One of the largest reimbursement expenses for which Synovus is
reimbursed by clients is postage. All prior periods presented have been restated
to conform with the new presentation.
FOREIGN CURRENCY TRANSLATION
TSYS maintains several different foreign operations whose functional
currency is their local currency. The foreign currency-based financial
statements of these subsidiaries and branches are translated into U.S. dollars
at current exchange rates, except for revenues, costs and expenses, and net
income which are translated at the average exchange rates for each reporting
period. Net gains or losses resulting from the currency translation of assets
and liabilities of TSYS' foreign operations, net of tax, are accumulated as a
component of accumulated other comprehensive income (loss).
Gains and losses on transactions denominated in currencies other than
the functional currencies are included in determining net income for the period
in which exchange rates change.
INCOME TAXES
Synovus uses the asset and liability method to account for income
taxes. Under the asset and liability method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [LOGO]
in tax rates is recognized in income in the period that includes the enactment
date. Synovus files a consolidated federal income tax return with its
wholly-owned and majority-owned subsidiaries.
STOCK-BASED COMPENSATION
Synovus accounts for its fixed stock-based compensation in accordance
with the provisions set forth in Accounting Principles Board (APB) Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations. In
accordance with APB Opinion No. 25, compensation expense is recorded on the
grant date only to the extent that the current market price of the underlying
stock exceeds the exercise price on the grant date.
SFAS No. 123, "Accounting for Stock-Based Compensation," established
accounting and disclosures 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".
Had Synovus determined compensation expense based on the fair value at
the grant date for its stock options granted during the years 1997 through 2003
under SFAS No. 123, net income would have been reduced to the pro forma amounts
indicated in the following table.
(In thousands, except
per share data) 2003 2002 2001
---- ---- ----
Net income as reported ................. $ 388,925 365,347 311,616
Total stock-based employee
compensation expense
determined under fair value
based method for all awards,
net of related tax effects ........... (13,856) (14,446) (15,526)
----------- ------- -------
Net income - pro forma ................. $ 375,069 350,901 296,090
=========== ======= =======
Earnings per share:
Basic-as reported .................... $ 1.29 1.23 1.07
Basic-pro forma ...................... 1.24 1.18 1.02
Diluted-as reported .................. 1.28 1.21 1.05
Diluted-pro forma .................... 1.23 1.17 1.00
The per share weighted average fair value of stock options granted
during 2003, 2002 and 2001 was $4.93, $8.37, and $9.99, respectively. The fair
value for these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions for 2003, 2002 and 2001, respectively: risk-free interest rates of
3.2%, 5.0%, and 5.3%; expected volatility of 34%, 34%, and 31%; expected life of
6.0 years, 6.6 years, and 7.9 years; and dividend yield of 3.3%, 2.4%, and 1.8%.
POSTRETIREMENT BENEFITS
Synovus sponsors a defined benefit health care plan for substantially
all of its employees and early retirees. The expected costs of retiree health
care and other postretirement benefits are being expensed over the period that
employees provide service.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made at a specific point in time, based on
relevant market information and other information about the financial
instrument. These estimates do not reflect any premium or discount that could
result from offering for sale, at one time, the entire holdings of a particular
financial instrument. Because no market exists for a portion of the financial
instruments, fair value estimates are also based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics of
various financial instruments, and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
Fair value estimates are based on existing balance sheet financial
instruments, without attempting to estimate the value of anticipated future
business, and the value of assets and liabilities that are not considered
financial instruments. Significant assets and liabilities that are not
considered financial instruments include deferred income taxes, premises and
equipment, capitalized contract acquisition costs, computer software,
investments in joint ventures, and goodwill. In addition, the income tax
ramifications related to the realization of the unrealized gains and losses can
have a significant effect on fair value estimates and have not been considered
in any of the estimates.
RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the FASB issued Statement No. 141 (SFAS No. 141),
"Business Combinations" and Statement No. 142 (SFAS No. 142), "Goodwill and
Other Intangible Assets". SFAS No. 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
SFAS No. 141 also specifies criteria that intangible assets acquired in a
purchase method business combination must meet to be recognized and reported
apart from goodwill. SFAS No. 142 requires that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of SFAS No. 142.
SFAS No. 142 also requires that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets".
Synovus adopted the provisions of SFAS No. 141 effective July 1, 2001
and adopted the provisions of SFAS No. 142 effective January 1, 2002.
SFAS No. 141 required upon the adoption of SFAS No. 142 that Synovus
evaluate its existing intangible assets and goodwill that were acquired in prior
purchase business combinations, and make any necessary reclassifications to
conform with the new criteria in SFAS No. 141 for recognition apart from
goodwill. Upon adoption of SFAS No. 142, Synovus was required to reassess the
useful lives and residual values of all intangible assets acquired, and make any
necessary amortization period adjustments. In addition, to the extent an
intangible asset was identified as having an indefinite useful life, Synovus was
required to test the intangible asset for impairment in accordance with the
provisions of SFAS No. 142. Any impairment would have been measured as of the
date of adoption and recognized as the cumulative effect of a change in
accounting principle.
As of June 30, 2002, Synovus had determined the fair value of each
reporting unit and compared it to the reporting unit's carrying amount,
including goodwill allocated to the reporting unit. Based on this analysis,
Synovus determined that there were no goodwill impairment losses to be
recognized as the cumulative effect of a change in accounting principle, since
fair values of each reporting unit exceeded the reporting unit's carrying value.
In June 2001, the FASB issued Statement No. 143 (SFAS No. 143),
"Accounting for Asset Retirement Obligations". SFAS No. 143 requires Synovus to
record the fair value of an asset retirement obligation as a liability in the
period in which it incurs a legal obligation associated with the retirement of
tangible long-lived assets that result from the acquisition, construction,
development and/or normal use of the assets. It also requires that a
corresponding asset be
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [LOGO]
recorded which is depreciated over the life of the asset. Subsequent to the
initial measurement of the asset retirement obligation, the obligation will be
adjusted at the end of each period to reflect the passage of time and changes in
the estimated future cash flows underlying the obligation. Synovus adopted SFAS
No. 143 on January 1, 2003. The adoption of SFAS No. 143 did not have a material
effect on Synovus' financial condition or results of operations.
In June 2002, the FASB issued Statement No. 146 (SFAS No. 146),
"Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146
addresses financial accounting and reporting for costs associated with exit or
disposal activities and nullifies EITF Issue No. 94-3 (EITF No. 94-3),
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." This
statement requires recognition of a liability for a cost associated with an exit
or disposal activity when the liability is incurred, as opposed to when the
entity commits to an exit plan under EITF No. 94-3. The provisions of this
statement are effective for exit or disposal activities that are initiated after
December 31, 2002, with early adoption encouraged. The adoption of SFAS No. 146
on January 1, 2003 did not have a material impact on Synovus' financial
condition or results of operations.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an interpretation of FASB Statements No.
5, 57, and 107 and a rescission of FASB Interpretation No. 34". This
interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees
issued. Interpretation No. 45 also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of the
interpretation are applicable to guarantees issued or modified after December
31, 2002 and the disclosure requirements are effective for financial statements
of interim or annual periods ending after December 15, 2002. The adoption of
Interpretation No. 45 did not have a material effect on Synovus' financial
condition or results of operations.
At the November 21, 2002 meeting of the FASB's EITF, the EITF ratified
as a consensus the tentative conclusions it reached at its October 25, 2002
meeting, regarding EITF Issue No. 00-21 (EITF No. 00-21), "Accounting for
Revenue Arrangements with Multiple Deliverables". EITF No. 00-21 addresses
certain aspects of the accounting by a vendor for arrangements under which it
will perform multiple revenue-generating activities. Those activities may
involve the delivery or performance of multiple products, services, and/or
rights to use assets, and performance may occur at different points in time or
over different periods of time. The arrangements are often accompanied by
initial installation, initiation, or activation services, and generally involve
either a fixed fee or a fixed fee coupled with a continuing payment stream. The
continuing payment stream generally corresponds to the continuing performance,
and may be fixed, variable based on future performance, or composed of a
combination of fixed and variable payments. EITF No. 00-21 addresses how to
account for those arrangements, and is effective for revenue arrangements
entered into in fiscal periods beginning after June 15, 2003. Entities may also
elect to report the change in accounting as a cumulative effect adjustment, in
which case disclosure should be made in periods subsequent to the date of
initial application of the amount of recognized revenue that was previously
included in the cumulative effect adjustment. The adoption of EITF No. 00-21 did
not significantly impact Synovus' financial condition or results of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities, an interpretation of ARB No. 51". In December
2003, the FASB issued Interpretation No. 46R, a revision of Interpretation No.
46. Interpretation No. 46R addresses the consolidation by business enterprises
of variable interest entities as defined in the interpretation. The
interpretation applies to variable interests in variable interest entities that
are special purpose entities for periods ending after December 15, 2003. For all
other types of variable interest entities, application of Interpretation No. 46R
is required for periods ending after March 15, 2004. For TSYS, which had a
variable interest in a variable interest entity that was a special purpose
entity, the interpretation would have applied in the first reporting period
ending after December 15, 2003. On June 30, 2003, TSYS terminated the operating
lease agreement and purchased the corporate campus for $93.5 million with a
combination of $73.3 million in cash and funds from a long-term line of credit
with a Synovus affiliate bank. Accordingly, the interpretation does not directly
impact Synovus' financial statements.
In April 2003, the FASB issued Statement No. 149 (SFAS No. 149),
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities".
SFAS No. 149 amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities under SFAS No. 133. SFAS No. 149 is
generally effective for contracts entered into or modified after June 30, 2003,
and for hedging relationships designated after June 30, 2003. The adoption of
SFAS No. 149 did not have a material impact on Synovus' financial statements.
In May 2003, the FASB issued Statement No. 150 (SFAS No. 150),
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity". SFAS No. 150 establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. It requires than an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). Many of those instruments were previously classified as equity.
SFAS No. 150 was effective for financial instruments entered into or modified
after May 31, 2003, and otherwise was effective at the beginning of the first
interim period beginning after June 15, 2003. Currently, the only impact of
adopting SFAS No. 150 has been the requirement to reclassify the
company-obligated mandatorily redeemable capital securities of subsidiary trusts
as liabilities beginning with the third quarter of 2003.
RECLASSIFICATIONS
Certain amounts in 2002 and 2001 have been reclassified to conform with
the presentation adopted in 2003.
NOTE 2 BUSINESS COMBINATIONS
On February 27, 2003, Synovus acquired all the issued and outstanding
common shares of FNB Newton Bankshares, Inc. (FNB), the parent company of First
Nation Bank, headquartered in Covington, Georgia. The acquisition was accounted
for using the purchase method of accounting, and accordingly, the results of
FNB's operations have been included in the consolidated financial statements
beginning March 1, 2003.
The aggregate purchase price was $96.0 million, consisting of 2,253,627
shares of Synovus common stock valued at $46.4 million, $46.4 million in cash,
stock options valued at $3.2 million, and $35 thousand in direct acquisition
costs, primarily consisting of external legal 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 date the terms
of the acquisition were agreed upon. The fair value of the stock options was
determined based on the Black-Scholes option pricing model.
Of the $66.2 million of acquired intangible assets, $58.0 million was
allocated to goodwill. The goodwill will not be deductible
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [LOGO]
for tax purposes. The identifiable intangible asset consists of the core deposit
premium. The core deposit premium has an estimated fair value of $8.1 million
and a weighted average useful life of 10 years.
Synovus has completed the purchase price allocation relating to the
acquisition. The purchase price allocation has been determined as presented in
the table below.
FNB NEWTON BANKSHARES, INC.
(In thousands) AS OF FEBRUARY 28, 2003
-----------------------
Cash and due from banks $ 16,238
Investments 30,011
Federal funds sold 25,200
Loans, net 292,325
Premises and equipment 10,141
Intangible asset 8,118
Goodwill 58,038
Other assets 4,460
----------
Total assets acquired 444,531
----------
Deposits 328,040
Notes payable 14,083
Other liabilities 6,443
----------
Total liabilities assumed 348,566
----------
Net assets acquired $ 95,965
==========
On February 28, 2003 Synovus acquired all the issued and outstanding
common shares of United Financial Holdings, Inc. (United Financial), the parent
company of United Bank and Trust Company, in St. Petersburg, Florida and United
Bank of the Gulf Coast, in Sarasota, Florida. The acquisition was accounted for
using the purchase method of accounting and accordingly, the results from United
Financial's operations have been included in the consolidated financial
statements beginning March 1, 2003.
The aggregate purchase price was $85.3 million, consisting of 2,388,087
shares of Synovus common stock valued at $47.6 million, $34.0 million in cash,
stock options valued at $3.5 million, and $215 thousand in direct acquisition
costs, primarily consisting of external legal 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 date the terms
of the acquisition were agreed upon. The fair value of the stock options was
determined based on the Black-Scholes option pricing model.
Of the $67.2 million of acquired intangible assets, $59.8 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 $7.4 million and a weighted average useful life of 10
years.
Synovus has completed the purchase price allocation relating to the
acquisition. The purchase price allocation has been determined as shown in the
table below.
UNITED FINANCIAL HOLDINGS, INC.
(In thousands) AS OF FEBRUARY 28, 2003
-----------------------
Cash and due from banks $ 29,559
Investments 34,255
Federal funds sold 7,035
Loans, net 327,768
Premises and equipment 16,806
Intangible asset 7,396
Goodwill 59,836
Other assets 7,481
----------
Total assets acquired 490,136
----------
Deposits 362,180
Capital securities of subsidiary trusts 17,744
Other liabilities 24,954
----------
Total liabilities assumed 404,878
----------
Net assets acquired $ 85,258
==========
On April 28, 2003, TSYS completed the acquisition of Enhancement
Services Corporation (ESC) for $36.0 million in cash. TSYS has allocated
approximately $26.0 million to goodwill, approximately $8.2 million to
intangibles and the remaining amount to the net assets acquired. ESC provides
targeted loyalty consulting and travel, as well as gift card and merchandise
reward programs to more than 40 national and regional financial institutions in
the United States.
Proforma information relating to the impact of these three acquisitions
on Synovus' consolidated financial statements, assuming such acquisitions had
occurred at the beginning of the periods reported, is not presented as such
impact is not significant.
On July 31, 2002 Synovus acquired all the issued and outstanding common
shares of the $557 million asset Community Financial Group, Inc. (Community
Financial). Community Financial is the parent company of The Bank of Nashville,
headquartered in Nashville, Tennessee. The aggregate purchase price was $87.0
million, consisting of 3,065,235 shares of Synovus common stock valued at $82.2
million, stock options valued at $4.7 million, and $49 thousand in direct
acquisition costs, consisting primarily of external legal and accounting fees.
On May 31, 2002, Synovus acquired all the issued and outstanding common
shares of GLOBALT, Inc. (GLOBALT). GLOBALT is a provider of investment advisory
services based in Atlanta, Georgia, offering a full line of distinct large cap
and mid cap growth equity strategies and products. GLOBALT's assets under
management at June 1, 2002 were approximately $1.3 billion. GLOBALT now operates
as a wholly-owned subsidiary of Synovus and as a part of the Synovus Financial
Management Services unit. The aggregate purchase price was $20.0 million,
consisting of 702,433 shares of Synovus common stock valued at $19.0 million,
$0.9 million for forgiveness of debt, and $100 thousand in direct acquisition
costs, consisting primarily of external legal and accounting fees. The terms of
the merger agreement provide for additional consideration to the former GLOBALT
shareholders. Such consideration will be based on a multiple of earnings before
interest, taxes, and depreciation, as defined, for each of the three years
ending December 31, 2004, 2005, and 2006. Based on assumptions as of the date
when the merger agreement was executed, Synovus expected that the aggregate
contingent consideration would be approximately $6 million. However, GLOBALT's
future profitability could result in a higher or lower contingent consideration
paid to the former GLOBALT shareholders.
On December 7, 2001, Synovus completed the acquisition of the $304
million asset FABP Bancshares, Inc. (FABP), of Pensacola, Florida, the parent
company of First American Bank of Pensacola, N.A. Synovus issued 3,539,751
shares of its common stock for all the issued and outstanding shares of FABP.
On February 28, 2001, Synovus completed the acquisition of Creative
Financial Group, Ltd. (Creative Financial), based in Atlanta, Georgia, and its
operating unit Robert Andrew Securities, Inc. At the acquisition date, Creative
Financial had $546 million in assets under management. The companies operate as
part of the Synovus Financial Management Services unit. Synovus issued 937,701
shares of its common stock for all the issued and outstanding shares of these
two entities.
On February 16, 2001, Synovus completed the acquisition of the $200
million asset Carolina Southern Bank of Spartanburg, South Carolina. Synovus
issued 3,188,558 shares of its common stock, and merged the bank into its
affiliate bank, The National Bank of South Carolina.
The aforementioned acquisitions in 2001 were accounted for as poolings
of interests, except that the financial information preceding the dates of
acquisition have not been restated to include the financial condition and
results of operations of these entities since the effect was not material. Net
income for the year ended December 31, 2001 would have been increased by $3.0
million, if periods prior to the acquisition date had been restated for the
acquisitions.
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [LOGO]
On January 30, 2004, Synovus completed the acquisition of the $255.6
million asset Peoples Florida Banking Corporation (Peoples) in Palm Harbor,
Florida. Synovus issued 1,636,827 shares of its common stock and paid $32.1
million in cash in exchange for all the issued and outstanding shares of Peoples
common stock. Peoples is the parent company of Peoples Bank, a state-chartered,
commercial bank which provides a comprehensive range of financial services to
individuals, corporations, professional associations, nonprofit organizations,
and local governments in the Tampa Bay, Florida area.
On December 17, 2003, Synovus announced the signing of a definitive
agreement to acquire the $423.5 million asset Trust One Bank (Trust One) in
Memphis, Tennessee in a tax free exchange of shares of common stock. Trust One
has six branches serving east Shelby County, Tennessee, which includes
Germantown, Cordova, Collierville and east Memphis. The merger is subject to
approval by the shareholders of Trust One and regulatory agencies. The
acquisition is expected to be completed during the second quarter of 2004.
NOTE 3 INVESTMENT SECURITIES AVAILABLE FOR SALE
The amortized cost, gross unrealized gains and losses, and estimated
fair values of investment securities available for sale at December 31, 2003 and
2002 are summarized as follows:
DECEMBER 31, 2003
-----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ---------- ---------- ---------
U.S. Treasury and U.S. Government agencies .. $ 1,343,535 13,794 (3,504) 1,353,825
Mortgage-backed securities .................. 839,793 10,367 (3,153) 847,007
State and municipal ......................... 233,417 15,357 (36) 248,738
Equity securities ........................... 73,899 167 (159) 73,907
Other investments ........................... 5,774 123 (117) 5,780
------------ -------- -------- ---------
Total ....................................... $ 2,496,418 39,808 (6,969) 2,529,257
============ ======== ======== =========
DECEMBER 31, 2002
-----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ---------- ---------- ---------
U.S. Treasury and U.S. Government agencies .. $ 1,171,563 30,780 (23) 1,202,320
Mortgage-backed securities .................. 688,272 19,960 (286) 707,946
State and municipal ......................... 237,930 14,642 (50) 252,522
Equity securities ........................... 65,467 103 (420) 65,150
Other investments ........................... 9,658 297 (168) 9,787
------------ -------- -------- ---------
Total ....................................... $ 2,172,890 65,782 (947) 2,237,725
============ ======== ======== =========
Gross unrealized losses on investment securities and the fair value of
the related securities, aggregated by investment category and length of time
that individual securities have been in a continuous unrealized loss position,
at December 31, 2003, were as follows:
DECEMBER 31, 2003
---------------------------------------------------------------------------
LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL
------------------------ -------------------- ---------------------
(In thousands) FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED
VALUE LOSS VALUE LOSS VALUE LOSS
----- ---------- ----- ---------- ----- ----------
U.S. Treasury and U.S. Government agencies .. $ 344,279 (3,504) -- -- 344,279 (3,504)
Mortgage-backed securities .................. 287,599 (3,153) -- -- 287,599 (3,153)
State and municipal ......................... 6,345 (34) 201 (2) 6,546 (36)
Equity securities ........................... 1,840 (159) -- -- 1,840 (159)
Other investments ........................... 1,027 (27) 410 (90) 1,437 (117)
--------- ------ --- --- ------- ------
Total ....................................... $ 641,090 (6,877) 611 (92) 641,701 (6,969)
========= ====== === === ======= ======
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [LOGO]
The amortized cost and estimated fair value by contractual maturity of
investment securities available for sale at December 31, 2003 are shown below.
Actual maturities may differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
AMORTIZED ESTIMATED
(In thousands) COST FAIR VALUE
---------- ----------
U.S. Treasury and
U.S. Government agencies:
Within 1 year ......................... $ 195,618 197,908
1 to 5 years .......................... 946,238 954,042
5 to 10 years ......................... 159,579 160,081
More than 10 years .................... 42,100 41,794
---------- ---------
Total ............................ $1,343,535 1,353,825
========== =========
State and municipal:
Within 1 year ......................... $ 14,251 14,424
1 to 5 years .......................... 77,745 82,443
5 to 10 years ......................... 94,722 101,918
More than 10 years .................... 46,699 49,953
---------- ---------
Total ............................ $ 233,417 248,738
========== =========
Other investments:
Within 1 year ......................... $ 1,764 1,778
1 to 5 years .......................... 1,659 1,766
5 to 10 years ......................... -- --
More than 10 years .................... 2,351 2,236
---------- ---------
Total ............................ $ 5,774 5,780
========== =========
Equity securities ........................ $ 73,899 73,907
========== =========
Mortgage-backed securities ............... $ 839,793 847,007
========== =========
Total investment securities:
Within 1 year ......................... $ 211,633 214,110
1 to 5 years .......................... 1,025,642 1,038,251
5 to 10 years ......................... 254,301 261,999
More than 10 years .................... 91,150 93,983
Equity securities ........................ 73,899 73,907
Mortgage-backed securities ............... 839,793 847,007
---------- ---------
Total ................................. $2,496,418 2,529,257
========== =========
A summary of sales transactions in the investment securities available
for sale portfolio for 2003, 2002, and 2001 is as follows:
GROSS GROSS
(In thousands) PROCEEDS REALIZED GAINS REALIZED LOSSES
-------- -------------- ---------------
2003 ........ $207,124 2,960 (469)
2002 ........ $137,137 3,339 (701)
2001 ........ 212,395 4,293 (2,571)
At December 31, 2003 and 2002, investment securities with a carrying
value of $2.0 billion and $1.8 billion, respectively, were pledged to secure
certain deposits, repurchase agreements, and Federal Home Loan Bank advances, as
required by law.
NOTE 4 LOANS
Loans outstanding, by classification, are summarized as follows:
DECEMBER 31
---------------------------
(In thousands) 2003 2002
----------- ----------
Commercial:
Commercial, financial,
and agricultural .................... $ 4,632,507 4,367,779
Real estate-construction ............. 3,958,649 3,119,508
Real estate-mortgage ................. 5,095,247 4,304,024
----------- ----------
Total commercial ................ 13,686,403 11,791,311
----------- ----------
Retail:
Real estate-mortgage ................. 1,865,701 1,701,332
Consumer loans - credit card ......... 252,287 238,392
Consumer loans - other ............... 691,557 757,626
----------- ----------
Total retail .................... 2,809,545 2,697,350
----------- ----------
Total loans ..................... 16,495,948 14,488,661
----------- ----------
Unearned income ...................... (31,034) (24,752)
----------- ----------
Total loans, net
of unearned income ............. $16,464,914 14,463,909
=========== ==========
Activity in the allowance for loan losses is summarized as follows:
DECEMBER 31
---------------------------------------
(In thousands) 2003 2002 2001
--------- ------- -------
Balance at beginning
of year .......................... $199,841 170,769 147,867
Allowance for loan losses of
acquired/divested
subsidiaries, net ................ 10,534 7,967 6,217
Provision for losses on loans ..... 71,777 65,327 51,673
Recoveries of loans
previously charged off ........... 8,112 7,039 6,817
Loans charged off ................. (64,205) (51,261) (41,805)
--------- ------- -------
Balance at end of year ............ $ 226,059 199,841 170,769
========= ======= =======
At December 31, 2003, the recorded investment in loans that were
considered to be impaired was $101.8 million. Included in this amount is $44.3
million of impaired loans for which the related allowance is $12.0 million, and
$57.5 million of impaired loans for which there is no related allowance
determined in accordance with SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan." At December 31, 2003, impaired loans in the amount of
$36.1 million were on nonaccrual status.
At December 31, 2002, the recorded investment in loans that were
considered to be impaired was $87.7 million. Included in this amount is $49.7
million of impaired loans for which the related allowance is $15.3 million, and
$38.0 million of impaired loans for which there is no related allowance
determined in accordance with SFAS No. 114. At December 31, 2002, impaired loans
in the amount of $29.6 million were on nonaccrual status.
The allowance for loan losses on impaired loans was primarily
determined using the fair value of the loans' collateral, less estimated selling
costs. The average recorded investment in impaired loans was approximately $96.6
million, $69.6 million, and $63.8 million for the years ended December 31, 2003,
2002, and 2001, respectively, and the related amount of interest income
recognized during the period that such loans were impaired was approximately
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [LOGO]
$5.4 million, $3.9 million, and $3.2 million for the years ended December 31,
2003, 2002, and 2001, respectively.
Loans on nonaccrual status amount to $67.2 million, $66.3 million, and
$51.2 million at December 31, 2003, 2002, and 2001, respectively. If nonaccrual
loans had been on a full accruing basis, interest income on these loans would
have been increased by approximately $2.7 million, $2.5 million, and $3.0
million for the years ended December 31, 2003, 2002, and 2001, respectively.
A substantial portion of the loans is secured by real estate in markets
in which affiliate banks are located throughout Georgia, Alabama, Tennessee,
South Carolina, and Florida. Accordingly, the ultimate collectibility of a
substantial portion of the loan portfolio, and the recovery of a substantial
portion of the carrying amount of real estate owned, are susceptible to changes
in market conditions in these areas.
In the ordinary course of business, Synovus' affiliate banks have made
loans to certain executive officers and directors (including their associates)
of the Parent Company and its significant subsidiaries, as defined. Significant
subsidiaries consist of TSYS, Columbus Bank and Trust Company, and The National
Bank of South Carolina. Management believes that such loans are made
substantially on the same terms, including interest rate and collateral, as
those prevailing at the time for comparable transactions with other customers.
The following is a summary of such loans outstanding and the activity in these
loans for the year ended December 31, 2003.
(In thousands)
Balance at December 31, 2002 ............................. $ 170,981
Adjustment for executive officer
and director changes .................................... (2,407)
---------
Adjusted balance at December 31, 2002 .................... 168,574
New loans ................................................ 176,385
Repayments ............................................... (150,484)
---------
Balance at December 31, 2003 ............................. $ 194,475
=========
NOTE 5 CONTRACT ACQUISITION COSTS AND COMPUTER SOFTWARE
Capitalized contract acquisition costs, consisting of conversion costs
and payments for processing rights at TSYS, net of accumulated amortization,
were $125.5 million and $123.7 million at December 31, 2003 and 2002,
respectively. Amortization expense related to contract acquisition costs was
$20.8 million, $14.1 million, and $6.6 million, for the years ended December 31,
2003, 2002, and 2001, respectively. Estimated future amortization expense
related to contract acquisition costs for the next five years is: $24.5 million
in 2004, $24.2 million in 2005, $21.1 million in 2006, $13.8 million in 2007,
and $13.1 million in 2008.
The weighted average estimated useful lives of payments for processing
rights was approximately 9.95 years at December 31, 2003 with weighted average
remaining useful lives of 6.41 years.
The weighted average estimated useful lives of conversion costs was
approximately 7.35 years at December 31, 2003 with weighted average remaining
useful lives of 4.76 years.
The following table summarizes TSYS' computer software at December 31,
2003 and 2002:
(In thousands) 2003 2002
--------- -------
Purchased computer software ................ $ 324,117 236,196
TS(2) ...................................... 33,049 33,049
Acquisition technology intangibles ......... 3,700 --
Other capitalized software
development costs ......................... 99,541 80,666
--------- -------
460,407 349,911
Less accumulated amortization .............. (202,317) (149,614)
--------- -------
Computer software, net ..................... $ 258,090 200,297
========= =======
Amortization expense related to purchased and capitalized software
development costs at TSYS was $52.7 million, $37.1 million, and $29.6 million
for the years ended December 31, 2003, 2002, and 2001, respectively. Aggregate
estimated amortization of computer software expense over the next five years is:
$41.6 million in 2004, $35.8 million in 2005, $34.5 million in 2006, $31.2
million in 2007 and $25.4 million in 2008.
The weighted average estimated useful lives of purchased computer
software was approximately 7.72 years at December 31, 2003 with weighted average
remaining useful lives of 2.66 years.
The weighted average estimated useful lives of acquisition technology
intangibles was approximately 5.00 years at December 31, 2003 with weighted
average remaining useful lives of 4.34 years.
The weighted average estimated useful lives of software development
costs was approximately 7.68 years at December 31, 2003 with weighted average
remaining useful lives of 3.40 years.
During 2001, TSYS ceased developing certain software projects. The
projects were reevaluated to determine their utilization in a new customer
service platform design plan. As a result, TSYS expensed $1.2 million of
previously capitalized software development costs in salaries and other
personnel and other operating expenses that were originally capitalized on this
project.
NOTE 6 INTANGIBLE AND OTHER ASSETS
Intangible assets (excluding goodwill) as of December 31, 2003 and 2002
are presented in the following table:
2003 2002
-------------------------------- -------------------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
(In thousands) AMOUNT AMORTIZATION NET AMOUNT AMORTIZATION NET
-------- ------------ ------ -------- ------------ ------
Purchased trust revenues $ 4,210 (725) 3,485 4,210 (444) 3,766
Acquired customer contracts 7,731 (1,253) 6,478 4,331 (252) 4,079
Employment contracts/ -- --
non-competition agreements 491 (103) 388 91 (12) 79
Core deposit premiums 39,903 (19,523) 20,380 24,389 (15,444) 8,945
Intangibles associated with the
acquisition of minority
interest in TSYS 2,846 (190) 2,656 -- -- --
Other 700 (117) 583 -- -- --
-------- --------- ------ ------- --------- ------
Total carrying value $ 55,881 (21,911) 33,970 33,021 (16,152) 16,869
======== ========= ====== ======= ========= ======
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [LOGO]
Aggregate intangible assets amortization expense (excluding goodwill)
for the years ended December 31, 2003, 2002, and 2001 was $5.8 million, $2.2
million, and $1.8 million, respectively. Estimated amortization expense for the
next five years is: $5.9 million in 2004, $4.8 million in 2005, $7.2 million in
2006, $3.4 million in 2007, and $3.0 million in 2008.
Significant balances included in other assets are company-owned life
insurance programs and TSYS' investments in joint ventures.
At December 31, 2003 and 2002, Synovus maintained certain company-owned
life insurance programs with a carrying value of approximately $160.2 million
and $149.1 million, respectively.
Investments in joint ventures consist of TSYS' 49% investment in TSYS
de Mexico and TSYS' 50% investment in Vital. Both investments are accounted for
using the equity method. Other assets include $66.7 million and $54.2 million in
recorded balances related to these investments at December 31, 2003 and 2002,
respectively.
NOTE 7 INTEREST BEARING DEPOSITS
A summary of interest bearing deposits at December 31, 2003 and 2002 is
as follows:
(In thousands) 2003 2002
----------- ----------
Interest bearing demand deposits ...... $ 2,687,229 2,368,431
Money market accounts ................. 4,057,545 3,314,126
Savings accounts ...................... 524,845 437,723
Time deposits under $100,000 .......... 2,269,679 2,351,494
Time deposits of $100,000 or more ..... 3,568,744 3,153,685
----------- ----------
Total interest bearing deposits.... $13,108,042 11,625,459
=========== ==========
Interest expense on time deposits of $100,000 or more for the years
ended December 31, 2003, 2002, and 2001 was $94.2 million, $102.1 million, and
$144.9 million, respectively.
The following table presents scheduled maturities of time deposits at
December 31, 2003:
(In thousands)
Maturing within one year .............. $ 3,842,795
between 1 - 2 years ................ 1,164,764
2 - 3 years ................... 305,606
3 - 4 years ................... 212,270
4 - 5 years ................... 142,151
thereafter .................... 170,837
-----------
$ 5,838,423
===========
NOTE 8 LONG-TERM DEBT AND SHORT-TERM BORROWINGS
Long-term debt at December 31, 2003 and 2002 consists of the following:
(In thousands) 2003 2002
---------- ---------
Parent Company:
7.25% senior notes, due December 15, 2005, with semi-annual interest payments
and principal to be paid at maturity ..................................................... $ 200,000 200,000
4.875% senior notes, due February 15, 2013, with semi-annual interest payments
and principal to be paid at maturity ..................................................... 300,000 --
6.125% senior notes, due October 15, 2003, with semi-annual interest payments
and principal to be paid at maturity ..................................................... -- 75,000
LIBOR + 3.60% debentures due December 23, 2031 with quarterly interest payments
and principal to be paid at maturity (rate of 4.70% at December 31, 2003) ................ 10,453 --
---------- ---------
Total long-term debt - Parent Company .................................................... 510,453 275,000
Subsidiaries:
Federal Home Loan Bank advances with interest and principal payments due at various maturity
dates through 2018 and interest rates ranging from 1.09% to 8.37% at December 31, 2003
(weighted average interest rate is 3.27% at December 31, 2003) ........................... 1,020,345 1,061,065
Other notes payable and capital lease and software obligations payable with interest and
principal payments due at various maturity dates through 2008 and interest rates ranging
from 3.0% to 19.6% at December 31, 2003 .................................................. 44,979 135
---------- ---------
Total long-term debt - subsidiaries ...................................................... 1,065,324 1,061,200
---------- ---------
Total long-term debt ..................................................................... $1,575,777 1,336,200
========== =========
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [LOGO]
The provisions of the loan and security agreements associated with some
of the promissory notes place certain restrictions, within specified limits, on
payments of cash dividends, issuance of additional debt, creation of liens upon
property, disposition of common stock or assets, and investments in
subsidiaries. As of December 31, 2003, Synovus and its subsidiaries were in
compliance with the covenants of the loan and security agreements.
The Federal Home Loan Bank advances are secured by certain loans
receivable of approximately $2.4 billion, as well as investment securities of
approximately $209.9 million at December 31, 2003.
Synovus has an unsecured line of credit with an unaffiliated bank for
$25 million with an interest rate of 50 basis points above the short-term index,
as defined. The line of credit requires an annual commitment fee of .125% on the
average daily available balance and draws can be made on demand (subject to
compliance with certain restrictive covenants). There were no advances
outstanding at December 31, 2003 and 2002.
Required annual principal payments on long-term debt for the five years
subsequent to December 31, 2003 are shown on the following table:
(In thousands) PARENT COMPANY SUBSIDIARIES TOTAL
-------------- -------------- ------------ -------
2004......... $ -- 256,550 256,550
2005......... 200,000 133,772 333,772
2006......... -- 196,387 196,387
2007......... -- 221,061 221,061
2008......... -- 57,258 57,258
The following table sets forth certain information regarding federal
funds purchased and securities sold under repurchase agreements, the principal
components of short-term borrowings.
(In thousands) 2003 2002 2001
---------- --------- ---------
Balance at December 31 ... $1,354,887 1,275,084 1,345,822
Weighted average interest
rate at December 31 ..... 0.93% 1.20% 1.67%
Maximum month end
balance during the year . $1,459,818 1,493,466 1,551,534
Average amount outstanding
during the year ......... $1,101,216 1,131,455 1,153,878
Weighted average interest
rate during the year .... 1.07% 1.65% 3.70%
NOTE 9 OTHER COMPREHENSIVE INCOME (LOSS)
The components of other comprehensive income (loss) for the years ended
December 31, 2003, 2002, and 2001, are as follows:
2003 2002 2001
------------------------------- ----------------------------- ----------------------------
BEFORE- TAX NET OF BEFORE- TAX NET OF BEFORE- TAX NET OF
TAX EXPENSE TAX TAX EXPENSE TAX TAX EXPENSE TAX
(In thousands) AMOUNT OR BENEFIT AMOUNT AMOUNT OR BENEFIT AMOUNT AMOUNT OR BENEFIT AMOUNT
-------- ---------- ------- ------- ---------- ------ ------- ---------- ------
Net unrealized gain (loss)
on cash flow hedges ............. $ (4,562) 1,789 (2,773) (1,504) 513 (991) 9,821 (3,740) 6,081
Net unrealized gains (losses) on
investment securities available
for sale:
Net unrealized gains (losses)
arising during the year ....... (29,505) 11,313 (18,192) 25,412 (9,677) 15,735 31,331 (11,931) 19,400
Reclassification adjustment
for net gains realized
in net income ................. (2,491) 959 (1,532) (2,638) 1,016 (1,622) (1,722) 663 (1,059)
-------- -------- ------- ------- -------- ------ ------- -------- ------
Net unrealized gains (losses) ..... (31,996) 12,272 (19,724) 22,774 (8,661) 14,113 29,609 (11,268) 18,341
Foreign currency
translation gains (losses) ...... 9,379 (3,486) 5,893 5,728 (2,075) 3,653 (2,357) 869 (1,488)
-------- -------- ------- ------- -------- ------ ------- -------- ------
Other comprehensive income (loss).. $(27,179) 10,575 (16,604) 26,998 (10,223) 16,775 37,073 (14,139) 22,934
======== ======== ======= ======= ======== ====== ======= ======== ======
On January 1, 2001, Synovus recorded a net-of-tax cumulative effect
gain of $.8 million to recognize hedges at fair value upon adoption of SFAS No.
133. Cash settlements were $7.6 million, $6.3 million, and $2.2 million for the
years ended December 31, 2003, 2002 and 2001, respectively, all of which were
included in earnings. During 2001, Synovus recorded cash settlements on
terminated hedges of $3.3 million, which were deferred and are being amortized
into earnings over the shorter of the remaining contract life or the maturity of
the designated asset as an adjustment to interest income. There were no
terminated cash flow hedges during 2003 or 2002. The corresponding amortization
on these settlements was approximately $1.2 million, $1.0 million and $500
thousand in 2003, 2002 and 2001, respectively. The change in unrealized gains on
cash flow hedges was approximately ($3.4) million in 2003, ($500) thousand in
2002 and $5.7 million in 2001.
NOTE 10 EARNINGS PER SHARE
The following table displays a reconciliation of the information used
in calculating basic and diluted earnings per share (EPS) for the years ended
December 31, 2003, 2002, and 2001:
2003 2002 2001
------------------------------- ------------------------------- -------------------------------
WEIGHTED NET WEIGHTED NET WEIGHTED NET
(In thousands, NET AVERAGE INCOME NET AVERAGE INCOME NET AVERAGE INCOME
except per share data) INCOME SHARES PER SHARE INCOME SHARES PER SHARE INCOME SHARES PER SHARE
-------- -------- --------- -------- -------- --------- -------- -------- ---------
BASIC EPS ................... $388,925 302,010 $ 1.29 $365,347 297,325 $ 1.23 $311,616 290,304 $ 1.07
Effect of dilutive options... 2,918 3,872 5,546
-------- -------- --------
DILUTED EPS ................. $388,925 304,928 $ 1.28 $365,347 301,197 $ 1.21 $311,616 295,850 $ 1.05
======== ======== ========= ======== ======== ========= ======== ======== =========
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [LOGO]
The following represents options to purchase shares of Synovus common
stock that were outstanding during the periods noted below, but were not
included in the computation of diluted earnings per share because the options'
exercise prices were greater than the average market price of the common shares.
WEIGHTED AVERAGE
QUARTER NUMBER EXERCISE PRICE
ENDED OF SHARES PER SHARE
---------------------------- ---------- ----------------
DECEMBER 31, 2003 .......... 2,609,500 $ 28.99
SEPTEMBER 30, 2003 ......... 6,475,443 $ 27.13
JUNE 30, 2003 .............. 11,401,281 $ 25.05
MARCH 31, 2003 ............. 11,577,418 $ 25.02
December 31, 2002 .......... 11,687,175 $ 25.02
September 30, 2002 ......... 6,612,434 $ 27.45
June 30, 2002 .............. 2,637,500 $ 28.98
March 31, 2002 ............. 2,607,500 $ 28.99
December 31, 2001 .......... 4,675,645 $ 27.87
September 30, 2001 ......... 2,500 $ 32.57
March 31, 2001 ............. 3,444 $ 28.12
NOTE 11 DERIVATIVE INSTRUMENTS, COMMITMENTS AND CONTINGENCIES
DERIVATIVE INSTRUMENTS
As part of its overall interest rate risk management activities,
Synovus utilizes derivative instruments to manage its exposure to various types
of interest rate risks. These derivative instruments consist of commitments to
sell fixed-rate mortgage loans, interest rate swaps, and interest rate collars.
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.
At December 31, 2003, Synovus had commitments to fund fixed-rate
mortgage loans to customers in the amount of $77 million. The fair value of
these commitments at December 31, 2003 was $660 thousand.
At December 31, 2003, outstanding commitments to sell fixed-rate
mortgage loans amounted to approximately $153.5 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 December 31,
2003 was $(1.3) 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 will ordinarily
enter 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 December 31, 2003, the
notional amount of customer related derivative financial instruments was $351.5
million.
Interest rate swap transactions generally involve the exchange of fixed
and floating rate interest rate payment obligations without the exchange of
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.
The notional amount of interest rate swap contracts was $912.5 million
and $425.0 million as of December 31, 2003 and 2002, respectively. The estimated
net unrealized gain on these interest rate contracts was $2.7 million and $8.6
million at December 31, 2003 and 2002, respectively.
The interest rate contracts at December 31, 2003 are being utilized to
hedge $570 million in floating rate loans, and $342.5 million in fixed-rate
liabilities.
A summary of interest rate contracts and their terms at December 31,
2003 and 2002 is shown on the following page. In accordance with the provisions
of SFAS No. 133, the fair value (net unrealized gain) of these contracts has
been recorded on the consolidated balance sheet beginning January 1, 2001.
Synovus expects to reclassify from accumulated other comprehensive
income approximately $3.7 million as net-of-tax earnings during the next twelve
months, as the related payments for interest rate swaps and amortization of
deferred gains are recorded.
During 2001, Synovus terminated certain cash flow hedges which resulted
in a net pre-tax gain of $3.3 million. Such gains were included as a component
of accumulated other comprehensive income and are being amortized over the
shorter of the remaining contract life or the maturity of the designated asset
as an adjustment to interest income. The remaining unamortized deferred gain
balances at December 31, 2003 and 2002 were $432 thousand and $1.7 million,
respectively. There were no terminated cash flow hedges during 2003 or 2002.
LOAN COMMITMENTS AND LETTERS OF CREDIT
Synovus is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby and
commercial letters of credit. These instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amounts recognized in
the consolidated financial statements.
The carrying amount of loan commitments and letters of credit closely
approximates the fair value of such financial instruments. Carrying amounts
include unamortized fee income and, in some instances, allowances for any
estimated credit losses from these financial instruments. These amounts are not
material to Synovus' consolidated balance sheet.
As of December 31, 2003, Synovus had standby and commercial letters of
credit in the amount of $2.0 billion. The standby letters of credit are
conditional commitments issued by Synovus to guarantee the performance of a
customer to a third party. The approximate terms of these commitments range from
one to five years. Collateral is required to support letters of credit in
accordance with management's evaluation of the creditworthiness of each
customer.
The exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit, and standby
and commercial letters of credit, is represented by the contract amount of those
instruments. Synovus uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, total commitment amounts do not necessarily
represent future cash requirements.
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [LOGO]
WEIGHTED NET
WEIGHTED WEIGHTED AVERAGE UNREALIZED
NOTIONAL AVERAGE AVERAGE MATURITY UNREALIZED UNREALIZED GAINS
(Dollars in thousands) AMOUNT RECEIVE RATE PAY RATE (*) IN MONTHS GAINS LOSSES (LOSSES)
-------- ------------ ------------ --------- ---------- ---------- ----------
DECEMBER 31, 2003
RECEIVE FIXED SWAPS:
FAIR VALUE HEDGES ......... $342,500 4.36% 1.16% 97 $ 2,087 (2,703) (616)
CASH FLOW HEDGES .......... 570,000 5.43% 4.00% 23 4,637 (1,280) 3,357
-------- ---------- -------- --------
TOTAL ..................... $912,500 5.03% 2.94% 51 $ 6,724 (3,983) 2,741
======== ========== ======== ========
December 31, 2002
Receive fixed swaps:
Fair value hedges ......... $115,000 4.82% 1.34% 40 $ 2,287 (429) 1,858
Cash flow hedges .......... 310,000 6.66% 4.25% 26 6,717 -- 6,717
-------- ---------- -------- --------
Total ..................... $425,000 6.17% 3.46% 30 $ 9,004 (429) 8,575
======== ========== ======== ========
(*) Variable pay rate based upon contract rates in effect at December 31, 2003
and 2002.
Loan commitments and letters of credit at December 31, 2003 include the
following:
(In thousands)
Standby and commercial letters of credit ..... $2,042,715
Undisbursed construction loans ............... 1,265,430
Unused credit card lines ..................... 1,042,426
Other loan commitments ....................... 2,674,832
----------
Total ..................................... $7,025,403
==========
Due to the short-term nature of the outstanding loan and letter of
credit commitments, and the likelihood that when funded, these instruments will
be indexed to then current market rates, the off-balance sheet value closely
approximates fair value.
LEASE COMMITMENTS
Synovus and its subsidiaries have entered into long-term operating
leases for various facilities and computer equipment. Management expects that as
these leases expire they will be renewed or replaced by similar leases.
At December 31, 2003, minimum rental commitments under all such
noncancelable leases for the next five years and thereafter are as follows:
(In thousands)
2004 .......................... $ 80,405
2005 .......................... 86,269
2006 .......................... 51,881
2007 .......................... 23,273
2008 .......................... 9,811
Thereafter .................... 28,487
--------
Total ......................... $280,126
========
Rental expense on computer equipment, including cancelable leases, was
$93.6 million, $81.8 million, and $89.2 million for the years ended December 31,
2003, 2002, and 2001, respectively. Rental expense on facilities was $18.3
million, $15.3 million, and $16.1 million for the years ended December 31, 2003,
2002, and 2001, respectively.
CONTRACTUAL COMMITMENTS
In the normal course of its business, TSYS maintains long-term
processing contracts with its clients. These processing contracts contain
commitments, including but not limited to, minimum standards and time frames
against which its performance is measured. In the event that TSYS does not meet
its contractual commitments with its clients, TSYS may incur penalties and/or
certain clients may have the right to terminate their contracts with TSYS. TSYS
does not believe that it will fail to meet its contractual commitments to an
extent that will result in a material adverse effect on its financial condition
or results of operations.
LEGAL PROCEEDINGS
Synovus and its subsidiaries are subject to various legal proceedings
and claims that arise in the ordinary course of its business. In the opinion of
management, based in part upon the advice of legal counsel, all matters are not
quantifiable, are believed to be adequately covered by insurance, or if not
covered, are believed to be without merit or are of such kind or involve such
amounts that would not have a material adverse effect on the financial position,
results of operations or cash flows of Synovus if disposed of unfavorably.
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. Sections 3729-33, in
connection with mailings made on behalf of the client from July 1997 through
November 2001. Although the exact scope of the investigation is not clear, TSYS
believes that the subject matter of the investigation relates to the U.S. Postal
Service's Move Update Requirements. In general, the Postal Service's Move Update
Requirements are designed to reduce the volume of mail that is returned to
sender as undeliverable as addressed. In effect, these requirements provide,
among other things, various procedures that may be utilized to maintain the
accuracy of mailing lists in exchange for discounts on postal rates. TSYS has
received a subpoena from the Office of the Inspector General of the U.S. Postal
Service, and has produced documents responsive to the subpoena, and expects to
provide further documentation to the government in connection with this
investigation. TSYS intends to fully cooperate with the Department of Justice in
the investigation and there can be no assurance as to the timing or outcome of
the investigation, including whether the investigation will result in any
criminal or civil fines, penalties, judgments or treble damage or other claims
against TSYS. TSYS is not in a position to estimate whether or not any loss may
arise out of this investigation. As a result, no reserve or accrual has been
recorded in TSYS or Synovus' financial statements relating to this matter.
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [LOGO]
NOTE 12 REGULATORY REQUIREMENTS AND RESTRICTIONS
The amount of dividends paid to the Parent Company from each of the
subsidiary banks is limited by various banking regulatory agencies. The amount
of cash dividends available from subsidiary banks for payment in 2004, in the
aggregate, without prior approval from the banking regulatory agencies, is
approximately $224.4 million. In prior years, certain Synovus banks have
received permission and have paid cash dividends to the Parent Company in excess
of these regulatory limitations.
Synovus is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the consolidated financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, Synovus
must meet specific capital guidelines that involve quantitative measures of
assets, liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. Capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require Synovus on a consolidated basis, and the Parent Company and
subsidiary banks individually, to maintain minimum amounts and ratios of total
and Tier I capital to risk-weighted assets as defined, and of Tier I capital to
average assets, as defined. Management believes that as of December 31, 2003,
Synovus meets all capital adequacy requirements to which it is subject.
As of December 31, 2003, the most recent notification from the Federal
Reserve Bank of Atlanta categorized all of the subsidiary banks as
well-capitalized under the regulatory framework for prompt corrective action. To
be categorized as well-capitalized, Synovus and its subsidiaries must maintain
minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set
forth in the table shown below. Management is not aware of the existence of any
conditions or events occurring subsequent to December 31, 2003 which would
affect the well-capitalized classification.
The following table summarizes regulatory capital information at
December 31, 2003 and 2002 on a consolidated basis and for each significant
subsidiary, as defined.
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
----------------------- --------------------- -----------------------
(Dollars in thousands) 2003 2002 2003 2002 2003 2002
----------- --------- --------- --------- ------- -------
SYNOVUS FINANCIAL CORP.
Tier I capital .................... $ 2,091,755 1,994,654 802,052 701,133 N/A n/a
Total risk-based capital .......... 2,617,814 2,195,652 1,604,105 1,402,266 N/A n/a
Tier I capital ratio .............. 10.43% 11.38% 4.00 4.00 N/A n/a
Total risk-based capital ratio .... 13.06 12.53 8.00 8.00 N/A n/a
Leverage ratio .................... 10.09 10.86 4.00 4.00 N/A n/a
COLUMBUS BANK AND TRUST COMPANY
Tier I capital .................... $ 916,246 819,457 181,847 160,106 272,770 240,159
Total risk-based capital .......... 947,554 847,055 363,964 320,212 454,617 400,265
Tier I capital ratio .............. 20.15% 20.47% 4.00 4.00 6.00 6.00
Total risk-based capital ratio .... 21.84 21.16 8.00 8.00 10.00 10.00
Leverage ratio .................... 21.83 20.60 4.00 4.00 5.00 5.00
THE NATIONAL BANK OF SOUTH CAROLINA
Tier I capital .................... $ 229,302 204,949 101,378 87,689 152,067 131,533
Total risk-based capital .......... 258,943 231,909 202,756 175,377 253,445 219,222
Tier I capital ratio .............. 9.05% 9.35% 4.00 4.00 6.00 6.00
Total risk-based capital ratio .... 10.22 10.58 8.00 8.00 10.00 10.00
Leverage ratio .................... 8.32 8.61 4.00 4.00 5.00 5.00
n/a - the Prompt Corrective Action Provisions are applicable at the bank level
only.
NOTE 13 EMPLOYMENT EXPENSES AND BENEFIT PLANS
Synovus generally provides noncontributory money purchase, profit
sharing, and 401(k) plans, which cover all eligible employees. Annual
discretionary contributions to these plans are set each year by the respective
Boards of Directors of each subsidiary, but cannot exceed amounts allowable as a
deduction for federal income tax purposes. Aggregate contributions to these
money purchase, profit sharing, and 401(k) plans for the years ended December
31, 2003, 2002, and 2001 were approximately $38.4 million, $45.8 million, and
$47.0 million, respectively.
Synovus has stock purchase plans for directors and employees whereby
Synovus makes contributions equal to one-half of employee and director voluntary
contributions. The funds are used to purchase outstanding shares of Synovus
common stock. TSYS has established director and employee stock purchase plans,
modeled after Synovus' plans, except that the funds are used to purchase
outstanding shares of TSYS common stock. Synovus and TSYS contributed $9.5
million, $9.0 million, and $8.2 million, to these plans in 2003, 2002, and 2001,
respectively.
Synovus has entered into employment agreements with certain executive
officers for past and future services which provide for current compensation in
addition to salary in the form of deferred compensation payable at retirement or
in the event of death, total disability, or termination of employment. The
aggregate cost of these salary continuation plans and employment agreements is
not material to the consolidated financial statements.
Synovus provides certain medical benefits to qualified retirees through
a postretirement medical benefits plan. The benefit expense and accrued benefit
cost is not material to the consolidated financial statements.
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [LOGO]
NOTE 14 STOCK-BASED COMPENSATION
Synovus has various stock option plans under which the Compensation
Committee of the Board of Directors has the authority to grant stock options to
Synovus employees. At December 31, 2003, Synovus had 10,751,186 shares of its
authorized but unissued common stock reserved for future grants under the stock
option plans. The general terms of the existing stock option plans include
vesting periods ranging from two to three years and exercise periods ranging
from five to ten years. Such stock options are granted at exercise prices which
equal the fair market value of a share of common stock on the grant date.
Synovus has granted performance-accelerated stock options to certain
key executives. The exercise price per share is equal to the fair market value
at the date of grant. The options are exercisable in equal installments when the
per share market price of Synovus common stock exceeds $40, $45, and $50.
However, all options may be exercised after seven years from the grant date.
Summary information regarding these performance-accelerated stock
options is presented below. There were no performance-accelerated stock options
granted during 2003 or 2002.
OPTIONS
YEAR OPTIONS NUMBER OF EXERCISE PRICE OUTSTANDING
GRANTED STOCK OPTIONS PER SHARE AT 12/31/03
------------ ------------- -------------- -----------
2000 4,100,000 $17.69 - $18.06 4,100,000
2001 2,600,000 $28.99 2,600,000
A summary of stock options outstanding as of December 31, 2003, 2002, and 2001
and changes during the years then ended is presented below:
2003 2002 2001
---------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- -------- ---------- -------- ---------- --------
Options outstanding at beginning of period ....... 25,874,237 $ 19.59 25,578,818 $ 19.44 23,219,413 $ 16.87
Options granted .................................. 2,242,276 19.21 2,336,548 25.46 4,908,263 26.59
Options assumed in connection with acquisitions... 590,622 9.02 366,991 14.54 263,032 15.70
Options exercised ................................ (2,730,176) 10.93 (1,989,814) 10.03 (2,406,374) 9.99
Options cancelled ................................ (503,441) 19.94 (418,306) 20.72 (405,516) 19.72
---------- -------- ---------- -------- ---------- --------
Options outstanding at end of period .......... 25,473,518 $ 20.23 25,874,237 $ 19.59 25,578,818 $ 19.44
========== ======== ========== ======== ========== ========
Options exercisable at end of period .......... 12,722,235 $ 17.54 13,646,001 $ 16.47 11,707,401 $ 14.57
========== ======== ========== ======== ========== ========
The following is a summary of stock options outstanding at December 31, 2003:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ ----------------------------
NUMBER OF WEIGHTED AVERAGE WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES OPTIONS REMAINING TERM EXERCISE PRICE OPTIONS EXERCISE PRICE
------------------------ ---------- ---------------- ---------------- --------- ----------------
$ 1.75 - $ 4.31......... 17,644 3.7 years $ 2.28 17,644 $ 2.28
$ 4.58 - $ 6.74......... 186,878 1.2 years $ 6.00 186,878 $ 6.00
$ 7.50 - $11.21......... 1,851,639 3.0 years $ 9.29 1,851,639 $ 9.29
$11.38 - $16.35......... 2,108,932 3.6 years $ 14.38 2,108,932 $ 14.38
$17.69 - $26.50......... 18,671,275 6.3 years $ 20.90 8,557,142 $ 20.38
$27.82 - $32.57......... 2,637,150 7.3 years $ 28.98 -- --
In addition to the stock options described above, non-transferable,
restricted shares of Synovus common stock have been awarded to certain key
executives under key executive restricted stock bonus plans. The market value of
the common stock at the date of issuance is included as a reduction of
shareholders' equity in the consolidated balance sheet and is amortized as
compensation expense using the straight-line method over the vesting period of
the awards. Aggregate compensation expense with respect to the foregoing Synovus
restricted stock awards was approximately $55 thousand, $114 thousand, and $299
thousand for the years ended December 31, 2003, 2002, and 2001, respectively.
Summary information regarding outstanding restricted stock bonus plans at
December 31, 2003 is presented below:
YEAR AWARDS MARKET VALUE VESTING
GRANTED AT AWARD DATE PERIOD
----------- ------------- -------
2000 $ 97,646 5 years
2002 177,786 5 years
F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [LOGO]
The following table provides aggregate information regarding grants under all
Synovus equity compensation plans through December 31, 2003.
(a) (c)
NUMBER OF SECURITIES (b) NUMBER OF SHARES
TO BE ISSUED WEIGHTED-AVERAGE REMAINING AVAILABLE FOR
UPON EXERCISE OF EXERCISE PRICE OF ISSUANCE EXCLUDING
OUTSTANDING OUTSTANDING SHARES REFLECTED
PLAN CATEGORY (1) OPTIONS OPTIONS IN COLUMN (a)
------------------------------ -------------------- ----------------- -----------------------
Shareholder approved
equity compensation plans(2) 24,841,299 $20.47 10,751,186(3)
Non-shareholder approved
equity compensation plans -- -- --
---------- ------ ----------
Total 24,841,299 $20.47 10,751,186
========== ====== ==========
(1) Does not include information for equity compensation plans assumed by
Synovus in mergers. A total of 632,219 shares of common stock was issuable upon
exercise of options granted under plans assumed in mergers and outstanding at
December 31, 2003. The weighted average exercise price of all options granted
under plans assumed in mergers and outstanding at December 31, 2003 was $10.93.
Synovus cannot grant additional awards under these assumed plans.
(2) Does not include an aggregate of 3,758 shares of restricted stock which will
vest over the remaining years through 2007.
(3) Includes 10,751,186 shares available for future grants as restricted stock
awards under the 2002 Plan.
NOTE 15 FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying and estimated fair values of
on-balance sheet financial instruments at December 31, 2003 and 2002. The
estimated fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties.
The carrying and estimated fair values relating to derivative
instruments and off-balance sheet financial instruments are summarized in Note
11.
Cash and due from banks, interest earning deposits with banks, and
federal funds sold are repriced on a short-term basis; as such, the carrying
value closely approximates fair value.
The fair value of mortgage loans held for sale is based on quoted
prices from secondary market investors.
The fair value of loans is estimated for portfolios of loans with
similar financial characteristics. Loans are segregated by type, such as
commercial, mortgage, home equity, credit card, and other consumer loans. Fixed
rate commercial loans are further segmented into certain collateral code
groupings. Mortgage loans are further segmented into fixed and adjustable-rate
interest terms.
Commercial, mortgage, and other consumer loans with adjustable interest rates
are assumed to be at fair value. Home equity loans have adjustable interest
rates and are, therefore, assumed to be at fair value. The fair value of
fixed-rate loans is calculated by discounting contractual cash flows using
estimated market discount rates which reflect the credit and interest rate risk
inherent in the loan.
In accordance with SFAS No. 107, "Disclosures About Fair Value of
Financial Instruments", the fair value of deposits with no stated maturity, such
as non-interest bearing demand accounts, interest bearing demand deposits, money
market accounts, and savings accounts, is equal to the amount payable on demand
as of that respective date. The fair value of time deposits is based on the
discounted value of contractual cash flows. The discount rate is estimated using
the rates currently offered for deposits of similar remaining maturities.
Short-term debt that matures within ten days is assumed to be at fair
value. The fair value of other short-term and long-term debt with fixed interest
rates is calculated by discounting contractual cash flows using estimated market
discount rates.
2003 2002
------------------------ -----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
(In thousands) VALUE FAIR VALUE VALUE FAIR VALUE
----------- ---------- ---------- ----------
Financial assets:
Cash and due from banks ................... $ 696,030 696,030 741,092 741,092
Interest earning deposits with banks ...... 4,423 4,423 5,055 5,055
Federal funds sold and securities purchased
under resale agreements .................. 172,922 172,922 92,709 92,709
Mortgage loans held for sale .............. 133,306 133,306 245,858 245,858
Investment securities available for sale .. 2,529,257 2,529,257 2,237,725 2,237,725
Loans, net ................................ 16,238,855 16,322,005 14,264,068 14,382,106
Financial liabilities:
Non-interest bearing deposits ............. 2,833,567 2,833,567 2,303,375 2,303,375
Interest bearing deposits ................. 13,108,042 13,243,424 11,625,459 11,695,352
Federal funds purchased and securities sold
under repurchase agreements .............. 1,354,887 1,354,887 1,275,084 1,275,084
Long-term debt ............................ 1,575,777 1,636,893 1,336,200 1,404,118
F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [LOGO]
NOTE 16 INCOME TAXES
For the years ended December 31, 2003, 2002, and 2001, income tax
expense (benefit) consists of:
(In thousands) 2003 2002 2001
-------- ------- -------
Current:
Federal ................... $189,901 180,418 159,427
State ..................... 5,896 10,252 7,608
-------- ------- -------
195,797 190,670 167,035
-------- ------- -------
Deferred:
Federal ................... 19,137 14,277 9,551
State ..................... 7,642 (6,414) 1,791
-------- ------- -------
26,779 7,863 11,342
-------- ------- -------
Total income tax expense $222,576 198,533 178,377
======== ======= =======
Income tax expense as shown in the consolidated statements of income
differed from the amounts computed by applying the U.S. Federal income tax rate
of 35% to pretax income as a result of the following:
(Dollars in thousands) 2003 2002 2001
--------- ------- -------
Taxes at statutory
federal income tax rate ..... $ 214,025 197,358 171,498
Tax-exempt income ............. (4,553) (4,420) (3,986)
State income taxes, net of
federal income tax benefit... 8,800 2,495 6,110
Minority interest ............. 9,440 8,277 6,951
Tax credits ................... (2,403) (4,042) (1,249)
Other, net .................... (2,733) (1,135) (947)
--------- ------- -------
Total income tax expense ... $ 222,576 198,533 178,377
========= ======= =======
Effective income tax rate... 36.40% 35.21 36.40
========= ======= =======
At December 31, 2003 and 2002, Synovus had state income tax credit
carryforwards of $7.4 million and $9.8 million, respectively. The credits will
begin to expire in the year 2008. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this assessment. Based
upon the level of historical taxable income and projections for future taxable
income over the periods in which the deferred income tax assets become
deductible, management believes that it is more likely than not that Synovus
will realize the benefits of these deductible differences, net of existing
valuation allowances, at December 31, 2003. The valuation allowance for deferred
tax assets was $1.4 million and $350 thousand at December 31, 2003 and 2002,
respectively.
For the year ended December 31, 2003, net deferred tax liabilities
increased by $6.4 million as a result of the acquisitions of FNB, United
Financial, and ESC. For the year ended December 31, 2002, net deferred tax
liabilities decreased by $2.2 million as a result of the acquisitions of GLOBALT
and Community Financial. As discussed in Note 2, Synovus has accounted for these
acquisitions under the purchase method of accounting.
The tax effects of temporary differences that gave rise to significant
portions of the deferred income tax assets and liabilities at December 31, 2003
and 2002, are shown in the following table.
(In thousands) 2003 2002
--------- --------
Deferred income tax assets:
Provision for losses on loans ................................... $ 93,930 81,029
State tax credits ............................................... 7,427 9,776
Deferred compensation ........................................... 2,423 3,263
Other assets .................................................... 21,756 9,607
--------- --------
Total gross deferred income tax assets ....................... 125,536 103,675
Less valuation allowance ........................................ (1,415) (350)
--------- --------
Total net deferred income tax assets ......................... 124,121 103,325
--------- --------
Deferred income tax liabilities:
Differences in depreciation ..................................... (69,082) (47,224)
Computer software development costs ............................. (45,270) (40,105)
Net unrealized gain on investment securities available for sale.. (12,403) (24,675)
Ownership interest in partnership ............................... (4,071) (4,800)
Net unrealized gain on cash flow hedges ......................... (1,438) (3,227)
Foreign currency translation .................................... (4,846) (609)
Deferred revenue ................................................ (10,333) --
Other liabilities ............................................... (21,643) (4,368)
--------- --------
Total gross deferred income tax liabilities .................. (169,086) (125,008)
--------- --------
Net deferred income tax liability ....................... $ (44,965) (21,683)
========= ========
NOTE 17 OPERATING SEGMENTS
Synovus has two reportable segments: Financial Services and Transaction
Processing Services. 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. The Transaction Processing
Services segment primarily provides electronic payment processing services and
other related services to card-issuing institutions in the United States,
Mexico, Canada, Honduras, Europe and the Caribbean. The significant accounting
policies of the segments are described in the summary of significant accounting
policies. 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.
Segment information for the years ended December 31, 2003, 2002, and
2001, is presented in the following table.
F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [LOGO]
FINANCIAL TRANSACTION PROCESSING
(In thousands) YEAR SERVICES SERVICES (a) ELIMINATIONS CONSOLIDATED
---- ----------- ---------------------- ------------ ------------
Interest income .......................... 2003 $ 1,061,522 747 (777)(b) 1,061,492
2002 1,054,307 1,958 (1,225)(b) 1,055,040
2001 1,130,888 2,542 (2,542)(b) 1,130,888
Interest expense ......................... 2003 299,066 139 (777)(b) 298,428
2002 338,725 36 (1,225)(b) 337,536
2001 503,573 66 (2,542)(b) 501,097
Net interest income ...................... 2003 762,456 608 -- 763,064
2002 715,582 1,922 -- 717,504
2001 627,315 2,476 -- 629,791
Provision for loan losses ................ 2003 71,777 -- -- 71,777
2002 65,327 -- -- 65,327
2001 51,673 -- -- 51,673
Net interest income after provision ...... 2003 690,679 608 -- 691,287
for loan losses 2002 650,255 1,922 -- 652,177
2001 575,642 2,476 -- 578,118
Total non-interest income ................ 2003 311,023 1,074,457 (16,151)(c) 1,369,329
2002 269,194 979,900 (14,272)(c) 1,234,822
2001 246,992 929,277 (12,052)(c) 1,164,217
Total non-interest expense ............... 2003 575,407 862,887 (16,151)(C) 1,422,143
2002 515,518 798,224 (14,272)(c) 1,299,470
2001 473,744 770,791 (12,052)(c) 1,232,483
Income before income taxes ............... 2003 426,295 212,178 (26,972)(d) 611,501
2002 403,931 183,598 (23,649)(d) 563,880
2001 348,890 160,962 (19,859)(d) 489,993
Income tax expense ....................... 2003 151,709 70,867 -- 222,576
2002 140,625 57,908 -- 198,533
2001 123,498 54,879 -- 178,377
Net income ............................... 2003 274,586 141,311 (26,972)(d) 388,925
2002 263,306 125,690 (23,649)(d) 365,347
2001 225,392 106,083 (19,859)(d) 311,616
Total assets ............................. 2003 20,715,606 1,000,836 (83,813)(e) 21,632,629
2002 18,350,869 774,082 (88,705)(e) 19,036,246
2001 16,047,941 661,926 (54,976)(e) 16,654,891
(a) Includes equity in income of joint ventures which is included in other
operating income.
(b) Primarily interest on TSYS' cash deposits with the Financial Services
segment and on TSYS' line of credit with a Synovus affiliate bank.
(c) Principally, electronic payment processing services provided by TSYS to the
Financial Services segment.
(d) Minority interest in TSYS and GP Network Corporation (a TSYS subsidiary).
(e) Primarily, TSYS' cash deposits with the Financial Services segment.
Segment information for the changes in the carrying amount of goodwill
for the years ended December 31, 2003 and 2002 is shown in the following table.
There were no impairment losses for the years ended December 31, 2003 and 2002.
TRANSACTION
FINANCIAL PROCESSING
(In thousands) SERVICES SERVICES CONSOLIDATED
-------- ----------- ------------
BALANCE AS OF DECEMBER 31, 2001 ............. $ 23,363 3,608 26,971
Goodwill acquired ........................... 72,126 -- 72,126
Other (*) ................................... -- 11 11
-------- --------- ---------
BALANCE AS OF DECEMBER 31, 2002.............. $ 95,489 3,619 99,108
Goodwill acquired ........................... 123,753 25,992 149,745
Other (*) ................................... -- 15 15
-------- --------- ---------
BALANCE AS OF DECEMBER 31, 2003.............. $219,242 29,626 248,868
======== ========= =========
(*) Consists of foreign currency translation adjustments for GP Network
Corporation.
F-24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [LOGO]
NOTE 18 CONDENSED FINANCIAL INFORMATION OF SYNOVUS FINANCIAL CORP. (PARENT
COMPANY ONLY)
CONDENSED BALANCE SHEETS
DECEMBER 31,
--------------------------
(In thousands) 2003 2002
----------- ---------
ASSETS
Cash ............................................................. $ 579 535
Investment in consolidated bank subsidiaries (including TSYS)..... 2,539,644 2,106,537
Investment in consolidated nonbank subsidiaries .................. 30,707 31,666
Notes receivable from bank subsidiaries .......................... 108,837 118,049
Notes receivable from nonbank subsidiaries ....................... 731 2,365
Other assets ..................................................... 125,724 101,962
----------- ---------
Total assets ............................................... $ 2,806,222 2,361,114
=========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Long-term debt ................................................. $ 510,453 275,000
Other liabilities .............................................. 50,730 45,261
----------- ---------
Total liabilities .......................................... 561,183 320,261
----------- ---------
Shareholders' equity:
Common stock ................................................... 307,748 300,573
Surplus ........................................................ 442,931 305,718
Treasury stock ................................................. (113,940) (1,285)
Unearned compensation .......................................... (266) (146)
Accumulated other comprehensive income ......................... 29,509 46,113
Retained earnings .............................................. 1,579,057 1,389,880
----------- ---------
Total shareholders' equity ................................. 2,245,039 2,040,853
----------- ---------
Total liabilities and shareholders' equity ................. $ 2,806,222 2,361,114
=========== =========
CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
-----------------------------------
(In thousands) 2003 2002 2001
--------- ------- -------
Income:
Dividends received from bank subsidiaries (including TSYS) .......................... $ 230,580 224,375 169,157
Information technology fees from subsidiaries ....................................... 62,301 61,784 60,597
Securities gains (losses), net ...................................................... (209) 3 195
Interest income ..................................................................... 10,591 9,219 10,288
Other income ........................................................................ 21,873 24,646 10,589
--------- ------- -------
Total income ................................................................... 325,136 320,027 250,826
--------- ------- -------
Expenses:
Interest expense .................................................................... 31,807 19,594 19,293
Other expenses ...................................................................... 125,964 119,293 113,477
--------- ------- -------
Total expenses ................................................................. 157,771 138,887 132,770
--------- ------- -------
Income before income taxes and equity in undistributed income of subsidiaries
and equity-method investees .................................................... 167,365 181,140 118,056
Allocated income tax benefit ........................................................... (23,832) (17,376) (19,633)
--------- ------- -------
Income before equity in undistributed income of subsidiaries
and equity-method investees ......................................................... 191,197 198,516 137,689
Equity in undistributed income of subsidiaries and equity-method investees ............. 197,728 166,831 173,927
--------- ------- -------
Net income .......................................................................... $ 388,925 365,347 311,616
========= ======= =======
F-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [LOGO]
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
---------------------------------
(In thousands) 2003 2002 2001
--------- -------- --------
OPERATING ACTIVITIES
Net income ......................................................................... $ 388,925 365,347 311,616
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed income of subsidiaries ................................... (179,918) (146,250) (156,103)
Equity in undistributed income of equity-method investees ........................ (17,810) (20,581) (17,824)
Depreciation, amortization, and accretion, net ................................... 16,428 17,124 15,082
Net increase (decrease) in other liabilities ..................................... 5,469 (8,027) 9,552
Net increase in other assets ..................................................... (23,762) (16,969) (21,446)
Other, net ....................................................................... (11,330) (7,611) (561)
--------- -------- --------
Net cash provided by operating activities ..................................... 178,002 183,033 140,316
--------- -------- --------
INVESTING ACTIVITIES
Net investment in subsidiaries ..................................................... (52,864) (71,176) (39,882)
Purchase of treasury stock ......................................................... (112,655) -- --
Cash paid for acquisitions ......................................................... (80,400) -- --
Cash proceeds from sales of subsidiaries ........................................... 5,181 19,258 --
Net decrease in short-term notes receivable from bank subsidiaries ................. 9,212 20,789 11,628
Net decrease (increase) in short-term notes receivable from nonbank subsidiaries ... 1,634 (1,865) 5,221
--------- -------- --------
Net cash used in investing activities ......................................... (229,892) (32,994) (23,033)
--------- -------- --------
FINANCING ACTIVITIES
Dividends paid to shareholders ..................................................... (194,177) (169,107) (142,083)
Principal repayments on long-term debt ............................................. (81,959) -- (1,240)
Proceeds from issuance of long-term debt ........................................... 300,000 -- --
Proceeds from issuance of common stock ............................................. 28,070 19,047 26,546
--------- -------- --------
Net cash provided by (used in) financing activities ........................... 51,934 (150,060) (116,777)
--------- -------- --------
Increase (decrease) in cash ........................................................... 44 (21) 506
Cash at beginning of year ............................................................. 535 556 50
--------- -------- --------
Cash at end of year ................................................................... $ 579 535 556
========= ======== ========
For the years ended December 31, 2003, 2002, and 2001, the Parent
Company paid income taxes (net of refunds received) of $175 million, $168
million, and $166 million, and interest in the amount of $26 million, $19
million, and $19 million, respectively, each year.
On April 14, 2003, the Synovus board of directors approved a two-year
$200 million share repurchase plan. Through December 31, 2003, 5.5 million
shares have been purchased under this plan at a total cost of $112.7 million.
NOTE 19 SUPPLEMENTAL FINANCIAL DATA
Components of other operating income and expenses in excess of 1% of
total revenues for any of the respective years are as follows:
YEARS ENDED DECEMBER 31,
---------------------------
(In thousands) 2003 2002 2001
------- ------ ------
Income:
Earnings on equity-method investments.... $17,810 20,581 17,824
Expenses:
Stationery, printing, and supplies ...... 34,128 33,476 35,388
Third-party processing services ......... 27,518 26,805 28,691
Telephone and communications ............ 20,811 21,839 18,656
F-26
[LOGO]
SYNOVUS FINANCIAL CORP.
REPORT OF FINANCIAL RESPONSIBILITY
The management of Synovus Financial Corp. (Synovus) is responsible for
the integrity and objectivity of the consolidated financial statements and other
financial information presented in this report. These statements have been
prepared in accordance with generally accepted accounting principles and
necessarily include amounts based on judgments and estimates by management.
Synovus maintains internal accounting control policies and related
procedures designed to provide reasonable assurance that assets are safeguarded,
that transactions are executed in accordance with management's authorization and
properly recorded, and that accounting records may be relied upon for the
preparation of reliable published annual and interim financial statements and
other financial information. The design, monitoring and revision of internal
accounting control systems involve, among other things, management's judgment
with respect to the relative cost and expected benefits of specific control
measures. Synovus also maintains an internal auditing function which evaluates
and reports on the adequacy and effectiveness of internal accounting controls
and policies and procedures.
KPMG LLP, independent auditors, are engaged to audit Synovus'
consolidated financial statements.
The Audit Committee of the Board of Directors, composed solely of
independent directors, meets periodically with Synovus management, internal
auditors, and independent auditors to review matters relating to the quality of
financial reporting and internal accounting controls. Both the internal auditors
and the independent auditors have unrestricted access to the Audit Committee.
/s/ JAMES H. BLANCHARD
James H. Blanchard
Chief Executive Officer
/s/ THOMAS J. PRESCOTT
Thomas J. Prescott
Executive Vice President and Chief Financial Officer
February 20, 2004
F-27
[LOGO]
[KPMG LOGO] 303 Peachtree Street, N.E.
Suite 2000
Atlanta, GA 30308
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Synovus Financial Corp.:
We have audited the accompanying consolidated balance sheets of Synovus
Financial Corp. and subsidiaries (Synovus) as of December 31, 2003 and 2002, and
the related consolidated statements of income, changes in shareholders' equity
and cash flows for each of the years in the three-year period ended December 31,
2003. These consolidated financial statements are the responsibility of Synovus'
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Synovus
Financial Corp. and subsidiaries at December 31, 2003 and 2002, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2003, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements,
Synovus changed its method of accounting for goodwill in 2002 and its method of
accounting for derivative instruments and hedging activities in 2001.
KPMG LLP
February 20, 2004
F-28
SELECTED FINANCIAL DATA [LOGO]
(Amounts in thousands, except per share data)
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
2003 2002 2001 2000 1999
----------- ----------- ----------- ----------- -----------
INCOME STATEMENT:
Total revenues (a) ................................. $ 2,129,902 1,949,688 1,792,286 1,626,966 1,457,027
Net interest income ................................ 763,064 717,504 629,791 562,332 513,294
Provision for losses on loans ...................... 71,777 65,327 51,673 44,341 34,007
Non-interest income ................................ 1,369,329 1,234,822 1,164,217 1,065,415 944,935
Non-interest expense ............................... 1,422,143 1,299,470 1,232,483 1,155,176 1,061,719
Net income ......................................... 388,925 365,347 311,616 262,557 225,307
PER SHARE DATA:
Net income - basic ................................. 1.29 1.23 1.07 0.93 0.80
Net income - diluted ............................... 1.28 1.21 1.05 0.92 0.80
Cash dividends declared ............................ 0.66 0.59 0.51 0.44 0.36
Book value ......................................... 7.43 6.79 5.75 4.98 4.35
BALANCE SHEET:
Investment securities .............................. 2,529,257 2,237,725 2,088,287 2,077,928 1,993,957
Loans, net of unearned income ...................... 16,464,914 14,463,909 12,417,917 10,751,887 9,068,239
Deposits ........................................... 15,941,609 13,928,834 12,146,198 11,161,710 9,440,087
Long-term debt ..................................... 1,575,777 1,336,200 1,052,943 840,859 318,620
Shareholders' equity ............................... 2,245,039 2,040,853 1,694,946 1,417,171 1,226,669
Average total shareholders' equity ................. 2,166,777 1,855,492 1,548,030 1,303,634 1,165,426
Average total assets ............................... 20,412,853 17,414,654 15,375,004 13,466,385 11,438,696
PERFORMANCE RATIOS AND OTHER DATA:
Return on average assets ........................... 1.91% 2.10 2.03% 1.95 1.97
Return on average equity ........................... 17.95 19.69 20.13 20.14 19.33
Net interest margin ................................ 4.26 4.65 4.65 4.70 5.07
Efficiency ratio (b) ............................... 53.34 52.07 53.80 55.35 58.15
Dividend payout ratio (c) .......................... 51.56 48.76 48.57 47.83 45.00
Average shareholders' equity to average assets ..... 10.61 10.65 10.07 9.68 10.19
Average shares outstanding, basic .................. 302,010 297,325 290,304 283,552 280,016
Average shares outstanding, diluted ................ 304,928 301,197 295,850 286,882 283,355
(a) Consists of net interest income and non-interest income, excluding
securities gains (losses).
(b) For the Financial Services segment.
(c) Determined by dividing dividends declared per share (excluding pooled
subsidiaries) by diluted net income per share.
F-29
FINANCIAL REVIEW [LOGO]
EXECUTIVE SUMMARY
The following financial review provides a discussion of Synovus'
financial condition, changes in financial condition, and results of operations
as well as a summary of Synovus' critical accounting policies. This section
should be read in conjunction with the preceding audited consolidated financial
statements and accompanying notes.
ABOUT OUR BUSINESS
Synovus is a diversified financial services holding company, based in
Columbus, Georgia, with more than $21 billion in assets. Synovus operates two
business segments: the Financial Services and the Transaction Processing
Services segments. The FINANCIAL SERVICES segment provides integrated financial
services including banking, financial management, insurance, mortgage and
leasing services through 40 decentralized affiliate banks and other Synovus
offices in five southeastern states. At December 31, 2003, our affiliate banks
ranged in size from $100 million to $4 billion in total assets. The TRANSACTION
PROCESSING SERVICES segment provides electronic payment processing services
through our 81% owned subsidiary Total System Services, Inc. (TSYS), the world's
largest third party processor of international payments. Our ownership in TSYS
gives us a unique mix: for 2003, 50% 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 - Fee Income Growth
- Loan Growth - Expense Management
- Credit Quality
TSYS
- Revenue Growth - Expense Management
2003 FINANCIAL PERFORMANCE VS. 2002
CONSOLIDATED
- Net income $388.9 million, up 6.5%
- Diluted EPS $1.28, up 5.2%
FINANCIAL SERVICES
- Net interest margin: 4.26% compared to 4.65% in 2002
- Loan growth: 13% (9% excluding acquisitions; this measure is
referred to below as "organic loan growth")
- Credit quality: Ended the year in a very positive fashion:
- Nonperforming assets ratio of .58%, down from .64% at year-end
2002, and
- Past dues over 90 days as a percentage of total loans of .13%
compared to .21% at year-end 2002, and
- Net charge-off ratio of .36%, compared to .33% for 2002.
- Fee income growth: 15.5%
- Net overhead ratio: Improved to 1.36% from 1.48% in 2002.
- Net income growth: 4.3%
TSYS
- Revenue growth before reimbursable items: 14.4%
- Net income growth: 12.1%
2003 was one of our strongest years in terms of financial performance.
The highlights for the year include organic loan growth of 9% (higher than most
of our industry peers), outstanding credit quality (both the nonperforming
assets ratio and past dues were lower than the previous year and continue to
compare favorably to industry averages), the stabilization of the net interest
margin, a record performance by our mortgage unit, and a successful year at TSYS
(12.1% net income growth which was in line with expectations). The biggest
challenge for us in 2003 was to stabilize the net interest margin in a year when
interest rates were at the lowest level they have been in 45 years. We succeeded
in this effort and reversed the declining trend in the fourth quarter of 2003,
when the net interest margin increased for the first time in eight quarters. For
the year, the net interest margin was 4.26%, a 39 basis point (b.p.) decline
from the 2002 margin of 4.65%. This decline was due to the 55 b.p. decrease in
the average prime rate for the year and a strong preference on behalf of our
customers for variable rate loans. Net interest income represents approximately
40% of our revenues. A net interest margin compression like the one we
experienced in 2003 has a significant impact on our earnings growth. This is why
even though 2003 was one of our strongest years in terms of financial
performance, our earnings growth was lower than the levels we have traditionally
experienced. Another factor that impacted the year-over-year earnings growth
rate was the $9.4 million after-tax gain from the sale of four banking locations
recorded in the fourth quarter of 2002.
Our team members met the challenges of 2003 and we believe that we are
well positioned for 2004 with momentum on many fronts.
CRITICAL ACCOUNTING POLICIES
The accounting and financial reporting policies of Synovus conform to
accounting principles generally accepted in the United States of America and to
general practices within the banking and electronic payment processing
industries. Following is a description of the accounting policies applied by
Synovus which are deemed "critical". In determining which accounting policies
are critical in nature, Synovus has identified the policies that require
significant judgment or involve complex estimates. The application of these
policies has a significant impact on Synovus' financial statements. Synovus'
financial results could differ significantly if different judgments or estimates
are applied in the application of these policies.
Allowance for Loan Losses:
The allowance for loan losses is determined based on an analysis which
assesses the risk within the loan portfolio. The two most significant judgments
or estimates made in the determination of the allowance for loan losses are the
risk ratings for loans in the commercial loan portfolio and the valuation of the
collateral for loans that are classified as impaired loans.
Commercial Loans - Risk Ratings
Commercial loans are assigned a risk rating on a 9 point scale. For
commercial loans that are not considered impaired, the allocated allowance for
loan losses is determined based upon the loss percentage factors that correspond
to each risk rating. Commercial loans that are not impaired represented 82% of
total loans at December 31, 2003. The corresponding allowance for these loans
was $145.5 million. The rating process is subject to certain subjective factors
and estimates. Synovus uses a well-defined risk rating methodology, and has
established policies that require "checks and balances" to manage the risks
inherent in estimating loan losses.
The risk ratings are based on the borrowers' credit risk profile,
considering factors such as debt service history and capacity, inherent risk in
the credit (e.g., based on industry type and source of repayment), and
collateral position. Ratings 6 through 9 are modeled after the bank regulatory
classifications of special mention, substandard, doubtful, and loss. Loss
percentage factors are based on historical loss rates, bank regulatory guidance,
and Synovus' assessment of losses within each risk rating. The occurrence of
certain events could result in changes to the loss factors. Accordingly, these
loss factors are reviewed periodically and modified as necessary.
F-30
FINANCIAL REVIEW [LOGO]
Each loan is assigned a risk rating during the approval process. This
process begins with a rating recommendation from the loan officer responsible
for originating the loan. The rating recommendation is subject to approvals from
other members of management and/or loan committees depending on the size and
type of credit. Ratings are re-evaluated at least every twelve months in
connection with the loan review process at each affiliate bank. Additionally, an
independent holding company credit review function evaluates each affiliate
bank's risk rating process at least every twelve to eighteen months.
Collateral Valuation
A majority of our impaired loans are collateral dependent. The
allowance for loan losses on these loans is determined based upon fair value
estimates (net of selling costs) of the respective collateral. The actual losses
on these loans could differ significantly if the fair value of the collateral is
different from the estimates used by Synovus in determining the allocated
allowance. Most of our collateral-dependent impaired loans are secured by real
estate. The fair value of these real estate properties is generally determined
based upon appraisals performed by a certified or licensed appraiser. Management
also considers other factors or recent developments which could result in
adjustments to the collateral value estimates indicated in the appraisals.
Loss Factors
The allocated allowance for retail loans is generally determined by
segregating the retail loan portfolio into pools of homogeneous loan categories.
Loss factors applied to these pools are generally based on average historical
losses for the previous two years and current delinquency trends. The occurrence
of certain events could result in changes to the loss factors. Accordingly,
these loss factors are reviewed periodically and modified as necessary.
Other
Certain economic and interest rate factors could have a material impact
on the determination of the allowance for loan losses and corresponding credit
costs. The depth, duration, and dispersion of any economic recession all have an
impact on the credit risk profile of the loan portfolio. Additionally, a rapidly
rising interest rate environment could as well have a material impact on certain
borrowers' ability to pay.
Revenue Recognition:
TSYS' electronic payment processing revenues are derived from long-term
processing contracts with financial and nonfinancial institutions and are
recognized as the services are performed. Electronic payment processing revenues
are generated primarily from charges based on the number of accounts on file,
transactions and authorizations processed, statements mailed, and other
processing services for cardholder accounts on file. Most of these contracts
have prescribed annual revenue minimums. The original terms of processing
contracts generally range from three to ten years in length.
On March 3, 2003, TSYS announced that Bank One selected TSYS to upgrade
its credit card processing. Under the long-term software licensing and services
agreement, TSYS will provide electronic payment processing services to Bank
One's credit card accounts for at least two years beginning in the second half
of 2004 (excluding statement and card production services), and then TSYS will
license a modified version of its TS2 consumer and commercial card software to
Bank One under a perpetual license with a six year payment term. TSYS uses the
percentage-of-completion accounting method for its agreement with Bank One.
TSYS recognizes software license revenue in accordance with Statement
of Position No. (SOP) 97-2, "Software Revenue Recognition," and SOP 98-9,
"Modification of SOP 97-2, Software Revenue Recognition With Respect to Certain
Transactions." For software licenses for which any services rendered are not
considered essential to the functionality of the software, revenue is
recognized upon delivery of the software, provided (1) there is evidence of an
arrangement, (2) collection of the fee is considered probable, (3) the fee is
fixed or determinable, and (4) vendor specific objective evidence (VSOE) exists
to allocate revenue to the undelivered elements of the arrangement.
When services are considered essential to the functionality of the
software licensed, revenues are recognized over the period that such services
will be performed using the percentage-of-completion method in accordance with
SOP 81-1, "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts." Progress during the period services are performed is
measured by the percentage of costs incurred to date to estimated total costs
for each arrangement. Provisions for estimated losses on incomplete contracts
are made in the period in which such losses are determined. For license
arrangements in which the fee is not fixed or determinable, the license revenue
is recognized as payments become due.
TSYS' other service revenues are derived from recovery collections
work, bankruptcy process management, legal account management, skip tracing,
commercial printing activities and customer relationship management services,
such as call center activities for card activation and balance transfer
requests. The contract terms for these services are generally shorter term in
nature as compared with TSYS' long-term processing contracts. Revenue is
recognized on these other services either on a per unit or a fixed price basis.
TSYS uses the percentage-of-completion method of accounting for its fixed price
contracts, and progress is measured by the percentage of costs incurred to date
to estimated total costs for each arrangement. Provisions for estimated losses
on incomplete contracts are made in the period in which such losses are
determined.
Contract Acquisition Costs:
TSYS capitalizes contract acquisition costs related to signing or
renewing long-term contracts. These costs, primarily consisting of cash payments
for rights to provide processing services and internal conversion costs, are
amortized using the straight-line method over the contract term beginning when
the client's cardholder accounts are converted and producing revenues. All costs
incurred prior to a signed agreement are expensed as incurred.
The amortization of contract acquisition costs associated with cash
payments is recorded as a reduction of electronic payment processing services
revenues in the consolidated statements of income. The amortization of contract
acquisition costs associated with conversion activity is recorded as other
operating expenses in the consolidated statements of income. TSYS evaluates the
carrying value of contract acquisition costs for impairment for each customer on
the basis of whether these costs are fully recoverable from expected
undiscounted net operating cash flows of the related contract. The determination
of expected undiscounted net operating cash flows requires management to make
estimates.
These costs may become impaired with the loss of a contract, the
financial decline of a client, termination of conversion efforts after a
contract is signed, diminished prospects for current clients, or if TSYS' actual
results differ from its estimates of future cash flows.
Software Development Costs:
In accordance with Financial Accounting Standards Board (FASB)
Statement No. 86, "Computer Software to be Sold, Leased or otherwise Marketed,"
software development costs are capitalized once technological feasibility of the
software product has been established. Costs incurred prior to establishing
technological feasibility are expensed as incurred. Technological feasibility is
established when TSYS has completed a detail program design and has determined
that a product can be produced to meet its design specifications, including
functions, features, and technical performance requirements. Capitalization of
costs ceases when the product is generally available to clients. TSYS evaluates
the unamortized cap-
F-31
FINANCIAL REVIEW [LOGO]
italized costs of software development as compared to the net realizable value
of the software product which is determined by future undiscounted net operating
cash flows. The amount by which the unamortized software development costs
exceed the net realizable value is written off in the period that such
determination is made. Software development costs are amortized using the
greater of (1) the straight-line method over its estimated useful life, which
ranges from three to ten years, or (2) the ratio of current revenues to total
anticipated revenue over its useful life.
TSYS also develops software that is used internally. These software
development costs are capitalized based upon the provisions of Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use". Internal-use software development costs are
capitalized once (a) the preliminary project stage is completed, (b) management
authorizes and commits to funding a computer software project, and (c) it is
probable that the project will be completed and the software will be used to
perform the function intended. Costs incurred prior to meeting these
qualifications are expensed as incurred. Capitalization of costs ceases when the
project is substantially complete and ready for its intended use. Internal-use
software development costs are amortized using an estimated useful life of three
to seven years.
Software development costs may become impaired in situations where
development efforts are abandoned due to the viability of the planned project
becoming doubtful or due to technological obsolescence of the planned software
product.
Transaction Processing Provisions:
TSYS has recorded estimates to accrue for contract contingencies
(performance penalties) and processing errors. A significant number of TSYS'
contracts with large clients contain service level agreements, which can result
in TSYS incurring performance penalties if contractually required service levels
are not met. When providing these accruals, TSYS takes into consideration such
factors as the prior history of performance penalties and processing errors
incurred, actual contractual penalties inherent in its contracts, progress
towards milestones, and known processing errors not covered by insurance.
These accruals are included in other liabilities in the accompanying
consolidated balance sheets. Increases and decreases in transaction processing
provisions are charged to other non-interest expense in the consolidated
statements of income, and payments or credits for performance penalties and
processing errors are charged against the accrual.
ACQUISITIONS
Table 1 summarizes the acquisitions completed during the past three
years.
TABLE 1 ACQUISITIONS
(Dollars in thousands)
TOTAL SHARES ACCOUNTING
COMPANY AND LOCATION DATE ASSETS ISSUED CASH TREATMENT
---------------------------------- ----------------- -------- --------- -------- ---------------------
Enhancement Services Corporation.. April 28, 2003 $ 43,230 -- $ 36,000 Purchase
Roswell, Georgia
United Financial Holdings, Inc. .. February 28, 2003 $490,000 2,388,087 $ 34,000 Purchase
St. Petersburg, Florida
FNB Newton Bancshares, Inc. ...... February 27, 2003 $445,000 2,253,627 $ 46,400 Purchase
Covington, Georgia
Community Financial Group, Inc. .. July 31, 2002 $557,000 3,065,235 -- Purchase
Nashville, Tennessee
GLOBALT, Inc. .................... May 31, 2002 $ 23,000 702,433 -- Purchase
Atlanta, Georgia
FABP Bancshares, Inc. ............ December 7, 2001 $304,000 3,539,751 -- Pooling (Non-restated)
Pensacola, Florida
Creative Financial Group, Ltd. ... February 28, 2001 $ 150 937,701 -- Pooling (Non-restated)
Atlanta, Georgia
Carolina Southern Bank............ February 16, 2001 $200,000 3,188,558 -- Pooling (Non-restated)
Spartanburg, South Carolina
This information is discussed in further detail in Note 2 of the consolidated
financial statements.
EARNING ASSETS, SOURCES OF FUNDS, AND NET INTEREST INCOME
Average total assets for 2003 were $20.4 billion or 17.2% over 2002
average total assets of $17.4 billion. Average earning assets for 2003 were
$18.1 billion, which represented 88.6% of average total assets. Average earning
assets increased $2.5 billion, or 16.2%, over 2002. The $2.5 billion increase
consisted primarily of a $2.2 billion increase in average net loans and a $238
million increase in average investment securities balances. The primary funding
sources for this earning asset growth were a $2.2 billion increase in average
deposits and a $454 million increase in average long-term debt. Average
shareholders' equity for 2003 was $2.2 billion.
For 2002, average total assets increased $2.0 billion, or 13.3%.
Average earning assets for 2002 were $15.6 billion, which represented 89.4% of
average total assets. For more detailed information on the average balance
sheets for the years ended December 31, 2003, 2002, and 2001, refer to Table 3.
Net interest income (interest income less interest expense) is a major
component of net income, representing the earnings of the primary business of
gathering funds from deposit and other sources and investing those funds in
loans and investment securities. Our long-term objective is to manage those
assets and liabilities to maximize net interest income while balancing interest
rate, credit, liquidity, and capital risks.
Net interest income is presented in this discussion on a tax-equivalent
basis, so that the income from assets exempt from federal income taxes is
adjusted based on a statutory marginal federal tax rate of 35% in all years (See
Table 2). The net interest margin is defined as taxable-equivalent net interest
income divided by average total interest earning assets and provides an
indication of the efficiency of the earnings from balance sheet activities. The
net interest margin is affected by changes in the spread between interest
earning asset yields and interest bearing liability costs (spread rate), and by
the percentage of interest earning assets funded by non-interest bearing
liabilities.
Net interest income for 2003 was a record $763.1 million, up $45.6
million, or 6.3%, from 2002. On a taxable-equivalent basis, net interest income
was $770.5 million, up $45.7 million, or 6.3%, over 2002. During 2003, average
interest earning assets increased
F-32
FINANCIAL REVIEW [LOGO]
$2.5 billion, or 16.2%, with the majority of this increase attributable to loan
growth. Increases in the level of deposits and long-term debt were the primary
funding sources for the increase in earning assets.
The net interest margin was 4.26% for 2003, down 39 basis points from
2002. This decrease resulted from a 91 basis point decrease in the yield on
earning assets, which was partially offset by a 52 basis point decrease in the
effective cost of funds, which includes non-interest bearing demand deposits.
The primary earning assets of the Company, loans and investment securities,
experienced declines in yields during 2003. Loan yields decreased 82 basis
points, primarily due to a 55 basis point decrease in the average prime rate and
a customer-driven shift in the loan portfolio to a higher level of variable rate
loans. Due to customer demand, all of the Company's loan growth was in the form
of variable rate loans, primarily indexed to the prime rate. Due to historically
low short-term rates and a steep yield curve, these loans are currently lower
yielding than fixed rate loans. Investment security yields declined 149 basis
points, primarily due to lower reinvestment yields and a higher level of
prepayments. High levels of prepayment activity resulted in accelerated premium
amortization and a greater volume of funds to reinvest at lower yields, both of
which had a negative impact on realized securities yields.
During 2003, the downward trend in the margin began to moderate with
the margin bottoming at 4.22% in the third quarter. The fourth quarter margin
improved four basis points to 4.26%, the first increase in eight quarters with
corporate initiatives to improve loan and deposit pricing being a primary driver
of the improvement. Continued solid core deposit growth, particularly in demand
deposit and money market accounts, has also proven beneficial to the margin.
Assuming an unchanged prime rate for 2004, Synovus expects the 2004 margin to
remain stable compared to 2003. Any increase in the prime rate should have a
positive impact on the margin due to the significant level of variable rate
loans currently on the balance sheet.
During 2002, the margin experienced a moderate declining trend,
decreasing from a first quarter level of 4.77% to a 4.53% level in the fourth
quarter. This decline was due to several factors, including repricing of fixed
rate assets and the impact of a 50 basis point decline in the prime rate in
November. An additional factor impacting the margin was the composition of
Synovus' earning assets growth. Substantially all of our earning assets growth
was in the form of floating rate loans primarily tied to the prime rate. With
the steep yield curve and historically low short-term rates, these loans were
moderately lower yielding during the year which put downward pressure on the net
interest margin.
TABLE 2 NET INTEREST INCOME
YEARS ENDED DECEMBER 31,
------------------------------------
(In thousands) 2003 2002 2001
---------- ---------- ----------
Interest income .......... $1,061,492 1,055,040 1,130,888
Taxable-equivalent
adjustment ............. 7,388 7,265 7,249
---------- --------- ---------
Interest income,
taxable-equivalent ... 1,068,880 1,062,305 1,138,137
Interest expense ......... 298,428 337,536 501,097
Net interest income,
---------- --------- ---------
taxable-equivalent ... $ 770,452 724,769 637,040
========== ========= =========
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FINANCIAL REVIEW [LOGO]
TABLE 3 CONSOLIDATED AVERAGE BALANCES, INTEREST, AND YIELDS
2003 2002
----------------------------------- ----------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
(Dollars in thousands) BALANCE INTEREST RATE BALANCE INTEREST RATE
------------ ---------- ------ ------------ ----------- ------
ASSETS
INTEREST EARNING ASSETS:
Taxable loans, net (a)(b) .............. $ 15,556,295 948,351 6.10% $ 13,312,986 920,595 6.92%
Tax-exempt loans, net (a)(b)(c) ........ 69,924 4,950 7.08 67,759 4,609 6.80
Allowance for loan losses .............. (220,004) -- -- (184,253) -- --
------------ ---------- ------------ ----------
Loans, net .......................... 15,406,215 953,301 6.19 13,196,492 925,204 7.01
------------ ---------- ------------ ----------
Taxable investment securities .......... 2,065,924 83,727 4.05 1,829,301 103,688 5.67
Tax-exempt investment securities (c) ... 235,401 16,920 7.19 233,537 17,167 7.35
------------ ---------- ------------ ----------
Total investment securities ......... 2,301,325 100,647 4.37 2,062,838 120,855 5.86
------------ ---------- ------------ ----------
Interest earning deposits with banks ... 4,515 25 0.55 3,857 51 1.31
Federal funds sold and securities
purchased under resale agreements .... 111,893 1,546 1.38 71,389 1,538 2.12
Mortgage loans held for sale ........... 254,240 13,361 5.26 229,073 14,657 6.40
------------ ---------- ------------ ----------
Total interest earning assets ....... 18,078,188 1,068,880 5.91 15,563,649 1,062,305 6.82
------------ ---------- ----- ------------ ---------- -----
Cash and due from banks ................ 594,097 489,389
Premises and equipment, net ............ 714,255 596,527
Other real estate ...................... 28,273 22,147
Other assets (d) ....................... 998,040 742,942
------------ ------------
Total assets ........................ $ 20,412,853 $ 17,414,654
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST BEARING LIABILITIES:
Interest bearing demand deposits ....... $ 2,515,161 17,779 0.71 $ 2,035,917 19,532 0.96
Money market accounts .................. 3,695,601 41,086 1.11 3,058,174 50,594 1.65
Savings deposits ....................... 502,246 1,243 0.25 446,205 2,431 0.54
Time deposits .......................... 5,848,271 157,453 2.69 5,346,391 188,099 3.52
Federal funds purchased and
securities sold under
repurchase agreements ................ 1,101,216 11,829 1.07 1,131,455 18,639 1.65
Other borrowed funds ................... 1,639,487 69,038 4.21 1,185,200 58,241 4.85
------------ ---------- ------------ ----------
Total interest bearing liabilities .. 15,301,982 298,428 1.95 13,203,342 337,536 2.55
------------ ---------- ----- ------------ ---------- -----
SPREAD RATE ......................... 3.96% 4.27%
===== =====
Non-interest bearing demand deposits ..... 2,501,539 1,983,131
Other liabilities ........................ 442,555 372,689
Shareholders' equity ..................... 2,166,777 1,855,492
------------ ------------
Total liabilities and
shareholders' equity .............. $ 20,412,853 $ 17,414,654
============ ============
NET INTEREST INCOME/MARGIN ............... 770,452 4.26% 724,769 4.65%
===== =====
Taxable-equivalent adjustment ............ (7,388) (7,265)
---------- ----------
Net interest income, actual .............. $ 763,064 $ 717,504
========== ==========
2001
--------------------------------------
AVERAGE YIELD/
(Dollars in thousands) BALANCE INTEREST RATE
------------ ---------- ------
ASSETS
INTEREST EARNING ASSETS:
Taxable loans, net (a)(b) .............. $ 11,487,866 986,090 8.58%
Tax-exempt loans, net (a)(b)(c) ........ 55,230 4,938 8.94
Allowance for loan losses .............. (158,488) -- --
------------ ----------
Loans, net .......................... 11,384,608 991,028 8.70
------------ ----------
Taxable investment securities .......... 1,787,515 111,062 6.21
Tax-exempt investment securities (c) ... 232,312 17,223 7.41
------------ ----------
Total investment securities ......... 2,019,827 128,285 6.35
------------ ----------
Interest earning deposits with banks ... 4,862 211 4.34
Federal funds sold and securities
purchased under resale agreements .... 92,868 4,397 4.73
Mortgage loans held for sale ........... 198,395 14,216 7.17
------------ ----------
Total interest earning assets ....... 13,700,560 1,138,137 8.31
------------ ---------- -----
Cash and due from banks ................ 429,024
Premises and equipment, net ............ 545,637
Other real estate ...................... 15,002
Other assets (d) ....................... 684,781
------------
Total assets ........................ $ 15,375,004
============
LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST BEARING LIABILITIES:
Interest bearing demand deposits ....... $ 1,654,570 30,956 1.87
Money market accounts .................. 2,354,665 76,958 3.27
Savings deposits ....................... 419,074 5,682 1.36
Time deposits .......................... 5,229,961 291,065 5.57
Federal funds purchased and
securities sold under
repurchase agreements ................ 1,153,878 42,643 3.70
Other borrowed funds ................... 909,963 53,793 5.90
------------ ----------
Total interest bearing liabilities .. 11,722,111 501,097 4.27
------------ ---------- -----
SPREAD RATE ......................... 4.04%
=====
Non-interest bearing demand deposits ..... 1,693,911
Other liabilities ........................ 410,952
Shareholders' equity ..................... 1,548,030
------------
Total liabilities and
shareholders' equity .............. $ 15,375,004
============
NET INTEREST INCOME/MARGIN ............... 637,040 4.65%
=====
Taxable-equivalent adjustment ............ (7,249)
----------
Net interest income, actual .............. $ 629,791
==========
(a) Average loans are shown net of unearned income. Nonperforming loans are
included.
(b) Interest income includes loan fees as follows: 2003 - $65.7 million; 2002 -
$59.7 million; 2001 - $50.3 million.
(c) Reflects taxable-equivalent adjustments, using the statutory federal income
tax rate of 35%, in adjusting interest on tax-exempt loans and investment
securities to a taxable-equivalent basis.
(d) Includes average net unrealized gains on investment securities available for
sale of $48.8 million, $53.6 million, and $39.2 million for the years ended
December 31, 2003, 2002, and 2001, respectively.
F-34
FINANCIAL REVIEW [LOGO]
TABLE 4 RATE/VOLUME ANALYSIS
2003 COMPARED TO 2002 2002 COMPARED TO 2001
----------------------------------- -----------------------------------
CHANGE DUE TO (a) CHANGE DUE TO (a)
----------------------------------- -----------------------------------
YIELD/ NET YIELD/ NET
(In thousands) VOLUME RATE CHANGE VOLUME RATE CHANGE
--------- --------- --------- --------- --------- ---------
Interest earned on:
Taxable loans, net $ 155,237 (127,481) 27,756 156,595 (222,090) (65,495)
Tax-exempt loans, net (b) 147 194 341 1,120 (1,449) (329)
Taxable investment securities 13,417 (33,378) (19,961) 2,595 (9,969) (7,374)
Tax-exempt investment securities (b) 137 (384) (247) 91 (147) (56)
Interest earning deposits with banks 9 (35) (26) (44) (116) (160)
Federal funds sold and securities
purchased under resale agreements 859 (851) 8 (1,016) (1,843) (2,859)
Mortgage loans held for sale 1,611 (2,907) (1,296) 2,200 (1,759) 441
--------- --------- --------- --------- --------- ---------
Total interest income 171,417 (164,842) 6,575 161,541 (237,373) (75,832)
--------- --------- --------- --------- --------- ---------
Interest paid on:
Interest bearing demand deposits 4,601 (6,354) (1,753) 7,131 (18,555) (11,424)
Money market accounts 10,518 (20,026) (9,508) 23,005 (49,369) (26,364)
Savings deposits 303 (1,491) (1,188) 369 (3,620) (3,251)
Time deposits 17,666 (48,312) (30,646) 6,485 (109,451) (102,966)
Federal funds purchased and securities
sold under agreement to repurchase (499) (6,311) (6,810) (830) (23,174) (24,004)
Other borrowed funds 21,354 (10,557) 10,797 16,239 (11,791) 4,448
--------- --------- --------- --------- --------- ---------
Total interest expense 53,943 (93,051) (39,108) 52,399 (215,960) (163,561)
--------- --------- --------- --------- --------- ---------
Net interest income $ 117,474 (71,791) 45,683 109,142 (21,413) 87,729
========= ========= ========= ========= ========= =========
(a) The change in interest due to both rate and volume has been allocated
to the rate component.
(b) Reflects taxable-equivalent adjustments using the statutory federal
income tax rate of 35% in adjusting interest on tax-exempt loans and
investment securities to a taxable-equivalent basis.
NON-INTEREST INCOME
Non-interest income consists of TSYS revenues as well as a wide variety
of fee generating services from the Financial Services segment. Consolidated
non-interest income was $1.37 billion, $1.23 billion, and $1.16 billion for the
years ended December 31, 2003, 2002, and 2001, respectively. TSYS' combined
revenues represented 78.5% of consolidated non-interest income in 2003 compared
to 79.4% in 2002.
Non-interest income excluding reimbursable items totaled $1.1 billion
in 2003, an increase of 14.0% from 2002. For 2002, non-interest income excluding
reimbursable items was $1.0 billion, an increase of 7.7% from 2001. Revenues
from electronic payment processing and other transaction processing services
offered by TSYS were the largest contributors, increasing $102.6 million, or
14.3% in 2003, and increasing $64.6 million, or 9.9% in 2002 over the previous
year. Financial Services' non-interest income increased $33.5 million, or 12.1%
in 2003, and $30.6 million or 12.4% in 2002. The increase in Financial Services'
non-interest income in 2003 was led by increases in mortgage revenues and
service charges on deposits.
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 through TSYS'
cardholder systems, TS2 and TS1, to financial institutions and other
organizations throughout the United States, Mexico, Canada, Honduras, the
Caribbean and Europe. TSYS offers merchant services to financial institutions
and other organizations in Japan through its majority owned subsidiary, GP
Network Corporation (GP Net), and in the United States through its joint
venture, Vital Processing Services L.L.C. (Vital).
Electronic payment processing revenues are generated primarily from
charges based on the number of accounts on file, transactions and authorizations
processed, statements mailed, credit bureau requests, credit 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 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.
The following table summarizes TSYS' accounts on file at December 31,
2003, 2002, and 2001.
TSYS' ACCOUNTS ON FILE
PERCENT CHANGE
-------------------
2003 2002
(in millions) 2003 2002 2001 VS. 2002 VS. 2001
------ ------ ------ -------- --------
At December 31, 273.90 245.9 218.5 11.4% 12.5%
Average 262.6% 232.1 206.1 13.1% 12.6
F-35
FINANCIAL REVIEW [LOGO]
Electronic payment processing services revenues increased 14.7%, or
$89.9 million, for the year ended December 31, 2003, compared to the year ended
December 31, 2002, which increased 8.0%, or $45.1 million, compared to the year
ended December 31, 2001.
On March 3, 2003, TSYS announced that Bank One selected TSYS to upgrade
its credit card processing. Under the long term software licensing and services
agreement, TSYS will provide electronic payment processing services to Bank
One's credit card accounts for at least two years starting in 2004 (excluding
statement and card production services), and then TSYS will license a modified
version of its TS2 consumer and commercial software to Bank One under a
perpetual license with a six year payment term. TSYS uses the
percentage-of-completion accounting method for its agreement with Bank One and
recognizes revenues in proportion to costs incurred. TSYS' revenues from Bank
One were approximately 3.3% of total revenues in 2003.
On January 14, 2004, J.P. Morgan Chase & Co. (JPM) and Bank One
announced that they have agreed to merge. Based on discussions with executive
management of Bank One after the recent merger announcement by JPM and Bank One,
TSYS and Bank One are proceeding with their efforts to complete the Bank One
conversion according to schedule. However, there are no assurances that the Bank
One conversion will be completed on schedule or that Bank One and JPM may not
elect to terminate the Bank One agreement with TSYS prior to the conversion. The
impact of the transaction between Bank One and JPM on the financial position,
results of operations and cash flows of TSYS cannot be determined at this time.
In October 2003, Circuit City Stores, Inc. announced that it had sold
its bankcard portfolio, which includes Visa and MasterCard credit card
receivables and related cash reserves to FleetBoston Financial. On January 20,
2004, Circuit City announced an agreement to sell its private-label credit card
business to Bank One. TSYS has a long-term agreement with Circuit City Stores
until April 2006. TSYS' revenues from Circuit City were approximately 3% of
total revenues in 2003. The impact of the transactions between Circuit City and
FleetBoston Financial and Circuit City and Bank One on the financial position,
results of operations and cash flows of TSYS cannot be determined at this time.
In July 2003, Sears and Citigroup announced an agreement for the
proposed 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
80.7 million Sears accounts. During the year ended December 31, 2003, TSYS'
revenues from the TSYS/Sears agreement represented 6.2% of TSYS' consolidated
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 onetime right to market test TSYS' pricing
and functionality after May 1, 2004. Potential results of such market test, in
which TSYS will be a participant, include continuation of the processing
agreement under its existing terms, continuation of the processing agreement
under mutually agreed modified terms, or termination of the processing agreement
after May 1, 2006 without a termination fee. The impact of the transaction
between Sears and Citigroup on the financial position, results of operations and
cash flows of TSYS cannot be determined at this time.
TSYS provides processing services to its clients worldwide and plans to
continue to expand its service offerings internationally in the future. On
August 6, 2002, TSYS announced the signing of a 10-year processing agreement
with CIBC to process more than 5 million Visa accounts. The portfolio was
converted in early 2003 to TS2. In a separate agreement, TSYS announced in
January 2002 that it would process the new "entourage" line of American Express
products for CIBC, including Canada's first nationwide chip card. TSYS has
supported CIBC's commercial card product since 1994.
During 2003, TSYS' largest client in Mexico notified TSYS that the
client intends to utilize 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 the Company of its
intentions to deconvert in mid-2004. This client represented approximately 21%
of TSYS' revenues from Mexico prior to the deconversions. As a result,
management expects that electronic payment processing revenues for 2004 from
Mexico will decrease significantly when compared to electronic payment
processing revenues from Mexico for 2003 and 2002.
Total revenues from clients based in Mexico was $31.4 million for 2003,
a 7.5% increase over the $29.2 million in 2002, which was a 75.2% increase over
the $16.9 million in 2001. The increase in revenue in 2002 was attributable to
growth of accounts on file of approximately 29.3% and the restructuring of the
joint venture agreement.
TSYS' electronic payment processing services revenues are also impacted
by the use of optional value added products and services of TSYS' processing
systems. Value added products and services are optional features to which each
client can choose to subscribe in order to potentially increase the financial
performance of its portfolio. Value added products and services include: risk
management tools and techniques, such as credit evaluation, fraud detection and
prevention, and behavior analysis tools; and revenue enhancement tools and
customer retention programs, such as loyalty programs and bonus rewards. These
revenues can increase or decrease over time as clients subscribe to or cancel
these services.
For the years ended December 31, 2003, 2002 and 2001, value added
products and services represented 14.1%, 12.7% and 11.7% of total revenues,
respectively. Revenues from these products and services, which include some
reimbursable items paid to third-party vendors, increased 22.1%, or $26.8
million, for 2003 compared to 2002, and increased 16.3%, or $17.0 million, for
2002 compared to 2001.
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 23.0% to $22.2 million in 2003,
compared to $18.0 million in 2002, which increased 17.8% compared to $15.3
million in 2001.
Financial Services:
Financial Services' total non-interest income was $311.0 million,
$269.2 million, and $247.0 million for the years ended December 31, 2003, 2002,
and 2001, respectively. Table 5 shows the principal components of Financial
Services' non-interest income.
F-36
FINANCIAL REVIEW
TABLE 5 NON-INTEREST INCOME - FINANCIAL SERVICES SEGMENT
(In thousands) 2003 2002 2001
-------- ------- -------
Service charges on deposits $107,404 93,969 86,539
Fees for trust services 30,556 28,585 26,930
Credit card fees 26,044 22,469 21,184
Mortgage banking income 58,633 41,323 38,272
Brokerage revenue 20,461 18,840 16,363
Securities gains, net 2,491 2,638 1,722
Other fee income 23,682 20,494 17,199
Other operating income 41,752 49,231 38,783
-------- ------- -------
Total non-interest income
before impairment loss 311,023 277,549 246,992
Impairment loss on private
equity investment -- (8,355) --
-------- ------- -------
Total non-interest income $311,023 269,194 246,992
======== ======= =======
SERVICE CHARGES ON DEPOSITS represent the single largest fee income
component for Financial Services. Service charges on deposits totaled $107.4
million in 2003, an increase of 14.3% from the previous year, and $94.0 million
in 2002, an increase of 8.6% from 2001. The main factors that contributed to the
increase in service charges over the last two years were increases in the number
of individual and commercial accounts, transaction volume growth, and the effect
of pricing increases in certain service charges.
FEES FOR TRUST SERVICES are derived from providing estate
administration services, personal trust and investment management services,
corporate trust, and employee benefit plan administration. At December 31, 2003
and 2002, the total market value of trust assets administered by Synovus was
approximately $10.0 billion and $7.9 billion, respectively. Fees for trust
services have been impacted by lower market values of equity securities for 2003
compared to a year ago. Most of the impact of the lower market values of managed
assets has been offset by the addition of $1.5 billion in new trust assets
during 2003. The recent increase in market indices began to provide some benefit
in the second half of 2003 and is expected to provide additional benefits in
2004.
Our mortgage unit continued to benefit from our integrated sales
approach as well as record-low interest rates during 2003. MORTGAGE BANKING
INCOME increased by $17.3 million or 41.9% over 2002 compared to an increase of
$3.1 million or 8.0% over 2001. Total mortgage production volume during 2003 was
$2.7 billion, compared to $2.2 billion in 2002. Mortgage origination revenues
were $33.5 million compared to $27.7 million in 2002. Secondary marketing gains
were $24.9 million in 2003 compared to $13.2 million in 2002. The increase in
secondary marketing gains was due primarily to improved pricing due to the
increase in demand.
OTHER FEE INCOME includes fees for letters of credit, safe deposit box
fees, access fees for automatic teller machine use, official check issuance
fees, and other miscellaneous fee-related income. These fees increased $3.2
million or 15.6% over 2002, primarily from a $2.8 million increase in letter of
credit fees.
OTHER OPERATING INCOME was $41.8 million in 2003, compared to $49.2
million in 2002. The main components of other operating income are income from
company-owned life insurance policies, insurance commissions, financial planning
and asset management fees, and other items discussed below.
Financial planning and asset management fees increased $1.9 million or
23.6% compared to 2002, primarily due to the acquisition of GLOBALT, Inc. in the
second quarter of 2002.
Other operating income includes pre-tax gains from the sales of banking
locations of $15.4 million in 2002 and $3.7 million in 2001. These sales have
resulted from Synovus' strategic market repositioning by exiting certain low
growth markets and reinvesting these resources into higher growth markets.
In 2001, other operating income included a $10.0 million pretax gain
from the sale of the Star System ATM network, which represented our ownership
interest in the network.
TABLE 6 NON-INTEREST EXPENSE
2003(*) 2002(*) 2001(*)
---------------------- ----------------------- ------------------------
TRANSACTION TRANSACTION TRANSACTION
(In thousands) FINANCIAL PROCESSING FINANCIAL PROCESSING FINANCIAL PROCESSING
SERVICES SERVICES SERVICES SERVICES SERVICES SERVICES
--------- ----------- --------- ----------- ---------- -----------
Salaries and other personnel expense $340,219 332,616 304,422 303,972 283,172 283,462
Net occupancy and equipment expense 75,841 205,845 69,214 174,967 62,904 172,770
Other operating expenses 159,347 99,261 141,882 88,186 127,668 81,993
-------- ------- ------- ------- ------- -------
Total non-interest expense
before reimbursable items $575,407 637,722 515,518 567,125 473,744 538,225
======== ======= ======= ======= ======= =======
(*) The added totals are greater than the consolidated totals due to
inter-segment balances which are eliminated in consolidation.
F-37
FINANCIAL REVIEW [LOGO]
NON-INTEREST EXPENSE
Management analyzes non-interest expense in two separate components:
Financial Services and Transaction Processing Services. Table 6 summarizes this
data for the years ended December 31, 2003, 2002, and 2001.
Financial Services:
2003 vs. 2002
Reported total non-interest expense for the Financial Services segment
increased $59.9 million or 11.6% over 2002. The single largest factor impacting
the year-over-year growth relates to acquisitions and divestitures completed
during the years of 2003 and 2002. Total non-interest expense, excluding the
amounts related to acquisitions and divestitures completed in 2003 and 2002,
increased by $30.2 million or 5.9% compared to 2002. The core infrastructure
expenses within the support units (primarily human resources, technology, and
corporate overhead) increased by approximately 4% over the prior year. The
remainder of the growth was primarily in the sales and production areas of the
highest growth banking markets.
Total full-time equivalent (FTE) employees were 6,020 at December 31,
2003, up 371 or 6.6% from 5,649 FTE employees at year-end 2002. The 2003
acquisitions contributed 259 of the total increase. Excluding the impact of
these acquisitions, the increase over the prior year was 2.0%.
Total SALARIES AND OTHER PERSONNEL EXPENSE increased $35.8 million or
11.8% in 2003 compared to 2002. Approximately $13.7 million of the total
increase was related to the net effect of acquisitions and divestitures
completed in 2003 and 2002. The remaining increase related primarily to normal
merit and promotional salary adjustments.
NET OCCUPANCY AND EQUIPMENT EXPENSE increased $6.6 million or 9.6%
during 2003. Approximately $3.9 million of the total increase was related to the
net effect of acquisitions and divestitures completed in 2003 and 2002.
Additionally, software maintenance contracts expense increased by approximately
$1.0 million during 2003.
Other operating expenses increased $17.5 million or 12.3% over 2002.
Approximately $10.0 million of the total increase was related to the net effect
of acquisitions and divestitures completed in 2003 and 2002. Expenses and net
losses associated with foreclosed real estate properties increased by
approximately $5.7 million over 2002. Another factor impacting the
year-over-year comparison is a $5.7 million merchant fraud loss that was
recognized in 2002.
The efficiency ratio (non-interest expense divided by the sum of
federal taxable equivalent net interest income and non-interest income excluding
net securities gains) was 53.34% for 2003 compared to 52.07% in 2002. The
decline in the margin was the biggest contributor to the movement in the
efficiency ratio. The net overhead ratio (non-interest expense less non-interest
income - excluding net securities gains divided by total average assets)
improved to 1.36% for the year compared to 1.48% for 2002.
2002 vs. 2001
Non-interest expense increased $41.8 million, or 8.8% in 2002 over
2001. SALARIES AND OTHER PERSONNEL EXPENSES increased $21.3 million or 7.5%. The
increase was primarily due to normal merit and promotional salary adjustments.
Moderate headcount growth and acquisitions also contributed to the increase.
NET OCCUPANCY AND EQUIPMENT EXPENSE increased $6.3 million or 10.0%
during 2002. The growth related primarily to increased occupancy costs resulting
from branch expansions as well as increased depreciation costs related to newly
acquired computer hardware and software.
OTHER OPERATING EXPENSES increased $14.2 million or 11.1% during 2002.
$5.7 million of the total increase related to a merchant fraud loss recorded in
2002. The increase was also impacted by approximately $3.8 million in
incremental costs related to acquisitions completed in 2002 and 2001. These
increases were partially offset by lower intangibles amortization expenses in
2002 as compared to 2001. In accordance with the provisions of SFAS No. 142,
Synovus ceased the amortization of goodwill beginning January 1, 2002. Total
goodwill amortization expense in 2001 was $3.0 million, pre-tax.
Transaction Processing Services:
During 2003, TSYS' operating expenses as a percentage of revenues
decreased to 75.1%, compared to 75.7% and 77.3% for 2002 and 2001, respectively.
The decrease in the ratio is primarily a result of a company-wide emphasis on
expense control, a focus on improved processes and lower provisions for
transaction processing accruals.
SALARIES AND OTHER PERSONNEL EXPENSE increased 9.4% in 2003 over 2002,
compared to 7.2% in 2002 over 2001. A significant portion of TSYS' operating
expenses relates to salaries and other personnel costs. During 2003, the number
of employees increased to 5,743, compared to 5,399 in 2002 and 5,322 in 2001.
The majority of the increase in the number of employees for 2003 compared to
2002 related to the acquisition of ESC and the opening of a programming center
in Boise, Idaho. The change in total employment costs consists of increases of
$16.1 million, $53.1 million and $40.3 million in 2003, 2002 and 2001,
respectively, associated with the growth in the number of employees, normal
salary increases and related employee benefits. These increases were net of
$32.6 million, $42.9 million and $22.2 million in 2003, 2002 and 2001,
respectively, invested in software development and contract acquisition costs.
The increase in 2003 was also offset with a reduction in the accrual for
performance-based incentive benefits.
NET OCCUPANCY AND EQUIPMENT EXPENSE increased 17.7% in 2003 over 2002,
compared to 1.3% in 2002 over 2001. Depreciation and amortization expense
increased $17.8 million, or 30.6%, to $76.1 million for the year ended December
31, 2003, compared to $58.3 million for the year ended December 31, 2002, which
increased $7.9 million, or 15.6%, from $50.4 million for the year ended December
31, 2001. Amortization expense of purchased computer software increased $10.9
million in 2003 as TSYS expanded its processing capacity. TSYS has certain
license agreements requiring increased license fees based upon achieving certain
thresholds of processing capacity. Amortization expense of developed software
increased $5.3 million as a result of developed software placed in service
during 2002.
Due to rapidly changing technology in computer equipment and software,
TSYS' equipment and software needs are fulfilled primarily through operating
leases and software licensing arrangements. Equipment and software rental
expense was $85.9 million for the year ended December 31, 2003, an increase of
$10.9 million, or 14.6%, compared to $74.8 million for the year ended December
31, 2002, a decrease of $4.2 million, or 5.3%, compared to $79.0 million for the
year ended December 31, 2001. TSYS equipment and software rentals increased in
2003 as a result of expanding processing capacity and converting two clients to
TS2. Equipment and software rentals decreased in 2002 as TSYS made a concerted
effort to improve processing productivity and implement cost controls.
In July 2003, TSYS announced plans to build a state-of-the-art
(pound)20 million European data center to accommodate future client growth and
to prepare for its corporate expansion throughout Europe. The center is
scheduled to be completed and operational by the fourth quarter of 2004.
OTHER OPERATING EXPENSES increased 12.6% in 2003 compared to 2002, and
increased 7.6% in 2002 compared to 2001. Other operating expenses were impacted
by the court costs asso-
F-38
FINANCIAL REVIEW [LOGO]
ciated with a new debt-collection arrangement entered into by TDM, amortization
of contract acquisition costs, the provision for bad debt expense and the
provision for transaction processing accruals. As a result of a new
debt-collection agreement with an existing client in 2003, TSYS recognized
approximately $12.4 million of court costs and attorney commissions in other
operating expenses that it expects to recover in future periods. Amortization of
contract acquisition costs associated with conversions was $7.7 million, $3.5
million and $387,000 in 2003, 2002 and 2001, respectively.
For 2003, 2002 and 2001, transaction processing provisions were $3.4
million, $6.5 million and $1.4 million, respectively. For 2003, 2002 and 2001,
bad debt expense was $2.7 million, $2.7 million and $683,000, respectively.
INVESTMENT SECURITIES AVAILABLE FOR SALE
The investment securities portfolio consists of debt and equity
securities classified as available for sale. Investment securities provide
Synovus with a source of liquidity and a relatively stable source of income. The
investment securities portfolio also provides management with a tool to balance
the interest rate risk of its loan and deposit portfolios. At December 31, 2003,
approximately $2.0 billion of these investment securities were pledged as
required collateral for certain deposits, FHLB advances, and repurchase
agreements. See Table 8 for maturity and average yield information of the
investment securities portfolio.
The investment strategy focuses on the use of the investment securities
portfolio to manage the interest rate risk created by the inherent mismatch
between the loan and deposit portfolios. Due to strong loan demand at subsidiary
banks, there is little need for investment securities to augment income or
utilize unpledged deposits. As such, the investment securities are primarily
U.S. Government agencies and Government agency sponsored mortgage-backed
securities, both of which have a high degree of liquidity and limited credit
risk. A mortgage-backed security depends on the underlying pool of mortgage
loans to provide a cash flow pass-through of principal and interest. At December
31, 2003, substantially all of the collateralized mortgage obligations and
mortgage-backed pass-through securities held by Synovus were issued or backed by
Federal agencies.
As of December 31, 2003 and 2002, the estimated fair value of
investment securities as a percentage of their amortized cost was 101.3% and
103.0%, respectively. The investment securities portfolio had gross unrealized
gains of $39.8 million and gross unrealized losses of $7.0 million, for a net
unrealized gain of $32.8 million as of December 31, 2003. As of December 31,
2002, the investment securities portfolio had a net unrealized gain of $64.8
million. Shareholders' equity included a net unrealized gain of $20.4 million
and $40.2 million on the available for sale portfolio as of December 31, 2003
and 2002, respectively.
During 2003, the average balance of investment securities increased to
$2.30 billion, compared to $2.06 billion in 2002. Synovus earned a
taxable-equivalent rate of 4.37% and 5.86% for 2003 and 2002, respectively, on
its investment securities portfolio. As of December 31, 2003 and 2002, average
investment securities represented 12.7% and 13.3%, respectively, of average
interest earning assets.
Table 7 presents the carrying value of investment securities available
for sale at December 31, 2003, 2002, and 2001.
TABLE 7 INVESTMENT SECURITIES AVAILABLE FOR SALE
DECEMBER 31,
------------------------------------
(In thousands) 2003 2002 2001
---------- --------- ---------
U.S. Treasury and U.S. Government agencies $1,353,825 1,202,320 1,051,201
Mortgage-backed securities 847,007 707,946 735,405
State and municipal 248,738 252,522 242,646
Other investments 79,687 74,937 59,035
---------- --------- ---------
Total $2,529,257 2,237,725 2,088,287
========== ========= =========
F-39
FINANCIAL REVIEW [LOGO]
The calculation of weighted average yields for investment securities in
Table 8 is based on the amortized cost and effective yields of each security.
The yield on state and municipal securities is computed on a taxable-equivalent
basis using the statutory federal income tax rate of 35%. Maturity information
is presented based upon contractual maturity. Actual maturities may differ from
contractual maturities because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.
TABLE 8 INVESTMENT SECURITIES AVAILABLE FOR SALE MATURITIES AND AVERAGE
YIELDS
DECEMBER 31, 2003
--------------------
ESTIMATED AVERAGE
(Dollars in thousands) FAIR VALUE YIELD
---------- -------
U.S. Treasury and
U.S. Government agencies:
Within 1 year $ 197,908 3.18%
1 to 5 years 954,042 3.38
5 to 10 years 160,081 5.09
More than 10 years 41,794 5.58
----------
Total $1,353,825 3.63
==========
State and municipal:
Within 1 year $ 14,424 5.93
1 to 5 years 82,443 6.89
5 to 10 years 101,918 7.39
More than 10 years 49,953 7.81
----------
Total $ 248,738 7.22
==========
Other investments:
Within 1 year $ 1,778 5.97
1 to 5 years 1,766 7.12
5 to 10 years -- --
More than 10 years $ 2,236 5.46
----------
Total $ 5,780 6.09
==========
Equity securities $ 73,907 3.75
==========
Mortgage-backed securities $ 847,007 4.37
==========
Total investment securities:
Within 1 year $ 214,110 3.39
1 to 5 years 1,038,251 3.67
5 to 10 years 261,999 5.98
More than 10 years 93,983 6.76
Equity securities 73,907 3.75
Mortgage-backed securities 847,007 4.37
----------
Total $2,529,257 4.24%
========== ====
LOANS
Since lending activities are a significant source of revenue, our main
objective is to adhere to sound lending practices. When analyzing prospective
loans, management considers both interest rate and credit quality objectives in
determining whether to extend a given loan and the appropriate pricing for that
loan. Operating under a decentralized structure, management emphasizes lending
in the local markets we serve. Synovus strives to maintain a diversified loan
portfolio to spread risk and reduce exposure to economic downturns that may
occur in different segments of the economy, geographic locations, or in
particular industries. Table 9 illustrates that a significant portion of the
loan portfolio is in the real estate sector. However, as discussed further
herein, these loans are diversified by geography, industry and loan type. The
loan policy discourages loans to highly speculative real estate developments,
highly leveraged transactions, and other industries known for excessive risk.
Portfolio Composition:
Synovus continues to maintain a strong local market presence in each of
its markets, with a focus on relationship banking. The loan portfolio spreads
across five southeastern states with diverse economies. The Georgia affiliates
represent a majority with 58% of the consolidated portfolio. The Alabama
affiliates represent 15%, followed by South Carolina with 14%, Florida with 10%,
and Tennessee with 3%.
The commercial loan portfolio consists of commercial, financial,
agricultural, and real estate loans. These loans are granted primarily on the
borrower's general credit standing and on the strength of the borrower's ability
to generate repayment cash flows from income sources. Real estate construction
and mortgage loans are secured by commercial real estate as well as 1-4 family
residences, and represent extensions of credit used as interim or permanent
financing of real estate properties.
Total commercial real estate loans at December 31, 2003 were $9.1
billion or 55.0% of the total loan portfolio. As shown on Table 14, the
commercial real estate loan portfolio is diversified among various property
types: investment properties, 1-4 family properties, land acquisition,
owner-occupied, and other property.
Included in the commercial real estate category are $3.3 billion in loans
for the purpose of financing owner-occupied properties and other properties such
as churches and other charitable organizations, manufacturing/industrial
facilities, and recreational properties. The primary source of repayment on
these loans is revenue generated from products or services offered by the
business or organization. The secondary source of repayment on these loans is
the real estate.
The commercial real estate loan portfolio includes loans in the Atlanta
market totaling $1.9 billion, of which $340.4 million are investment property
loans.
Retail loans consist of residential mortgages, equity lines, credit
card loans, installment loans and other credit line loans. Retail lending
decisions are made based upon the cash flow or earning power of the borrower
that represents the primary source of repayment. However, in many lending
transactions collateral is taken to provide an additional measure of security.
Collateral securing these loans provides a secondary source of repayment in that
the collateral may be liquidated. Synovus determines the need for collateral on
a case-by-case basis. Factors considered include the purpose of the loan,
current and prospective credit-worthiness of the customer, terms of the loan,
and economic conditions.
F-40
FINANCIAL REVIEW [LOGO]
TABLE 9 LOANS BY TYPE
DECEMBER 31,
--------------------------------------------------------------
2003 2002 2001
-------------------- ------------------ ------------------
(Dollars in thousands) AMOUNT %* AMOUNT %* AMOUNT %*
------------ ----- ---------- ----- ---------- -----
Commercial:
Commercial, financial, and agricultural $ 4,632,507 28.1% 4,367,779 30.2 4,004,042 32.2
Real estate - construction 3,958,649 24.1 3,119,508 21.6 2,665,877 21.5
Real estate - mortgage 5,095,247 30.9 4,304,024 29.8 3,138,748 25.3
------------ ----- ---------- ----- ---------- -----
Total commercial 13,686,403 83.1 11,791,311 81.6 9,808,667 79.0
------------ ----- ---------- ----- ---------- -----
Retail:
Real estate-mortgage 1,865,701 11.3 1,701,332 11.8 1,553,154 12.5
Consumer loans - credit card 252,287 1.5 238,392 1.6 234,651 1.9
Consumer loans - other 691,557 4.3 757,626 5.2 843,169 6.8
------------ ----- ---------- ----- ---------- -----
Total retail 2,809,545 17.1 2,697,350 18.6 2,630,974 21.2
------------ ----- ---------- ----- ---------- -----
Total loans 16,495,948 14,488,661 12,439,641
Unearned income (31,034) (0.2) (24,752) (0.2) (21,724) (0.2)
------------ ----- ---------- ----- ---------- -----
Total loans, net of unearned income $ 16,464,914 100.0% 14,463,909 100.0 12,417,917 100.0
============ ===== ========== ===== ========== =====
2000 1999
----------------- ------------------
(Dollars in thousands) AMOUNT %* AMOUNT %*
---------- ---- ---------- -----
Commercial:
Commercial, financial, and agricultural 3,747,047 34.9 3,012,293 33.2
Real estate - construction 2,411,489 22.4 1,792,813 19.8
Real estate - mortgage 2,336,234 21.7 1,983,766 21.9
---------- ---- ---------- -----
Total commercial 8,494,770 79.0 6,788,872 74.9
---------- ---- ---------- -----
Retail:
Real estate-mortgage 1,184,437 11.0 1,089,217 12.0
Consumer loans - credit card 233,137 2.2 237,546 2.6
Consumer loans - other 855,933 8.0 961,881 10.6
---------- ---- ---------- -----
Total retail 2,273,507 21.2 2,288,644 25.2
---------- ---- ---------- -----
Total loans 10,768,277 9,077,516
Unearned income (16,390) (0.2) (9,277) (0.1)
---------- ---- ---------- -----
Total loans, net of unearned income 10,751,887 100.0 9,068,239 100.0
========== ==== ========== =====
* Loan balance in each category, expressed as a percentage of total loans, net
of unearned income.
Portfolio Growth:
At December 31, 2003, total loans outstanding were $16.5 billion, an
increase of 13.8% over 2002. Excluding the impact of acquisitions completed in
2003, total loans increased by 9.1% over year-end 2002. Average loans increased
16.8% or $2.2 billion compared to 2002, representing 86.4% of average earning
assets and 76.6% of average total assets. The overall increase was led by 16.1%
growth in the commercial loan portfolio.
Total commercial real estate loans increased by $1.6 billion, or 22.0%
from year-end 2002. This growth includes $502.7 million in loans added to our
portfolio as a result of acquisitions completed in 2003. Excluding the impact of
these acquisitions, the commercial real estate portfolio grew by $1.1 billion or
15.2% over year-end 2002. The growth in our commercial real estate portfolio was
led by robust growth in our residential development and 1-4 family construction
loans, which are primarily in the entry-level to mid-market price range. The
demand for single family housing has been very strong in most of our markets,
including the Atlanta market, due in part to the record-low interest rate
environment. This trend is expected to temper as long-term rates increase. We
continue to monitor the housing sector, absorption rates, as well as the
homebuilders in each of our markets.
Total retail loans increased by $112.2 million or 4.2% from year-end
2002. This growth includes $38.7 million in loans added to our portfolio as a
result of acquisitions completed in 2003. Excluding the impact of these
acquisitions, the retail loan portfolio grew by $73.5 million or 2.7% over
year-end 2002. The decline in the other consumer loans category was primarily a
result of refinancing activity, some of which resulted in corresponding
increases in home equity lines (a component of real estate mortgage loans).
As shown on Table 9, the commercial real estate portfolio has been the
primary contributor to the overall loan growth in recent years. While this
segment of the portfolio is expected to continue to grow, we also expect that
the growth in the remaining segments of the portfolio will gradually begin to
increase at a higher rate than recent trends as a result of various new products
where we expect strong growth in 2004. During the fourth quarter of 2003, home
equity lines increased $55 million, or 34% annualized. This momentum is expected
to continue in 2004 as several marketing campaigns take place throughout the
year.
Table 10 shows the maturity of selected loan categories as of December
31, 2003. Also provided are the amounts due after one year, classified according
to the sensitivity in interest rates.
Actual repayments of loans may differ from the contractual maturities
reflected in Table 10 because borrowers have the right to prepay obligations
with and without prepayment penalties. Additionally, the refinancing of such
loans or the potential delinquency of such loans could create differences
between the contractual maturities and the actual repayment of such loans.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
Despite credit standards, internal controls, and a continuous loan
review process, the inherent risk in the lending process results in periodic
charge-offs. The provision for loan losses is the charge to operating earnings
necessary to maintain an adequate allowance for loan losses. Through the
provision for loan losses, Synovus maintains an allowance for loan losses that
management believes is adequate to absorb losses within the loan portfolio.
However, future additions to the allowance may be necessary based on
TABLE 10 LOAN MATURITIES AND INTEREST RATE SENSITIVITY
DECEMBER 31, 2003
----------------------------------------------------
ONE OVER ONE YEAR OVER
YEAR THROUGH FIVE FIVE
(In thousands) OR LESS YEARS YEARS TOTAL
------------ ------------- ------- ------------
Selected loan categories:
Commercial, financial, and agricultural $ 2,504,313 1,771,650 356,544 4,632,507
Real estate-construction 2,451,538 1,376,800 130,311 3,958,649
------------ ---------- ------- ------------
Total $ 4,955,851 3,148,450 486,855 8,591,156
============ ========== ======= ============
Loans due after one year:
Having predetermined interest rates $ 1,392,375
Having floating interest rates 2,242,930
------------
Total $ 3,635,305
============
F-41
changes in economic conditions, as well as changes in assumptions regarding a
borrower's ability to pay and/or collateral values. In addition, various
regulatory agencies, as an integral part of their examination procedures,
periodically review the affiliate banks' allowance for loan losses. Based on
their judgments about information available to them at the time of their
examination, such agencies may require the affiliate banks to recognize
additions to their allowance for loan losses.
Allowance for Loan Losses Methodology
To determine the adequacy of the allowance for loan losses, a formal
analysis is completed quarterly to assess the risk within the loan portfolio.
This assessment, conducted by lending officers and each bank's loan
administration department, as well as an independent holding company credit
review function, includes analyses of historical performance, past due trends,
the level of nonperforming loans, reviews of certain impaired loans, loan
activity since the previous quarter, consideration of current economic
conditions, and other pertinent information. Each loan is assigned a rating,
either individually or as part of a homogeneous pool, based on an internally
developed rick rating system. The resulting conclusions are reviewed and
approved by senior management.
The allowance for loan losses consists of two main components: the
allocated and unallocated allowances. Both components of the allowance are
available to cover inherent losses in the portfolio. The allocated component of
the allowance is determined by type of loan within the commercial and retail
portfolios. The allocated allowance for commercial loans includes an allowance
for impaired loans which is determined as described in the following paragraph.
Additionally, the allowance for commercial loans includes an allowance for
non-impaired loans which is based on application of loss reserve factors to the
components of the portfolio based on the assigned loan grades. The allocated
allowance for retail loans is generally determined on pools of homogeneous loan
categories. Loss factors applied to these pools are generally based on average
historical losses for the past two years, current delinquency trends, and other
factors. The unallocated component of the allowance is established for losses
that specifically exist in the remainder of the portfolio, but have yet to be
identified. This also compensates for the uncertainty in estimating loan losses.
The unallocated component of the allowance is based upon management's evaluation
of various conditions, the effects of which are not directly considered in the
allocated allowance. These include credit concentrations, recent levels and
trends in delinquencies and nonaccrual loans, new credit products, changes in
lending policies and procedures, changes in personnel, and regional and local
economic conditions.
Considering current information and events regarding the borrowers'
ability to repay their obligations, management considers a loan to be impaired
when the ultimate collectibility of all principal and interest amounts due,
according to the contractual terms of the loan agreement, is in doubt. When a
loan becomes impaired, management calculates the impairment based on the present
value of expected future cash flows discounted at the loan's effective interest
rate. If the loan is collateral dependent, the fair value of the collateral is
used to measure the amount of impairment. The amount of impairment and any
subsequent changes are recorded through a charge to earnings, as an adjustment
to the allowance for loan losses. When management considers a loan, or a portion
thereof, as uncollectible, it is charged against the allowance for loan losses.
A majority of Synovus' impaired loans are collateral dependent. Accordingly,
Synovus has determined the required allowance on these loans based upon fair
value estimates (net of selling costs) of the respective collateral. The
required allowance (or the actual losses) on these impaired loans could differ
significantly if the ultimate fair value of the collateral is significantly
different from the fair value estimates used by Synovus in estimating such
potential losses.
A summary by loan category of loans charged off, recoveries of loans
previously charged off, and additions to the allowance through provision expense
is presented in Table 11.
Allocation of the Allowance for Loan Losses at December 31, 2003
Table 12 shows a five year comparison of the allocation of the
allowance for loan losses. The allocation of the allowance for loan losses is
based on historical data, subjective judgment, and estimates, and therefore is
not necessarily indicative of the specific amounts or loan categories in which
charge-offs may ultimately occur.
At December 31, 2003, the allocated component of the allowance for loan
losses related to commercial real estate construction loans was $39.9 million,
up 50.8% from $26.5 million in 2002. Most of the increase is due to a 26.9%
increase in the related loan balances. Additionally, the allocated allowance in
this category also reflects an increase in the overall risk ratings assigned to
credits in this group based on the current economic environment. As a percentage
of commercial real estate construction loans, the allocated allowance in this
category was 1.01% at December 31, 2003, compared to .85% the previous year-end.
The allowance allocated to credit card loans is based primarily on
previous charge-off experience, as well as current past due levels. At year-end
2003, the allowance allocated to credit card loans was 3.01% of total credit
card loans, compared to 3.69% the previous year-end. The change in the allocated
reserve is due to lower charge-offs and improving past due levels.
Other consumer loans had an allocated allowance of $8.0 million or
1.16% of loans in the respective category at December 31, 2003, compared to $9.6
million or 1.27% at December 31, 2002. In terms of dollars, the allocated
allowance decreased 16.5% while the corresponding loan balance decreased by
8.7%. Most of the growth in the consumer portfolio has been in home equity lines
of credit, which have had minimal losses and past dues. This has lowered the
overall credit risk profile of this segment of our portfolio, resulting in a
decline of the allocated reserve.
The unallocated component of the allowance for loan losses remained
unchanged at .30% at both December 31, 2002 and 2003. Management believes that
this level of unallocated allowance is adequate to provide for probable losses
that are inherent in the loan portfolio and that have not been fully provided
for through the allocated allowance. Factors considered in determining the
adequacy of the unallocated allowance include the economic environment, increase
in concentration in commercial real estate loans, and the continued strong loan
growth in our larger markets. These factors are tempered by the diversification
within the commercial real estate portfolio, the continuing positive performance
within this segment, the knowledge and experience of our commercial lending
staff, and the relationship banking philosophy maintained through our community
bank structure.
F-42
FINANCIAL REVIEW [LOGO]
TABLE 11 ALLOWANCE FOR LOAN LOSSES
DECEMBER 31,
-----------------------------------------------------
(Dollars in thousands) 2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
Allowance for loan losses at beginning of year $199,841 170,769 147,867 127,558 114,109
Allowance for loan losses of acquired/divested 10,534 7,967 6,217 -- 2,928
subsidiaries, net
Loans charged off:
Commercial:
Commercial, financial, and agricultural 37,535 28,338 17,806 11,825 9,457
Real estate - construction 2,918 444 307 482 538
Real estate - mortgage 2,533 1,745 1,294 1,336 1,099
-------- -------- -------- -------- --------
Total commercial 42,986 30,527 19,407 13,643 11,094
-------- -------- -------- -------- --------
Retail:
Real estate - mortgage 2,972 1,375 1,750 2,052 1,598
Consumer loans - credit card 7,631 10,408 11,579 9,961 11,592
Consumer loans - other 10,616 8,951 9,069 6,504 6,159
-------- -------- -------- -------- --------
Total retail 21,219 20,734 22,398 18,517 19,349
-------- -------- -------- -------- --------
Total loans charged off 64,205 51,261 41,805 32,160 30,443
-------- -------- -------- -------- --------
Recoveries on loans previously charged off:
Commercial:
Commercial, financial, and agricultural 3,454 2,512 2,448 2,990 2,594
Real estate - construction 189 50 38 258 45
Real estate - mortgage 325 284 132 357 363
-------- -------- -------- -------- --------
Total commercial 3,968 2,846 2,618 3,605 3,002
-------- -------- -------- -------- --------
Retail:
Real estate - mortgage 330 346 680 945 295
Consumer loans - credit card 1,467 1,554 1,166 895 1,359
Consumer loans - other 2,347 2,293 2,353 2,683 2,301
-------- -------- -------- -------- --------
Total retail 4,144 4,193 4,199 4,523 3,955
-------- -------- -------- -------- --------
Total loans recovered 8,112 7,039 6,817 8,128 6,957
-------- -------- -------- -------- --------
Net loans charged off 56,093 44,222 34,988 24,032 23,486
-------- -------- -------- -------- --------
Provision expense 71,777 65,327 51,673 44,341 34,007
-------- -------- -------- -------- --------
Allowance for loan losses at end of year $226,059 199,841 170,769 147,867 127,558
======== ======== ======== ======== ========
Allowance for loan losses to loans, net of unearned income 1.37% 1.38 1.38 1.38 1.41
======== ======== ======== ======== ========
Ratio of net loans charged off to average loans
outstanding, net of unearned income 0.36% 0.33 0.30 0.24 0.29
======== ======== ======== ======== ========
TABLE 12 ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
DECEMBER 31,
------------------------------------------------------
2003 2002 2001
----------------- --------------- ---------------
(Dollars in thousands) AMOUNT %* AMOUNT %* AMOUNT %*
--------- ----- ------- ----- ------- -----
Commercial:
Commercial, financial, and agricultural $ 66,418 28.1% 67,375 30.2 70,166 32.2
Real estate - construction 39,921 24.1 26,476 21.6 23,368 21.5
Real estate - mortgage 51,140 30.9 40,334 29.8 25,754 25.3
--------- ----- ------- ----- ------- -----
Total commercial 157,479 83.1 134,175 81.6 119,288 79.0
--------- ----- ------- ----- ------- -----
Retail:
Real estate-mortgage 4,032 11.3 3,951 11.8 1,503 12.5
Consumer loans - credit card 7,602 1.5 8,800 1.6 9,803 1.9
Consumer loans - other 8,006 4.3 9,590 5.2 15,268 6.8
--------- ----- ------- ----- ------- -----
Total retail 19,640 17.1 22,341 18.6 26,574 21.2
--------- ----- ------- ----- ------- -----
Unearned income (0.2) (0.2) (0.2)
Unallocated 48,940 43,325 24,907
--------- ----- ------- ----- ------- -----
Total allowance for loan losses $ 226,059 100.0% 199,841 100.0 170,769 100.0
========= ===== ======= ===== ======= =====
DECEMBER 31,
--------------------------------
2000 1999
-------------- ---------------
(Dollars in thousands) AMOUNT %* AMOUNT %*
-------- ----- -------- -----
Commercial:
Commercial, financial, and agricultural 58,034 34.9 54,011 33.2
Real estate - construction 13,410 22.4 3,380 19.8
Real estate - mortgage 18,488 21.7 9,324 21.9
------- ----- -------- -----
Total commercial 89,932 79.0 66,715 74.9
------- ----- -------- -----
Retail:
Real estate-mortgage 2,160 11.0 1,634 12.0
Consumer loans - credit card 11,320 2.2 11,877 2.6
Consumer loans - other 14,613 8.0 20,200 10.6
------- ----- -------- -----
Total retail 28,093 21.2 33,711 25.2
------- ----- -------- -----
Unearned income (0.2) (0.1)
Unallocated 29,842 27,132
------- ----- -------- -----
Total allowance for loan losses 147,867 100.0 127,558 100.0
======= ===== ======== =====
* Loan balance in each category, expressed as a percentage of total loans.
F-43
FINANCIAL REVIEW [LOGO]
NONPERFORMING ASSETS AND PAST DUE LOANS
Nonperforming assets consist of loans classified as nonaccrual or
restructured, and real estate acquired through foreclosure. Accrual of interest
on loans is discontinued when reasonable doubt exists as to the full collection
of interest or principal, or when they become contractually in default for 90
days or more as to either interest or principal, unless they are both
well-secured and in the process of collection. Nonaccrual loans consist of those
loans on which recognition of interest income has been discontinued. Loans may
be restructured as to rate, maturity, or other terms as determined on an
individual credit basis. Demand and time loans, whether secured or unsecured,
are generally placed on nonaccrual status when principal and/or interest is 90
days or more past due, or earlier if it is known or expected that the collection
of all principal and/or interest is unlikely. Loans past due 90 days or more,
which based on a determination of collectibility are accruing interest, are
classified as past due loans. Nonaccrual loans are reduced by the direct
application of interest and principal payments to loan principal, for accounting
purposes only. Table 13 presents the amount of interest income that would have
been recorded on non-performing loans if those loans had been current and
performing in accordance with their original terms.
Nonperforming assets increased $2.6 million to $95.9 million with the
corresponding nonperforming asset ratio decreasing to .58% as of December 31,
2003 compared to .64% as of year-end 2002. The largest increases in
non-performing loans during 2003 include a $7.9 million hotel loan in Florida
and a $3.6 million increase related to a loan for a company in the manufacturing
and trucking industries. These increases were partially offset by other large
decreases in non-performing loans. The largest decreases in non-performing loans
during 2003 were a $5.2 million loan on a recreational facility in South
Carolina, which has been foreclosed, and a $5.2 million commercial development
loan in Florida. Other real estate increased by $1.9 million during 2003. The
single largest increase was the aforementioned $5.2 million recreational
facility property, which was partially offset by a $2.9 million decrease in an
agricultural real estate property.
As a percentage of total loans outstanding, loans 90 days past due and
still accruing interest decreased from prior year levels to .13% at December 31,
2003, compared to .21% at year-end 2002. 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. Impaired loans at
December 31, 2003 and 2002 are $101.8 million and $87.7 million, respectively.
Management continuously monitors nonperforming, impaired, and past due
loans, to prevent further deterioration regarding the condition of these loans.
Management is not aware of any material loans classified for regulatory purposes
as loss, doubtful, substandard, or special mention that have been excluded from
nonperforming assets or impaired loans. Management further believes
nonperforming assets and impaired loans include all material loans in which
doubts exist as to the collectibility of amounts due according to the
contractual terms of the loan agreement.
TABLE 13 NONPERFORMING ASSETS AND PAST DUE LOANS
DECEMBER 31,
---------------------------------------------------
(Dollars in thousands) 2003 2002 2001 2000 1999
----------- ------- ------- ------- -------
Nonperforming loans (a) $ 67,442 66,736 51,586 41,709 27,924
Other real estate 28,422 26,517 15,867 13,898 6,718
----------- ------- ------- ------- -------
Nonperforming assets $ 95,864 93,253 67,453 55,607 34,642
=========== ======= ======= ======= =======
Loans 90 days past due and still accruing:
Total outstanding $ 21,138 30,192 27,134 33,587 16,878
=========== ======= ======= ======= =======
As a % of loans 0.13% 0.21 0.22 0.31 0.19
=========== ======= ======= ======= =======
Allowance for loan losses $ 226,059 199,841 170,769 147,867 127,558
=========== ======= ======= ======= =======
Allowance for loan losses as a % of loans 1.37% 1.38 1.38 1.38 1.41
=========== ======= ======= ======= =======
As a % of loans and other real estate:
Nonperforming loans 0.41% 0.46 0.41 0.39 0.31
Other real estate 0.17 0.18 0.13 0.13 0.07
----------- ------- ------- ------- -------
Nonperforming assets 0.58% 0.64 0.54 0.52 0.38
=========== ======= ======= ======= =======
Allowance for loan losses to nonperforming loans 335.19% 299.45 331.04 354.52 456.80
=========== ======= ======= ======= =======
Interest income on nonperforming loans that would have been reported for
the years ended December 31, 2003, 2002, and 2001 is summarized as follows:
2003 2002 2001
------- ----- -----
Interest at contractual rates (b) $ 4,547 3,921 6,550
Less interest recorded as income 1,884 1,455 3,593
------- ----- -----
Reduction of interest income $ 2,663 2,466 2,957
======= ===== =====
(a) Nonperforming assets exclude loans 90 days past due and still accruing
interest.
(b) Interest income that would have been recorded if the loans had been
current and performing in accordance with their original terms.
F-44
FINANCIAL REVIEW [LOGO]
Table 14 shows the composition of the loan portfolio and non-performing
loans classified by loan type as of December 31, 2003 and 2002. The commercial
real estate category is further segmented into the various property types
determined in accordance with the purpose of the loans.
At December 31, 2003, commercial real estate (CRE) loans represent
55.0% of the total portfolio, while CRE non-performing loans represent 39.4% or
$26.6 million of total non-performing loans. Only one of the credits in the CRE
non-performing loan category exceeded the $2.0 million level. This credit was a
$7.9 million hotel loan in Florida.
Commercial and industrial non-performing loans represent 49.6% or $33.5
million of total non-performing loans at December 31, 2003. The three largest
credits included in this amount are a $6.5 million loan to an Atlanta waste
management company, $5.3 million in loans to a company in the manufacturing and
trucking industries, and a $2.8 million loan to a company in the trucking and
transportation industry.
TABLE 14
DECEMBER 31, 2003 DECEMBER 31, 2002
------------------------------ ------------------------------
NONPERFORMING NONPERFORMING
LOANS AS A LOANS AS A
LOANS AS PERCENTAGE LOANS AS PERCENTAGE
A PERCENTAGE OF TOTAL A PERCENTAGE OF TOTAL
OF TOTAL LOANS NONPERFORMING OF TOTAL LOANS NONPERFORMING
OUTSTANDING LOANS OUTSTANDING LOANS
-------------- ------------- -------------- -------------
COMMERCIAL REAL ESTATE
Multi-Family 3.1% 1.4 2.6 -
Hotels 4.5 11.7 4.5 -
Office Buildings 3.8 1.6 4.1 1.3
Shopping Centers 2.8 1.2 3.5 0.7
Commercial Development 2.8 1.8 2.9 10.1
-------- -------- --------- --------
TOTAL INVESTMENT PROPERTIES 17.0 17.7 17.6 12.1
-------- -------- --------- --------
1-4 Family Construction 5.0 2.1 4.7 1.5
1-4 Family Perm / Mini-Perm 3.9 5.2 3.6 1.9
Residential Development 4.5 3.1 3.6 1.4
-------- -------- --------- --------
TOTAL 1-4 FAMILY PROPERTIES 13.4 10.4 11.9 4.8
LAND ACQUISITION 4.7 0.2 3.5 0.6
-------- -------- --------- --------
TOTAL INVESTMENT-RELATED R/E 35.1 28.3 33.0 17.5
-------- -------- --------- --------
OWNER-OCCUPIED 11.6 8.6 11.6 9.2
OTHER PROPERTY 8.3 2.5 6.8 3.4
-------- -------- --------- --------
TOTAL COMMERCIAL REAL ESTATE 55.0 39.4 51.4 30.1
COMMERCIAL & INDUSTRIAL 28.1 49.6 30.2 59.1
CONSUMER 17.1 11.0 18.6 10.8
UNEARNED INCOME (0.2) - (0.2) -
-------- -------- --------- --------
TOTAL 100.0% 100.0 100.0 100.0
======== ======== ========= ========
TABLE 15 AVERAGE DEPOSITS
DECEMBER 31,
----------------------------------------------------------
(Dollars in thousands) 2003 %* 2002 %* 2001 %*
----------- ----- ---------- ----- ---------- -----
Non-interest bearing demand deposits.. $ 2,501,539 16.6 1,983,131 15.4 1,693,911 14.9
Interest bearing demand deposits...... 2,515,161 16.7 2,035,917 15.8 1,654,570 14.6
Money market accounts................. 3,695,601 24.6 3,058,174 23.7 2,354,665 20.7
Savings deposits...................... 502,246 3.3 446,205 3.5 419,074 3.7
Time deposits under $100,000.......... 2,399,371 15.9 2,415,506 18.8 2,608,502 23.0
Time deposits $100,000 and over....... 3,448,900 22.9 2,930,885 22.8 2,621,459 23.1
----------- ----- ---------- ----- ---------- -----
Total average deposits............. $15,062,818 100.0 12,869,818 100.0 11,352,181 100.0
=========== ===== ========== ===== ========== =====
* Average deposits balance in each category expressed as percentage of total
average deposits.
DEPOSITS
Deposits provide the most significant funding source for interest
earning assets. Table 15 shows the relative composition of average deposits for
2003, 2002, and 2001. Refer to Table 16 for the maturity distribution of time
deposits of $100,000 or more. These larger deposits represented 22.4% and 22.6%
of total deposits at December 31, 2003 and 2002, respectively. Large
denomination time deposits are generally from customers within the local market
areas of subsidiary banks, and, therefore, provide a greater degree of stability
than is typically associated with this source of funds. Synovus also utilizes
national market brokered deposits as a funding source while continuing to
maintain and grow its local market large denomination time deposit base. Time
deposits over $100,000 at December 31, 2003, 2002, and 2001 were $3.6 billion,
$3.2 billion, and $2.7 billion, respectively. Interest expense for the years
ended December 31, 2003, 2002, and 2001, on these large denomination deposits
was $94.2 million, $102.1 million, and $144.9 million, respectively.
In 2003, Synovus continued to focus on growing in-market core deposits,
particularly money market, NOW, and non-interest bearing demand deposits with
the objective of reducing the overall cost of funds. During 2003, average
deposits increased $2.2 billion or 17.0%, to $15.1 billion from $12.9 billion in
2002. Average interest bearing deposits for 2003, which include interest bearing
demand deposits, money market accounts, savings deposits, and time deposits,
increased $1.7 billion or 15.4% from 2002. Average non-interest bearing demand
deposits increased $518.4 million or 26.1% during 2003. Average interest bearing
deposits increased $1.2 billion or 12.7% from 2001 to 2002, while average
non-interest bearing demand deposits increased $289.2 million, or 17.1%. See
Table 3 for further information on average deposits, including the average rates
paid in 2003, 2002, and 2001.
TABLE 16 MATURITY DISTRIBUTION OF TIME DEPOSITS OF $100,000 OR MORE
(In thousands) DECEMBER 31, 2003
-----------------
3 months or less................. $ 792,374
Over 3 months through 6 months... 532,258
Over 6 months through 12 months.. 876,134
Over 12 months................... 1,367,978
-----------
Total outstanding.............. $ 3,568,744
===========
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FINANCIAL REVIEW [LOGO]
MARKET RISK AND INTEREST RATE SENSITIVITY
Market risk reflects the risk of economic loss resulting from adverse
changes in market prices and interest rates. This risk of loss can be reflected
in either diminished current market values or reduced current and potential net
income. Synovus' primary market risk is interest rate risk.
Managing interest rate risk is a primary goal of the asset/liability
management function. Synovus attempts to achieve consistent growth in net
interest income while limiting volatility arising from changes in interest
rates. Synovus seeks to accomplish this goal by balancing the maturity and
repricing characteristics of assets and liabilities along with the selective use
of derivative instruments.
Simulation modeling is the primary tool used by Synovus to measure its
interest rate sensitivity. On at least a quarterly basis, the following
twenty-four month time period is simulated to determine a baseline net interest
income forecast and the sensitivity of this forecast to changes in interest
rates. These simulations include all of the Company's earning assets,
liabilities and derivative instruments. Forecasted balance sheet changes,
primarily reflecting loan and deposit growth forecasts prepared by each banking
affiliate, are included in the periods modeled. The magnitude and velocity of
rate changes among the various asset and liability groups exhibit different
characteristics for each possible interest rate scenario; additionally, customer
loan and deposit preferences can vary in response to changing interest rates.
Simulation modeling enables Synovus to capture the effect of these differences.
Simulation also enables Synovus to capture the effect of expected prepayment
level changes on selected assets and liabilities subject to prepayment.
Synovus maintains policies designed to limit the maximum acceptable
negative impact on net interest income over twelve and twenty-four month time
horizons from a gradual change in short-term interest rates of up and down 200
basis points. These policies specify the maximum allowable negative change in
net interest income in the rising and declining rate scenarios from the stable
rate scenarios. The current policy limits this change to 5% of projected net
interest income for the twelve-month time horizon and 7% for the twenty-four
month time horizon.
Short-term interest rates remained at historically record-low levels
during 2003, with the targeted federal funds rate averaging 1.12% for the year
and the prime bank lending rate averaging 4.12% for the year. These rates ended
the year at 1% and 4%, respectively, as a result of the Federal Reserve's 25
basis point policy reduction in June of 2003. Synovus has modeled its exposure
to a further 100 basis point gradual decline in the prime rate to 3%. In this
scenario, net interest income for 2004 would be expected to decrease by
approximately 2.9% as compared to an unchanged interest rate environment. In a
gradually rising rate environment, Synovus would expect 2004 net interest income
to increase, as compared to an unchanged interest rate environment. These
increases would be approximately 2.3% for a gradual 100 basis point increase and
5.5% for a gradual 200 basis point increase. The actual realized change in net
interest income would depend on several factors. These factors include, but are
not limited to, actual realized growth in asset and liability volumes, as well
as the mix experienced over these time horizons. Market conditions and their
resulting impact on loan, deposit, and wholesale funding pricing would also be a
primary determinant in the realized level of net interest income.
Synovus also utilizes simulation modeling to evaluate the longer-term
interest rate risk position of the Company. Synovus measures this position by
simulating the market value of equity in changing rate environments. The model
estimates the impact of an immediate 200 basis point rate shock on the present
value of the future cash flows of all assets, liabilities, and derivative
instruments. Synovus maintains a policy guideline limiting the maximum allowable
change in the market value of equity in both rising and declining rate shocks.
This policy limits the maximum allowable change to an amount equal to 15% of
shareholders' equity. Synovus was within this guideline at year-end.
TABLE 17 TWELVE MONTH NET INTEREST INCOME SENSITIVITY
CHANGE IN CHANGE IN
SHORT-TERM NET
INTEREST RATE INTEREST
(IN BASIS POINTS) INCOME
----------------- ---------
+ 200 5.5%
+ 100 2.3%
- 100 (2.9)%
Another tool utilized by management is cumulative gap analysis, which
seeks to measure the repricing differentials, or gap, between rate sensitive
assets and liabilities over various time periods. Table 18 reflects the gap
positions of the consolidated balance sheets at December 31, 2003 and 2002, at
various repricing intervals. The projected deposit repricing volumes reflect
adjustments based on management's assumptions of the expected rate sensitivity
relative to the prime rate for core deposits without contractual maturity (i.e.,
interest bearing checking, savings, and money market accounts). Management
believes that these adjustments allow for a more accurate profile of the
interest rate risk position. The projected repricing of investment securities
reflects expected prepayments on mortgage-backed securities and expected cash
flows on securities subject to accelerated redemption options. These assumptions
are made based on the interest rate environment as of each balance sheet date,
and are subject to change as the general level of interest rates change.
Management would anticipate a lengthening of average investment maturities in a
rising rate environment and a shortening in a declining rate environment. While
these potential changes are not depicted in the static gap analysis, simulation
modeling allows for the proper analysis of these and other relevant potential
changes. This gap analysis indicates a cumulative three-month gap of positive
16.4% and a cumulative one-year gap of positive 15.8% as of December 31, 2003.
These gap measurements would indicate an asset sensitive positioning over both
short and longer term time horizons. Realized asset sensitivity would be
expected to be more moderate than that indicated by these gap measurements.
Management believes that adjusted gap analysis is a useful tool for measuring
interest rate risk only when used in conjunction with its simulation model.
Synovus is also subject to market risk in certain of its fee income
business lines. TSYS income and equity can be affected by movement in foreign
currency exchange rates. TSYS maintains several different foreign operations
whose resulting foreign currency translations into U.S. dollars could result in
a negative impact to Synovus' shareholders' equity and/or net income. Financial
management services revenues can be affected by risk in the securities markets,
primarily the equity securities market. A significant portion of the fees in
this unit are determined based upon a percentage of asset values. Weaker
securities markets and lower equity values could have an adverse impact on the
fees generated by these operations. Mortgage banking income is also subject to
market risk. Mortgage loan originations are sensitive to
F-46
FINANCIAL REVIEW [LOGO]
levels of mortgage interest rates and therefore, mortgage revenue could be
negatively impacted during a period of rising interest rates. The extension of
commitments to customers to fund mortgage loans also subjects Synovus to market
risk. This risk is primarily created by the time period between making the
commitment and closing and delivering the loan. Synovus seeks to minimize this
exposure by utilizing various risk management tools, the primary of which are
best efforts commitments and forward sales commitments.
TABLE 18 INTEREST RATE SENSITIVITY
DECEMBER 31, 2003
--------------------------------------
(Dollars in millions) 0-3 4-12 1-5 OVER 5
MONTHS MONTHS YEARS YEARS
---------- ------- ------- -------
Investment securities (*) ................................... $ 465.5 708.1 970.0 352.8
Loans, net of unearned income ............................... 9,460.3 2,320.3 4,066.5 617.8
Mortgage loans held for sale ................................ 133.3 -- -- --
Other ....................................................... 177.3 -- -- --
---------- ------- ------- -------
Interest sensitive assets .............................. 10,236.4 3,028.4 5,036.5 970.6
---------- ------- ------- -------
Deposits .................................................... 4,509.8 3,144.3 4,856.1 597.9
Other borrowings ............................................ 1,686.1 31.9 667.2 504.0
---------- ------- ------- -------
Interest sensitive liabilities ......................... 6,195.9 3,176.2 5,523.3 1,101.9
---------- ------- ------- -------
Interest rate swaps .................................... (887.5) 45.0 570.0 272.5
---------- ------- ------- -------
Interest sensitivity gap ............................. $ 3,153.0 (102.8) 83.2 141.2
========== ======= ======= =======
Cumulative interest sensitivity gap .................. $ 3,153.0 3,050.2 3,133.4 3,274.6
========== ======= ======= =======
Cumulative interest sensitivity gap as a
percentage of total interest sensitive assets ...... 16.4% 15.8 16.3 17.0
========== ======= ======= =======
DECEMBER 31, 2002
-------------------------------------------
0-3 4-12 1-5 OVER 5
MONTHS MONTHS YEARS YEARS
---------- -------- ------- -------
Investment securities (*) ................................. $ 395.8 661.9 912.3 202.8
Loans, net of unearned income ............................. 8,419.3 1,569.4 3,867.8 607.4
Mortgage loans held for sale .............................. 245.9 -- -- --
Other ..................................................... 97.8 -- -- --
---------- -------- ------- -------
Interest sensitive assets ........................... 9,158.8 2,231.3 4,780.1 810.2
---------- -------- ------- -------
Deposits .................................................. 4,196.3 3,440.3 3,612.6 376.2
Other borrowings .......................................... 1,748.1 116.0 533.8 213.2
---------- -------- ------- -------
Interest sensitive liabilities ...................... 5,944.4 3,556.3 4,146.4 589.4
---------- -------- ------- -------
Interest rate swaps ................................. (385.0) 45.0 320.0 20.0
---------- -------- ------- -------
Interest sensitivity gap .......................... $ 2,829.4 (1,280.0) 953.7 240.8
========== ======== ======= =======
Cumulative interest sensitivity gap ............... $ 2,829.4 1,549.4 2,503.1 2,743.9
========== ======== ======= =======
Cumulative interest sensitivity gap as a percentage
of total interest sensitive assets .............. 16.7% 9.1 14.7 16.2
========== ======== ======= =======
(*) Excludes net unrealized gains of $32.8 million and $64.8 million at
December 31, 2003 and 2002, respectively.
DERIVATIVE INSTRUMENTS FOR INTEREST RATE RISK MANAGEMENT
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. The primary instruments utilized by Synovus are interest
rate swaps where Synovus receives a fixed rate of interest and pays a floating
rate tied to either the prime rate or LIBOR. These swaps are utilized to hedge
the variability of cash flows or fair values of on-balance sheet assets and
liabilities.
Interest rate contracts utilized by Synovus include end-user activities
designed as hedges, all of which are linked to specific assets or liabilities as
part of overall interest rate risk management practices. Management believes
that the utilization of these instruments provides greater financial flexibility
and is a very efficient tool for managing interest rate risk.
The notional amount of interest rate swap and floor contracts utilized
by Synovus as part of its overall interest rate risk management activities as of
December 31, 2003 and 2002, was $912.5 million and $425.0 million, respectively.
The notional amounts represent the amount on which calculations of interest
payments to be exchanged are based. Although Synovus is not exposed to credit
risk equal to the notional amounts, there is exposure to potential credit risks
equal to the fair or replacement values of the swaps if the counterparty fails
to perform. This credit risk is normally a very small percentage of the notional
amount and fluctuates as interest rates change. Synovus minimizes this risk by
subjecting the transaction to the same approval process as on-balance sheet
credit activities, by dealing with only highly-rated counterparties, and by
obtaining collateral agreements for exposure above certain predetermined limits.
A summary of these interest rate contracts and their terms at December
31, 2003 and 2002 is shown in Table 19. The fair value
F-47
FINANCIAL REVIEW [LOGO]
(net unrealized gain) of these contracts has been recorded on the consolidated
balance sheets.
During 2003, there were three maturities and five terminations. There
were five maturities and two terminations in 2002. Interest rate contracts
contributed additional net interest income of $13.9 million and an eight basis
point increase in the net interest margin for 2003. For 2002, interest rate
contracts contributed to an increase in net interest income of $12.0 million and
an eight basis point increase to the net interest margin.
TABLE 19 INTEREST RATE CONTRACTS
WEIGHTED NET
WEIGHTED WEIGHTED AVERAGE UNREALIZED
NOTIONAL AVERAGE AVERAGE MATURITY UNREALIZED UNREALIZED GAINS
(Dollars in thousands) AMOUNT RECEIVE RATE PAY RATE (*) IN MONTHS GAINS LOSSES (LOSSES)
--------- ------------ ------------ --------- ---------- ---------- -----------
DECEMBER 31, 2003
RECEIVE FIXED SWAPS:
FAIR VALUE HEDGES ............. $ 342,500 4.36% 1.16% 97 $ 2,087 (2,703) (616)
CASH FLOW HEDGES .............. 570,000 5.43% 4.00% 23 4,637 (1,280) 3,357
--------- ------- ------ -----
TOTAL ......................... $ 912,500 5.03% 2.94% 51 $ 6,724 (3,983) 2,741
========= ======= ====== =====
December 31, 2002
Receive fixed swaps:
Fair value hedges ............. $ 115,000 4.82% 1.34% 40 $ 2,287 (429) 1,858
Cash flow hedges .............. 310,000 6.66% 4.25% 26 6,717 -- 6,717
--------- ------- ------ -----
Total ......................... $ 425,000 6.17% 3.46% 30 $ 9,004 (429) 8,575
========= ======= ====== =====
(*) Variable pay rate based upon contract rates in effect at December 31,
2003 and 2002.
LIQUIDITY
Liquidity represents the availability of funding to meet the needs of
depositors, borrowers, and creditors at a reasonable cost, on a timely basis,
and without adverse consequences. Synovus' strong capital position, solid core
deposit base, and excellent credit ratings are the cornerstones of its liquidity
management activities.
The Synovus Asset/Liability Management Committee actively analyzes and
manages the liquidity position in coordination with its subsidiary banks. These
subsidiaries maintain liquidity in the form of cash on deposit, securities
available for sale, and cash derived from prepayments and maturities of both
their investment and loan portfolios. Liquidity is also enhanced by the
acquisition of new deposits. The subsidiary banks monitor deposit flow and
evaluate alternate pricing structures to retain and grow deposits. Liquidity is
also enhanced by the subsidiary banks' strong reputation in the national deposit
markets. This reputation allows subsidiary banks to issue longer-term
certificates of deposit to enhance their liquidity and funding positions.
Certain Synovus subsidiary banks maintain correspondent banking
relationships with various national and regional financial organizations. These
relationships provide access to short-term borrowings through federal funds
lines, which allows Synovus to meet immediate liquidity needs if required. These
lines total approximately $3.2 billion and are extended at the ongoing
discretion of the correspondent financial institutions. Synovus' strong credit
rating is a primary determinant in the continued availability of these lines.
Should Synovus' credit rating decline to a level below investment grade, these
lines' availability would be significantly diminished. For this reason, Synovus
affiliate banks maintain additional sources of liquidity including
collateralized borrowing accounts with the Federal Reserve Bank.
Synovus serves diverse markets. Some of these are rapidly growing areas
where loan demand outpaces the generation of deposits. However, through loan
participations and federal funds sold among affiliate banks, these loans can be
effectively funded by affiliates having lower local loan demand. Additionally,
lending is focused within the local markets served by Synovus, enabling the
development of comprehensive banking relationships.
Selected Synovus subsidiary banks maintain an additional liquidity
source through their membership in the Federal Home Loan Bank. At year-end 2003,
these banks had access to additional funding of approximately $2.1 billion,
subject to available collateral and Federal Home Loan Bank credit policies,
through utilization of Federal Home Loan Bank advances.
The Parent Company requires cash for various operating needs including
dividends to shareholders, business combinations, capital infusions into
subsidiaries, the servicing of debt, and the payment of general corporate
expenses. The primary source of liquidity for the Parent Company is dividends
and management fees 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 or long-term
borrowings. The Parent Company utilized this capability in February 2003 by
issuing $300 million of ten year maturity subordinated debt. This debt bears a
coupon interest rate of 4.875% and is rated "A-" by Standard & Poors Corp. and
"A3" by Moody's Investor Service. For a complete description of borrowings by
Synovus and its subsidiaries as of December 31, 2003, see Note 8 to the
consolidated financial statements.
The consolidated statements of cash flows detail cash flows from
operating, investing, and financing activities. Net cash provided by operating
activities was $725 million for the year ended December 31, 2003, while
financing activities provided $1.3 billion. Investing activities used $2.1
billion of these amounts, resulting in a net decrease in cash and cash
equivalents of $45.1 million.
Management is not aware of any trends, events, or uncertainties that
will have, or that are reasonably likely to have a material impact on liquidity,
capital resources, or operations. Further, management is not aware of any
current recommendations by regula-
F-48
FINANCIAL REVIEW [LOGO]
tory agencies which, if they were to be implemented, would have such effect.
Table 20 sets forth certain information about contractual cash
obligations at December 31, 2003.
TABLE 20 CONTRACTUAL CASH OBLIGATIONS
PAYMENTS DUE AFTER DECEMBER 31, 2003
-------------------------------------------------------------------------
(In thousands) 1 YEAR OR LESS OVER 1 - 3 YEARS 4 - 5 YEARS AFTER 5 YEARS TOTAL
-------------- ---------------- ----------- ------------- ---------
Long-term debt ......................... $241,434 501,500 277,115 510,749 1,530,798
Capital lease and software obligations.. 15,116 28,659 1,204 -- 44,979
Operating leases ....................... 80,405 138,150 33,084 28,487 280,126
-------- ---------- -------- ------- ---------
Total contractual cash obligations ..... $336,955 668,309 311,403 539,236 1,855,903
======== ========== ========= ======= =========
CAPITAL RESOURCES
Synovus has always placed great emphasis on maintaining a strong
capital base and continues to exceed regulatory capital requirements. Management
is committed to maintaining a capital level sufficient to assure shareholders,
customers, and regulators that Synovus is financially sound, and to enable
Synovus to sustain an appropriate degree of leverage to provide a desirable
level of profitability. Synovus has the ability to generate internal capital
growth sufficient to support the asset growth it has experienced. Total
shareholders' equity of $2.2 billion represented 10.38% of total assets at
December 31, 2003.
The regulatory banking agencies use a risk-adjusted calculation to aid
them in their determination of capital adequacy by weighting assets based on the
credit risk associated with on- and off-balance sheet assets. The majority of
these risk-weighted assets for Synovus are on-balance sheet assets in the form
of loans. A small portion of risk-weighted assets are considered off-balance
sheet assets and primarily consist of letters of credit and loan commitments
that Synovus enters into in the normal course of business. Capital is
categorized into two types: Tier I and Tier II. As a financial holding company,
Synovus and its subsidiary banks are required to maintain capital levels
required for a well-capitalized institution, as defined in the regulations. The
regulatory agencies define a well-capitalized bank as one that has a leverage
ratio of at least 5%, a Tier I capital ratio of at least 6%, and a total
risk-based capital ratio of at least 10%. At December 31, 2003, Synovus and all
subsidiary banks were in excess of the minimum capital requirements with a
consolidated Tier I capital ratio of 10.43% and a total risk-based capital ratio
of 13.06%, compared to Tier I and total risk-based capital ratios of 11.38% and
12.53%, respectively, in 2002 as shown in Table 21.
In addition to the risk-based capital standards, a minimum leverage
ratio of 4% is required for the highest-rated financial holding companies that
are not undertaking significant expansion programs. An additional 1% to 2% may
be required for other companies, depending upon their regulatory ratings and
expansion plans. The leverage ratio is defined as Tier I capital divided by
quarterly average assets, net of certain intangibles. Synovus had a leverage
ratio of 10.09% at December 31, 2003 and 10.86% at December 31, 2002,
significantly exceeding regulatory requirements.
Capital levels also exceed all requirements under the Federal Reserve
Board's guidelines. The Federal Reserve Board requires a minimum primary capital
ratio of 5.50% and a total capital ratio of 6.00% for financial holding
companies and banks. At December 31, 2003, the primary and total capital ratios
as defined by the Federal Reserve Board were 10.83% and 12.33%, respectively,
compared to 11.51% for both the primary and total capital ratios at year-end
2002.
TABLE 21 CAPITAL RATIOS
DECEMBER 31,
-----------------------------
(Dollars in thousands) 2003 2002
------------ ------------
Tier I capital:
Shareholders' equity $ 2,245,039 $ 2,040,853
Net unrealized gain on
investment securities available
for sale (20,436) (40,160)
Net unrealized gain on
cash flow hedges (2,319) (5,090)
Disallowed intangibles (286,205) (120,524)
Disallowed deferred tax asset (3,918) --
Deferred tax liability on core
deposit
premium related to acquisitions 7,303 2,476
Minority interest 141,838 117,099
Qualifying trust preferred securities 10,453 --
------------ ------------
Total Tier I capital 2,091,755 1,994,654
------------ ------------
Tier II capital:
Qualifying subordinated debt 300,000 --
Eligible portion of the allowance
for loan losses 226,059 199,841
Eligible portion of unrealized
gain on equity securities -- 1,157
------------ ------------
Total Tier II capital 526,059 200,998
------------ ------------
Total risk-based capital $ 2,617,814 2,195,652
============ ============
Total risk-adjusted assets $ 20,051,309 17,528,329
============ ============
Tier I capital ratio 10.43% 11.38
Total risk-based capital ratio 13.06 12.53
Leverage ratio 10.09 10.86
Regulatory minimums
(for well-capitalized status):
Tier I capital ratio 6.00%
Total risk-based capital ratio 10.00
Leverage ratio 5.00
The 81% ownership of TSYS is an important aspect of the market price of
Synovus common stock and should be considered
F-49
FINANCIAL REVIEW [LOGO]
in a comparison of the relative market price of Synovus common stock to other
financial services companies. As of February 17, 2004, there were approximately
29,827 shareholders of record of Synovus common stock, some of which are holders
in nominee name for the benefit of a number of different shareholders. Table 22
displays high and low stock price quotations of Synovus common stock which are
based on actual transactions.
TABLE 22 MARKET AND STOCK PRICE INFORMATION
HIGH LOW
---- ---
2003
QUARTER ENDED DECEMBER 31, 2003 ............ $ 29.04 25.99
QUARTER ENDED SEPTEMBER 30, 2003 ........... 26.69 21.35
QUARTER ENDED JUNE 30, 2003 ................ 23.62 17.31
QUARTER ENDED MARCH 31, 2003 ............... 20.88 17.89
2002
Quarter ended December 31, 2002 ............ $ 21.90 16.81
Quarter ended September 30, 2002 ........... 27.01 20.17
Quarter ended June 30, 2002 ................ 30.39 24.31
Quarter ended March 31, 2002 ............... 31.74 24.75
DIVIDENDS
It is Synovus' objective to pay out at least one-third of earnings to
shareholders in cash dividends. The dividend payout ratio was 51.56%, 48.76%,
and 48.57% in 2003, 2002, and 2001, respectively. Cash dividends have been paid
on the common stock of Synovus (including its predecessor companies) in every
year since 1891. It is the present intention of the Synovus Board of Directors
to continue to pay cash dividends on its common stock in accordance with the
previously mentioned objective. Table 23 presents the declared and paid dates
for recent dividends, as well as per share dividend amounts.
TABLE 23 DIVIDENDS
PER SHARE
DATE DECLARED DATE PAID AMOUNT
------------- --------- ------
2003
NOVEMBER 20, 2003 JANUARY 2, 2004 $0.1650
AUGUST 20, 2003 OCTOBER 1, 2003 0.1650
JUNE 10, 2003 JULY 1, 2003 0.1650
MARCH 4, 2003 APRIL 1, 2003 0.1650
2002
November 20, 2002 January 2, 2003 $0.1475
August 19, 2002 October 1, 2002 0.1475
June 11, 2002 July 1, 2002 0.1475
February 27, 2002 April 1, 2002 0.1475
COMMITMENTS AND CONTINGENCIES
Synovus believes it has sufficient capital, liquidity, and future cash
flows from operations to meet operating needs over the next year. Table 24 and
Note 8, to the consolidated financial statements provide additional information
on short-term and long-term borrowings.
In the normal course of its business, TSYS maintains processing
contracts with its clients. These processing contracts contain commitments,
including, but not limited to, minimum standards and time frames against which
its performance is measured. In the event TSYS does not meet its contractual
commitments with its clients, TSYS may incur penalties and/or certain customers
may have the right to terminate their contracts with TSYS. TSYS does not believe
that it will fail to meet its contractual commitments to an extent that will
result in a material adverse effect on its financial condition or results of
operations.
Synovus and its subsidiaries are subject to various legal proceedings
and claims that arise in the ordinary course of its business. In the opinion of
management, based in part upon the advice of legal counsel, all matters are not
quantifiable, are believed to be adequately covered by insurance, or if not
covered, are believed to be without merit or are of such kind or involve such
amounts that would not have a material adverse effect on the financial position,
results of operations or cash flows of Synovus if disposed of unfavorably.
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. Sections 3729-33, in
connection with mailings made on behalf of the client from July 1997 through
November 2001. Although the exact scope of the investigation is not clear, TSYS
believes that the subject matter of the investigation relates to the U.S. Postal
Service's Move Update Requirements. In general, the Postal Service's Move Update
Requirements are designed to reduce the volume of mail that is returned to
sender as undeliverable as addressed. In effect, these requirements provide,
among other things, various procedures that may be utilized to maintain the
accuracy of mailing lists in exchange for discounts on postal rates. TSYS has
received a subpoena from the Office of the Inspector General of the U.S. Postal
Service, and has produced documents responsive to the subpoena, and expects to
provide further documentation to the government in connection with this
investigation. TSYS intends to fully cooperate with the Department of Justice in
the investigation and there can be no assurance as to the timing or outcome of
the investigation, including whether the investigation will result in any
criminal or civil fines, penalties, judgments or treble damage or other claims
against TSYS. TSYS is not in a position to estimate whether or not any loss may
arise out of this investigation. As a result, no reserve or accrual has been
recorded in TSYS or Synovus' financial statements relating to this matter.
SHORT-TERM BORROWINGS
The following table sets forth certain information regarding federal
funds purchased and securities sold under repurchase agreements, the principal
components of short-term borrowings.
TABLE 24 SHORT-TERM BORROWINGS
(In thousands) 2003 2002 2001
---- ---- ----
Balance at December 31 ......... $1,354,887 1,275,084 1,345,822
Weighted average interest
rate at December 31 .......... 0.93% 1.20% 1.67%
Maximum month end
balance during the year ...... $1,459,818 1,493,466 1,551,534
Average amount outstanding
during the year .............. $1,101,216 1,131,455 1,153,878
Weighted average interest
rate during the year ........ 1.07% 1.65% 3.70%
INCOME TAX EXPENSE
Income tax expense was $222.6 million in 2003, up from $198.5 million
in 2002, and $178.4 million in 2001. The effective income tax rate was 36.4%,
35.2%, and 36.4%, in 2003, 2002, and 2001, respectively. See Note 16 to the
consolidated financial statements for a detailed analysis of income taxes.
F-50
FINANCIAL REVIEW [LOGO]
INFLATION
Inflation has an important impact on the growth of total assets in the
banking industry and may create a need to increase equity capital at higher than
normal rates in order to maintain an appropriate equity to assets ratio. Synovus
has been able to maintain a high level of equity through retention of an
appropriate percentage of its net income. Synovus deals with the effects of
inflation by managing its interest rate sensitivity gap position through its
asset/liability management program and by periodically adjusting its pricing of
services and banking products to take into consideration current costs.
PARENT COMPANY
The Parent Company's assets, primarily its investment in subsidiaries,
are funded, for the most part, by shareholders' equity. It also utilizes
short-term and long-term debt. The Parent Company is responsible for providing
the necessary funds to strengthen the capital of its subsidiaries, acquire new
businesses, fund internal growth, pay corporate operating expenses, and pay
dividends to its shareholders. These operations are funded by dividends and fees
received from subsidiaries, and borrowings from outside sources.
In connection with dividend payments to the Parent Company from its
subsidiary banks, certain rules and regulations of the various state and federal
banking regulatory agencies limit the amount of dividends which may be paid.
Approximately $224.4 million in dividends could be paid in 2004 to the Parent
Company from its subsidiary banks without prior regulatory approval. Synovus
anticipates receiving regulatory approval to allow certain subsidiaries to pay
dividends in excess of their respective regulatory limits.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement No. 143 (SFAS No. 143), "Accounting for Asset Retirement Obligations."
SFAS No. 143 requires Synovus to record the fair value of an asset retirement
obligation as a liability in the period in which it incurs a legal obligation
associated with the retirement of tangible long-lived assets that result from
the acquisition, construction, development, and/or normal use of the assets. It
also requires that a corresponding asset be recorded which is depreciated over
the life of the asset. Subsequent to the initial measurement of the asset
retirement obligation, the obligation will be adjusted at the end of each period
to reflect the passage of time and changes in the estimated future cash flows
underlying the obligation. Synovus adopted SFAS No. 143 on January 1, 2003. The
adoption of SFAS No. 143 did not have a material effect on Synovus' financial
condition or results of operations.
In June 2002, the FASB issued Statement No. 146 (SFAS No. 146),
"Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146
addresses financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No.
94-3 (EITF No. 94-3), "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity." The provisions of this statement
were effective for exit or disposal activities initiated after December 31,
2002. The adoption of SFAS No. 146 on January 1, 2003 did not have a material
impact on Synovus' financial condition or results of operations.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an interpretation of FASB Statements No.
5, 57, and 107 and a rescission of FASB Interpretation No. 34". This
interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees
issued. Interpretation No. 45 also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of the
interpretation were applicable to guarantees issued or modified after December
31, 2002. The disclosure requirements were effective for financial statements of
interim or annual periods ended after December 15, 2002. The adoption of
Interpretation No. 45 did not have a material effect on Synovus' financial
condition or results of operations.
At the November 21, 2002 meeting of the FASB's EITF, the EITF ratified
as a consensus the tentative conclusions it reached at its October 25, 2002
meeting, regarding EITF Issue No. 00-21 (EITF No. 00-21), "Accounting for
Revenue Arrangements with Multiple Deliverables". EITF No. 00-21 addresses
certain aspects of the accounting by a vendor for arrangements under which it
will perform multiple revenue-generating activities. Those activities may
involve the delivery or performance of multiple products, services, and/or
rights to use assets, and performance may occur at different points in time or
over different periods of time. The arrangements are often accompanied by
initial installation, initiation, or activation services, and generally involve
either a fixed fee or a fixed fee coupled with a continuing payment stream. The
continuing payment stream generally corresponds to the continuing performance,
and may be fixed, variable based on future performance, or composed of a
combination of fixed and variable payments. EITF No. 00-21 addresses how to
account for those arrangements, and was effective for revenue arrangements
entered into in fiscal periods beginning after June 15, 2003. Entities may also
elect to report the change in accounting as a cumulative effect adjustment, in
which case disclosure should be made in periods subsequent to the date of
initial application of the amount of recognized revenue that was previously
included in the cumulative effect adjustment. The adoption of EITF No. 00-21 did
not significantly impact Synovus' financial condition or results of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities, an interpretation of ARB No. 51". In December
2003, the FASB issued Interpretation No. 46R, a revision of Interpretation No.
46. Interpretation No. 46R addresses the consolidation by business enterprises
of variable interest entities as defined in the interpretation. The
interpretation applies to variable interests in variable interest entities that
are special purpose entities for periods ending after December 15, 2003. For all
other types of variable interest entities, application of Interpretation No. 46R
is required for periods ending after March 15, 2004. For TSYS, which had a
variable interest in a variable interest entity that was a special purpose
entity, the interpretation would have applied in the first reporting period
ending after December 15, 2003. On June 30, 2003, TSYS terminated the operating
lease agreement and purchased the corporate campus for $93.5 million with a
combination of $73.3 million in cash and funds from a long-term line of credit
with a Synovus affiliate bank. Accordingly, the interpretation does not directly
impact Synovus' financial statements.
In April 2003, the FASB issued Statement No. 149 (SFAS No. 149),
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities".
SFAS No. 149 amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 149 is generally
effective for contracts entered into or modified after June 30, 2003, and for
hedging relationships designated after June 30, 2003. The adoption of SFAS No.
149 did not have a material impact on Synovus' financial statements.
In May 2003, the FASB issued Statement No. 150 (SFAS No. 150),
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity". SFAS No. 150 establishes standards for how an issuer
classifies and measures
F-51
FINANCIAL REVIEW [LOGO]
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. SFAS No. 150 is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003, except for mandatorily redeemable financial
instruments of nonpublic entities. Currently, the only impact of adopting SFAS
No. 150 has been the requirement to reclassify the $17.5 million in
company-obligated mandatory redeemable capital securities of subsidiary trusts
as liabilities beginning with the third quarter of 2003.
2004 EARNINGS OUTLOOK
Synovus expects its earnings per share growth for 2004 to be within the
8-10% range, based in part upon the following assumptions:
- Continued improvement in credit quality, resulting in a net
charge-off ratio of approximately 0.30% for the year and a
non-performing assets ratio in the 0.45-0.55% range by year
end.
- The net interest margin will remain stable in a flat rate
environment.
- Loan growth of 10-12%.
- TSYS' net income growth of 5% to 7%.
SHARE REPURCHASE PLAN
On April 14, 2003, the Synovus board of directors approved a $200
million share repurchase plan. Through December 31, 2003, 5.5 million shares
have been purchased under this plan at a total cost of $112.7 million.
Consistent with the expectation at the inception of the plan, Synovus
repurchased one-half of the total authorization during the first 90 days after
the plan was approved. The pace of future repurchases under this two-year plan
will depend on various factors including price, market conditions, acquisitions,
and the general financial position of Synovus.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Annual Report which are not statements of
historical fact constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act (the "Act"). These forward-looking
statements include, among others, statements regarding management's belief
concerning the adequacy of the allowance for loan losses; TSYS' belief with
respect to its ability to meet its contractual commitments; management's belief
with respect to legal proceedings and other claims; any matter that might arise
out of the United States Department of Justice's investigation of TSYS; TSYS'
belief with respect to its growth opportunities; management's belief with
respect to the economic and interest rate environments and their impact on
Synovus; management's belief with respect to the adequacy of the unallocated
component of the allowance for loan losses; management's belief with respect to
the resolution of certain loan delinquencies and the inclusion of all material
loans in which doubt exists as to collectibility in nonperforming assets and
impaired loans; management's belief with respect to the use of derivatives to
manage interest rate risk; the Board of Directors' present intent to continue to
pay cash dividends; management's belief with respect to having sufficient
capital, liquidity, and future cash flows from operations to meet operating
needs over the next year; Synovus' expected growth in earnings per share for
2004 and the assumptions underlying such statements, including, with respect to
Synovus' expected increase in earnings per share for 2004; continued improvement
in credit quality, resulting in a net charge-off ratio of approximately 0.30%
for the year and a non-performing assets ratio in the 0.45-0.55% range by year
end; a stable net interest margin in a flat rate environment; loan growth of
10-12% in 2004; and TSYS' net income growth for 2004 within the 5-7% range. In
addition, certain statements in future filings by Synovus with the Securities
and Exchange Commission, in press releases, and in oral and written statements
made by or with the approval of Synovus which are not statements of historical
fact constitute forward-looking statements 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 the Annual Report. Many of these factors are
beyond Synovus' ability to control or predict. These factors include, but are
not limited to: (i) Synovus' inability to achieve a net charge-off ratio of
0.30% for 2004, a non-performing assets ratio in the 0.45-0.55% range by year
end 2004, a stable net interest margin and loan growth of 10-12% in 2004; (ii)
TSYS' inability to achieve its net income goals for 2004; (iii) the strength of
the U.S. economy in general and the strength of the local economies in which
operations are conducted; (iv) the effects of and changes in trade, monetary and
fiscal policies, and laws, including interest rate policies of the Federal
Reserve Board; (v) inflation, interest rate, market and monetary fluctuations;
(vi) the timely development of and acceptance of new products and services and
perceived overall value of these products and services by users; (vii) changes
in consumer spending, borrowing, and saving habits; (viii) technological changes
are more difficult or expensive than anticipated; (ix) acquisitions are more
difficult to integrate than anticipated; (x) the ability to increase market
share and control expenses; (xi) the effect of changes in laws and regulations
(including laws and regulations concerning taxes, banking, securities, and
insurance) with which Synovus and its subsidiaries must comply; (xii) the effect
of changes in accounting policies and practices, as may be adopted by the
regulatory agencies, the Financial Accounting Standards Board, or other
authoritative bodies; (xiii) changes in Synovus' organization, compensation, and
benefit plans; (xiv) the costs and effects of litigation or adverse facts and
developments related thereto; (xv) a deterioration in credit quality or a
reduced demand for credit; (xvi) Synovus' inability to successfully manage any
impact from slowing economic conditions or consumer spending; (xvii) the
occurrence of catastrophic events that could impact Synovus or TSYS or its major
customers' operating facilities, communication systems and technology or that
have a material negative impact on current economic conditions or levels of
consumer spending; (xviii) successfully managing the potential both for patent
protection and patent liability in the context of rapidly developing legal
framework for expansive software patent protection; (xix) hostilities increase
in the Middle East or elsewhere; and (xx) the success of Synovus at managing the
risks involved in the foregoing.
Such forward-looking statements speak only as of the date on which such
statements are made, and Synovus undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made to reflect the occurrence of unanticipated events.
F-52
SUMMARY OF QUARTERLY FINANCIAL DATA [LOGO]
Presented below is a summary of the unaudited consolidated quarterly financial
data for the years ended December 31, 2003 and 2002.
(In thousands, except per share data)
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
2003
INTEREST INCOME ...................... $264,745 266,248 270,742 259,757
======== ======= ======= =======
NET INTEREST INCOME .................. 197,431 193,113 190,937 181,583
======== ======= ======= =======
PROVISION FOR LOSSES ON LOANS ........ 19,800 15,108 16,565 20,304
======== ======= ======= =======
INCOME BEFORE INCOME TAXES ........... 160,912 157,722 152,468 140,399
======== ======= ======= =======
NET INCOME ........................... 102,639 100,000 96,367 89,919
======== ======= ======= =======
NET INCOME PER SHARE, BASIC .......... .34 .33 .32 .30
======== ======= ======= =======
NET INCOME PER SHARE, DILUTED ........ .34 .33 .32 .30
======== ======= ======= =======
2002
Interest income ...................... $269,146 269,144 258,677 258,073
======== ======= ======= =======
Net interest income .................. 186,607 182,939 175,341 172,617
======== ======= ======= =======
Provision for losses on loans ........ 15,830 16,410 19,978 13,109
======== ======= ======= =======
Income before income taxes ........... 157,352 143,855 133,471 129,202
======== ======= ======= =======
Net income ........................... 104,428 92,272 85,895 82,752
======== ======= ======= =======
Net income per share, basic .......... .35 .31 .29 .28
======== ======= ======= =======
Net income per share, diluted ........ .35 .31 .29 .28
======== ======= ======= =======
F-53
APPENDIX 1
SYNOVUS FINANCIAL CORP.
Post Office Box 120, Columbus, Georgia 31902-0120
ANNUAL MEETING OF SHAREHOLDERS TO BE HELD APRIL 22, 2004
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
By signing on the reverse side, I hereby appoint Thomas J. Prescott and Liliana
McDaniel as Proxies, each of them singly and each with power of substitution,
and hereby authorize them to represent and to vote as designated below all the
shares of common stock of Synovus Financial Corp. held on record by me or with
respect to which I am entitled to vote on February 17, 2004 at the Annual
Meeting of Shareholders to be held on April 22, 2004 or any adjournment or
postponement thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED BY THE UNDERSIGNED.
IF THIS PROXY IS SIGNED AND RETURNED AND DOES NOT SPECIFY A VOTE ON ANY
PROPOSAL, THE PROXY WILL BE VOTED IN ACCORDANCE WITH THE RECOMMENDATIONS OF THE
BOARD OF DIRECTORS.
The Board of Directors is not aware of any matters likely to be presented for
action at the Annual Meeting of Shareholders other than the matters listed
herein. However, if any other matters are properly brought before the Annual
Meeting, the persons named in this Proxy or their substitutes will vote upon
such other matters in accordance with their best judgement. This Proxy is
revocable at any time prior to its use.
By signing on the reverse side, I acknowledge receipt of NOTICE of the ANNUAL
MEETING and the PROXY STATEMENT and hereby revoke all Proxies previously given
by me for the ANNUAL MEETING.
IN ADDITION TO VOTING AND SIGNING THE PROXY, YOU MUST ALSO COMPLETE AND SIGN THE
CERTIFICATION TO BE ENTITLED TO TEN VOTES PER SHARE.
Address Change/Comments (Mark the corresponding box on the reverse side)
*FOLD AND DETACH HERE*
IF YOU DO NOT VOTE BY PHONE OR OVER THE INTERNET,
PLEASE VOTE, DATE AND SIGN ON THE REVERSE SIDE AND RETURN PROMPTLY
IN THE ENCLOSED ENVELOPE.
Please sign exactly as your name appears on this Proxy. When shares are held by
joint tenants, both must sign. When signing in a fiduciary or representative
capacity, give your full title as such. If a corporation, please sign in full
corporate name by an authorized officer. If a partnership, please sign in full
partnership name by an authorized person.
PROXY CERTIFICATE OF Mark Here [ ]
BENEFICIAL OWNER for Address
Change or
Comments
THE BOARD OF DIRECTORS RECOMMENDS A INSTRUCTIONS:Please provide the required
VOTE FOR THE PROPOSALS LISTED BELOW. information. THIS CERTIFICATE MUST BE
SIGNED TO BE VALID. If you do not com-
1. Proposal to elect as directors plete and sign this Certificate of Bene-
to serve until the Annual ficial Owner, your shares covered by the
Meeting of Shareholders in 2007. Proxy to the left will be voted on the
basis of one vote per share.
(01) James H. Blanchard Yes No
(02) C. Edward Floyd A. Are you the beneficial owner, [ ] [ ]
(03) Gardiner W. Garrard, Jr. in all capacities, of more than
(04) V. Nathaniel Hansford 1,139,063 shares of Synovus Common
(05) Alfred W. Jones III Stock?
(06) H. Lynn Page
(07) James D. Yancey If you answered "No" to Question A,
do not answer B or C. Your shares
Proposal to elect as directors represented by the Proxy to the left
to serve until the Annual Meeting are entitled to ten votes per share.
of Shareholders in 2006.
(08) Frank W. Brumley Yes No
(09) Elizabeth W. Camp B. If your answer to question A [ ] [ ]
(10) T. Michael Goodrich was "Yes", have you acquired
(11) J. Neal Purcell more than 1,139,063 shares of
(12) William B. Turner, Jr. Synovus Common Stock since
February 17, 2000 (including
With- For all shares received as a stock dividend)?
For hold Except If you answered "No" to Question B,
[ ] [ ] [ ] do not answer Question C. Your shares
represented by the Proxy to the left
INSTRUCTION: To withhold authority to are entitled to ten votes per share.
vote for any individual nominee, mark
the "For All Except" box and strike a C. If you answered "Yes" to Question B,
line through that nominee's name in the please describe the date and nature
list above. Your shares will be voted of your acquisition of all shares of
for the remaining nominee(s). Synovus Common Stock you have
acquired since February 17, 2000
2. To ratify the appointment of (including shares acquired as a
KPMG LLP as Synovus' independent result of a stock dividend). Your re-
auditor. sponse to Question C will determine
which of the shares represented by
For Against Abstain the Proxy will be entitled to ten
[ ] [ ] [ ] votes per share.
To the best of my knowledge and belief,
the information provided herein is true
and correct. I understand that the
Board of Directors of Synovus Financial
Corp. may require me to provide
additional information or evidence to
document my beneficial ownership of
Consenting to receive all future these shares and I agree to provide
annual meeting materials and share- such evidence if so requested.
holder communications electronically
is simple and fast! Enroll today at
www.melloninvestor.com/ISD for
secure online access to your proxy
materials, statements, tax documents
and other important shareholder
correspondence.
NOTE BOTH SIGNATURE LINES ARE REQUIRED WHEN CERTIFYING YOUR SHARES.
Shareholder sign here__________________ Date____________ Shareholder sign here__________________ Date____________
Co-owner sign here_____________________ Date____________ Co-owner sign here_____________________ Date____________
Sign here to Vote your shares Sign here to Certify your shares
*FOLD AND DETACH HERE*
________________________________________________________________________________
Vote by Internet or Telephone or Mail
24 Hours a Day, 7 Days a Week
Internet and telephone voting is available through 11:59PM Eastern Time
the day prior to annual meeting day.
Your Internet or telephone vote authorizes the named proxies to vote your shares
in the same manner as if you marked, signed and returned your proxy card.
Internet Telephone Mail
http://www.eproxy.com/snv 1-800-435-6710
Use the Internet to vote your Use any touch-tone tele- Mark, sign and
proxy. Have your proxy card phone to vote your proxy. date your proxy
in hand when you access Have your proxy card in card and return
the website. OR hand when you call. OR it in the
enclosed postage-
paid envelope.
If you vote your proxy by Internet or by telephone,
you do NOT need to mail back your proxy card.
You can view the Annual Report and Proxy Statement
on the Internet at www.synovus.com/annual2003