In order for a shareholder proposal to be considered for inclusion in Synovus’ Proxy Statement for the 20072008 Annual Meeting of Shareholders, the written proposal must be received by the Corporate Secretary of Synovus at the address below. The Corporate Secretary must receive the proposal no later than November 24, 2006.2007. The proposal will also need to comply with the SEC’s
Synovus Financial Corp.
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 24, 20062007 and not later than February 7, 2007.2008. 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.
Financial Information
A copy of Synovus’ 2005 2006Form 10-K will be furnished, without charge, by writing to the Corporate Secretary, Synovus Financial Corp., 1111 Bay Avenue, Suite 500, Columbus, Georgia 31901. TheForm 10-K is also available on Synovus’ home page on the Internet at www.synovus.com. Click on “Investor Relations,” “Financial Reports” 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 theirout-of-pocket expenses for forwarding proxy materials to beneficial owners.
53
Householding
The Securities and Exchange Commission has adopted amendments to itsCommission’s 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 20062007 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:
| | |
| • | Only one annual reportAnnual Report and proxy statementProxy 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 reportAnnual Report and proxy statementProxy Statement for the 20062007 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 reportsAnnual Reports or proxy statementsProxy 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.
| |
| |
|
| Richard E. Anthony |
| President and Chief Executive Officer |
Richard E. Anthony
Chairman of the Board and
Chief Executive Officer
March 24, 200623, 2007
54
40
APPENDIX A
SYNOVUS FINANCIAL CORP.
DIRECTOR INDEPENDENCE STANDARDS
The following independence standards have been approved by the Board of Directors and are included within Synovus’ Corporate Governance Guidelines.
A majority of the Board of Directors will be independent directors who meet the criteria for independence required by the NYSE. The Corporate Governance and Nominating Committee will make recommendations to the Board annually as to the independence of directors as defined by the NYSE. To be considered independent under the NYSE Listing Standards, the Board must determine that a director does not have any direct or indirect material relationship with the Company. The Board has established the following standards to assist it in determining director independence. A director is not independent if:
| | |
| • | The director is, or has been within the last three years, an employee of the Company or an immediate family member is, or has been within the last three years, an executive officer of the Company. |
|
| • | The director has received, or has an immediate family member who has received, during any twelve-month period within the last three years, more than $100,000 in direct compensation from the Company, other than director and committee fees and pension or other forms of deferred compensation for prior service (provided such compensation is not contingent in any way on continued service). (Compensation received by an immediate family member for service as an employee of the Company (other than an executive officer) is not taken into consideration under this independence standard). |
|
| • | (A) The director or an immediate family member is a current partner of a firm that is the Company’s internal or external auditor; (B) the director is a current employee of such a firm; (C) the director has an immediate family member who is a current employee of such a firm and who participates in the firm’s audit, assurance or tax compliance (but not tax planning) practice; or (D) the director or an immediate family member was within the last three years (but is no longer) a partner or employee of such a firm and personally worked on the Company’s audit within that time. |
|
| • | The director or an immediate family member is, or has been within the last three years, employed as an executive officer of another company where any of the Company’s present executive officers at the same time serves or served on that company’s compensation committee. |
|
| • | The director is a current employee, or an immediate family member is a current executive officer, of a company that has made payments to, or received payments from, the Company for property or services in an amount which, in any of the last three fiscal years, exceeds the greater of $1 million, or 2% of such other company’s consolidated gross revenues. |
The following relationships will not be considered to be material relationships that would impair a director’s independence:
| | |
| • | The director is a current employee, or an immediate family member of the director is a current executive officer, of a company that has made payments to, or received payments from, the Company for property or services (including financial services) in an amount which, in the prior fiscal year, is less than the greater of $1 million, or 2% of such other company’s consolidated gross revenues. (In the event this threshold is exceeded, and where applicable in the standards set forth below, the three year “look back” period referenced above will apply to future independence determinations). |
|
| • | The director or an immediate family member of the director is a partner of a law firm that provides legal services to the Company and the fees paid to such law firm by the Company |
A-1
A-1
| | |
| | in the prior fiscal year were less than the greater of $1 million, or 2% of the law firm’s total revenues. |
| | |
| • | The director or an immediate family member of the director is an executive officer of a tax exempt organization and the Company’s contributions to the organization in the prior fiscal year were less than the greater of $1 million, or 2% of the organization’s consolidated gross revenues. |
|
| • | The director received less than $100,000 in direct compensation from the Company during the prior twelve month period, other than director and committee fees and pension or other forms of deferred compensation for prior service (provided such compensation is not contingent in any way on continued service). |
|
| • | The director’s immediate family member received in his or her capacity as an employee of the Company (other than as an executive officer of the Company), less than $250,000 in direct compensation from the Company in the prior fiscal year, other than director and committee fees and pension or other forms of deferred compensation for prior service (provided such compensation is not contingent in any way on continued service). |
|
| • | The director or an immediate family member of the director has, directly, in his or her individual capacities, or, indirectly, in his or her capacity as the owner of an equity interest in a company of which he or she is not an employee, lending relationships, deposit relationships or other banking relationships (such as depository, trusts and estates, private banking, investment banking, investment management, custodial, securities brokerage, insurance, cash management and similar services) with the Company provided that: |
| | |
| 1) | Such relationships are in the ordinary course of business of the Company and are on substantially the same terms as those prevailing at the time for comparable transactions with non-affiliated persons; and |
|
| 2) | With respect to extensions of credit by the Company’s subsidiaries: |
1) Such relationships are in the ordinary course of business of the Company and are on substantially the same terms as those prevailing at the time for comparable transactions with non-affiliated persons; and
2) With respect to extensions of credit by the Company’s subsidiaries:
| | |
| (a) | such extensions of credit have been made in compliance with applicable law, including Regulation O of the Board of Governors of the Federal Reserve, Sections 23A and 23B of the Federal Reserve Act and Section 13(k) of the Securities Exchange Act of 1934; and |
|
| (b) | no event of default has occurred under the extension of credit. |
(b) no event of default has occurred under the extension of credit.
For relationships not described above or otherwise not covered in the above examples, a majority of the Company’s independent directors, after considering all of the relevant circumstances, may make a determination whether or not such relationship is material and whether the director may therefore be considered independent under the NYSE Listing Standards. The Company will explain the basis of any such determinations of independence in the next proxy statement.
For purposes of these independence standards an “immediate family member” includes a person’s spouse, parents, children, siblings, mothers andfathers-in-law, sons anddaughters-in-law, brothers andsisters-in-law, and anyone (other than domestic employees) who shares such person’s home.
For purposes of these independence standards “Company” includes any parent or subsidiary in a consolidated group with the Company.
A-2
A-2
APPENDIX B
SYNOVUS FINANCIAL CORP.
DIRECTOR ELECTION BY MAJORITY VOTE GUIDELINES
The following director election by majority vote guidelines have been approved by the Board of Directors and are included within Synovus’ Corporate Governance Guidelines.
In an uncontested election, any nominee for director who receives a greater number of votes “withheld” from his or her election than votes “for” such election (a “Majority Withheld Vote”) will promptly tender his or her resignation following certification of the shareholder vote.
The Corporate Governance and Nominating Committee will promptly consider the resignation offer and recommend to the Board whether to accept or reject it, including rejecting the resignation on the condition that the underlying cause of the withheld votes be cured. In considering whether to accept the resignation, the Corporate Governance and Nominating Committee will consider all factors deemed relevant by members of the Corporate Governance and Nominating Committee, including, without limitation, the stated reasons why shareholders “withheld” votes for election from such director, the length of service and qualifications of the director whose resignation has been tendered, the director’s contribution to the Company and the Company’s Corporate Governance Guidelines.
The Board will act on the Corporate Governance and Nominating Committee’s recommendation no later than 90 days following certification of the shareholder vote. In considering the Corporate Governance and Nominating Committee’s recommendation, the Board will consider the factors considered by the Corporate Governance and Nominating Committee and such additional information and factors the Board believes to be relevant.
The Company will promptly disclose the Board’s decision whether to accept the director’s resignation offer (providing a full explanation of the process by which the decision was reached and the reasons for rejecting the resignation offer, if applicable) in aForm 8-K filed with the Securities and Exchange Commission.
To the extent that one or more directors’ resignations are accepted by the Board, the Corporate Governance and Nominating Committee will recommend to the Board whether to fill such vacancy or vacancies or to reduce the size of the Board.
Any director who tenders his or her resignation pursuant to this provision will not participate in the Corporate Governance and Nominating Committee recommendation or Board action regarding whether to accept the resignation offer.
If a majority of the members of the Corporate Governance and Nominating Committee received a Majority Withheld Vote at the same election, then the independent directors who did not receive a Majority Withheld Vote will appoint a committee amongst themselves to consider the resignation offers and recommend to the Board whether to accept or reject them. This Board committee may, but need not, consist of all of the independent directors who did not receive a Majority Withheld Vote or those independent directors who were not standing for election.
This corporate governance guideline will be summarized or included in each proxy statement relating to an election of directors of the Company.
B-1
B-1
| | | | |
2005 | | | F-2 | |
|
2004 | | | F-3 | |
|
2004 | | | F-4 | |
|
2004 | | | F-5 | |
|
| | | F-6 | |
|
| | | F-40F-46 | |
|
| | | F-41F-47 | |
|
| | | F-42F-48 | |
|
| | | F-43F-49 | |
|
| | | F-44F-50 | |
|
(Unaudited) | | | F-82F-91 | |
F-1
Consolidated Balance Sheets
| | | | | | | | | | | | | | | | | | | | |
| | | | |
(In thousands, except share data) | (In thousands, except share data) | | | (In thousands, except share data) | | |
| | | December 31, | | | | December 31, | |
| | | | | | | | |
| | | 2005 | | | 2004 | | | | 2006 | | | 2005 | |
| | | | | | | | | | | | | | |
ASSETS | ASSETS | | | | | | | | ASSETS | | | | | | | |
Cash and due from banks, including $49,659 and $36,977 in 2005 and 2004, respectively, on deposit to meet Federal Reserve requirements | | $ | 880,886 | | | 683,035 | | |
Cash and due from banks, including $41,337 and $49,659 in 2006 and 2005, respectively, on deposit to meet Federal Reserve requirements | | Cash and due from banks, including $41,337 and $49,659 in 2006 and 2005, respectively, on deposit to meet Federal Reserve requirements | | $ | 889,975 | | | 880,886 | |
Interest earning deposits with banks | Interest earning deposits with banks | | | 2,980 | | | 4,153 | | Interest earning deposits with banks | | | 19,389 | | | 2,980 | |
Federal funds sold and securities purchased under resale agreements | Federal funds sold and securities purchased under resale agreements | | | 68,922 | | | 135,471 | | Federal funds sold and securities purchased under resale agreements | | | 101,091 | | | 68,922 | |
Trading account assets (note 3) | Trading account assets (note 3) | | | 27,322 | | | — | | Trading account assets (note 3) | | | 15,266 | | | 27,322 | |
Mortgage loans held for sale | Mortgage loans held for sale | | | 143,144 | | | 120,186 | | Mortgage loans held for sale | | | 175,042 | | | 143,144 | |
Investment securities available for sale (note 4) | Investment securities available for sale (note 4) | | | 2,958,320 | | | 2,695,593 | | Investment securities available for sale (note 4) | | | 3,352,357 | | | 2,958,320 | |
| | |
Loans, net of unearned income (note 5) | Loans, net of unearned income (note 5) | | | 21,392,347 | | | 19,480,396 | | Loans, net of unearned income (note 5) | | | 24,654,552 | | | 21,392,347 | |
Allowance for loan losses (note 5) | Allowance for loan losses (note 5) | | | (289,612 | ) | | | (265,745 | ) | Allowance for loan losses (note 5) | | | (314,459 | ) | | | (289,612 | ) |
| | | | | | | | | | | | |
| | Loans, net | | | 21,102,735 | | | 19,214,651 | | | Loans, net | | | 24,340,093 | | | 21,102,735 | |
| | | | | | | | | | | | |
Premises and equipment, net | Premises and equipment, net | | | 669,425 | | | 638,407 | | Premises and equipment, net | | | 752,738 | | | 669,425 | |
Contract acquisition costs and computer software, net (note 6) | Contract acquisition costs and computer software, net (note 6) | | | 431,849 | | | 401,074 | | Contract acquisition costs and computer software, net (note 6) | | | 383,899 | | | 431,849 | |
Goodwill, net (notes 2 and 18) | Goodwill, net (notes 2 and 18) | | | 458,382 | | | 416,283 | | Goodwill, net (notes 2 and 18) | | | 669,515 | | | 458,382 | |
Other intangible assets, net (notes 2 and 7) | Other intangible assets, net (notes 2 and 7) | | | 44,867 | | | 41,628 | | Other intangible assets, net (notes 2 and 7) | | | 63,586 | | | 44,867 | |
Other assets (notes 7 and 17) | Other assets (notes 7 and 17) | | | 831,840 | | | 699,697 | | Other assets (notes 7 and 17) | | | 1,091,822 | | | 831,840 | |
| | | | | | | | | | | | |
| | Total assets | | $ | 27,620,672 | | | 25,050,178 | | | Total assets | | $ | 31,854,773 | | | 27,620,672 | |
| | | | | | | | | | | | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | |
Liabilities: | Liabilities: | | | | | | | | Liabilities: | | | | | | | |
| Deposits: | | | | | | | | Deposits: | | | | | | | |
| | Non-interest bearing retail and commercial deposits | | $ | 3,700,750 | | | 3,337,908 | | | Non-interest bearing retail and commercial deposits | | $ | 3,538,598 | | | 3,700,750 | |
| | Interest bearing retail and commercial deposits (note 8) | | | 14,798,845 | | | 12,948,523 | | | Interest bearing retail and commercial deposits (note 8) | | | 17,741,354 | | | 14,798,845 | |
| | | | | | | | | | | | |
| | Total retail and commercial deposits | | | 18,499,595 | | | 16,286,431 | | | Total retail and commercial deposits | | | 21,279,952 | | | 18,499,595 | |
| | Brokered time deposits (note 8) | | | 2,284,770 | | | 2,291,037 | | | Brokered time deposits (note 8) | | | 3,014,495 | | | 2,284,770 | |
| | | | | | | | | | | | |
| | Total deposits | | | 20,784,365 | | | 18,577,468 | | | Total deposits | | | 24,294,447 | | | 20,784,365 | |
| Federal funds purchased and securities sold under repurchase agreements (note 9) | | | 1,158,669 | | | 1,208,080 | | Federal funds purchased and securities sold under repurchase agreements (note 9) | | | 1,572,809 | | | 1,158,669 | |
| Long-term debt (note 9) | | | 1,933,638 | | | 1,879,583 | | Long-term debt (note 9) | | | 1,350,139 | | | 1,933,638 | |
| Other liabilities (note 17) | | | 597,698 | | | 576,474 | | Other liabilities (note 17) | | | 692,019 | | | 597,698 | |
| | | | | | | | | | | | |
| | Total liabilities | | | 24,474,370 | | | 22,241,605 | | | Total liabilities | | | 27,909,414 | | | 24,474,370 | |
| | | | | | | | | | | | |
Minority interest in consolidated subsidiaries | Minority interest in consolidated subsidiaries | | | 196,973 | | | 167,284 | | Minority interest in consolidated subsidiaries | | | 236,709 | | | 196,973 | |
Shareholders’ equity (notes 2, 13, and 15): | Shareholders’ equity (notes 2, 13, and 15): | | | | | | | | Shareholders’ equity (notes 2, 13, and 15): | | | | | | | |
| Common stock — $1.00 par value. Authorized 600,000,000 shares; issued 318,301,275 in 2005 and 315,636,047 in 2004; outstanding 312,639,737 in 2005 and 309,974,509 in 2004 | | | 318,301 | | | 315,636 | | Common stock — $1.00 par value. Authorized 600,000,000 shares; issued 331,213,913 in 2006 and 318,301,275 in 2005; outstanding 325,552,375 in 2006 and 312,639,737 in 2005 | | | 331,214 | | | 318,301 | |
| Surplus | | | 686,447 | | | 628,396 | | Additional paid-in capital | | | 1,033,055 | | | 686,447 | |
| Treasury stock — 5,661,538 shares | | | (113,944 | ) | | | (113,944 | ) | Treasury stock, at cost — 5,661,538 shares | | | (113,944 | ) | | | (113,944 | ) |
| Unearned compensation | | | (3,126 | ) | | | (106 | ) | Unearned compensation | | | — | | | (3,126 | ) |
| Accumulated other comprehensive income (loss) | | | (29,536 | ) | | | 8,903 | | Accumulated other comprehensive loss (note 1) | | | (2,129 | ) | | | (29,536 | ) |
| Retained earnings | | | 2,091,187 | | | 1,802,404 | | Retained earnings (note 1) | | | 2,460,454 | | | 2,091,187 | |
| | | | | | | | | | | | |
| | Total shareholders’ equity | | | 2,949,329 | | | 2,641,289 | | | Total shareholders’ equity | | | 3,708,650 | | | 2,949,329 | |
| | | | | | | | | | | | |
Commitments and contingencies (note 12) | Commitments and contingencies (note 12) | | | | | | | | Commitments and contingencies (note 12) | | | | | | | |
| | Total liabilities and shareholders’ equity | | $ | 27,620,672 | | | 25,050,178 | | | Total liabilities and shareholders’ equity | | $ | 31,854,773 | | | 27,620,672 | |
| | | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
F-2
Consolidated Statements of Income
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | |
(In thousands, except per share data) | (In thousands, except per share data) | | | (In thousands, except per share data) | | |
| | | Years Ended December 31, | | | | Years Ended December 31, | |
| | | | | | | | |
| | | 2005 | | | 2004 | | | 2003 | | | | 2006 | | | 2005 | | | 2004 | |
| | | | | | | | | | | | | | | | | | | | |
Interest income: | Interest income: | | | | | | | | | | | Interest income: | | | | | | | | | | |
| | Loans, including fees | | $ | 1,375,227 | | | 1,051,117 | | | 951,584 | | | Loans, including fees | | $ | 1,859,914 | | | 1,375,227 | | | 1,051,117 | |
| | Investment securities available for sale: | | | | | | | | | | | | Investment securities available for sale: | | | | | | | | | | |
| | U.S. Treasury and U.S. Government agency securities | | | 53,037 | | | 45,184 | | | 50,959 | | | U.S. Treasury and U.S. Government agency securities | | | 69,834 | | | 53,037 | | | 45,184 | |
| | Mortgage-backed securities | | | 40,287 | | | 38,731 | | | 29,345 | | | Mortgage-backed securities | | | 52,469 | | | 40,287 | | | 38,731 | |
| | State and municipal securities | | | 10,072 | | | 10,786 | | | 11,248 | | | State and municipal securities | | | 9,208 | | | 10,072 | | | 10,786 | |
| | Other investments | | | 5,402 | | | 4,644 | | | 3,423 | | | Other investments | | | 6,915 | | | 5,402 | | | 4,644 | |
| | Trading account assets | | | 642 | | | — | | | — | | | Trading account assets | | | 2,691 | | | 642 | | | — | |
| | Mortgage loans held for sale | | | 7,304 | | | 6,581 | | | 13,361 | | | Mortgage loans held for sale | | | 8,638 | | | 7,304 | | | 6,581 | |
| | Federal funds sold and securities purchased under resale agreements | | | 4,082 | | | 1,945 | | | 1,547 | | | Federal funds sold and securities purchased under resale agreements | | | 6,422 | | | 4,082 | | | 1,945 | |
| | Interest earning deposits with banks | | | 172 | | | 32 | | | 25 | | | Interest earning deposits with banks | | | 375 | | | 172 | | | 32 | |
| | | | | | | | | | | | | | | | |
| | Total interest income | | | 1,496,225 | | | 1,159,020 | | | 1,061,492 | | | Total interest income | | | 2,016,466 | | | 1,496,225 | | | 1,159,020 | |
| | | | | | | | | | | | | | | | |
Interest expense: | Interest expense: | | | | | | | | | | | Interest expense: | | | | | | | | | | |
| | Deposits (note 8) | | | 407,305 | | | 216,284 | | | 217,561 | | | Deposits (note 8) | | | 739,949 | | | 407,305 | | | 216,284 | |
| | Federal funds purchased and securities sold under repurchase agreements | | | 31,569 | | | 19,286 | | | 11,830 | | | Federal funds purchased and securities sold under repurchase agreements | | | 71,439 | | | 31,569 | | | 19,286 | |
| | Long-term debt | | | 88,504 | | | 62,771 | | | 69,037 | | | Long-term debt | | | 71,204 | | | 88,504 | | | 62,771 | |
| | | | | | | | | | | | | | | | |
| | Total interest expense | | | 527,378 | | | 298,341 | | | 298,428 | | | Total interest expense | | | 882,592 | | | 527,378 | | | 298,341 | |
| | | | | | | | | | | | | | | | |
| | Net interest income | | | 968,847 | | | 860,679 | | | 763,064 | | | Net interest income | | | 1,133,874 | | | 968,847 | | | 860,679 | |
Provision for losses on loans (note 5) | Provision for losses on loans (note 5) | | | 82,532 | | | 75,319 | | | 71,777 | | Provision for losses on loans (note 5) | | | 75,148 | | | 82,532 | | | 75,319 | |
| | | | | | | | | | | | | | | | |
| | Net interest income after provision for losses on loans | | | 886,315 | | | 785,360 | | | 691,287 | | | Net interest income after provision for losses on loans | | | 1,058,726 | | | 886,315 | | | 785,360 | |
| | | | | | | | | | | | | | | | |
Non-interest income: | Non-interest income: | | | | | | | | | | | Non-interest income: | | | | | | | | | | |
| | Electronic payment processing services | | | 867,914 | | | 755,267 | | | 701,022 | | | Electronic payment processing services | | | 985,868 | | | 867,914 | | | 755,267 | |
| | Merchant services | | | 237,418 | | | 26,169 | | | — | | | Merchant acquiring services | | | 260,275 | | | 237,418 | | | 26,169 | |
| | Other transaction processing services revenue | | | 183,412 | | | 170,905 | | | 120,485 | | | Other transaction processing services | | | 186,394 | | | 183,412 | | | 170,905 | |
| | Service charges on deposit accounts | | | 112,788 | | | 121,450 | | | 107,697 | | | Service charges on deposit accounts | | | 112,417 | | | 109,960 | | | 121,450 | |
| | Fiduciary and asset management fees | | | 44,886 | | | 43,001 | | | 39,377 | | | Fiduciary and asset management fees | | | 47,800 | | | 44,886 | | | 43,001 | |
| | Brokerage and investment banking revenue | | | 24,487 | | | 21,748 | | | 20,461 | | | Brokerage and investment banking income | | | 26,729 | | | 24,487 | | | 21,748 | |
| | Mortgage banking income | | | 28,682 | | | 26,300 | | | 58,633 | | | Mortgage banking income | | | 29,255 | | | 28,682 | | | 26,300 | |
| | Bankcard fees | | | 37,638 | | | 30,174 | | | 25,751 | | | Bankcard fees | | | 44,303 | | | 38,813 | | | 30,174 | |
| | Securities gains, net (note 4) | | | 463 | | | 75 | | | 2,491 | | | Securities (losses) gains, net (note 4) | | | (2,118 | ) | | | 463 | | | 75 | |
| | Other fee income | | | 32,914 | | | 29,227 | | | 23,682 | | | Other fee income | | | 38,743 | | | 34,148 | | | 29,227 | |
| | Other operating income (note 20) | | | 35,597 | | | 67,157 | | | 44,565 | | | Other operating income | | | 52,201 | | | 36,016 | | | 67,157 | |
| | | | | | | | | | | | | | | | |
| Non-interest income before reimbursable items | | | 1,606,199 | | | 1,291,473 | | | 1,144,164 | | Non-interest income before reimbursable items | | | 1,781,867 | | | 1,606,199 | | | 1,291,473 | |
| | Reimbursable items | | | 312,280 | | | 229,538 | | | 225,165 | | | Reimbursable items | | | 351,719 | | | 312,280 | | | 229,538 | |
| | | | | | | | | | | | | | | | |
| | Total non-interest income | | | 1,918,479 | | | 1,521,011 | | | 1,369,329 | | | Total non-interest income | | | 2,133,586 | | | 1,918,479 | | | 1,521,011 | |
| | | | | | | | | | | | | | | | |
Non-interest expense: | Non-interest expense: | | | | | | | | | | | Non-interest expense: | | | | | | | | | | |
| | Salaries and other personnel expense (notes 14 and 15) | | | 836,371 | | | 731,579 | | | 672,248 | | | Salaries and other personnel expense (notes 14 and 15) | | | 974,515 | | | 836,371 | | | 731,579 | |
| | Net occupancy and equipment expense (note 12) | | | 368,210 | | | 321,689 | | | 281,688 | | | Net occupancy and equipment expense (note 12) | | | 414,169 | | | 368,210 | | | 321,689 | |
| | Other operating expenses (note 20) | | | 426,530 | | | 305,560 | | | 243,042 | | | Other operating expenses (note 20) | | | 430,274 | | | 426,530 | | | 305,560 | |
| | | | | | | | | | | | | | | | |
| Non-interest expense before reimbursable items | | | 1,631,111 | | | 1,358,828 | | | 1,196,978 | | Non-interest expense before reimbursable items | | | 1,818,958 | | | 1,631,111 | | | 1,358,828 | |
| | Reimbursable items | | | 312,280 | | | 229,538 | | | 225,165 | | | Reimbursable items | | | 351,719 | | | 312,280 | | | 229,538 | |
| | | | | | | | | | | | | | | | |
| | Total non-interest expense | | | 1,943,391 | | | 1,588,366 | | | 1,422,143 | | | Total non-interest expense | | | 2,170,677 | | | 1,943,391 | | | 1,588,366 | |
| | | | | | | | | | | | | | | | |
Minority interest in subsidiaries’ net income | Minority interest in subsidiaries’ net income | | | 37,381 | | | 28,724 | | | 26,972 | | Minority interest in subsidiaries’ net income | | | 48,102 | | | 37,381 | | | 28,724 | |
| | Income before income taxes | | | 824,022 | | | 689,281 | | | 611,501 | | | Income before income taxes | | | 973,533 | | | 824,022 | | | 689,281 | |
Income tax expense (note 17) | Income tax expense (note 17) | | | 307,576 | | | 252,248 | | | 222,576 | | Income tax expense (note 17) | | | 356,616 | | | 307,576 | | | 252,248 | |
| | | | | | | | | | | | | | | | |
| | Net income | | $ | 516,446 | | | 437,033 | | | 388,925 | | | Net income | | $ | 616,917 | | | 516,446 | | | 437,033 | |
| | | | | | | | | | | | | | | | |
Net income per share (notes 1 and 11): | | | | | | | | | | | |
Net income per share (notes 11 and 15): | | Net income per share (notes 11 and 15): | | | | | | | | | | |
| | Basic | | $ | 1.66 | | | 1.42 | | | 1.29 | | | Basic | | $ | 1.92 | | | 1.66 | | | 1.42 | |
| | | | | | | | | | | | | | | | |
| | Diluted | | | 1.64 | | | 1.41 | | | 1.28 | | | Diluted | | | 1.90 | | | 1.64 | | | 1.41 | |
| | | | | | | | | | | | | | | | |
Weighted average shares outstanding (note 11): | Weighted average shares outstanding (note 11): | | | | | | | | | | | Weighted average shares outstanding (note 11): | | | | | | | | | | |
| | Basic | | | 311,495 | | | 307,262 | | | 302,010 | | | Basic | | | 321,241 | | | 311,495 | | | 307,262 | |
| | | | | | | | | | | | | | | | |
| | Diluted | | | 314,815 | | | 310,330 | | | 304,928 | | | Diluted | | | 324,232 | | | 314,815 | | | 310,330 | |
| | | | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
F-3
Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | |
(In thousands, except per share data) | (In thousands, except per share data) | | | (In thousands, except per share data) | | |
| | | | | Accumulated | | | | | | | | Accumulated | | | |
| | | | | Other | | | | | | | | Additional | | | | | Other | | | |
| | | Shares | | | Common | | | | | Treasury | | | Unearned | | | Comprehensive | | | Retained | | | | | | Shares | | | Common | | | Paid-In | | | Treasury | | | Unearned | | | Comprehensive | | | Retained | | | |
Years ended December 31, 2005, 2004, and 2003 | | Issued | | | Stock | | | Surplus | | | Stock | | | Compensation | | | Income (Loss) | | | Earnings | | | Total | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2002 | | | 300,573 | | $ | 300,573 | | | 305,718 | | | (1,285 | ) | | | (146 | ) | | | 46,113 | | | 1,389,880 | | | 2,040,853 | | |
Net income | | | — | | | — | | | — | | | — | | | — | | | — | | | 388,925 | | | 388,925 | | |
Other comprehensive loss, net of tax (note 10): | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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) | | | 4,641 | | | 4,641 | | | 95,835 | | | — | | | — | | | — | | | — | | | 100,476 | | |
Cash dividends declared - $.66 per share | | | — | | | — | | | — | | | — | | | — | | | — | | | (199,748 | ) | | | (199,748 | ) | |
Amortization of unearned compensation (note 15) | | | — | | | — | | | — | | | — | | | 105 | | | — | | | — | | | 105 | | |
Stock options exercised (note 15) | | | 2,534 | | | 2,534 | | | 25,536 | | | — | | | — | | | — | | | — | | | 28,070 | | |
Stock option tax benefit | | | — | | | — | | | 12,348 | | | — | | | — | | | — | | | — | | | 12,348 | | |
Ownership change at majority-owned subsidiary | | | — | | | — | | | 3,494 | | | — | | | — | | | — | | | — | | | 3,494 | | |
Treasury stock purchases | | | — | | | — | | | — | | | (112,655 | ) | | | — | | | — | | | — | | | (112,655 | ) | |
Issuance of stock options in connection with acquisition | | | — | | | — | | | — | | | — | | | (225 | ) | | | — | | | — | | | (225 | ) | |
Years ended December 31, 2006, 2005, and 2004 | | Years ended December 31, 2006, 2005, and 2004 | | Issued | | | Stock | | | Capital | | | Stock | | | Compensation | | | Income (Loss) | | | Earnings | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2003 | Balance at December 31, 2003 | | | 307,748 | | $ | 307,748 | | | 442,931 | | | (113,940 | ) | | | (266 | ) | | | 29,509 | | | 1,579,057 | | | 2,245,039 | | Balance at December 31, 2003 | | | 307,748 | | $ | 307,748 | | | 442,931 | | | (113,940 | ) | | | (266 | ) | | | 29,509 | | | 1,579,057 | | | 2,245,039 | |
Net income | Net income | | | — | | | — | | | — | | | — | | | — | | | — | | | 437,033 | | | 437,033 | | Net income | | | — | | | — | | | — | | | — | | | — | | | — | | | 437,033 | | | 437,033 | |
Other comprehensive loss, net of tax (note 10): | Other comprehensive loss, net of tax (note 10): | | | | | | | | | | | | | | | | | | | | | | | | | | Other comprehensive loss, net of tax (note 10): | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net unrealized loss on cash flow hedges | | | — | | | — | | | — | | | — | | | — | | | (5,753 | ) | | | — | | | (5,753 | ) | Net unrealized loss on cash flow hedges | | | — | | | — | | | — | | | — | | | — | | | (5,753 | ) | | | — | | | (5,753 | ) |
| Change in unrealized gains/losses on investment securities available for sale, net of reclassification adjustment | | | — | | | — | | | — | | | — | | | — | | | (20,577 | ) | | | — | | | (20,577 | ) | Change in unrealized gains/losses on investment securities available for sale, net of reclassification adjustment | | | — | | | — | | | — | | | — | | | — | | | (20,577 | ) | | | — | | | (20,577 | ) |
| Gain on foreign currency translation | | | — | | | — | | | — | | | — | | | — | | | 5,724 | | | — | | | 5,724 | | Gain on foreign currency translation | | | — | | | — | | | — | | | — | | | — | | | 5,724 | | | — | | | 5,724 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other comprehensive loss | | | — | | | — | | | — | | | — | | | — | | | (20,606 | ) | | | — | | | (20,606 | ) | Other comprehensive loss | | | — | | | — | | | — | | | — | | | — | | | (20,606 | ) | | | — | | | (20,606 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive income | Comprehensive income | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 416,427 | | Comprehensive income | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 416,427 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of common stock for acquisitions (note 2) | Issuance of common stock for acquisitions (note 2) | | | 5,478 | | | 5,478 | | | 151,700 | | | — | | | — | | | — | | | — | | | 157,178 | | Issuance of common stock for acquisitions (note 2) | | | 5,478 | | | 5,478 | | | 151,700 | | | — | | | — | | | — | | | — | | | 157,178 | |
Cash dividends declared - $.69 per share | Cash dividends declared - $.69 per share | | | — | | | — | | | — | | | — | | | — | | | — | | | (213,686 | ) | | | (213,686 | ) | Cash dividends declared - $.69 per share | | | — | | | — | | | — | | | — | | | — | | | — | | | (213,686 | ) | | | (213,686 | ) |
Amortization of unearned compensation (note 15) | Amortization of unearned compensation (note 15) | | | — | | | — | | | — | | | — | | | 160 | | | — | | | — | | | 160 | | Amortization of unearned compensation (note 15) | | | — | | | — | | | — | | | — | | | 160 | | | — | | | — | | | 160 | |
Stock options exercised (note 15) | Stock options exercised (note 15) | | | 2,405 | | | 2,405 | | | 21,060 | | | — | | | — | | | — | | | — | | | 23,465 | | Stock options exercised (note 15) | | | 2,405 | | | 2,405 | | | 21,060 | | | — | | | — | | | — | | | — | | | 23,465 | |
Stock option tax benefit | Stock option tax benefit | | | — | | | — | | | 12,705 | | | — | | | — | | | — | | | — | | | 12,705 | | Stock option tax benefit | | | — | | | — | | | 12,705 | | | — | | | — | | | — | | | — | | | 12,705 | |
Ownership change at majority-owned subsidiary | Ownership change at majority-owned subsidiary | | | — | | | — | | | 5 | | | — | | | — | | | — | | | — | | | 5 | | Ownership change at majority-owned subsidiary | | | — | | | — | | | 5 | | | — | | | — | | | — | | | — | | | 5 | |
Treasury stock purchase | Treasury stock purchase | | | — | | | — | | | — | | | (4 | ) | | | — | | | — | | | — | | | (4 | ) | Treasury stock purchase | | | — | | | — | | | — | | | (4 | ) | | | — | | | — | | | — | | | (4 | ) |
Issuance of common stock under commitment to charitable foundation | Issuance of common stock under commitment to charitable foundation | | | 5 | | | 5 | | | (5 | ) | | | — | | | — | | | — | | | — | | | — | | Issuance of common stock under commitment to charitable foundation | | | 5 | | | 5 | | | (5 | ) | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2004 | Balance at December 31, 2004 | | | 315,636 | | $ | 315,636 | | | 628,396 | | | (113,944 | ) | | | (106 | ) | | | 8,903 | | | 1,802,404 | | | 2,641,289 | | Balance at December 31, 2004 | | | 315,636 | | | 315,636 | | | 628,396 | | | (113,944 | ) | | | (106 | ) | | | 8,903 | | | 1,802,404 | | | 2,641,289 | |
Net income | Net income | | | — | | | — | | | — | | | — | | | — | | | — | | | 516,446 | | | 516,446 | | Net income | | | — | | | — | | | — | | | — | | | — | | | — | | | 516,446 | | | 516,446 | |
Other comprehensive loss, net of tax (note 10): | Other comprehensive loss, net of tax (note 10): | | | | | | | | | | | | | | | | | | | | | | | | | | Other comprehensive loss, net of tax (note 10): | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net unrealized loss on cash flow hedges | | | — | | | — | | | — | | | — | | | — | | | (2,240 | ) | | | — | | | (2,240 | ) | Net unrealized loss on cash flow hedges | | | — | | | — | | | — | | | — | | | — | | | (2,240 | ) | | | — | | | (2,240 | ) |
| Change in unrealized gains/losses on investment securities available for sale, net of reclassification adjustment | | | — | | | — | | | — | | | — | | | — | | | (28,354 | ) | | | — | | | (28,354 | ) | Change in unrealized gains/losses on investment securities available for sale, net of reclassification adjustment | | | — | | | — | | | — | | | — | | | — | | | (28,354 | ) | | | — | | | (28,354 | ) |
| Loss on foreign currency translation | | | — | | | — | | | — | | | — | | | — | | | (7,845 | ) | | | — | | | (7,845 | ) | Loss on foreign currency translation | | | — | | | — | | | — | | | — | | | — | | | (7,845 | ) | | | — | | | (7,845 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other comprehensive loss | | | — | | | — | | | — | | | — | | | — | | | (38,439 | ) | | | — | | | (38,439 | ) | Other comprehensive loss | | | — | | | — | | | — | | | — | | | — | | | (38,439 | ) | | | — | | | (38,439 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive income | Comprehensive income | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 478,007 | | Comprehensive income | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 478,007 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash dividends declared - $.73 per share | Cash dividends declared - $.73 per share | | | — | | | — | | | — | | | — | | | — | | | — | | | (227,663 | ) | | | (227,663 | ) | Cash dividends declared - $.73 per share | | | — | | | — | | | — | | | — | | | — | | | — | | | (227,663 | ) | | | (227,663 | ) |
Issuance of restricted stock (note 15) | Issuance of restricted stock (note 15) | | | 146 | | | 146 | | | 3,807 | | | — | | | (3,953 | ) | | | — | | | — | | | — | | Issuance of restricted stock (note 15) | | | 146 | | | 146 | | | 3,807 | | | — | | | (3,953 | ) | | | — | | | — | | | — | |
Amortization of unearned compensation (note 15) | Amortization of unearned compensation (note 15) | | | — | | | — | | | — | | | — | | | 933 | | | — | | | — | | | 933 | | Amortization of unearned compensation (note 15) | | | — | | | — | | | — | | | — | | | 933 | | | — | | | — | | | 933 | |
Stock options exercised (note 15) | Stock options exercised (note 15) | | | 2,506 | | | 2,506 | | | 40,619 | | | — | | | — | | | — | | | — | | | 43,125 | | Stock options exercised (note 15) | | | 2,506 | | | 2,506 | | | 40,619 | | | — | | | — | | | — | | | — | | | 43,125 | |
Stock option tax benefit | Stock option tax benefit | | | — | | | — | | | 9,505 | | | — | | | — | | | — | | | — | | | 9,505 | | Stock option tax benefit | | | — | | | — | | | 9,505 | | | — | | | — | | | — | | | — | | | 9,505 | |
Ownership change at majority-owned subsidiary | Ownership change at majority-owned subsidiary | | | — | | | — | | | 3,907 | | | — | | | — | | | — | | | — | | | 3,907 | | Ownership change at majority-owned subsidiary | | | — | | | — | | | 3,907 | | | — | | | — | | | — | | | — | | | 3,907 | |
Issuance of common stock for acquisitions (note 2) | Issuance of common stock for acquisitions (note 2) | | | 8 | | | 8 | | | 218 | | | — | | | — | | | — | | | — | | | 226 | | Issuance of common stock for acquisitions (note 2) | | | 8 | | | 8 | | | 218 | | | — | | | — | | | — | | | — | | | 226 | |
Issuance of common stock under commitment to charitable foundation | Issuance of common stock under commitment to charitable foundation | | | 5 | | | 5 | | | (5 | ) | | | — | | | — | | | — | | | — | | | — | | Issuance of common stock under commitment to charitable foundation | | | 5 | | | 5 | | | (5 | ) | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2005 | Balance at December 31, 2005 | | | 318,301 | | $ | 318,301 | | | 686,447 | | | (113,944 | ) | | | (3,126 | ) | | | (29,536 | ) | | | 2,091,187 | | | 2,949,329 | | Balance at December 31, 2005 | | | 318,301 | | | 318,301 | | | 686,447 | | | (113,944 | ) | | | (3,126 | ) | | | (29,536 | ) | | | 2,091,187 | | | 2,949,329 | |
SAB No. 108 adjustment to opening shareholders’ equity (note 1) | | SAB No. 108 adjustment to opening shareholders’ equity (note 1) | | | — | | | — | | | — | | | — | | | — | | | 826 | | | 3,434 | | | 4,260 | |
Postretirement unfunded health benefit obligation from adoption of SFAS No. 158, net of tax (note 1) | | Postretirement unfunded health benefit obligation from adoption of SFAS No. 158, net of tax (note 1) | | | — | | | — | | | — | | | — | | | — | | | (3,212 | ) | | | — | | | (3,212 | ) |
| | | | | | | | | | | | | | | | | | | |
Net Income | | Net Income | | | — | | | — | | | — | | | — | | | — | | | — | | | 616,917 | | | 616,917 | |
Other comprehensive income, net of tax (note 10): | | Other comprehensive income, net of tax (note 10): | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Net unrealized gain on cash flow hedges | | | — | | | — | | | — | | | — | | | — | | | 3,650 | | | — | | | 3,650 | |
| | Change in unrealized gains/losses on investment securities available for sale, net of reclassification adjustment | | | — | | | — | | | — | | | — | | | — | | | 13,268 | | | — | | | 13,268 | |
| | Gain on foreign currency translation | | | — | | | — | | | — | | | — | | | — | | | 12,875 | | | — | | | 12,875 | |
| | | | | | | | | | | | | | | | | | | |
| | Other comprehensive income | | | — | | | — | | | — | | | — | | | — | | | 29,793 | | | — | | | 29,793 | |
| | | | | | | | | | | | | | | | | | | |
Comprehensive income | | Comprehensive income | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 646,710 | |
| | | | | | | | | | | | | | | | | | | |
Cash dividends declared - $.78 per share | | Cash dividends declared - $.78 per share | | | — | | | — | | | — | | | — | | | — | | | — | | | (251,084 | ) | | | (251,084 | ) |
Reclassification of unearned compensation to additional paid-in capital upon adoption of SFAS No. 123(R) | | Reclassification of unearned compensation to additional paid-in capital upon adoption of SFAS No. 123(R) | | | — | | | — | | | (3,126 | ) | | | — | | | 3,126 | | | — | | | — | | | — | |
Issuance of restricted stock (note 15) | | Issuance of restricted stock (note 15) | | | 610 | | | 610 | | | (610 | ) | | | — | | | — | | | — | | | — | | | — | |
Share-based compensation expense (note 15) | | Share-based compensation expense (note 15) | | | — | | | — | | | 23,373 | | | — | | | — | | | — | | | — | | | 23,373 | |
Stock options exercised (note 15) | | Stock options exercised (note 15) | | | 3,459 | | | 3,459 | | | 62,051 | | | — | | | — | | | — | | | — | | | 65,510 | |
Stock option tax benefit | | Stock option tax benefit | | | — | | | — | | | 11,390 | | | — | | | — | | | — | | | — | | | 11,390 | |
Ownership change at majority-owned subsidiary | | Ownership change at majority-owned subsidiary | | | — | | | — | | | 6,031 | | | — | | | — | | | — | | | — | | | 6,031 | |
Issuance of common stock for acquisitions (note 2) | | Issuance of common stock for acquisitions (note 2) | | | 8,844 | | | 8,844 | | | 247,499 | | | — | | | — | | | — | | | — | | | 256,343 | |
| | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2006 | | Balance at December 31, 2006 | | | 331,214 | | $ | 331,214 | | | 1,033,055 | | | (113,944 | ) | | | — | | | (2,129 | ) | | | 2,460,454 | | | 3,708,650 | |
| | | | | | | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
F-4
Consolidated Statements of Cash Flows
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | |
(In thousands) | (In thousands) | | | (In thousands) | | |
| | | Years Ended December 31, | | | | Years Ended December 31, | |
| | | | | | | | |
| | | 2005 | | | 2004 | | | 2003 | | | | 2006 | | | 2005 | | | 2004 | |
| | | | | | | | | | | | | | | | | | | | |
Operating Activities | Operating Activities | | | | | | | | | | | Operating Activities | | | | | | | | | | |
| | Net income | | $ | 616,917 | | | 516,446 | | | 437,033 | |
| | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | |
| | | Provision for losses on loans | | | 75,148 | | | 82,532 | | | 75,319 | |
| | | Depreciation, amortization, and accretion, net | | | 231,288 | | | 193,152 | | | 161,062 | |
| | | Equity in income of equity investments | | | (14,726 | ) | | | (6,135 | ) | | | (23,736 | ) |
| Net income | | $ | 516,446 | | | 437,033 | | | 388,925 | | | Deferred income tax (benefit) expense | | | (44,970 | ) | | | (53,575 | ) | | | 22,401 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | Increase in interest receivable | | | (84,457 | ) | | | (40,853 | ) | | | (16,495 | ) |
| | Provision for losses on loans | | | 82,532 | | | 75,319 | | | 71,777 | | | Increase in interest payable | | | 74,422 | | | 23,363 | | | 3,007 | |
| | Depreciation, amortization, and accretion, net | | | 193,131 | | | 161,062 | | | 112,012 | | | Minority interest in subsidiaries’ net income | | | 48,102 | | | 37,381 | | | 28,724 | |
| | Equity in income of joint ventures | | | (6,135 | ) | | | (23,736 | ) | | | (17,810 | ) | | Decrease (increase) in trading account assets | | | 12,056 | | | (27,322 | ) | | | — | |
| | Deferred income tax (benefit) expense | | | (53,575 | ) | | | 22,401 | | | 26,779 | | | Originations of mortgage loans held for sale | | | (1,550,099 | ) | | | (1,414,357 | ) | | | (1,398,334 | ) |
| | (Increase) decrease in interest receivable | | | (40,853 | ) | | | (16,495 | ) | | | 1,466 | | | Proceeds from sales of mortgage loans held for sale | | | 1,518,554 | | | 1,391,378 | | | 1,410,725 | |
| | Increase (decrease) in interest payable | | | 23,363 | | | 3,007 | | | (4,783 | ) | | Increase in prepaid and other assets | | | (150,668 | ) | | | (80,982 | ) | | | (36,700 | ) |
| | Minority interest in subsidiaries’ net income | | | 37,381 | | | 28,724 | | | 26,972 | | | Increase in accrued salaries and benefits | | | 6,781 | | | 37,953 | | | 36,000 | |
| | Increase in trading account assets | | | (27,322 | ) | | | — | | | — | | | Increase (decrease) in other liabilities | | | (3,741 | ) | | | (26,422 | ) | | | 166,375 | |
| | (Increase) decrease in mortgage loans held for sale | | | (22,958 | ) | | | 13,291 | | | 112,552 | | | Decrease in billings in excess of costs and profits on uncompleted contracts | | | — | | | — | | | (17,573 | ) |
| | Increase in prepaid and other assets | | | (80,982 | ) | | | (36,700 | ) | | | (11,606 | ) | | Net (gains) losses on sales of available for sale investment securities | | | (2,118 | ) | | | 463 | | | 75 | |
| | Increase (decrease) in accrued salaries and benefits | | | 37,953 | | | 36,000 | | | (10,813 | ) | | Gain on sale of loans | | | (1,975 | ) | | | — | | | — | |
| | (Decrease) increase in other liabilities | | | (26,422 | ) | | | 166,375 | | | (31,280 | ) | | Gain on sale of other assets | | | (5,436 | ) | | | — | | | — | |
| | (Decrease) increase in billings in excess of costs and profits on uncompleted contracts | | | — | | | (17,573 | ) | | | 17,573 | | | Gain on sale of banking locations | | | — | | | — | | | (15,849 | ) |
| | Gain on sale of banking locations | | | — | | | (15,849 | ) | | | — | | | Share-based compensation | | | 27,163 | | | 1,999 | | | 55 | |
| | Impairment of developed software | | | 3,619 | | | 10,059 | | | — | | | Impairment of developed software | | | — | | | 3,619 | | | 10,059 | |
| | Other, net | | | (16,462 | ) | | | (46,640 | ) | | | 40,422 | | | Other, net | | | 27,455 | | | (18,924 | ) | | | (45,870 | ) |
| | | | | | | | | | | | | | | | |
| | Net cash provided by operating activities | | | 619,716 | | | 796,278 | | | 722,186 | | | Net cash provided by operating activities | | | 779,696 | | | 619,716 | | | 796,278 | |
| | | | | | | | | | | | | | | | |
Investing Activities | Investing Activities | | | | | | | | | | | Investing Activities | | | | | | | | | | |
| Net cash paid for acquisitions | | | (56,995 | ) | | | (37,172 | ) | | | (66,204 | ) | Net cash paid for acquisitions | | | (53,664 | ) | | | (56,995 | ) | | | (37,172 | ) |
| Net decrease in interest earning deposits with banks | | | 1,173 | | | 70 | | | 632 | | Net (increase) decrease in interest earning deposits with banks | | | (16,409 | ) | | | 1,173 | | | 70 | |
| Net decrease (increase) in federal funds sold and securities purchased under resale agreements | | | 66,549 | | | 34,456 | | | (47,978 | ) | Net (increase) decrease in federal funds sold and securities purchased under resale agreements | | | (27,387 | ) | | | 66,549 | | | 34,456 | |
| Proceeds from maturities and principal collections of investment securities available for sale | | | 660,085 | | | 1,351,436 | | | 1,429,904 | | Proceeds from maturities and principal collections of investment securities available for sale | | | 676,492 | | | 660,085 | | | 1,351,436 | |
| Proceeds from sales of investment securities available for sale | | | 50,048 | | | 33,332 | | | 207,124 | | Proceeds from sales of investment securities available for sale | | | 130,457 | | | 50,048 | | | 33,332 | |
| Purchases of investment securities available for sale | | | (1,019,585 | ) | | | (1,491,355 | ) | | | (1,900,237 | ) | Purchases of investment securities available for sale | | | (1,051,733 | ) | | | (1,019,585 | ) | | | (1,491,355 | ) |
| Net cash received on sale of banking locations | | | — | | | 25,069 | | | — | | Net cash received on sale of banking locations | | | — | | | — | | | 25,069 | |
| Net increase in loans | | | (1,990,774 | ) | | | (2,598,559 | ) | | | (1,426,471 | ) | Proceeds from sale of commercial loans | | | 32,813 | | | — | | | — | |
| Purchases of premises and equipment | | | (106,674 | ) | | | (111,396 | ) | | | (184,226 | ) | Net increase in loans | | | (2,498,467 | ) | | | (1,990,774 | ) | | | (2,598,559 | ) |
| Proceeds from disposals of premises and equipment | | | 1,708 | | | 3,061 | | | 2,681 | | Purchases of premises and equipment | | | (140,143 | ) | | | (106,674 | ) | | | (111,396 | ) |
| Contract acquisition costs | | | (19,468 | ) | | | (29,150 | ) | | | (18,129 | ) | Proceeds from disposals of premises and equipment | | | 1,201 | | | 1,708 | | | 3,061 | |
| Additions to licensed computer software from vendors | | | (12,875 | ) | | | (57,302 | ) | | | (47,312 | ) | Proceeds from sale of other assets | | | 5,632 | | | — | | | — | |
| Additions to internally developed computer software | | | (22,602 | ) | | | (5,224 | ) | | | (17,689 | ) | Additions to other intangible assets | | | (6,446 | ) | | | — | | | — | |
| | | | | | | | | Contract acquisition costs | | | (42,452 | ) | | | (19,468 | ) | | | (29,150 | ) |
| | Net cash used in investing activities | | | (2,449,410 | ) | | | (2,882,734 | ) | | | (2,067,905 | ) | Additions to licensed computer software from vendors | | | (11,858 | ) | | | (12,875 | ) | | | (57,302 | ) |
| | | | | | | | | Additions to internally developed computer software | | | (13,973 | ) | | | (22,602 | ) | | | (5,224 | ) |
| | | | | | | | | |
| | | Net cash used in investing activities | | | (3,015,937 | ) | | | (2,449,410 | ) | | | (2,882,734 | ) |
| | | | | | | | | |
Financing Activities | Financing Activities | | | | | | | | | | | Financing Activities | | | | | | | | | | |
| | Net increase in demand and savings deposits | | | 948,033 | | | 1,354,258 | | | 1,388,914 | |
| Net increase in demand and savings deposits | | | 1,354,258 | | | 1,388,914 | | | 1,290,526 | | Net increase in certificates of deposit | | | 1,738,743 | | | 852,639 | | | 803,208 | |
| Net increase in certificates of deposit | | | 852,639 | | | 803,208 | | | 32,029 | | Net increase (decrease) in federal funds purchased and securities sold under repurchase agreements | | | 361,401 | | | (49,411 | ) | | | (192,229 | ) |
| Net (decrease) increase in federal funds purchased and securities sold under repurchase agreements | | | (49,411 | ) | | | (192,229 | ) | | | 79,803 | | Principal repayments on long-term debt | | | (760,937 | ) | | | (617,177 | ) | | | (399,690 | ) |
| Principal repayments on long-term debt | | | (617,177 | ) | | | (399,690 | ) | | | (337,160 | ) | Proceeds from issuance of long-term debt | | | 127,203 | | | 672,666 | | | 655,727 | |
| Proceeds from issuance of long-term debt | | | 672,666 | | | 655,727 | | | 511,362 | | Treasury stock purchased | | | — | | | — | | | (4 | ) |
| Treasury stock purchased | | | — | | | (4 | ) | | | (112,655 | ) | Excess tax benefit from share-based payment arrangements | | | 10,460 | | | — | | | — | |
| Dividends paid to shareholders | | | (224,303 | ) | | | (209,883 | ) | | | (194,177 | ) | Dividends paid to shareholders | | | (244,654 | ) | | | (224,303 | ) | | | (209,883 | ) |
| Proceeds from issuance of common stock | | | 43,125 | | | 23,465 | | | 28,070 | | Proceeds from issuance of common stock | | | 65,510 | | | 43,125 | | | 23,465 | |
| | | | | | | | | | | | | | | | |
| | Net cash provided by financing activities | | | 2,031,797 | | | 2,069,508 | | | 1,297,798 | | | Net cash provided by financing activities | | | 2,245,759 | | | 2,031,797 | | | 2,069,508 | |
| | | | | | | | | | | | | | | | |
Effect of exchange rate changes on cash and cash equivalent balances held in foreign currencies | Effect of exchange rate changes on cash and cash equivalent balances held in foreign currencies | | | (4,252 | ) | | | 3,953 | | | 2,859 | | Effect of exchange rate changes on cash and cash equivalent balances held in foreign currencies | | | (429 | ) | | | (4,252 | ) | | | 3,953 | |
| | | | | | | | | | | | | | | | |
Increase (decrease) in cash and cash equivalents | Increase (decrease) in cash and cash equivalents | | | 197,851 | | | (12,995 | ) | | | (45,062 | ) | Increase (decrease) in cash and cash equivalents | | | 9,089 | | | 197,851 | | | (12,995 | ) |
Cash and due from banks at beginning of year | Cash and due from banks at beginning of year | | | 683,035 | | | 696,030 | | | 741,092 | | Cash and due from banks at beginning of year | | | 880,886 | | | 683,035 | | | 696,030 | |
| | | | | | | | | | | | | | | | |
Cash and due from banks at end of year | Cash and due from banks at end of year | | $ | 880,886 | | | 683,035 | | | 696,030 | | Cash and due from banks at end of year | | $ | 889,975 | | | 880,886 | | | 683,035 | |
| | | | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
F-5
Notes to Consolidated Financial Statements
| |
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. Synovus provides integrated financial services including banking, financial management, insurance, mortgage, and leasing services through 3940 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 banksfinancial and other card-issuingnon-financial institutions located inthroughout the United States Mexico, Canada, Honduras, Puerto Rico and Europe.internationally. TSYS offers merchant processingacquiring services to financial institutions and other organizations in the United States through its wholly owned subsidiary, TSYS Acquiring Services, L.L.C. (TSYS Acquiring), and in Japan through its subsidiaries, Vital Processing Services L.L.C. (Vital) andmajority owned subsidiary, GP Network Corporation (GP Net), respectively..
Basis of Presentation
In preparing the consolidated financial statements in accordance with accounting principlesU.S. generally accepted in the United States of America,accounting principles, 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; the determination of transaction processing provisions; 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 principlesU.S. generally accepted in the United States of Americaaccounting principles and to general practices within the banking, electronic payment, and merchant processingacquiring 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
Cash and due from banks includes cash and all amounts due from banks with original maturities less than 90 days. For the years ended December 31, 2006, 2005, 2004, and 2003,2004, income taxes of $323$391.4 million, $191$323.0 million, and $235$190.9 million, and interest of $501$806.4 million, $299$505.7 million, and $298$298.1 million, respectively, were paid.
Loans receivable of approximately $33 million, $20 million, $11 million, and $23$11 million were transferred to other real estate during 2006, 2005, 2004, and 2003,2004, 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.
Trading Account Assets
Trading account assets, which include both debt and equity securities, are reported at fair value. Fair value adjustments and fees from trading account activities are included as a component of other fee income. Gains and losses realized from the sale of trading account assets are determined by specific identification and are included as a component of other fee income. Interest income on trading assets is reported as a component of interest income.
Mortgage Loans Held for Sale
Mortgage loans held for sale are carried at the lower of aggregate cost or fair value. Fair value and adjusted for changes in fair value whenis based on forward sales commitments, hedging the loanswhich qualify for hedge accounting. Fairaccounting, and are carried at cost when used to hedge the loans. Otherwise, fair values are based upon quoted prices from secondary market investors. No valuation allowances were required at December 31, 20052006 or 2004.2005.
The cost of mortgage loans held for sale is the mortgage note amount less discounts and unearned fees.
Investment Securities Available for Sale
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 (loss), until realized.
A decline in the fair 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.
F-6
Notes to Consolidated Financial Statements 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
F-6
Notes to Consolidated Financial Statements 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.inconsequential.
Loans and Interest Income
Loans are reported at principal amounts outstanding less unearned income, net deferred fees and expenses, 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 the provision for losses on loans 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 individualimpaired loans.
Management believes that the allowance for loan losses is adequate. While management uses available information to recognize 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 adjustments 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.
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, and loans that are measured at fair value or at the lower of cost or fair value. 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 loan risk ratings, adequacy of the underlying collateral, loan concentrations, and historical charge-off trends, and economic conditions that may affect the borrowers’ ability to pay.trends.
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. The Company reviews long-lived assets, such as premises and equipment, for impairment whenever events and circumstances indicate that the carrying amount of an asset may not be recoverable.
F-7
Notes to Consolidated Financial Statements Contract Acquisition Costs
TSYS capitalizes contract acquisition costs related to signing or renewing long-term contracts. TSYS capitalizes internal conversion costs in accordance with Financial Accounting Standards Board (FASB) Technical Bulletin No. 90-90-1,1, “Accounting for Separately Priced Extended Warranty and Product Maintenance Contracts.” The capitalization of costs
F-7
Notes to Consolidated Financial Statements related to cash payments for rights to provide processing services is capitalized in accordance with the FASB’s Emerging Issues Task Force (EITF) Issue No. 01-9 “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendors Products),” and the U.S. Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 104 (SAB No. 104), “Revenue Recognition.” These 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 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 associated with each customer for impairment 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. The amount of impairment is written off in the period that such a determination is made. The determination of expected undiscounted net operating cash flows requires management to make estimates.
Computer Software
Licensed Computer Software
TSYS licenses software that is used in providing electronic payment processing, merchant acquiring and other services to clients. Licensed 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 licensed under MIPS agreements is amortized using aunits-of-production units-of-production basis over the estimated useful life of the software, generally not to exceed ten years. At each balance sheet date, 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
In accordance with SFAS 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. At each balance sheet date, TSYS evaluates the unamortized capitalized costs of software development as compared to the net realizable value of the software product which is determined by expected undiscounted net operating cash flows. The amount by which the unamortized software development costs exceed the net realizable value is writtencharged off to operations 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 SOPAICPA Statement of Position (SOP) No. 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” Internal-use software development costs are capitalized once (1) the preliminary project stage is completed, (2) management authorizes and commits to funding a computer software project, and (3) 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 five 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.
F-8
Notes to Consolidated Financial Statements Acquisition Technology Intangibles
Acquisition technology intangibles represent software technology assets resulting from acquisitions. These assets are amortized using the straight-line method over periods not exceeding their estimated useful lives, which range from five to nine years. SFAS No. 142, “Goodwill and Other Intangible Assets” requires that intangible assets with estimated 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.
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 for 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
F-8
Notes to Consolidated Financial Statements towards milestones, and known processing errors not covered by insurance.
These accruals are included in other current 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.
Goodwill and Other Intangible Assets
Goodwill, which represents the excess of cost over the fair value of net assets acquired of purchased companies, is tested for impairment at least annually. Synovus established its annual impairment test date as June 30. 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’ annual goodwill impairment analyses during the years ended December 31, 2006, 2005, and 2004.
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, customer relationships, and customer contract premiums resulting from the acquisition of investment advisory and transaction processing businesses. These identifiable intangible assets are amortized using accelerated methods over periods not exceeding the estimated average remaining life of the existing customer deposits, customer relationships, or contracts acquired. Amortization periods range from 3 to 15 years. Amortization periods for intangible assets are monitored to determine if events and circumstances require such periods to be reduced.
Goodwill and 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 based on the discounted expected future cash flows to be generated by the assets. Assets to be disposed of are reported at the lower of thetheir 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, is tested for impairment at least annually. 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’ annual goodwill impairment analyses during the years ended December 31, 2005, 2004, and 2003.
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 and transaction processing 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 contracts acquired. Amortization periods range from 3 to 15 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 forInvestments in 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.
TSYS’ Equity Investments in Joint Ventures
TSYS’TSYS has a 49% investment in Total System Services de México, S.A. de C.V. (TSYS de México), an electronic payment processing support operation located in Mexico, which is accounted for using the equity method of accounting, as is TSYS’ 34%accounting. TSYS also has a 44.56% investment in China UnionPay Data Co., Ltd. (CUP Data), a payment processing company which is headquartered in Shanghai, China. TSYSChina, and which is also accounted for Vital using the equity method of accounting throughaccounting. Prior to March 1, 2005, when itTSYS owned 50% of TSYS Acquiring, which was accounted for using the equity method of accounting. On March 1, 2005, TSYS acquired the remaining 50% equity stake in VitalTSYS Acquiring formerly held by Visa U.S.A. Vitaland began
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Notes to Consolidated Financial Statements consolidating this wholly-owned subsidiary. TSYS Acquiring is a merchant processingacquiring services 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 charge against the allowance for loan losses. Gains or losses on sale and any subsequent adjustments to the value are recorded as a component of other operating expenses.
Accounts Receivable
Accounts receivable balances are stated net of allowances for doubtful accounts and billing adjustments of $11.0 million and $12.6 million at December 31, 2006 and December 31, 2005.
TSYS records an allowance for doubtful accounts when it is probable that the accounts receivable balance will not be collected. When estimating the allowance for doubtful accounts, TSYS takes into consideration such factors as its day-to-day knowledge of the financial position of specific clients, the industry and size of its clients, the overall composition of its accounts receivable aging, prior history with specific customers of accounts receivable write-offs and prior experience of allowances in proportion to the overall receivable balance. This analysis includes an ongoing and continuous communication with its largest clients and those clients with past due balances. A financial decline of any one of TSYS’ large clients could have a material adverse effect on collectibility of receivables and thus the adequacy of the allowance for doubtful accounts.
Increases in the allowance for doubtful accounts are recorded as charges to bad debt expense and are reflected in other operating expenses in the consolidated statements of income. Write-offs of uncollectible accounts are charged against the allowance for doubtful accounts.
TSYS records an allowance for billing adjustments for actual and potential billing discrepancies. When estimating the allowance for billing adjustments, TSYS considers its overall history of billing adjustments, as well as its history with specific clients and known disputes. Increases in the allowance for billing adjustments are recorded as a reduction of revenues in the consolidated statements of income and actual adjustments to invoices are charged against the allowance for billing adjustments.
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.
In accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS No. 138 “Accounting for Certain Derivative Instruments and Hedging Activities, an Amendment of SFAS No. 133,” all derivative instruments are recorded on the consolidated balance sheet at their respective fair values.
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Notes to Consolidated Financial Statements 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 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 on the derivative instrument, are reported in earnings immediately. If the derivative instrument is not designated as a hedge, the gain or loss on the derivative instrument 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 sellfixed-rate mortgage loans and derivatives utilized to meet the financing, and interest rate and equity risk management needs of its customers, all derivatives utilized by Synovus to manage its interest rate sensitivity are designed as either a hedge of a recognizedfixed-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.
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Notes to Consolidated Financial Statements 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 payfloating-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. Ineffectiveness from fair value hedges is recognized in the consolidated statements of income as other operating income.
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 receivefixed-rate interest payments and payfloating-rate interest payments. The maturity date of the agreement with the longest remaining term to maturity is May 3, 2009.June 16, 2011. These agreements allow Synovus to offset the variability of floating rate loan interest received with the variable interest payments duepaid on the interest rate swaps. The ineffectiveness from cash flow hedges is recognized in the consolidated statements of income as other operating income.
In 2005, Synovus entered into certain forward starting swap contracts to hedge the cash flow risk of futurecertain forecasted interest payments on a forecasted debt issuance. Upon the determination to issue debt, Synovus was potentially exposed to cash flow risk due to changes in market interest rates prior to the placement of the debt. The forward starting swaps allowed Synovus to hedge this exposure. Upon placement of the debt, these swaps were cash settled concurrent with the pricing of the debt. The effective portion of the cash flow hedge previously included in accumulated other comprehensive income is being amortized over the life of the debt issue as an adjustment to interest expense.
By using derivatives to hedge fair value and cash flow risks, Synovus exposes itself to potential credit risk. This potential credit risk is equalfrom the counterparty to the fair or replacement values of the swaps if the counterparty fails to perform on its obligations under the swap agreements.hedging instrument. This credit risk is normally a very small percentage of the notional amount and fluctuates as interest rates change. Synovus analyzes and approves credit risk for all potential derivative counterparties prior to execution of any derivative transaction. Synovus minimizes thiscredit risk by subjecting the transaction to the same approval process as other credit activities, by dealing with highly rated counterparties, and by obtaining collateral agreementscollateralization for exposures above certain predetermined limits.
Synovus also holds derivative instruments which consist of commitments to fundfixed-rate mortgage loans to customers (interest rate lock commitments) and forward commitments to sellmortgage-backed securities and individualfixed-rate mortgage loans. Synovus’ objective in obtaining the forward commitments is to mitigate the interest rate risk associated with the commitments to fund thefixed-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
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Notes to Consolidated Financial Statements 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 and equity risk management needs of its customers. Upon entering into these instruments to meet customer needs, Synovus enters into offsetting positions to minimize theinterest rate and equity price risk to Synovus. These derivative financial instruments are reported at fair value with any resulting gain or loss recorded in current period earnings. These instruments, and their offsetting positions, are recorded in other assets and other liabilities on the consolidated balance sheets.
Non-Interest Income
Electronic Payment Processing Services
TSYS’ electronic payment processing services revenues are derived from long-term processing contracts with financial and non-financial institutions and are generally recognized as the services are performed. Electronic payment processing services revenues are generated primarily from charges based on the number of accounts on file, transactions and authorizations processed, statements mailed, cards embossed and mailed, and other processing services for cardholder accounts on file. Most of these contracts have prescribed annual revenue minimums. The original terms of processingProcessing contracts generally range from three to ten years in length and provide for penalties for early termination.
TSYS recognizes revenues in accordance with SAB No. 104. SAB No. 104 sets forth guidance as to when revenue is realized or realizable and earned when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been performed; (3) the seller’s price to the buyer is fixed or determinable; and (4) collectibility is reasonably assured.
TSYS evaluates its contractual arrangements that provide services to clients through a bundled sales arrangement in accordance with the FASB’s EITF Issue No. 00-21 (EITF
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Notes to Consolidated Financial Statements (EITF 00-21), “Revenue Arrangements with Multiple Deliverables.” EITF 00-21 addresses the determination of whether an arrangement involving more than one deliverable contains more than one unit of accounting and how the arrangement consideration should be measured and allocated to the separate units of accounting.
A deliverable in multiple element arrangements indicates any performance obligation on the part of the seller and includes any combination of obligations to perform different services, grant licenses or other rights. Revenue is allocated to the separate units of accounting in a multiple element arrangement based on relative fair values, provided the delivered element has standalone value to the customer, the fair value of any undelivered items can be readily determined, and delivery of any undelivered items is probable and substantially within TSYS’ control. Evidence of fair value must be objective and reliable. An item has value to the customer on a standalone basis if it is sold separately by any vendor or the customer could resell the deliverable on a standalone basis.
TSYS recognizes software license revenue in accordance with 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 and VSOE exists for the undelivered elements of the arrangement, revenues are recognized over the period that such services will be performed using thepercentage-of-completion 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 in which services are performed is measured by the percentage of costs incurred to date to estimated total costs for each arrangement as this is the best measure of progress. 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 considered fixed or determinable, the license revenue is recognized as payments become due.
Maintenance fees associated with license software are billed annually in advance, and the associated revenue is recognized ratably over the term of the maintenance agreement. VSOE for maintenance is measured by the renewal rate offered to the client, taking into consideration the normal pricing and discounting practices for the underlying software license. Maintenance includes license updates, product support and unspecified software product upgrades.
Merchant Acquiring Services
TSYS’ merchant acquiring services revenues are derived from long-term processing contracts with large financial institutions and other merchant acquirers which generally range from three to eight years and provide for penalties for early termination. Merchant acquiring services revenues are generated primarily from processing all payment forms including credit, debit, electronic benefits transfer and electronic check truncation for merchants of all sizes across a wide array of retail market segments. The products and services offered include authorization and capture of electronic transactions, clearing and settlement of electronic transactions, information reporting services related to electronic transactions, merchant billing services, andpoint-of-sale point-of-sale terminal sales and services. TSYS recognizes merchant acquiring services revenue as those services are performed, primarily on a per unit basis. Revenues onpoint-of-sale point-of-sale terminal equipment are recognized upon the transfer of ownership and shipment of product.
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Notes to Consolidated Financial Statements Other Transaction Processing Services Revenue
TSYS’ other servicetransaction processing services revenues are derived from recovery collections work, bankruptcy process management, legal account management, skip tracing, commercial printing activities, targeted loyalty programs, and customer relationship management services, such as call center activities for card activation, balance transfer requests, customer service and collection. The contract terms for these services are generally shorter in nature as compared with TSYS’ long-term processing contracts. Revenue is recognized on these other transaction processing services as the services are performed either on a per unit or a fixed price basis.
Service Charges on Deposit Accounts
Service charges on deposit accounts consist of non-sufficient funds fees, account analysis fees, and other service charges on deposits which consist primarily of monthly account fees. Non-sufficient funds fees are recognized at the time when the account overdraft occurs. Account analysis fees consist of fees charged to certain commercial demand deposit accounts based upon account activity (and reduced by a credit which is based upon cash levels in the account). These fees, as well as monthly account fees, are recorded under the accrual method of accounting.
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Notes to Consolidated Financial Statements Fiduciary and Asset Management Fees
Fiduciary and asset management fees are generally determined based upon market values of assets under management as of a specified date during the period. These fees are recorded under the accrual method of accounting.
Brokerage and Investment Banking Revenue
Brokerage revenue consists primarily of commission income, which represents the spread between buy and sell transactions processed, and net fees charged to customers on a transaction basis for buy and sell transactions processed. Commission income is recorded on a settlement-date basis, which does not differ materially from trade-date basis. Brokerage revenue also includes portfolio management fees which represent monthly fees charged on a contractual basis to customers for the management of their investment portfolios and are recorded under the accrual method of accounting.
Investment banking revenue represents fees for services arising from securities offerings or placements in which Synovus acts as the agent. It also includes fees earned from providing advisory services. Revenue is recognized at the time the underwriting is completed and the revenue is reasonably determinable.
Mortgage Banking Income
Mortgage banking income consists primarily of gains and losses from the sale of mortgage loans. Mortgage loans are sold servicing released, without recourse or continuing involvement and satisfy SFAS No. 140 criteria for sale accounting. Gains (losses) on the sale of mortgage loans are determined and recognized at the time the sale proceeds are received and represent the difference between net sales proceeds and the carrying value of the loans at the time of sale adjusted for recourse obligations, if any, retained by Synovus.
Bankcard Fees
Bankcard fees consist primarily of interchange and merchant fees earned, net of fees paid, on debit card and credit card transactions. Net fees are recognized into income as they are collected.
Reimbursable Items
Reimbursable items consist ofout-of-pocket out-of-pocket expenses which are reimbursed by TSYS’ customers. Postage is the primary component of these expenses. TSYS accounts for reimbursable items in accordance with the FASB’s EITF No. 01-14 “Income Statement Characterization of Reimbursements Received for ‘Out-of-Pocket’ Expenses Incurred.”
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. TSYS does not currently utilize foreign exchange contracts or other derivative instruments to reduce its exposure to foreign currency rate changes.
Income Taxes
Synovus usesfiles a consolidated federal tax return with its wholly-owned and majority owned subsidiaries. Synovus accounts for income taxes in accordance with the asset and liability method to account formethod. Deferred 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.bases and operating loss and tax credit carryforwards. 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. Reserves against the carrying value of a deferred tax asset are established when necessary to reflect the decreased likelihood of realization of a deferred asset in the future. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Income tax provisions require the use of management judgments, which are subject to challenge by various taxing authorities. Contingency reserves are periodically established where the amount of the contingency can be reasonably determined and is likely to occur. Reductions in contingency reserves are recognized when tax disputes are settled or examination periods lapse.
Significant estimates, used in accounting for income taxes relate to the determination of taxable income, the determination of temporary differences between book and tax bases, as well as estimates on the realizability of tax credits.
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Notes to Consolidated Financial Statements
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-BasedShare-Based Compensation
Synovus accountsadopted SFAS No. 123R, “Share-Based Payment”, effective January 1, 2006 and elected to use the modified prospective transition method. SFAS No. 123R is effective for all unvested awards at January 1, 2006 and for all awards granted or modified, repurchased, or cancelled after that date. This statement requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions) and recognize compensation expense over the future service period.
Prior to adoption of SFAS No. 123R, Synovus accounted for its fixed stock-basedshare-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 iswas recorded on the grant date only to the extent that the current market price of the underlying stock exceedsexceeded the exercise price on the grant date.
SFAS No. 123, “Accounting for Stock-Based Compensation,” established accounting and disclosure requirements using a fair value based method of accounting for stock-based compensation plans. As allowed by SFAS No. 123, Synovus has elected to apply the accounting method prescribed under APB Opinion No. 25, and has adopted the disclosure requirements of SFAS No. 123, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.”
Had Synovus determined compensation expense based on the fair value at the grant date for its stock options granted during the years 1999 through 2005 under SFAS No. 123, net income would have been reduced to the pro forma amounts indicated in the following table.
| | | | | | | | | | | | | |
| |
(In thousands, except | | Years Ended December 31, | |
per share data) | | | |
| | 2005 | | | 2004 | | | 2003 | |
| | | | | | | | | |
Net income as reported | | $ | 516,446 | | | | 437,033 | | | | 388,925 | |
| Total stock-based employee compensation expense determined under fair value based methods for all awards, net of related tax effects | | | (14,050 | ) | | | (13,344 | ) | | | (13,856 | ) |
| | | | | | | | | |
| Pro forma | | $ | 502,396 | | | | 423,689 | | | | 375,069 | |
| | | | | | | | | |
Earnings per share: | | | | | | | | | | | | |
| Basic-as reported | | $ | 1.66 | | | | 1.42 | | | | 1.29 | |
| Basic-pro forma | | | 1.61 | | | | 1.38 | | | | 1.24 | |
| Diluted-as reported | | | 1.64 | | | | 1.41 | | | | 1.28 | |
| Diluted-pro forma | | | 1.60 | | | | 1.36 | | | | 1.23 | |
|
The per share weighted average fair value of stock options granted during 2005, 2004 and 2003 was $7.06, $7.36, and $4.93, 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 2005, 2004, and 2003, respectively: risk-free interest rates of 4.1%, 4.5%, and 3.2%; expected volatility of 21%, 29%, and 34%; expected life of 8.5 years, 6.5 years, and 6.0 years; and dividend yield of 2.4%, 2.6%, and 3.3%.
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, goodwill and other intangible assets. 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
On November 13, 2003, the EITF reached a consensus on EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” This guidance was to be applied in other-than-temporary impairment evaluations performed in reporting periods beginning after June 15, 2004. Disclosures were effective in annual financial statements for fiscal years ended after December 15, 2003, for investments accounted for under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and SFAS No. 124, “Accounting for Certain Investments Held by
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Notes to Consolidated Financial Statements Not-for-Profit Organizations.” In 2005, the FASB issued FASB Staff Position (FSP) No. 115-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” which nullifies certain provisions of EITF Issue No. 03-1, while retaining the disclosure requirements that have previously been adopted by Synovus. The adoption of FSP No. 115-1 did not have a material impact on Synovus’ financial statements.
In December 2003, the Accounting Standards Executive Committee issued SOP No. 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer.” SOP No. 03-3 addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans or debt securities (loans) acquired in a transfer or business combination if those differences are attributable, at least in part, to credit quality. SOP No. 03-3 is effective for loans acquired in years beginning after December 15, 2004. Synovus has not determined the impact that SOP No. 03-3 will have on its financial statements and believes that such determination will not be meaningful until Synovus completes a business combination with a financial institution and/or acquires a future loan portfolio.
In December 2004,February 2006, the FASB issued SFAS No. 123R, “Share-Based Payment.155, “Accounting for Certain Hybrid Financial Instruments.” SFAS No. 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. This statement requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award.
155 amends SFAS No. 123R applies to all awards granted after the required effective date133, “Accounting for Derivative Instruments and to awards modified, repurchased, or cancelled after that date. Compensation cost will be recognized on or after the required effective date for the portion of outstanding awards for which the requisite service has not yet been rendered, based on the grant-date fair value of those awards calculated under SFAS No. 123 for either recognition or pro forma disclosures.
On March 29, 2005, the SEC issued SAB No. 107 (SAB 107), “Share-Based Payment”. SAB 107 expresses the views of the SEC staff regarding the interaction between SFAS No. 123R and certain SEC rules and regulations, provides the staff’s views regarding the valuation of share-based payments by public companies, and provides guidance regarding share-based payments with non-employees.
On April 14, 2005, the SEC amended Rule 4-01(a) of Regulation S-X that amended the compliance date for SFAS No. 123R. The SEC’s new rule allows companies to implement SFAS No. 123R at the beginning of their next fiscal year, instead of the next reporting period that begins after June 15, 2005. Synovus adopted SFAS No. 123R effective January 1, 2006.
Synovus estimates that the adoption of SFAS No. 123R, including the effect of stock options to be granted in 2006, will result in an additional expense in 2006 of approximately $14.0 million, net of tax, relating to the expensing of stock options. Additionally, Synovus will incur an incremental (as compared to 2005) after-tax expense of approximately $3.0 million in 2006, for restricted stock awards, including the effect of restricted stock awards to be granted in 2006. While stock options have been the primary method of equity-based compensation historically, going forward, restricted stock awards are expected to be Synovus’ primary method of equity-based compensation.
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections — a replacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS No. 154 replaces APB Opinion No. 20, “Accounting Changes,Hedging Activities,” and SFAS No. 3, “Reporting Accounting Changes in Interim140, “Accounting for Transfers and Servicing of Financial Statements,”Assets and changes the requirements for the accounting for and reportingExtinguishments of a change in accounting principle.Liabilities.” SFAS No. 154 applies155 resolves issues addressed in Statement 133 Implementation Issue No. D1, “Application of Statement 133 to all voluntary changesBeneficial Interests in accounting principle by requiring retrospective applicationSecuritized Financial Assets.” SFAS No. 155 eliminates the exemption from applying SFAS No. 133 to prior periods’interests in securitized financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effectassets so that similar instruments are accounted for similarly regardless of the change.form of the instruments. SFAS No. 155 also permits election of fair value measurement at acquisition, at issuance, or when a previously recognized financial instrument is subject to are-measurement event, on an instrument-by-instrument basis. The provisions of this statement are effective for accounting changes and correctionsall financial instruments acquired or issued after the beginning of errors made inthe entity’s first fiscal years beginningyear that begins after DecemberSeptember 15, 2005.2006. Synovus does not expect the impact of SFAS No. 154155 on its financial position, results of operations or cash flows to be material.
In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets.” SFAS No. 156 amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” with respect to the accounting for separately recognized servicing assets and servicing liabilities. SFAS No. 156 requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in certain situations and requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. The provisions of this statement are effective as of the beginning of the first fiscal year that begins after September 15, 2006. Synovus does not expect the impact of SFAS No. 156 on its financial position, results of operations or cash flows to be material.
In June 2005,2006, the EITF reached a consensus on EITF IssueFASB issued FASB Interpretation No. 05-6 (EITF 05-6)48 (FIN 48), “Determining “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109.” FIN 48 clarifies the Amortization Periodaccounting for Leasehold Improvements.” This guidance provides that leasehold improvements acquireduncertainty in income taxes recognized in a business combination and those acquired after the inception of a lease should be amortized over the shorter of the useful life of the assets or a term that includes renewals that are reasonably assured at the date of acquisition of the leasehold improvements. The guidance is effectivecompany’s financial statements in accordance with FASB Statement No. 109, “Accounting for periods beginning after June 29, 2005. Synovus has not determined the impact that EITF 05-6Income Taxes.”
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Notes to Consolidated Financial Statements
FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
FIN 48 provides a two-step process in the evaluation of a tax position. The first step is recognition. A company determines whether it is more-likely-than-not that a tax position will havebe sustained upon examination, including a resolution of any related appeals or litigation processes, based upon the technical merits of the position. The second step is measurement. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement.
FIN 48 is effective for fiscal years beginning after December 15, 2006. Synovus expects the impact of adopting FIN 48 will not be material to its financial position, results of operations or cash flows.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This statement does not require any new fair value measurements, but applies under other accounting pronouncements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. The provisions of this statement are effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Synovus does not expect the impact of SFAS No. 157 on its financial statementsposition, results of operations or cash flows to be material.
In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and believesOther Postretirement Plans.” SFAS No. 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that such determination will not be meaningful until Synovus completesfunded status in the year in which the changes occur through comprehensive income of a business combinationentity. This statement provides different effective dates for the recognition and related disclosure provisions and for the required change to a fiscal year-end measurement date. An employer with publicly traded equity securities shall apply the requirement to recognize the funded status of a benefit plan and the disclosure requirements at the end of the first fiscal year ended after December 15, 2006, and shall apply the requirement to measure plan assets and benefit obligations as of the date of the employers’ fiscal year-end statement of financial position for fiscal years ending after December 15, 2008. In December, 2006, Synovus adopted the recognition provisions of SFAS No. 158, and recognized an accrued liability and an adjustment to shareholders’ equity of $3.2 million, net of tax, in connection with its unfunded postretirement health benefit obligation.
In September 2006, the EITF reached a consensus on EITF Issue No. 06-4 (EITF 06-4), “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements.” EITF 06-4 requires an employer to recognize a liability for future benefits based on the substantive agreement with the employee. EITF 06-4 requires a company to use the guidance prescribed in FASB Statement No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions” and Accounting Principles Board Opinion No. 12, “Omnibus Opinion,” when entering into an endorsement split-dollar life insurance agreement and recognizing the liability. EITF 06-4 is effective for fiscal periods beginning after December 15, 2007. Synovus is currently evaluating the impact of adopting EITF 06-4 on its financial position, results of operations and cash flows, but has yet to complete its assessment.
In September 2006, the EITF reached a consensus on EITF Issue No. 06-5 (EITF 06-5), “Accounting for Purchases of Life Insurance — Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4.” EITF 06-5 requires that includes leasehold improvements.a determination of the amount that could be realized under an insurance contract should (1) consider any additional amounts beyond cash surrender value included in the contractual terms of the policy and (2) be based on an assumed surrender at the individual policy or certificate level, unless all policies or certificates are required to be surrendered as a group. EITF 06-5 is effective for fiscal periods beginning after December 15, 2006. Synovus is currently evaluating the impact of adopting EITF 06-5 on its financial position, results of operations and cash flows, but has yet to complete its assessment.
In September 2006, the SEC issued SAB No. 108, “Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements.” In December 2006, Synovus adopted the provisions of SAB No. 108, which clarifies the way that a company should evaluate an identified unadjusted error for materiality. SAB No. 108 requires that the effect of misstatements that were not corrected at the end of the prior year be considered in quantifying misstatements in the current year financial statements. Two techniques were identified as being used by companies in practice to accumulate and quantify misstatements — the “rollover” approach and the “iron curtain” approach. The rollover approach, which is the approach that
F-15
Notes to Consolidated Financial Statements Synovus previously used, quantifies a misstatement based on the amount of the error originating in the current year income statement. Thus, this approach ignores the effects of correcting the portion of the current year balance sheet misstatement that originated in prior years. The iron curtain approach quantifies a misstatement based on the effects of correcting the misstatement existing in the balance sheet at the end of the current year, irrespective of the misstatement’s year(s) of origination. The primary weakness of the iron curtain approach is that it does not consider the correction of prior year misstatements in the current year to be errors.
Using the rollover approach resulted in an accumulation of misstatements to Synovus’ balance sheets that were deemed immaterial to Synovus’ financial statements because the amounts that originated in each year were quantitatively and qualitatively immaterial. Synovus has elected, as allowed under SAB No. 108, to reflect the effect of initially applying this guidance by adjusting the carrying amount of the impacted accounts as of the beginning of 2006 and recording an offsetting adjustment to the opening balance of retained earnings in 2006. Accordingly, Synovus recorded a cumulative adjustment to increase retained earnings by $3.4 million upon the adoption of SAB No. 108.
The following table presents a description of the individual adjustments included in the cumulative adjustment to retained earnings:
| | | | | | | | | | |
| |
| | Nature of Error | | Years | |
(In millions) | | Adjustment | | | Being Corrected | | Impacted | |
| | | | | | | | |
Brokered time deposits | | $ | (10.3 | ) | | Adjusted to reflect incorrect use of hedges | | | 2003 - 2005 | |
Deferred income tax liability | | | 3.8 | | | Adjusted to reflect tax effect of incorrect use of hedges | | | 2003 - 2005 | |
Accumulated other comprehensive loss | | | (0.8 | ) | | Adjusted to reflect incorrect use of hedges | | | 2004 - 2005 | |
Deferred income tax liability | | | 10.7 | | | Adjusted to reflect impact of calculation errors | | | 1993 - 2005 | |
| | | | | | | | |
Total increase in retained earnings | | $ | 3.4 | | | | | | | |
| | | | | | | | |
|
In the first quarter of 2003, Synovus entered into interest rate swaps to hedge the fair value of certain brokered time deposits. Effectiveness was measured using the short-cut method. Upon further review of these arrangements at September 30, 2005, Synovus determined that these hedges did not qualify for the shortcut method of hedge accounting as the broker placement fee for the related certificates of deposit was factored into the pricing of the swaps. The hedging relationships were redesignated on September 30, 2005, using the cumulative dollar offset method to measure effectiveness. The prior years’ adjustments were evaluated under the rollover approach and the correction of these misstatements was not material to Synovus’ results of operations in any of the years impacted. Brokered time deposits were increased by the amount of the cumulative fair value basis adjustment and the associated deferred tax liability was removed, resulting in a net decrease in shareholders’ equity of $6.5 million, to correct the incorrect use of hedge accounting.
In the fourth quarter of 2004, Synovus entered into certain forward starting interest rate swaps to hedge the future interest payments on debt forecasted to be issued in 2005. Synovus accounted for these arrangements as cash flow hedges. Upon further review of these arrangements, during the second quarter of 2005, it was determined that the swaps did not qualify for hedge accounting treatment. The hedging relationships were redesignated during the second quarter of 2005. The prior years’ adjustments were evaluated under the rollover approach and the correction of these misstatements was not material to Synovus’ results of operations in any of the years impacted. Accumulated other comprehensive losses were decreased and retained earnings were increased by $0.8 million, respectively, to correct the incorrect use of hedge accounting.
From 1993 through 2005, Synovus had errors in its calculation of deferred taxes for temporary differences related to certain business combinations and premises and equipment. The prior years’ errors were evaluated under the rollover approach and the correction of these misstatements was not material to Synovus results of operations in any of the years impacted. The deferred income tax liability was reduced by $10.7 million to correct the calculation errors.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS No. 159 permits entities to make an irrevocable election, at specified election dates, to measure eligible financial instruments and certain other items at fair value. This statement also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. The provisions of this statement are effective as of the beginning of the first fiscal year that begins after November 15, 2007. Synovus is currently evaluating the impact of adopting SFAS No. 159, but has yet to complete its assessment.
Reclassifications
Certain prior years’ amounts in 2004 and 2003 have been reclassified to conform withto the presentation adopted in 2005.2006.
F-16
Notes to Consolidated Financial Statements Note 2 Business Combinations | |
Note 2 | Business Combinations |
Effective on March 25, 2006, Synovus acquired all of the issued and outstanding common shares of Riverside Bancshares, Inc., the parent company of Riverside Bank (Riverside), headquartered in Marietta, Georgia. Concurrent with the acquisition, Riverside was merged into a subsidiary of Synovus, Bank of North Georgia. The acquisition was accounted for using the purchase method of accounting, and accordingly, the results of operations of Riverside Bancshares have been included in Synovus’ consolidated financial statements beginning March 25, 2006.
The aggregate purchase price was $171.1 million, consisting of 5,883,427 shares of Synovus common stock valued at $159.8 million, stock options valued at $11.4 million, and $182 thousand in direct acquisition costs. Synovus is in the process of completing the purchase price allocation relating to the acquisition.
The preliminary purchase price allocation is presented below.
| | | | | | |
| |
Riverside Bancshares, Inc. | | |
(In thousands) | |
Cash and due from banks | | $ | 13,041 | |
Investment securities | | | 116,604 | |
Loans, net | | | 469,983 | |
Premises and equipment | | | 11,973 | |
Goodwill | | | 122,096 | |
Core deposits premium | | | 6,861 | |
Other intangible assets | | | 3,310 | |
Other assets | | | 22,389 | |
| | | |
| Total assets acquired | | | 766,257 | |
Deposits* | | | 491,739 | |
Federal funds purchased | | | 2,069 | |
Securities sold under repurchase agreements | | | 50,670 | |
Long-term debt | | | 37,683 | |
Other liabilities | | | 13,020 | |
| | | |
| Total liabilities assumed | | | 595,181 | |
| | | |
| | Net assets acquired | | $ | 171,076 | |
| | | |
* Includes time deposits in the amount of $176.7 million. |
|
Effective on April 1, 2006, Synovus acquired all of the issued and outstanding common shares of Banking Corporation of Florida, the parent company of First Florida Bank (First Florida), headquartered in Naples, Florida. The acquisition was accounted for using the purchase method of accounting, and accordingly, the results of operations of First Florida have been included in Synovus’ consolidated financial statements beginning April 1, 2006.
The aggregate purchase price was $84.8 million, consisting of 2,938,791 shares of Synovus common stock valued at $80.1 million, stock options valued at $4.7 million and $24 thousand in direct acquisition costs. Synovus is in the process of completing the purchase price allocation relating to the acquisition.
The preliminary purchase price allocation is presented below.
| | | | | | |
| |
Banking Corporation of Florida | | |
(In thousands) | |
Cash and due from banks | | $ | 2,595 | |
Federal funds sold | | | 4,782 | |
Investment securities | | | 5,655 | |
Loans, net | | | 341,825 | |
Premises and equipment | | | 2,317 | |
Goodwill | | | 54,590 | |
Core deposits premium | | | 1,172 | |
Other intangible assets | | | 937 | |
Other assets | | | 3,655 | |
| | | |
| Total assets acquired | | | 417,528 | |
Deposits* | | | 321,283 | |
Long-term debt | | | 10,269 | |
Other liabilities | | | 1,147 | |
| | | |
| Total liabilities assumed | | | 332,699 | |
| | | |
| | Net assets acquired | | $ | 84,829 | |
| | | |
* Includes time deposits in the amount of $231.9 million. |
|
On July 11, 2006, TSYS completed the acquisition of Card Tech, Ltd., a privately owned London-based payments firm, and related companies. TSYS rebranded the group of companies as TSYS Card Tech. TSYS accounted for the acquisition using the purchase method of accounting, and accordingly, TSYS Card Tech’s results of operations have been included in Synovus’ consolidated financial statements beginning July 11, 2006. TSYS paid aggregate cash consideration of approximately $59.3 million, including direct acquisition costs. TSYS is in the process of allocating the purchase price to the respective assets and liabilities acquired, and has preliminarily allocated approximately $27.4 million to goodwill, approximately $24.6 million to other identifiable intangible assets and the remaining amounts to other identifiable assets and liabilities acquired.
On November 1, 2005, TSYS purchased an initial 34.04% equity interest in China UnionPay Data Co., Ltd. (CUP Data) for approximately $37.0 million. On August 1, 2006, TSYS paid aggregate consideration of approximately $15.6 million to increase its ownership interest to 44.56% of CUP Data.
TSYS accounts for its investment in CUP Data under the equity method of accounting. The difference between the cost of the investment and the amount of underlying equity in net assets of CUP Data is recognized as goodwill. TSYS allocated
F-17
Notes to Consolidated Financial Statements $39.8 million to goodwill and $12.8 million to net assets acquired. The goodwill associated with CUP Data is not reported as goodwill in the consolidated balance sheet, but it is reported as a component of the equity investment.
On November 16, 2006, TSYS announced an agreement with Merchants, a customer-contact company, and wholly-owned subsidiary of Dimension Data, to deliver a comprehensive range of managed services to financial institutions across Europe, the Middle East and Africa. The new venture, TSYS Managed Services EMEA, Ltd. (TSYS Managed Services), includes existing Merchants centers in Milton Keynes, England and Barneveld, The Netherlands. TSYS Managed Services is expected to add future centers in other countries throughout Europe and in South Africa. TSYS accounted for its majority interest in the new venture as a business combination, and accordingly, the results of operations of TSYS Managed Services have been included in the consolidated financial results beginning November 16, 2006. TSYS paid aggregate consideration of approximately $2.5 million, including direct acquisition costs, and has preliminarily allocated $323 thousand to goodwill related to TSYS Managed Services.
On March 1, 2005, TSYS completed the acquisition of Vital Processing Services, L.L.C. by purchasing the 50% equity stake formerly held by Visa U.S.A. for $95.8 million, including $794,000$794 thousand of direct acquisition costs. In April, 2006, Vital was rebranded as TSYS Acquiring Solutions, L.L.C. (TSYS Acquiring). TSYS recorded the acquisition of the 50% interest as a purchase business combination, requiring that TSYS allocate the purchase price to the assets acquired and liabilities assumed based on their relative fair values. TSYS is in the process of finalizingfinalized the purchase price allocation during the first quarter of 2006 and has preliminarily allocated $36.7$30.2 million to goodwill, $12.0 million to intangible assets and the remaining amount to the assets and liabilities acquired. Vital’sTSYS Acquiring’s results of operations have been included in the consolidated financial results beginning March 1, 2005.
The preliminaryfinal purchase price allocation is presented below.
| | | | | | | | | | | | |
| | | | |
Vital Processing Services, L.L.C. | | | |
TSYS Acquiring Solutions, L.L.C. | | TSYS Acquiring Solutions, L.L.C. | | |
(In thousands) | (In thousands) | | (In thousands) | |
Cash and cash equivalents | Cash and cash equivalents | | $ | 19,399 | | Cash and cash equivalents | | $ | 19,399 | |
Contract acquisition costs and computer software, net | Contract acquisition costs and computer software, net | | | 31,373 | | Contract acquisition costs and computer software, net | | | 31,656 | |
Intangible assets | Intangible assets | | | 12,000 | | Intangible assets | | | 12,000 | |
Goodwill | Goodwill | | | 36,686 | | Goodwill | | | 30,211 | |
Other assets | Other assets | | | 29,221 | | Other assets | | | 34,407 | |
| | | | | | | | |
| Total assets acquired | | | 128,679 | | Total assets acquired | | | 127,673 | |
Total liabilities assumed | Total liabilities assumed | | | 32,836 | | Total liabilities assumed | | | 31,830 | |
Minority interest | Minority interest | | | 49 | | Minority interest | | | 49 | |
| | | | | | | | |
| | Net assets acquired | | $ | 95,794 | | | Net assets acquired | | $ | 95,794 | |
| | | | | | | | |
|
The purchase of the remaining 50% interest in Vital provides TSYS greater synergies for its clients that service merchants who accept cards as payments and issue credit to their customers.
Effective October 1, 2005, TSYS acquired the remaining 49% interest in Merlin Solutions, L.L.C., a subsidiary of Vital,TSYS Acquiring, for approximately $2.0 million. TSYS has recorded the acquisition of the incremental 49% interest as a business combination requiring TSYS to allocate the purchase price to the assets acquired and liabilities assumed based on their relative fair values. TSYS has preliminarily allocated $1.9 million to goodwill related to this acquisition.
Effective November 1, 2005, TSYS purchased an initial 34% equity interest in CUP Data, the payments-processing subsidiary of China UnionPay Co., Ltd. (CUP). TSYS plans to increase its ownership interest to 45% upon receipt of regulatory approval, which is expected to occur in 2006. CUP is sanctioned by the People’s Bank of China, China’s central bank, and has become one of the world’s largest and fastest-growing payments networks. CUP Data currently provides transaction processing, disaster recovery and other services for banks and bankcard issuers in China. In its first two years of business, CUP Data has signed numerous processing agreements for several of China’s largest financial institutions.
TSYS accounts for its investment in CUP Data under the equity method of accounting. TSYS is in the process of finalizing the purchase price allocation and has preliminarily allocated $29.0 million to goodwill and $7.9 million to net assets acquired. The goodwill associated with CUP Data is not reported as goodwill in the consolidated balance sheet, but it is reported as a component of the equity investment.
On January 30, 2004, Synovus acquired all the issued and outstanding common shares of Peoples Florida Banking Corporation (Peoples Bank), the parent company of Peoples Bank, headquartered in Palm Harbor, Florida. The aggregate purchase price was $78.4 million, consisting of 1,636,827 shares of Synovus common stock valued at $43.7 million, $32.1 million in cash, stock options valued at $2.6 million and $37 thousand in direct acquisition costs, consisting primarily of external accounting fees.costs. On July 25, 2005, Peoples Bank was merged into Synovus Bank of Tampa Bay.
On June 1, 2004, Synovus acquired all the issued and outstanding common shares of Trust One Bank (Trust One) in Memphis, Tennessee. Trust One has six branches serving east Shelby County, Tennessee, which includes Germantown, Cordova, Collierville and east Memphis. The aggregate purchase price was $111.0 million, consisting of 3,841,302 shares of Synovus common stock valued at $107.7 million, approximately $3,000$3 thousand in cash, stock options valued at $3.2 million and $126 thousand in direct acquisition costs, consisting primarily of external legal fees and accounting fees.costs.
On August 2, 2004, TSYS completed the acquisition of Clarity Payment Solutions, Inc. (Clarity). The aggregate purchase price was $53.0 million in cash and $515 thousand in direct acquisition costs. Clarity was renamed TSYS Prepaid, Inc. (TSYS Prepaid). During 2005, TSYS finalized the purchase price allocation and allocated $39.6 million to goodwill, $8.5 million to computer software, $2.4 million to other
F-15
Notes to Consolidated Financial Statements intangibles and the remaining amount to the other assets and liabilities acquired.
On February 27, 2003, Synovus acquired all the issued and outstanding common shares of FNB Newton Bankshares, Inc., the parent company of First Nation Bank, headquartered in Covington, Georgia. 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.
On February 28, 2003, Synovus acquired all the issued and outstanding common shares of United Financial Holdings, Inc., the parent company of United Bank and Trust Company, in St. Petersburg, Florida and United Bank of the Gulf Coast, in Sarasota, Florida (collectively, United Bank). 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. On July 25, 2005, United Bank was merged into Synovus Bank of Tampa Bay.
On April 28, 2003, TSYS completed the acquisition of Enhancement Services Corporation (ESC) for $36.0 million in cash. TSYS 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, as well as travel, gift card and merchandise reward programs to more than 40 national and regional financial institutions in the United States.
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
F-18
Notes to Consolidated Financial Statements 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 awholly-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.costs. The terms of the merger agreement provide for contingent consideration based on a percentage of a multiple of earnings before interest, income taxes, depreciation, and other adjustments, as defined in the agreement (EBITDA) for each of the years endingended December 31, 2004, 2005, and 2006. The contingent consideration iswas payable by February 15th of the year subsequent to the calendar year for which the EBITDA calculation is made. The fair value of the contingent consideration is recorded as an addition to goodwill. On February 15, 2007, Synovus recorded additional consideration of $1.8 million, which was based on 14% of a multiple of GLOBALT’s EBITDA for the year ended December 31, 2006. On February 15, 2006, Synovus recorded additional purchase consideration of $585 thousand, which was based on 7% of a multiple of GLOBALT’s EBITDA for the year ended December 31, 2005. On February 15, 2005, Synovus recorded additional consideration of $226 thousand, which was based on 4% of a multiple of GLOBALT’s EBITDA for the year ended December 31, 2004. On February 15, 2006, Synovus recorded additional consideration
Pre-acquisition results of $585 thousand, which was based on 7% of a multiple of GLOBALT’s EBITDAoperations for the year ended December 31, 2005. The contingent consideration for the year ending December 31, 2006 will be based on 14% of a multiple of GLOBALT’s EBITDA for 2006.
On September 6, 2005, Synovus announced the signing of a definitive agreement to acquire the $650 million asset Riverside Bancshares, Inc. (Riverside), the parent company of Riverside Bank in Marietta, Georgia, in a tax-free exchange of common stock. Riverside Bank has five branches serving north metro Atlanta, Georgia. The merger is subject to approval by the shareholders of Riverside and is expected to close during the first quarter of 2006.
On October 31, 2005, Synovus announced the signing of a definitive agreement to acquire the $342 million asset Banking Corporation of Florida (First Florida), the parent company of First Florida Bank in Naples, Florida, in a tax-free exchange of common stock. First Florida Bank has two branches in Naples, Florida, one in Winter Park — parteach of the Orlando/central Florida community — and a loan production branch in Fort Myers, Florida. The merger, which is subjectabove business combinations were not material to approval by the shareholdersconsolidated financial results of First Florida, is expected to close after the close of business on March 31, 2006.Synovus. Accordingly, pro forma disclosures have not been provided.
Note 3 Trading Account Assets
| |
Note 3 | Trading Account Assets |
The following table summarizes trading account assets at December 31, 2006 and 2005. There were no trading account assets at December 31, 2004.
| | | | | | | | | | |
| | | | | | | |
| | | | | 2006 | | | 2005 | |
(In thousands) | (In thousands) | | (In thousands) | | | | | | |
U.S. Treasury and U.S. Government agency securities | U.S. Treasury and U.S. Government agency securities | | $ | 117 | | U.S. Treasury and U.S. Government agency securities | | $ | 830 | | | 117 | |
Mortgage-backed securities | Mortgage-backed securities | | | 25,403 | | Mortgage-backed securities | | | 13,715 | | | 25,403 | |
State and municipal securities | State and municipal securities | | | 1,401 | | State and municipal securities | | | 54 | | | 1,401 | |
Other investments | Other investments | | | 401 | | Other investments | | | 667 | | | 401 | |
| | | | | | | | | | |
| Total | | $ | 27,322 | | Total | | $ | 15,266 | | | 27,322 | |
| | | | | | | | | | |
|
F-16
Notes to Consolidated Financial Statements | |
Note 4 | 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, 20052006 and 20042005 are summarized as follows:
| | | | | | | | | | | | | | | | | | |
| | | |
| | | | | | | | | | | | | | | | | | | December 31, 2006 | |
| | | | | | |
| | December 31, 2005 | | | | | | Gross | | | Gross | | | Estimated | |
| | | | | | Amortized | | | Unrealized | | | Unrealized | | | Fair | |
| | | | Gross | | | Gross | | | Estimated | | | | Cost | | | Gains | | | Losses | | | Value | |
(In thousands) | | Amortized | | | Unrealized | | | Unrealized | | | Fair | | (In thousands) | | | | | | | | | | | | |
| | Cost | | | Gains | | | Losses | | | Value | | |
| | | | | | | | | | | | | |
U.S. Treasury and U.S. Government agency securities | | $ | 1,651,240 | | | 806 | | | (27,434 | ) | | | 1,624,612 | | U.S. Treasury and U.S. Government agency securities | | $ | 1,783,313 | | | 4,784 | | | (17,527 | ) | | | 1,770,570 | |
Mortgage-backed securities | | | 1,032,485 | | | 1,379 | | | (27,136 | ) | | | 1,006,728 | | Mortgage-backed securities | | | 1,291,895 | | | 4,054 | | | (20,591 | ) | | | 1,275,358 | |
State and municipal securities | | | 206,744 | | | 6,151 | | | (524 | ) | | | 212,371 | | State and municipal securities | | | 192,593 | | | 4,059 | | | (467 | ) | | | 196,185 | |
Equity securities | | | 112,350 | | | 493 | | | (37 | ) | | | 112,806 | | Equity securities | | | 95,332 | | | 1,021 | | | — | | | 96,353 | |
Other investments | | | 1,827 | | | — | | | (24 | ) | | | 1,803 | | Other investments | | | 13,976 | | | — | | | (85 | ) | | | 13,891 | |
| | | | | | | | | | | | | | | | | | | |
Total | | $ | 3,004,646 | | | 8,829 | | | (55,155 | ) | | | 2,958,320 | | |
| | | | | | | | | | Total | | $ | 3,377,109 | | | 13,918 | | | (38,670 | ) | | | 3,352,357 | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2004 | | | | December 31, 2005 | |
| | | | | | | |
| | | | Gross | | | Gross | | | Estimated | | | | | | Gross | | | Gross | | | Estimated | |
| | Amortized | | | Unrealized | | | Unrealized | | | Fair | | | | Amortized | | | Unrealized | | | Unrealized | | | Fair | |
| | Cost | | | Gains | | | Losses | | | Value | | | | Cost | | | Gains | | | Losses | | | Value | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Treasury and U.S. Government agency securities | | $ | 1,312,599 | | | 2,911 | | | (10,039 | ) | | | 1,305,471 | | U.S. Treasury and U.S. Government agency securities | | $ | 1,651,240 | | | 806 | | | (27,434 | ) | | | 1,624,612 | |
Mortgage-backed securities | | | 1,031,599 | | | 5,249 | | | (10,124 | ) | | | 1,026,724 | | Mortgage-backed securities | | | 1,032,485 | | | 1,379 | | | (27,136 | ) | | | 1,006,728 | |
State and municipal securities | | | 226,982 | | | 11,170 | | | (320 | ) | | | 237,832 | | State and municipal securities | | | 206,744 | | | 6,151 | | | (524 | ) | | | 212,371 | |
Equity securities | | | 119,823 | | | 1,014 | | | — | | | 120,837 | | Equity securities | | | 112,350 | | | 493 | | | (37 | ) | | | 112,806 | |
Other investments | | | 4,814 | | | 28 | | | (113 | ) | | | 4,729 | | Other investments | | | 1,827 | | | — | | | (24 | ) | | | 1,803 | |
| | | | | | | | | | | | | | | | | | | |
Total | | $ | 2,695,817 | | | 20,372 | | | (20,596 | ) | | | 2,695,593 | | |
| | | | | | | | | | Total | | $ | 3,004,646 | | | 8,829 | | | (55,155 | ) | | | 2,958,320 | |
| | | | | | | | | | | |
| | |
F-19
Notes to Consolidated Financial Statements 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, 20052006 and 2004,2005 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | December 31, 2006 | |
| | December 31, 2005 | | | | | |
| | | | | | Less than 12 Months | | | 12 Months or Longer | | | Total | |
| | Less than 12 Months | | | 12 Months or Longer | | | Total | | | | | | | | | | | |
| | | | | | | | | | | | Fair | | | Unrealized | | | Fair | | | Unrealized | | | Fair | | | Unrealized | |
| | Fair | | | Unrealized | | | Fair | | | Unrealized | | | Fair | | | Unrealized | | | | Value | | | Losses | | | Value | | | Losses | | | Value | | | Losses | |
(In thousands) | | Value | | | Losses | | | Value | | | Losses | | | Value | | | Losses | | (In thousands) | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
U.S. Treasury and U.S. Government agency securities | | $ | 576,406 | | | (8,198 | ) | | | 875,243 | | | (19,236 | ) | | | 1,451,649 | | | (27,434 | ) | U.S. Treasury and U.S. Government agency securities | | $ | 208,942 | | | (419 | ) | | | 1,118,599 | | | (17,108 | ) | | | 1,327,541 | | | (17,527 | ) |
Mortgage-backed securities | | | 386,242 | | | (6,557 | ) | | | 509,521 | | | (20,579 | ) | | | 895,763 | | | (27,136 | ) | Mortgage-backed securities | | | 205,418 | | | (618 | ) | | | 717,797 | | | (19,973 | ) | | | 923,215 | | | (20,591 | ) |
State and municipal securities | | | 24,506 | | | (253 | ) | | | 5,157 | | | (271 | ) | | | 29,663 | | | (524 | ) | State and municipal securities | | | 11,637 | | | (61 | ) | | | 20,281 | | | (406 | ) | | | 31,918 | | | (467 | ) |
Equity securities | | | 249 | | | (37 | ) | | | — | | | — | | | 249 | | | (37 | ) | Equity securities | | | — | | | — | | | — | | | — | | | — | | | — | |
Other investments | | | 1,264 | | | (24 | ) | | | — | | | — | | | 1,264 | | | (24 | ) | Other investments | | | 926 | | | (74 | ) | | | 1,001 | | | (11 | ) | | | 1,927 | | | (85 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 988,667 | | | (15,069 | ) | | | 1,389,921 | | | (40,086 | ) | | | 2,378,588 | | | (55,155 | ) | |
| | | | | | | | | | | | | | Total | | $ | 426,923 | | | (1,172 | ) | | | 1,857,678 | | | (37,498 | ) | | | 2,284,601 | | | (38,670 | ) |
| | | | | | | | | | | | | | | |
F-17
Notes to Consolidated Financial Statements | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | December 31, 2005 | |
| | December 31, 2004 | | | | | |
| | | | | | Less than 12 Months | | | 12 Months or Longer | | | Total | |
| | Less than 12 Months | | | 12 Months or Longer | | | Total | | | | | | | | | | | |
| | | | | | | | | | | | Fair | | | Unrealized | | | Fair | | | Unrealized | | | Fair | | | Unrealized | |
| | Fair | | | Unrealized | | | Fair | | | Unrealized | | | Fair | | | Unrealized | | | | Value | | | Losses | | | Value | | | Losses | | | Value | | | Losses | |
(In thousands) | | Value | | | Losses | | | Value | | | Losses | | | Value | | | Losses | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Treasury and U.S. Government agency securities | | $ | 948,246 | | | (9,062 | ) | | | 36,023 | | | (977 | ) | | | 984,269 | | | (10,039 | ) | U.S. Treasury and U.S. Government agency securities | | $ | 576,406 | | | (8,198 | ) | | | 875,243 | | | (19,236 | ) | | | 1,451,649 | | | (27,434 | ) |
Mortgage-backed securities | | | 579,017 | | | (7,870 | ) | | | 92,068 | | | (2,254 | ) | | | 671,085 | | | (10,124 | ) | Mortgage-backed securities | | | 386,242 | | | (6,557 | ) | | | 509,521 | | | (20,579 | ) | | | 895,763 | | | (27,136 | ) |
State and municipal securities | | | 15,524 | | | (316 | ) | | | 690 | | | (4 | ) | | | 16,214 | | | (320 | ) | State and municipal securities | | | 24,506 | | | (253 | ) | | | 5,157 | | | (271 | ) | | | 29,663 | | | (524 | ) |
Equity securities | | | — | | | — | | | — | | | — | | | — | | | — | | Equity securities | | | 249 | | | (37 | ) | | | — | | | — | | | 249 | | | (37 | ) |
Other investments | | | 1,557 | | | (12 | ) | | | 507 | | | (101 | ) | | | 2,064 | | | (113 | ) | Other investments | | | 1,264 | | | (24 | ) | | | — | | | — | | | 1,264 | | | (24 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 1,544,344 | | | (17,260 | ) | | | 129,288 | | | (3,336 | ) | | | 1,673,632 | | | (20,596 | ) | |
| | | | | | | | | | | | | | Total | | $ | 988,667 | | | (15,069 | ) | | | 1,389,921 | | | (40,086 | ) | | | 2,378,588 | | | (55,155 | ) |
| | | | | | | | | | | | | | | |
| | |
U.S. Treasury and U.S. Government agency securities. The unrealized losses in this category consist primarily of unrealized losses in direct obligations of U.S. Government agencies and were caused by interest rate increases. Because Synovus has the ability and intent to hold these investments until a recovery of fair value, which may be at maturity, Synovus does not consider these investments to be other-than-temporarilyother-than-temporarily impaired at December 31, 20052006 or December 31, 2004.2005.
Mortgage-backed securities. The unrealized losses on Synovus’ investment in U.S. governmentGovernment agency mortgage-backed securities were caused by interest rate increases. The contractual cash flows of theThese securities are guaranteedrated AAA by an agency of the U.S. government.both Moody’s and Standard and Poor’s. Because the decline in market value is attributable to changes in interest rates and not credit quality and because Synovus has the ability and intent to hold these investments until a recovery of fair value, which may be at maturity, Synovus does not consider these investments to be other-than-temporarilyother-than-temporarily impaired at December 31, 20052006 or December 31, 2004.2005.
F-18F-20
Notes to Consolidated Financial Statements
The amortized cost and estimated fair value by contractual maturity of investment securities available for sale at December 31, 20052006 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 | |
| | | | | Cost | | | Fair Value | |
(In thousands) | (In thousands) | | Amortized | | | Estimated | | (In thousands) | | | | | | |
| | Cost | | | Fair Value | | |
| | | | | | | |
U.S. Treasury and U.S. Government agency securities: | U.S. Treasury and U.S. Government agency securities: | | | | | | | | U.S. Treasury and U.S. Government agency securities: | | | | | | | |
| Within 1 year | | $ | 298,657 | | | 295,922 | | Within 1 year | | $ | 352,938 | | | 349,750 | |
| 1 to 5 years | | | 1,185,184 | | | 1,164,529 | | 1 to 5 years | | | 1,065,869 | | | 1,056,858 | |
| 5 to 10 years | | | 142,726 | | | 139,969 | | 5 to 10 years | | | 284,820 | | | 284,815 | |
| More than 10 years | | | 24,673 | | | 24,192 | | More than 10 years | | | 79,686 | | | 79,147 | |
| | | | | | | | | | | | |
| | | $ | 1,651,240 | | | 1,624,612 | | | | $ | 1,783,313 | | | 1,770,570 | |
| | | | | | | | | | | | |
State and municipal securities: | State and municipal securities: | | | | | | | | State and municipal securities: | | | | | | | |
| Within 1 year | | $ | 19,632 | | | 19,722 | | Within 1 year | | $ | 21,351 | | | 21,402 | |
| 1 to 5 years | | | 81,886 | | | 83,639 | | 1 to 5 years | | | 69,695 | | | 70,814 | |
| 5 to 10 years | | | 76,093 | | | 79,172 | | 5 to 10 years | | | 75,910 | | | 78,004 | |
| More than 10 years | | | 29,133 | | | 29,838 | | More than 10 years | | | 25,637 | | | 25,965 | |
| | | | | | | | | | | | |
| | | $ | 206,744 | | | 212,371 | | | | $ | 192,593 | | | 196,185 | |
| | | | | | | | | | | | |
Other investments: | Other investments: | | | | | | | | Other investments: | | | | | | | |
| Within 1 year | | $ | 271 | | | 264 | | Within 1 year | | $ | 266 | | | 264 | |
| 1 to 5 years | | | 1,367 | | | 1,350 | | 1 to 5 years | | | 1,097 | | | 1,087 | |
| 5 to 10 years | | | — | | | — | | 5 to 10 years | | | 2,796 | | | 2,796 | |
| More than 10 years | | | 189 | | | 189 | | More than 10 years | | | 9,817 | | | 9,744 | |
| | | | | | | | | | | | |
| | | $ | 1,827 | | | 1,803 | | | | $ | 13,976 | | | 13,891 | |
| | | | | | | | | | | | |
Equity securities | Equity securities | | $ | 112,350 | | | 112,806 | | Equity securities | | $ | 95,332 | | | 96,353 | |
| | | | | | | | | | | | |
Mortgage-backed securities | Mortgage-backed securities | | $ | 1,032,485 | | | 1,006,728 | | Mortgage-backed securities | | $ | 1,291,895 | | | 1,275,358 | |
| | | | | | | | | | | | |
Total investment securities: | Total investment securities: | | | | | | | | Total investment securities: | | | | | | | |
| Within 1 year | | $ | 318,560 | | | 315,908 | | Within 1 year | | $ | 374,555 | | | 371,416 | |
| 1 to 5 years | | | 1,268,437 | | | 1,249,518 | | 1 to 5 years | | | 1,136,661 | | | 1,128,759 | |
| 5 to 10 years | | | 218,819 | | | 219,141 | | 5 to 10 years | | | 363,526 | | | 365,615 | |
| More than 10 years | | | 53,995 | | | 54,219 | | More than 10 years | | | 115,140 | | | 114,856 | |
Equity securities | Equity securities | | | 112,350 | | | 112,806 | | Equity securities | | | 95,332 | | | 96,353 | |
Mortgage-backed securities | Mortgage-backed securities | | | 1,032,485 | | | 1,006,728 | | Mortgage-backed securities | | | 1,291,895 | | | 1,275,358 | |
| | | | | | | | | | | | |
| | | $ | 3,004,646 | | | 2,958,320 | | | | $ | 3,377,109 | | | 3,352,357 | |
| | | | | | | | | | | | |
|
A summary of sales transactions in the investment securities available for sale portfolio for 2006, 2005, 2004, and 20032004 is as follows:
| | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | Gross | | | Gross | |
| | | | Gross | | | Gross | | | | Realized | | | Realized | |
| | Proceeds | | | Realized Gains | | | Realized Losses | | | Proceeds | | | Gains | | | Losses | |
(In thousands) | | | | | | | | | | | | | | | | | | |
2006 | | | $ | 130,457 | | | — | | | (2,118 | ) |
2005 | | $ | 50,048 | | | 744 | | | (281 | ) | | $ | 50,048 | | | 744 | | | (281 | ) |
2004 | | $ | 33,332 | | | 620 | | | (545 | ) | | $ | 33,332 | | | 620 | | | (545 | ) |
2003 | | $ | 207,124 | | | 2,960 | | | (469 | ) | |
|
At December 31, 20052006 and 2004,2005, investment securities with a carrying value of $2.4$2.90 billion and $2.1$2.44 billion, respectively, were pledged to secure certain deposits, securities sold under agreements to repurchase, and Federal Home Loan Bank advances, as required by law and contractual agreements.
Note 5 Loans
Loans outstanding, by classification, are summarized as follows:
| | | | | | | | | | | |
| | | |
| | | | | | | | | | | | | December 31, | |
| | | | | | |
| | | December 31, | | | | 2006 | | | 2005 | |
(In thousands) | (In thousands) | | | | (In thousands) | | | | | | |
| | 2005 | | | 2004 | | |
| | | | | | | |
Commercial: | Commercial: | | | | | | | | Commercial: | | | | | | | |
| Commercial, financial, and agricultural | | $ | 5,231,150 | | | 5,064,828 | | Commercial, financial, and agricultural | | $ | 5,875,854 | | | 5,268,042 | |
| Real estate-construction | | | 6,394,161 | | | 5,173,275 | | Real estate-construction | | | 8,246,380 | | | 6,374,859 | |
| Real estate-mortgage | | | 6,465,915 | | | 6,116,308 | | Real estate-mortgage | | | 6,920,107 | | | 6,448,325 | |
| | | | | | | | | | | | |
| | Total commercial | | | 18,091,226 | | | 16,354,411 | | | Total commercial | | | 21,042,341 | | | 18,091,226 | |
| | | | | | | | | | | | |
Retail: | Retail: | | | | | | | | Retail: | | | | | | | |
| Real estate-mortgage | | | 2,559,339 | | | 2,298,682 | | Real estate-mortgage | | | 2,881,880 | | | 2,559,339 | |
| Consumer loans-credit card | | | 268,348 | | | 256,297 | | Consumer loans-credit card | | | 276,269 | | | 268,348 | |
| Consumer loans-other | | | 521,521 | | | 612,957 | | Consumer loans-other | | | 500,757 | | | 521,521 | |
| | | | | | | | | | | | |
| | Total retail | | | 3,349,208 | | | 3,167,936 | | | Total retail | | | 3,658,906 | | | 3,349,208 | |
| | | | | | | | | | | | |
| | Total loans | | | 21,440,434 | | | 19,522,347 | | | Total loans | | | 24,701,247 | | | 21,440,434 | |
| | | | | | | | | | | | |
| Unearned income | | | (48,087 | ) | | | (41,951 | ) | Unearned income | | | (46,695 | ) | | | (48,087 | ) |
| | | | | | | | | | | | |
| | Total loans, net of unearned income | | $ | 21,392,347 | | | 19,480,396 | | | Total loans, net of unearned income | | $ | 24,654,552 | | | 21,392,347 | |
| | | | | | | | | | | | |
|
F-21
Notes to Consolidated Financial Statements Activity in the allowance for loan losses is summarized as follows:
| | | | | | | | | | | | | |
| | | |
| | | | | | | | | | | | | | Years Ended December 31, | |
| | | | | |
| | Years Ended December 31, | | | 2006 | | | 2005 | | | 2004 | |
(In thousands) | | | | | | | | | | | | |
| | 2005 | | | 2004 | | | 2003 | | |
| | | | | | | | | | |
Balance at beginning of year | | $ | 265,745 | | | 226,059 | | | 199,841 | | | $ | 289,612 | | | 265,745 | | | 226,059 | |
Allowance for loan losses of acquired/ divested subsidiaries | | | — | | | 5,615 | | | 10,534 | | |
Allowance for loan losses of acquired subsidiaries | | | | 9,915 | | | — | | | 5,615 | |
Provision for losses on loans | | | 82,532 | | | 75,319 | | | 71,777 | | | | 75,148 | | | 82,532 | | | 75,319 | |
Recoveries of loans previously charged off | | | 8,561 | | | 9,720 | | | 8,112 | | | | 12,590 | | | 8,561 | | | 9,720 | |
Loans charged off | | | (67,226 | ) | | | (50,968 | ) | | | (64,205 | ) | | | (72,806 | ) | | | (67,226 | ) | | | (50,968 | ) |
| | | | | | | | | | | | | | |
Balance at end of year | | $ | 289,612 | | | 265,745 | | | 226,059 | | | $ | 314,459 | | | 289,612 | | | 265,745 | |
| | | | | | | | | | | | | | |
|
At December 31, 2006, the recorded investment in loans that were considered to be impaired was $42.2 million. Included in this amount is $1.7 million of impaired loans for which the related allowance for loan losses is $145 thousand, and $40.5 million of impaired loans for which there is no related allowance for loan losses determined in accordance with SFAS No. 114, “Accounting by Creditors for Impairment of a Loan.” Synovus’ criteria for an impaired loan was changed in 2006 to conform with the definition in SFAS No. 114. The change had no material impact to the allowance for loan losses or provision expense. At December 31, 2006, all impaired loans were on nonaccrual status.
At December 31, 2005, the recorded investment in loans that were considered to be impaired was $95.3 million. Included in this amount iswas $58.9 million of impaired loans for
F-19
Notes to Consolidated Financial Statements which the related allowance isfor loan losses was $22.9 million, and $36.4 million of impaired loans for which there iswas no related allowance for loan losses determined in accordance with SFAS No. 114, “Accounting by Creditors for Impairment of a Loan.”114. At December 31, 2005, impaired loans in the amount of $52 million were on nonaccrual status.
At December 31, 2004, the recorded investment in loans that were considered to be impaired was $99.2 million. Included in this amount was $58.9 million of impaired loans for which the related allowance was $22.3 million, and $40.3 million of impaired loans for which there was no related allowance determined in accordance with SFAS No. 114. At December 31, 2004, impaired loans in the amount of $53$52.6 million were on nonaccrual status.
The allowance for loan losses on impaired loans was primarily determined using either the fair value of the loans’ collateral, less estimated selling costs.costs, or discounted cash flows. The average recorded investment in impaired loans was approximately $67.1 million, $90.9 million, $107.0 million, and $96.6$107.0 million for the years ended December 31, 2006, 2005, and 2004, and 2003, respectively,respectively. There was no interest income recognized for the investment in impaired loans for the year ended December 31, 2006, and the related amount of interest income recognized during the period that such loans were impaired was approximately $3.6 million $2.9 million, and $5.4$2.9 million for the years ended December 31, 2005 2004, and 2003,2004, respectively.
Loans on nonaccrual status amount to $96.2 million, $80.0 million, $80.2 million, and $67.2$80.2 million, at December 31, 2006, 2005, 2004, and 2003,2004, respectively. If nonaccrual loans had been on a full accruing basis, interest income on these loans would have been increased by approximately $2.5$3.9 million, $2.7$2.5 million, and $2.7 million for the years ended December 31, 2006, 2005, 2004, and 2003,2004, respectively.
A substantial portion of the loans isare secured by real estate in markets in which affiliatesubsidiary 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’ affiliatesubsidiary 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 Columbus Bank and Trust Company, Bank of North Georgia, 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 unaffiliated customers. The following is a summary of such loans outstanding and the activity in these loans for the year ended December 31, 2005.2006.
| | | | | | | | |
| | | | |
(In thousands) | (In thousands) | | (In thousands) | |
Balance at December 31, 2004 | | $ | 256,711 | | |
Balance at December 31, 2005 | | | $ | 292,711 | |
Adjustment for executive officer and director changes | | | 1,876 | | | | (396 | ) |
| | | | | | |
Adjusted balance at December 31, 2004 | | | 258,587 | | |
Adjusted balance at December 31, 2005 | | | | 292,315 | |
New loans | | | 192,822 | | | | 234,196 | |
Repayments | | | (158,698 | ) | | | (228,102 | ) |
| | | | | | |
Balance at December 31, 2005 | | $ | 292,711 | | |
Balance at December 31, 2006 | | | $ | 298,409 | |
| | | | | | |
|
Note 6 Contract Acquisition Costs and Computer Software
| |
Note 6 | 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 $163.9$167.4 million and $132.4$163.9 million at December 31, 20052006 and 2004,2005, respectively. Amortization expense related to contract acquisition costs was $44.5 million, $37.8 million, $24.9 million, and $20.8$25.2 million, for the years ended December 31, 2006, 2005, and 2004, and 2003, respectively.
F-22
Notes to Consolidated Financial Statements Aggregate estimated amortization expense of contract acquisition costs for the next five years is as follows:
| | | | | |
| | | |
| | | Contract | |
| | | | | | Acquisition | |
| | | | Costs | |
(In thousands) | | Contract | | | | |
| | Acquisition | | |
| | Costs | | |
| | | | |
2006 | | $ | 41,688 | | |
2007 | | | 28,254 | | | $ | 34,011 | |
2008 | | | 24,669 | | | | 29,082 | |
2009 | | | 23,095 | | | | 28,007 | |
2010 | | | 15,429 | | | | 25,098 | |
2011 | | | | 23,606 | |
|
The weighted average estimated useful lives of conversioncontract acquisition costs is as follows:
| | | | |
| |
| | Weighted | |
| | Average | |
| | Amortization | |
| | Period (Yrs) | |
| | | |
Payments for processing rights | | | 11.69.8 | |
Conversion costs | | | 6.97.4 | |
Combined | | | 8.19.1 | |
|
F-20
Notes to Consolidated Financial Statements The following table summarizes TSYS’ computer software at December 31, 20052006 and 2004:2005:
| | | | | | | | | |
| | | | | | | | | | |
| | | | 2006 | | | 2005 | |
(In thousands) | (In thousands) | | | | | | | |
| | 2005 | | | 2004 | | |
| | | | | | | |
Licensed computer software | | $ | 395,992 | | | 383,371 | | | $ | 336,263 | | | 395,992 | |
Software development costs | | | 158,384 | | | 126,000 | | | | 172,555 | | | 158,384 | |
Acquisition technology intangibles | | | 30,700 | | | 12,200 | | | | 45,344 | | | 30,700 | |
| | | | | | | | | | |
| | | 585,076 | | | 521,571 | | | | 554,162 | | | 585,076 | |
Less accumulated amortization | | | (317,088 | ) | | | (252,924 | ) | | | (337,712 | ) | | | (317,088 | ) |
| | | | | | | | | | |
Computer software, net | | $ | 267,988 | | | 268,647 | | | $ | 216,450 | | | 267,988 | |
| | | | | | | | | | |
|
Amortization expense related to licensed and capitalized software development costs and acquisition technology intangibles at TSYS was $65.5$92.7 million, $50.6$69.4 million, and $53.2$51.8 million for the years ended December 31, 2006, 2005, 2004, and 2003,2004, respectively. Aggregate estimated amortization expense of computer software over the next five years is as follows:
| | | | | |
| | | | | | |
| | | | Computer | |
| | Computer | | | Software | |
(In thousands) | | Software | | | | |
| | | | |
2006 | | $ | 59,641 | | |
2007 | | | 55,480 | | | $ | 63,932 | |
2008 | | | 48,999 | | | | 57,050 | |
2009 | | | 39,331 | | | | 45,192 | |
2010 | | | 15,032 | | | | 25,976 | |
2011 | | | | 11,021 | |
|
The weighted average estimated useful lives of licensedTSYS’ computer software is as follows:
| | | | |
| |
| | Weighted | |
| | Average | |
| | Amortization | |
| | Period (Yrs) | |
| | | |
Licensed computer software | | | 7.06.7 | |
Software development costs | | | 6.7 | |
Acquisition technology intangibles | | | 7.47.7 | |
Combined | | | 7.06.8 | |
|
TSYS was developing its Integrated Payments Platform supporting the on-line and off-line debit and stored value markets, which would have given clients access to all national and regional networks, EBT programs, ATM driving and switching services for online debit processing. Through 2004, TSYS invested a total of $6.3 million. In March 2005, TSYS evaluated its debit solution and decided to modify its approach in the debit processing market. With the acquisition of VitalTSYS Acquiring and debit alternatives now available, TSYS determined that it would no longer market this third-party software product as its on-line debit solution. TSYS will continue to support this product for existing clients and will enhance and develop a new solution. As a result, TSYS recognized an impairment charges on developed software of $3.6 millioncharge in net occupancy and equipment expense during 2005.of approximately $3.1 million related to its on-line debit solution. In September 2005, TSYS also recognized an impairment loss on developed software of $482 thousand.
During 2004, TSYS changed its approach for entry into the Asia-Pacific market. As a result, TSYS recognized a $10.1 million charge to net occupancy and equipment expense for the write-off of the double-byte software development project.
F-21F-23
Notes to Consolidated Financial Statements
| |
Note 7 | Other Intangible Assets and Other Assets |
Other intangible assets (excluding goodwill) as of December 31, 20052006 and 20042005 are presented in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| | | | 2006 | | | 2005 | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | Gross | | | | | Gross | | | |
| | | | | Carrying | | | Accumulated | | | | | Carrying | | | Accumulated | | | |
| | | 2005 | | | 2004 | | | | Amount | | | Amortization | | | Net | | | Amount | | | Amortization | | | Net | |
(In thousands) | (In thousands) | | | | | | | (In thousands) | | | | | | | | | | | | | | | | | | |
| | Gross | | | | | Gross | | | | |
| | Carrying | | | Accumulated | | | | | Carrying | | | Accumulated | | | | |
| | Amount | | | Amortization | | | Net | | | Amount | | | Amortization | | | Net | | |
| | | | | | | | | | | | | | | | | | | |
Other intangible assets: | Other intangible assets: | | | | | | | | | | | | | | | | | | | | Other intangible assets: | | | | | | | | | | | | | | | | | | | |
| Purchased trust revenues | | $ | 4,210 | | | (1,286 | ) | | | 2,924 | | $ | 4,210 | | | (1,006 | ) | | | 3,204 | | Purchased trust revenues | | $ | 4,210 | | | (1,567 | ) | | | 2,643 | | $ | 4,210 | | | (1,286 | ) | | | 2,924 | |
| Acquired customer contracts | | | 7,731 | | | (3,818 | ) | | | 3,913 | | | 7,731 | | | (2,536 | ) | | | 5,195 | | Acquired customer contracts | | | 10,731 | | | (5,702 | ) | | | 5,029 | | | 7,731 | | | (3,818 | ) | | | 3,913 | |
| Employment contracts/non-competition agreements | | | 1,091 | | | (631 | ) | | | 460 | | | 1,091 | | | (308 | ) | | | 783 | | Employment contracts/non-competition agreements | | | 1,091 | | | (941 | ) | | | 150 | | | 1,091 | | | (631 | ) | | | 460 | |
| Core deposit premiums | | | 39,674 | | | (16,124 | ) | | | 23,550 | | | 50,031 | | | (21,915 | ) | | | 28,116 | | Core deposit premiums | | | 46,331 | | | (19,232 | ) | | | 27,099 | | | 39,674 | | | (16,124 | ) | | | 23,550 | |
| Intangibles associated with the acquisition of minority interest in TSYS | | | 2,846 | | | (759 | ) | | | 2,087 | | | 2,846 | | | (474 | ) | | | 2,372 | | Intangibles associated with the acquisition of minority interest in TSYS | | | 7,848 | | | (1,271 | ) | | | 6,577 | | | 2,846 | | | (759 | ) | | | 2,087 | |
| Customer relationships | | | 13,800 | | | (2,100 | ) | | | 11,700 | | | 1,800 | | | (250 | ) | | | 1,550 | | Customer relationships | | | 25,116 | | | (4,841 | ) | | | 20,275 | | | 13,800 | | | (2,100 | ) | | | 11,700 | |
| Other | | | 700 | | | (467 | ) | | | 233 | | | 700 | | | (292 | ) | | | 408 | | Other | | | 2,676 | | | (863 | ) | | | 1,813 | | | 700 | | | (467 | ) | | | 233 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total carrying value | | $ | 70,052 | | | (25,185 | ) | | | 44,867 | | $ | 68,409 | | | (26,781 | ) | | | 41,628 | | Total carrying value | | $ | 98,003 | | | (34,417 | ) | | | 63,586 | | $ | 70,052 | | | (25,185 | ) | | | 44,867 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
Aggregate other intangible assets amortization expense (excluding goodwill) for the years ended December 31, 2006, 2005, and 2004 and 2003 was $10.5 million, $8.8 million, $8.7 million, and $6.2$8.7 million, respectively. Aggregate estimated amortization expense over the next five years is: $8.1 million in 2006, $6.6$10.6 million in 2007, $5.6$9.4 million in 2008, $5.4$8.8 million in 2009, and $5.2$7.8 million in 2010.2010, and $7.5 million in 2011.
Other Assets
Significant balances included in other assets are accounts receivable, company-owned life insurance programspolicies, other real estate (ORE) and TSYS’ investments in joint ventures.equity method investments.
At December 31, 2006 and 2005, TSYS had accounts receivable of $246.6 million and 2004,$184.5 million, respectively, net of allowance for doubtful accounts and billing adjustments of $11.0 million and $12.6 million at 2006 and 2005, respectively.
At December 31, 2006 and 2005, Synovus maintained certain company-owned life insurance programspolicies with a carrying value of approximately $187.2$204.0 million and $169.7$187.2 million, respectively.
Investments in joint ventures consist of TSYS’ 49% investment in TSYS de México, TSYS’ 34%44.56% investment in CUP Data and prior to March 1, 2005, TSYS’ 50% investment in Vital. These investments are accounted for using the equity method. Other assets include $42.7$62.1 million and $54.4$42.7 million in recorded balances related to these investments at December 31, 20052006 and 2004,2005, respectively.
| |
Note 8 | Interest Bearing Deposits |
A summary of interest bearing deposits at December 31, 20052006 and 20042005 is as follows:
| | | | | | | | | |
| |
| | 2006 | | | 2005 | |
(In thousands) | | | | | | |
Interest bearing demand deposits | | $ | 3,228,350 | | | | 3,133,607 | |
Money market accounts | | | 6,905,834 | | | | 5,748,378 | |
Savings accounts | | | 499,962 | | | | 524,652 | |
Time deposits under $100,000 | | | 3,020,976 | | | | 2,440,484 | |
Time deposits of $100,000 or more | | | 4,086,232 | | | | 2,951,724 | |
| | | | | | |
| | | 17,741,354 | | | | 14,798,845 | |
Brokered time deposits* | | | 3,014,495 | | | | 2,284,770 | |
| | | | | | |
| Total interest bearing deposits | | $ | 20,755,849 | | | | 17,083,615 | |
| | | | | | |
* Brokered time deposits are in amounts of $100,000 or more. |
|
| | | | | | | | | |
| | 2005 | | | 2004 | |
(In thousands) | | | | | | |
Interest bearing demand deposits | | $ | 3,133,607 | | | $ | 2,998,947 | |
Money market accounts | | | 5,748,378 | | | | 4,869,200 | |
Savings accounts | | | 524,652 | | | | 547,074 | |
Time deposits under $100,000 | | | 2,440,484 | | | | 2,180,245 | |
Time deposits of $100,000 or more | | | 2,951,724 | | | | 2,353,057 | |
| | | | | | |
| | | 14,798,845 | | | | 12,948,523 | |
Brokered time deposits* | | | 2,284,770 | | | | 2,291,037 | |
| | | | | | |
| Total interest bearing deposits | | $ | 17,083,615 | | | $ | 15,239,560 | |
| | | | | | |
* Brokered time deposits are in amounts of $100,000 or more. |
|
Interest bearing deposits include the unamortized balance of purchase accounting adjustments and the fair value basis adjustment for those time deposits which are hedged with interest rate swaps. Interest expense for the years ended December 31, 2006, 2005, 2004, and 20032004 on time deposits of $100,000 or more was $299.5 million, $171.5 million, $94.3 million, and $94.2$94.3 million, respectively.
F-22F-24
Notes to Consolidated Financial Statements
The following table presents scheduled cash maturities of time deposits at December 31, 2005:
| | | | | | |
| | | | | | | |
(In thousands) | (In thousands) | | | (In thousands) | |
Maturing within one year | Maturing within one year | | $ | 5,425,428 | | Maturing within one year | | $ | 8,518,807 | |
| | between 1 — 2 years | | | 762,369 | |
2 — 3 years | | 2 — 3 years | | | 259,625 | |
3 — 4 years | | 3 — 4 years | | | 255,829 | |
4 — 5 years | | 4 — 5 years | | | 140,944 | |
| between 1 — 2 years | | | 1,159,941 | | Thereafter | | | 159,409 | |
| 2 — 3 years | | | 456,059 | | | | | |
| 3 — 4 years | | | 207,732 | | | | $ | 10,096,983 | |
| 4 — 5 years | | | 237,285 | | | | | |
| thereafter | | | 190,533 | | |
| | | | |
| | $ | 7,676,978 | | |
| | | | |
| |
| |
Note 9 | Long-Term Debt and Short-Term Borrowings |
Long-term debt at December 31, 20052006 and 20042005 consists of the following:
| | | | | | | | | | | | | | | | | | |
| | | | |
| | | 2005 | | | 2004 | | | | 2006 | | | 2005 | |
(In thousands) | (In thousands) | | | | | | | (In thousands) | | | | | | |
Parent Company: | Parent Company: | | | | | | | | Parent Company: | | | | | | | |
7.25% senior notes, due December 15, 2005, with semi-annual interest payments and principal to be paid at maturity | | $ | — | | | 200,000 | | |
4.875% subordinated notes, due February 15, 2013, with semi-annual interest payments and principal to be paid at maturity | 4.875% subordinated notes, due February 15, 2013, with semi-annual interest payments and principal to be paid at maturity | | | 300,000 | | | 300,000 | | 4.875% subordinated notes, due February 15, 2013, with semi-annual interest payments and principal to be paid at maturity | | $ | 300,000 | | | 300,000 | |
5.125% subordinated notes, due June 15, 2017, with semi-annual interest payments and principal to be paid at maturity | 5.125% subordinated notes, due June 15, 2017, with semi-annual interest payments and principal to be paid at maturity | | | 450,000 | | | — | | 5.125% subordinated notes, due June 15, 2017, with semi-annual interest payments and principal to be paid at maturity | | | 450,000 | | | 450,000 | |
LIBOR + 3.60% debentures, due December 23, 2031 with quarterly interest payments and principal to be paid at maturity (rate of 8.1% at December 31, 2005) | | | 10,252 | | | 10,297 | | |
LIBOR + 3.60% debentures, matured in December 2006 | | LIBOR + 3.60% debentures, matured in December 2006 | | | — | | | 10,252 | |
LIBOR + 3.45% debentures, due September 30, 2037 with quarterly interest payments and principal to be paid at maturity (rate of 8.81% at December 31, 2006) | | LIBOR + 3.45% debentures, due September 30, 2037 with quarterly interest payments and principal to be paid at maturity (rate of 8.81% at December 31, 2006) | | | 10,180 | | | — | |
LIBOR + 1.80% debentures, due April 19, 2035 with quarterly interest payments and principal to be paid at maturity (rate of 7.16% at December 31, 2006) | | LIBOR + 1.80% debentures, due April 19, 2035 with quarterly interest payments and principal to be paid at maturity (rate of 7.16% at December 31, 2006) | | | 10,218 | | | — | |
Hedge-related basis adjustment | Hedge-related basis adjustment | | | (883 | ) | | | 2,906 | | Hedge-related basis adjustment | | | 887 | | | (883 | ) |
| | | | | | | | | | | | |
| Total long-term debt — Parent Company | | | 759,369 | | | 513,203 | | Total long-term debt — Parent Company | | | 771,285 | | | 759,369 | |
| | | | | | | | | | | | |
Subsidiaries: | | | | | | | | |
Federal Home Loan Bank advances with interest and principal payments due at various maturity dates through 2018 and interest rates ranging from 2.00% to 6.68% at December 31, 2005 (weighted average interest rate is 4.14% at December 31, 2005) | | | 1,163,570 | | | 1,356,205 | | |
Other notes payable, capital leases and software obligations payable with interest and principal payments due at various maturity dates through 2008 and interest rates ranging from 2.6% to 18.0% at December 31, 2005 | | | 10,699 | | | 10,175 | | |
| | | | | | |
| Total long-term debt — subsidiaries | | | 1,174,269 | | | 1,366,380 | | |
| | | | | | |
| Total long-term debt | | $ | 1,933,638 | | | 1,879,583 | | |
| | | | | | |
| |
| | | | | | | | | |
| | 2006 | | | 2005 | |
| | | | | | |
Subsidiaries: | | | | | | | | |
Federal Home Loan Bank advances with interest and principal payments due at various maturity dates through 2018 and interest rates ranging from 2.00% to 6.68% at December 31, 2006 (weighted average interest rate of 4.51% at December 31, 2006) | | | 566,930 | | | | 1,163,570 | |
Other notes payable, capital leases and software obligations payable with interest and principal payments due at various maturity dates through 2028 (weighted average interest rate of 6.09% at December 31, 2006) | | | 11,924 | | | | 10,699 | |
| | | | | | |
| Total long-term debt — subsidiaries | | | 578,854 | | | | 1,174,269 | |
| | | | | | |
| Total long-term debt | | $ | 1,350,139 | | | | 1,933,638 | |
| | | | | | |
|
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, 2005,2006, 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 $2.6$2.4 billion, as well as investment securities of approximately $91.4$73.6 million at December 31, 2005.2006.
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, 20052006 and 2004.2005.
F-23F-25
Notes to Consolidated Financial Statements
Required annual principal payments on long-term debt for the five years subsequent to December 31, 20052006 are shown on the following table:
| | | | | | | | | | | | | | | | | | | | | | |
| | | | |
| | Parent | | | | Parent | | |
| | Company | | Subsidiaries | | | Total | | | Company | | Subsidiaries | | | Total | |
(In thousands) | | | | | | | | | | | | | | | | |
2006 | | $ | — | | | 681,797 | | | 681,797 | | |
2007 | | | — | | | 238,321 | | | 238,321 | | | $ | — | | | 254,640 | | | 254,640 | |
2008 | | | — | | | 17,592 | | | 17,592 | | | | — | | | 53,381 | | | 53,381 | |
2009 | | | — | | | 58,952 | | | 58,952 | | | | — | | | 135,037 | | | 135,037 | |
2010 | | | — | | | 16,615 | | | 16,615 | | | | — | | | 16,653 | | | 16,653 | |
2011 | | | | — | | | 33,315 | | | 33,315 | |
|
The following table sets forth certain information regarding federal funds purchased and securities sold under repurchase agreements, the principal components of short-term borrowings.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | |
| | 2005 | | | 2004 | | | 2003 | | | 2006 | | | 2005 | | | 2004 | |
(In thousands) | | | | | | | | | | | | | | | | | | |
Balance at December 31 | | $ | 1,158,669 | | | 1,208,080 | | | 1,354,887 | | | $ | 1,572,809 | | | 1,158,669 | | | 1,208,080 | |
Weighted average interest rate at December 31 | | | 3.69 | % | | | 1.95 | % | | | 0.93 | % | | | 5.00 | % | | | 3.69 | % | | | 1.95 | % |
Maximum month end balance during the year | | $ | 1,918,797 | | | 1,749,923 | | | 1,459,818 | | | $ | 1,974,272 | | | 1,918,797 | | | 1,749,923 | |
Average amount outstanding during the year | | $ | 1,103,005 | | | 1,479,815 | | | 1,101,216 | | | $ | 1,534,312 | | | 1,103,005 | | | 1,479,815 | |
Weighted average interest rate during the year | | | 2.86 | % | | | 1.30 | % | | | 1.07 | % | | | 4.66 | % | | | 2.86 | % | | | 1.30 | % |
|
| |
Note 10 | Other Comprehensive Income (Loss) |
Note 10 Other Comprehensive Income (Loss)
The components of other comprehensive income (loss) for the years ended December 31, 2006, 2005, 2004, and 20032004 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| | | 2006 | | 2005 | | 2004 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Before- | | Tax | | Net of | | Before- | | Tax | | Net of | | Before- | | Tax | | Net of |
| | 2005 | | 2004 | | 2003 | | Tax | | (Expense) | | Tax | | Tax | | (Expense) | | Tax | | Tax | | (Expense) | | Tax |
| | | | | | | | Amount | | or Benefit | | Amount | | Amount | | or Benefit | | Amount | | Amount | | or Benefit | | Amount |
(In thousands) | | Before- | | Tax | | Net of | | Before- | | Tax | | Net of | | Before- | | Tax | | Net of | | | | | | | | | | | | | | | | | | |
| | Tax | | (Expense) | | Tax | | Tax | | (Expense) | | Tax | | Tax | | (Expense) | | Tax | |
| | Amount | | or Benefit | | Amount | | Amount | | or Benefit | | Amount | | Amount | | or Benefit | | Amount | |
| | | | | | | | | | | | | | | | | | | |
Net unrealized gains (losses) on cash flow hedges | | $ | (3,670 | ) | | | 1,430 | | | (2,240 | ) | | | (9,718 | ) | | | 3,965 | | | (5,753 | ) | | | (4,562 | ) | | | 1,789 | | | (2,773 | ) | | $ | 5,909 | | | (2,259 | ) | | | 3,650 | | | (3,670 | ) | | | 1,430 | | | (2,240 | ) | | | (9,718 | ) | | | 3,965 | | | (5,753 | ) |
Net unrealized gains (losses) on investment securities available for sale: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Unrealized gains (losses) arising during the year | | | (45,639 | ) | | | 17,568 | | | (28,071 | ) | | | (32,988 | ) | | | 12,457 | | | (20,531 | ) | | | (29,505 | ) | | | 11,313 | | | (18,192 | ) | | | 19,456 | | | (7,482 | ) | | | 11,974 | | | (45,639 | ) | | | 17,568 | | | (28,071 | ) | | | (32,988 | ) | | | 12,457 | | | (20,531 | ) |
Reclassification adjustment for (gains) losses realized in net income | | | (463 | ) | | | 180 | | | (283 | ) | | | (75 | ) | | | 29 | | | (46 | ) | | | (2,491 | ) | | | 959 | | | (1,532 | ) | | | 2,118 | | | (824 | ) | | | 1,294 | | | (463 | ) | | | 180 | | | (283 | ) | | | (75 | ) | | | 29 | | | (46 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net unrealized gains (losses) | | | (46,102 | ) | | | 17,748 | | | (28,354 | ) | | | (33,063 | ) | | | 12,486 | | | (20,577 | ) | | | (31,996 | ) | | | 12,272 | | | (19,724 | ) | | | 21,574 | | | (8,306 | ) | | | 13,268 | | | (46,102 | ) | | | 17,748 | | | (28,354 | ) | | | (33,063 | ) | | | 12,486 | | | (20,577 | ) |
Foreign currency translation gains (losses) | | | (12,161 | ) | | | 4,316 | | | (7,845 | ) | | | 8,893 | | | (3,169 | ) | | | 5,724 | | �� | | 9,379 | | | (3,486 | ) | | | 5,893 | | | | 16,688 | | | (3,813 | ) | | | 12,875 | | | (12,161 | ) | | | 4,316 | | | (7,845 | ) | | | 8,893 | | | (3,169 | ) | | | 5,724 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other comprehensive loss | | $ | (61,933 | ) | | | 23,494 | | | (38,439 | ) | | | (33,888 | ) | | | 13,282 | | | (20,606 | ) | | | (27,179 | ) | | | 10,575 | | | (16,604 | ) | |
Other comprehensive income (loss) | | | $ | 44,171 | | | (14,378 | ) | | | 29,793 | | | (61,933 | ) | | | 23,494 | | | (38,439 | ) | | | (33,888 | ) | | | 13,282 | | | (20,606 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
F-26
Notes to Consolidated Financial Statements Cash settlements on cash flow hedges were $2.5 million, $7 thousand, $5.8 million, and $7.6$5.8 million for the years ended December 31, 2006, 2005, 2004 and 2003,2004, respectively, all of which were included in earnings. During 2006, 2005, 2004, and 2001,2004, Synovus recorded cash (payments) receipts on terminated hedges of $159 thousand, ($6.2) million, and $313 thousand, and $3.3 million, respectively, which were deferred and are being amortized into earnings over the shorter of the remaining contract life or the maturity of the designated instrument as an adjustment to interest income (expense). There was one terminated cash flow hedge during 2006. There were two terminated cash flow hedges during 2005 and one terminated cash flow hedge during 2004. There were no terminated cash flow hedges during 2003. The corresponding net amortization on these settlements was approximately ($389) thousand, ($165) thousand, and $456 thousand in 2006, 2005, and $1.2 million in 2005, 2004, and 2003, respectively. The change in unrealized gains (losses) on cash flow hedges was approximately $(3.8)$5.6 million in 2006, ($3.8) million in 2005, and ($9.3) million in 2004,2004.
In July 2006, TSYS restructured its European branch operation into a new statutory structure. As a result, TSYS’ UK branch structure was terminated with some of the former UK branch assets and ($3.4) millionworkforce being contributed into the new European statutory structure. Accordingly, TSYS adopted the permanent investment exception under Accounting Principles Board Opinion No. 23 (APB 23), “Accounting for Income Taxes — Special Areas,” with respect to future earnings of certain foreign subsidiaries. Its decision to permanently reinvest foreign earnings offshore means that TSYS will no longer allocate taxes to foreign currency translation adjustments associated with these foreign subsidiaries accumulated in 2003.
F-24
Notes to Consolidated Financial Statements other comprehensive income.
| |
Note 11 | 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, 2006, 2005, 2004, and 2003.2004.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2006 | | | 2005 | | | 2004 | |
| | | | | | | | | | | |
| | 2005 | | | 2004 | | | 2003 | | | | | Weighted | | | Net | | | | | Weighted | | | Net | | | | | Weighted | | | Net | |
| | | | | | | | | | | Net | | | Average | | | Income | | | Net | | | Average | | | Income | | | Net | | | Average | | | Income | |
(In thousands, | | | | Weighted | | | | | | | Weighted | | | | | | | Weighted | | | | | Income | | | Shares | | | Per Share | | | Income | | | Shares | | | Per Share | | | Income | | | Shares | | | Per Share | |
except per share data) | | Net | | | Average | | | Net Income | | | Net | | | Average | | | Net Income | | | Net | | | Average | | | Net Income | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Income | | | Shares | | | Per Share | | | Income | | | Shares | | | Per Share | | | Income | | | Shares | | | Per Share | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic EPS | | $ | 516,446 | | | 311,495 | | $ | 1.66 | | $ | 437,033 | | | 307,262 | | $ | 1.42 | | $ | 388,925 | | | 302,010 | | $ | 1.29 | | | $ | 616,917 | | | 321,241 | | $ | 1.92 | | $ | 516,446 | | | 311,495 | | $ | 1.66 | | $ | 437,033 | | | 307,262 | | $ | 1.42 | |
Effect of dilutive options | | | (158 | )* | | | 3,320 | | | | | | (247 | )* | | | 3,068 | | | | | | — | | | 2,918 | | | | | |
Effect of dilutive share awards | | | | — | | | 2,991 | | | | | | (158 | )* | | | 3,320 | | | | | | (247 | )* | | | 3,068 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Diluted EPS | | $ | 516,288 | | | 314,815 | | $ | 1.64 | | $ | 436,786 | | | 310,330 | | $ | 1.41 | | $ | 388,925 | | | 304,928 | | $ | 1.28 | | | $ | 616,917 | | | 324,232 | | $ | 1.90 | | $ | 516,288 | | | 314,815 | | $ | 1.64 | | $ | 436,786 | | | 310,330 | | $ | 1.41 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
* Represents dilution from outstanding TSYS stock options which enable their holders to obtain TSYS common stock. | | | | | |
| |
| |
* | Represents dilution from outstanding TSYS stock options which enable their holders to obtain TSYS common stock. |
The following represents potentially dilutive shares including options to purchase shares of Synovus common stock and non-vested shares that were outstanding during the periods noted below, but were not included in the computation of diluted earnings per share because the options’ exercise price and fair value of non-vested shares was greater than the average market price of the common shares.shares during the period.
| | | | | | | | | | | | | | | | |
| | | | |
| | | Weighted Average | | | | Weighted Average | |
Quarter | | Number | | | Exercise Price | | |
Ended | | of Shares | | | Per Share | | |
| | | | | | | | Number | | | Exercise Price | |
Quarter Ended | | | of Shares | | | Per Share | |
| | | | | | | |
December 31, 2006 | | | | 11,863 | | $ | 30.61 | |
September 30, 2006 | | | | 4,651,345 | | $ | 29.21 | |
June 30, 2006 | | | | 5,727,935 | | $ | 28.79 | |
March 31, 2006 | | | | 5,710,605 | | $ | 28.89 | |
December 31, 2005 | | | 4,725,260 | | $ | 29.21 | | | | 4,725,260 | | $ | 29.21 | |
September 30, 2005 | | | 4,703,210 | | $ | 29.22 | | | | 4,703,210 | | $ | 29.22 | |
June 30, 2005 | | | 2,933,225 | | $ | 29.05 | | | | 2,933,225 | | $ | 29.05 | |
March 31, 2005 | | | 2,637,150 | | $ | 28.98 | | | | 2,637,150 | | $ | 28.98 | |
December 31, 2004 | | | 2,637,150 | | $ | 28.98 | | | | 2,637,150 | | $ | 28.98 | |
September 30, 2004 | | | 7,002,758 | | $ | 27.34 | | | | 7,002,758 | | $ | 27.34 | |
June 30, 2004 | | | 7,046,977 | | $ | 27.33 | | | | 7,046,977 | | $ | 27.33 | |
March 31, 2004 | | | 6,905,462 | | $ | 27.37 | | | | 6,905,462 | | $ | 27.37 | |
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 | | |
|
F-27
Notes to Consolidated Financial Statements | |
Note 12 | 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.risk. These derivative instruments consist of interest rate swaps, commitments to sell fixed-rate mortgage loans, and interest rate swaps. The interest rate lock commitments made to prospective mortgage loan customers alsocustomers. Mortgage rate lock commitments represent derivative instruments since it is intended that such loans will be sold.
Synovus originates first lien residential mortgage loans for sale into the secondary market and generally does not hold the originated loans for investment purposes. Mortgage loans are either converted to securities or are sold to a third party servicing aggregator.
At December 31, 2005,2006, Synovus had commitments to fund fixed-rate mortgage loans to customers in the amount of $96.2$89.8 million. The fair value of these commitments at December 31, 20052006 was an unrealized loss of $337 thousand.$446 thousand, which was recorded as a component of mortgage banking income in the consolidated statements of income.
At December 31, 2005,2006, outstanding commitments to sell fixed-rate mortgage loans amounted to approximately $135.9$175.4 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, 20052006 was an unrealized lossgain of $684$267 thousand, which was recorded as a component of mortgage banking income in the consolidated statements of income.
Synovus utilizes interest rate swaps to manage interest rate risks, primarily arising from its core community banking activities. These 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 derivatives potentially exposes Synovus to the risk of counterparties’ failure to fulfill their legal obligations including, but not limited to, potential amounts due or payable under each derivative contract. 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 receive fixed interest rate swap contracts at December 31, 2006 are being utilized to hedge $700 million in floating rate loans and $2.08 billion in fixed-rate liabilities. The fair value (net unrealized gains or losses) of these contracts has been recorded on the consolidated balance sheets.
A summary of interest rate contracts and their terms at December 31, 2006 and 2005 is shown below. In accordance with the provisions of SFAS No. 133, the fair value (net unrealized gains and losses) of these contracts has been recorded on the consolidated balance sheets.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Weighted | | | | | Weighted | | | | | | | Net | |
| | | | Average | | | Weighted | | | Average | | | | | | | Unrealized | |
| | Notional | | | Receive | | | Average Pay | | | Maturity | | | Unrealized | | | Unrealized | | | Gains | |
| | Amount | | | Rate | | | Rate* | | | In Months | | | Gains | | | Losses | | | (Losses) | |
| | | | | | | | | | | | | | | | | | | | | |
December 31, 2006 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Receive fixed swaps: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fair value hedges | | $ | 2,082,500 | | | | 4.91 | % | | | 5.11 | % | | | 31 | | | $ | 32,686 | | | | (14,787 | ) | | | 17,899 | |
Cash flow hedges | | | 700,000 | | | | 7.91 | % | | | 8.25 | % | | | 38 | | | | 4,265 | | | | (2,253 | ) | | | 2,012 | |
| | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 2,782,500 | | | | 5.66 | % | | | 5.90 | % | | | 32 | | | $ | 36,951 | | | | (17,040 | ) | | | 19,911 | |
| | | | | | | | | | | | | | | | | | | | | |
December 31, 2005 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Receive fixed swaps: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fair value hedges | | $ | 807,500 | | | | 4.38 | % | | | 4.28 | % | | | 70 | | | $ | 1,270 | | | | (14,804 | ) | | | (13,534 | ) |
Cash flow hedges | | | 350,000 | | | | 6.10 | % | | | 7.25 | % | | | 18 | | | | 117 | | | | (3,667 | ) | | | (3,550 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 1,157,500 | | | | 4.90 | % | | | 5.18 | % | | | 54 | | | $ | 1,387 | | | | (18,471 | ) | | | (17,084 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| |
* | Variable pay rate based upon contract rates in effect at December 31, 2006 and 2005. |
F-28
Notes to Consolidated Financial Statements Synovus designates hedges of floating rate loans as cash flow hedges. These swaps hedge against the variability of cash flows from specified pools of floating rate prime based loans. Synovus calculates effectiveness of the hedging relationship quarterly using the cumulative dollar offset method. As of December 31, 2006, cumulative ineffectiveness for Synovus’ portfolio of cash flow hedges represented a gain of approximately $80 thousand. Ineffectiveness from cash flow hedges is recognized in the consolidated statements of income as other operating income.
Synovus expects to reclassify from accumulated other comprehensive income approximately $900 thousand asnet-of-tax expense during the next twelve months, as the related payments for interest rate swaps and amortization of deferred gains(losses) are recorded.
During 2006 and 2005, Synovus terminated certain cash flow hedges which resulted in a netpre-tax gain (loss) of $159 thousand and ($6.2) million, respectively. These gains (losses) have been included as a component of accumulated other comprehensive income (loss) and are being amortized over the shorter of the remaining contract life or the maturity of the designated instrument as an adjustment to interest income (expense). The remaining unamortized deferred gain (loss) balances at December 31, 2006 and 2005 were ($4.0) million and ($5.8) million, respectively.
Synovus designates hedges of fixed rate liabilities as fair value hedges. These swaps hedge against the change in fair market value of various fixed rate liabilities due to changes in the benchmark interest rate LIBOR. Synovus uses the short cut method of hedge accounting for fair value hedging relationships designated as hedging the change in fair value of fixed rate subordinated debt issued by Synovus. These transactions total approximately $300 million in notional principal. For all other fair value hedging relationships, Synovus measures hedge ineffectiveness quarterly using the cumulative dollar offset method. As of December 31, 2006, cumulative ineffectiveness for Synovus’ portfolio of fair value hedges represented a gain of approximately $210 thousand. Ineffectiveness from fair value hedges is recognized in the consolidated statements of income as other operating income.
Synovus also enters into derivative financial instruments to meet the financing and interest rate risk management needs of its customers. Upon entering into these instruments to meet customer needs, Synovus enters into offsetting positions in order to minimize the risk to Synovus. These derivative financial instruments are reported at fair value with any resulting gain or loss recorded in current period earnings. As of December 31, 20052006 and 2004,2005, the notional amount of customer related derivative financial instruments was $857.6 million$2.05 billion and $347.5$837.9 million, respectively.
Interest rate swap transactions generally involveSynovus also enters into derivative financial instruments to meet the exchangeequity risk management needs of fixed and floating rate interest rate payment obligations without the exchange of underlying principal amounts. Enteringits customers. Upon entering into interest rate contracts involves not only interest rate risk, but alsothese instruments to meet customer needs, Synovus enters into offsetting positions in order to minimize the risk to Synovus. These derivative financial instruments are recorded at fair value with any resulting gain or loss recorded in current period earnings. The notional amount 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 receive fixed interest rate swap contractscustomer related equity derivative financial instruments was $19.8 million at December 31, 2005 are being utilized to hedge $350 million in floating rate loans2006 and $807.5 million in fixed-rate liabilities.
F-25
Notes to Consolidated Financial Statements A summary of interest rate contracts and their terms at December 31, 2005 and 2004 is shown below. In accordance with the provisions of SFAS No. 133, the fair value (net unrealized gains and losses) of these contracts has been recorded on the consolidated balance sheet.
Synovus expects to reclassify from accumulated other comprehensive income approximately $2.1 million asnet-of-tax expense during the next twelve months, as the related payments for interest rate swaps and amortization of deferred gains(losses) are recorded.
During 2005 and 2004, Synovus terminated certain cash flow hedges which resulted in a net pre-tax gain (loss) of ($6.2) million and $313 thousand, respectively. These gains (losses) have been included as a component of accumulated other comprehensive income (loss) and are being amortized over the shorter of the remaining contract life or the maturity of the designated instrument as an adjustment to interest income (expense). The remaining unamortized deferred gain (loss) balances at December 31, 2005 and 2004 were ($5.8) million and $206 thousand, respectively. There were no terminated cash flow hedges during 2003.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Weighted | | | | | Weighted | | | | | | | Net | |
| | | | Average | | | Weighted | | | Average | | | | | | | Unrealized | |
| | Notional | | | Receive | | | Average Pay | | | Maturity | | | Unrealized | | | Unrealized | | | Gains | |
| | Amount | | | Rate | | | Rate* | | | In Months | | | Gains | | | Losses | | | (Losses) | |
| | | | | | | | | | | | | | | | | | | | | |
December 31, 2005 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Receive fixed swaps: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fair value hedges | | $ | 807,500 | | | | 4.38 | % | | | 4.28 | % | | | 70 | | | $ | 1,270 | | | | (14,804 | ) | | | (13,534 | ) |
Cash flow hedges | | | 350,000 | | | | 6.10 | % | | | 7.25 | % | | | 18 | | | | 117 | | | | (3,667 | ) | | | (3,550 | ) |
| | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 1,157,500 | | | | 4.90 | % | | | 5.18 | % | | | 54 | | | | 1,387 | | | | (18,471 | ) | | | (17,084 | ) |
| | | | | | | | | | | | | | | | | | | | | |
December 31, 2004 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Receive fixed swaps: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fair value hedges | | $ | 477,500 | | | | 4.24 | % | | | 2.33 | % | | | 88 | | | $ | 3,435 | | | | (5,214 | ) | | | (1,779 | ) |
Cash flow hedges | | | 500,000 | | | | 5.12 | % | | | 5.25 | % | | | 12 | | | | — | | | | (4,090 | ) | | | (4,090 | ) |
| | | | | | | | | | | | | | | | | | | | | |
Sub Total | | | 977,500 | | | | 4.69 | % | | | 3.83 | % | | | 49 | | | | 3,435 | | | | (9,304 | ) | | | (5,869 | ) |
Forward starting swaps: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash flow hedges | | | 200,000 | | | | — | | | | — | | | | 123 | | | | 293 | | | | (2,109 | ) | | | (1,816 | ) |
| | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 1,177,500 | | | | | | | | | | | | | | | $ | 3,728 | | | | (11,413 | ) | | | (7,685 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| |
* | Variable pay rate based upon contract rates in effect at December 31, 2005 and 2004. |
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.sheets.
As of December 31, 2005,2006, Synovus had standby and commercial letters of credit in the amount of $2.3$2.50 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
F-26
Notes to Consolidated Financial Statements those instruments. Synovus uses the same credit policies in making commitments and conditional obligations as it does foron-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 commitmentcommit-
F-29
Notes to Consolidated Financial Statements ment amounts do not necessarily represent future cash requirements.
Loan commitments and letters of credit at December 31, 20052006 include the following:
| | | | | | | | | | |
| | | | |
(In thousands) | (In thousands) | | (In thousands) | |
Standby and commercial letters of credit | Standby and commercial letters of credit | | $ | 2,312,148 | | Standby and commercial letters of credit | | $ | 2,497,161 | |
Commitments to fund commercial real estate, construction, and land development loans | Commitments to fund commercial real estate, construction, and land development loans | | | 2,054,375 | | Commitments to fund commercial real estate, construction, and land development loans | | | 2,323,353 | |
Unused credit card lines | Unused credit card lines | | | 1,386,723 | | Unused credit card lines | | | 1,351,400 | |
Commitments under home equity lines of credit | | Commitments under home equity lines of credit | | | 1,073,600 | |
Other loan commitments | Other loan commitments | | | 3,970,128 | | Other loan commitments | | | 3,780,281 | |
| | | | | | | | |
| Total | | $ | 9,723,374 | | Total | | $ | 11,025,795 | |
| | | | | | | | |
|
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 based on need.
At December 31, 2005,2006, minimum rental commitments under all such noncancelablenon-cancelable leases for the next five years and thereafter are as follows:
| | | | | | | | | | |
| | | | |
(In thousands) | (In thousands) | | (In thousands) | |
2006 | | $ | 130,967 | | |
2007 | 2007 | | | 108,865 | | 2007 | | $ | 118,009 | |
2008 | 2008 | | | 58,709 | | 2008 | | | 70,211 | |
2009 | 2009 | | | 24,349 | | 2009 | | | 50,161 | |
2010 | 2010 | | | 14,167 | | 2010 | | | 27,868 | |
2011 | | 2011 | | | 20,833 | |
Thereafter | Thereafter | | | 46,846 | | Thereafter | | | 97,031 | |
| | | | | | | | |
| Total | | $ | 383,903 | | Total | | $ | 384,113 | |
| | | | | | | | |
|
Rental expense on computer equipment, including cancelable leases, was $121.9 million, $107.9 million, $97.1 million, and $93.6$97.1 million for the years ended December 31, 2006, 2005, 2004, and 2003,2004, respectively. Rental expense on facilities was $31.2 million, $27.9 million, $21.4 million, and $18.3$21.4 million for the years ended December 31, 2006, 2005, 2004, and 2003,2004, 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 position, results of operations or cash flows.
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 opinionordinary course of management, based in part upon the advice of legal counsel, all mattersbusiness, Synovus and its subsidiaries are believedalso subject 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.regulatory examinations, information gathering requests, inquiries and investigations. Synovus establishes reserves for expected future litigation exposuresand regulatory matters when those matters present loss contingencies that Synovus determines to be both probable and reasonably estimable.
TSYS received notification from In the United States Attorneys’ Officepending regulatory matter described below, loss contingencies are not both probable and reasonably estimable in the view of management, and, accordingly, a reserve has not been established for the Northern Districtthis matter. Based on current knowledge, advice of Californiacounsel and available insurance coverage, management does not believe that the United States Departmenteventual outcome of Justice was investigating whether TSYSpending litigation and/or one of its large credit card processing clients violatedregulatory matters, including the False Claims Act, 31 U.S.C. §§3729-33, in connection with mailings madepending regulatory matter described below, will have a material adverse effect on behalf of the client from July 1997 through November 2001. The subject matter of the investigation related 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. TSYS produced documents and information in response to a subpoena that it received from the Office of the Inspector General of the United States Postal Service and otherwise cooperated with the Department of Justice during the investigation. The involved parties agreed to a settlement of the matter without any party admitting liability. The matter was settled during the third quarter of 2005 for amounts that were not material to TSYS’Synovus’ consolidated financial condition, results of operations or cash flows. However, in the event of unexpected future developments, it is possible that the ultimate resolution of these matters, if unfavorable, may be material to Synovus’ results of operations for any particular period.
Note 13 Regulatory Requirements Columbus Bank and RestrictionsTrust Company (“CB&T”), a wholly owned banking subsidiary of Synovus, and CompuCredit Corporation (“CompuCredit”) have agreed to an Assurance of Discontinuance (“Agreement”) with the New York State Attorney General’s office regarding allegations that CB&T and CompuCredit were in violation of New York state law with respect to identified marketing, servicing and collection practices pertaining to the Aspire credit card program. CB&T issues Aspire credit cards that are marketed and serviced by CompuCredit. Among other things, the Agreement provides for a civil penalty of $500,000 and requires specified restitution to cardholders.
Synovus and CB&T did not incur any financial loss in connection with the Agreement as CompuCredit agreed to be responsible for all amounts to be paid pursuant to the Agreement. A provision of the Affinity Agreement between CB&T and CompuCredit, pursuant to which CB&T issues the Aspire credit card, generally requires CompuCredit to indemnify CB&T for losses incurred as a result of the failure of the Aspire credit card program to comply with applicable law. Synovus is subject to a per event 10% share of any such loss, but Synovus’ 10% payment obligation is limited to a cumula-
F-30
Notes to Consolidated Financial Statements tive total of $2 million for all losses incurred. CompuCredit waived Synovus’ 10% payment obligation in connection with the Agreement.
In addition, the FDIC is currently conducting an investigation of the policies, practices and procedures used by CB&T in connection with the credit card programs offered pursuant to the Affinity Agreement with CompuCredit. CB&T is cooperating with the FDIC’s investigation. Synovus cannot predict the eventual outcome of the FDIC’s investigation; however, the investigation has resulted in material changes to CB&T’s policies, practices and procedures in connection with the credit card programs offered pursuant to the Affinity Agreement. It is probable that the investigation will result in further changes to CB&T’s policies, practices and procedures in connection with the credit card programs offered pursuant to the Affinity Agreement and the imposition of one or more regulatory sanctions, including a civil money penalty and/or restitution of certain fees to affected cardholders. At this time, management of Synovus does not expect the ultimate resolution of the investigation to have a material adverse effect on its consolidated financial condition, results of operations or cash flows as a result of the expected performance by CompuCredit of its indemnification obligations described in the paragraph above.
| |
Note 13 | 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 2006,2007, in the aggregate, without prior approval from the banking regulatory agencies, is approximately $355$445.0 million. In prior years, certain Synovus banks have received permission and have paid cash dividends
F-27
Notes to Consolidated Financial Statements 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 certainoff-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, 2005,2006, Synovus meets all capital adequacy requirements to which it is subject.
As of December 31, 2005,2006, 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.below on the following page. Management is not currently aware of the existence of any conditions or events occurring subsequent to December 31, 20052006 which would affect thewell-capitalized classification.
F-28F-31
Notes to Consolidated Financial Statements
The following table summarizes regulatory capital information at December 31, 20052006 and 20042005 on a consolidated basis and for each significant subsidiary, defined as defined.any direct subsidiary of the Company with assets or net income exceeding 10% of the consolidated totals.
| | | | | | | | | | | | | | | | | | | | |
| | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | To be Well |
| | | | | | Capitalized Under |
| | | To be Well | | | | For Capital Adequacy | | Prompt Corrective |
| | | | | Capitalized Under | | Actual | | Purposes | | Action Provisions |
| | | | For Capital Adequacy | | Prompt Corrective | | | | | | |
| | Actual | | Purposes | | Action Provisions | | 2006 | | 2005 | | 2006 | | 2005 | | 2006 | | 2005 |
(Dollars in thousands) | | | | | | | | | | | | | | | | | | |
| | 2005 | | 2004 | | 2005 | | 2004 | | 2005 | | 2004 | |
| | | | | | | | | | | | | |
Synovus Financial Corp. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Tier I capital | | $ | 2,660,704 | | | 2,369,332 | | | 1,040,352 | | | 943,991 | | | n/a | | | n/a | | | $ | 3,254,603 | | | 2,660,704 | | | 1,197,211 | | | 1,040,352 | | | n/a | | | n/a | |
Total risk-based capital | | | 3,700,315 | | | 2,935,077 | | | 2,080,704 | | | 1,887,982 | | | n/a | | | n/a | | | | 4,319,062 | | | 3,700,315 | | | 2,394,423 | | | 2,080,704 | | | n/a | | | n/a | |
Tier I capital ratio | | | 10.23 | % | | | 10.04 | | | 4.00 | | | 4.00 | | | n/a | | | n/a | | | | 10.87 | % | | | 10.23 | | | 4.00 | | | 4.00 | | | n/a | | | n/a | |
Total risk-based capital ratio | | | 14.23 | | | 12.44 | | | 8.00 | | | 8.00 | | | n/a | | | n/a | | | | 14.43 | | | 14.23 | | | 8.00 | | | 8.00 | | | n/a | | | n/a | |
Leverage ratio | | | 9.99 | | | 9.78 | | | 4.00 | | | 4.00 | | | n/a | | | n/a | | | | 10.64 | | | 9.99 | | | 4.00 | | | 4.00 | | | n/a | | | n/a | |
Columbus Bank and Trust Company | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Tier I capital | | $ | 1,145,365 | | | 1,014,308 | | | 211,243 | | | 196,739 | | | 316,865 | | | 295,108 | | | $ | 1,405,072 | | | 1,145,365 | | | 230,533 | | | 211,243 | | | 345,830 | | | 316,865 | |
Total risk-based capital | | | 1,177,604 | | | 1,047,399 | | | 422,487 | | | 393,477 | | | 528,108 | | | 491,847 | | | | 1,440,232 | | | 1,177,604 | | | 461,106 | | | 422,487 | | | 576,383 | | | 528,108 | |
Tier I capital ratio | | | 21.69 | % | | | 20.62 | | | 4.00 | | | 4.00 | | | 6.00 | | | 6.00 | | | | 24.38 | % | | | 21.69 | | | 4.00 | | | 4.00 | | | 6.00 | | | 6.00 | |
Total risk-based capital ratio | | | 22.30 | | | 21.30 | | | 8.00 | | | 8.00 | | | 10.00 | | | 10.00 | | | | 24.99 | | | 22.30 | | | 8.00 | | | 8.00 | | | 10.00 | | | 10.00 | |
Leverage ratio | | | 23.15 | | | 20.70 | | | 4.00 | | | 4.00 | | | 5.00 | | | 5.00 | | | | 24.56 | | | 23.15 | | | 4.00 | | | 4.00 | | | 5.00 | | | 5.00 | |
Bank of North Georgia | | | | | | | | | | | | | | | | | | | | |
Tier I capital | | | $ | 380,545 | | | 283,613 | | | 160,556 | | | 120,228 | | | 240,834 | | | 180,343 | |
Total risk-based capital | | | | 424,567 | | | 316,432 | | | 321,112 | | | 240,457 | | | 401,390 | | | 300,571 | |
Tier I capital ratio | | | | 9.48 | % | | | 9.44 | | | 4.00 | | | 4.00 | | | 6.00 | | | 6.00 | |
Total risk-based capital ratio | | | | 10.58 | | | 10.53 | | | 8.00 | | | 8.00 | | | 10.00 | | | 10.00 | |
Leverage ratio | | | | 9.74 | | | 9.96 | | | 4.00 | | | 4.00 | | | 5.00 | | | 5.00 | |
The National Bank of South Carolina | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Tier I capital | | $ | 305,544 | | | 276,365 | | | 128,994 | | | 116,854 | | | 193,491 | | | 175,281 | | | $ | 360,985 | | | 305,544 | | | 152,762 | | | 128,994 | | | 229,143 | | | 193,491 | |
Total risk-based capital | | | 340,828 | | | 310,383 | | | 257,988 | | | 233,708 | | | 322,485 | | | 292,135 | | | | 399,398 | | | 340,828 | | | 305,524 | | | 257,988 | | | 381,905 | | | 322,485 | |
Tier I capital ratio | | | 9.47 | % | | | 9.46 | | | 4.00 | | | 4.00 | | | 6.00 | | | 6.00 | | | | 9.45 | % | | | 9.47 | | | 4.00 | | | 4.00 | | | 6.00 | | | 6.00 | |
Total risk-based capital ratio | | | 10.57 | | | 10.62 | | | 8.00 | | | 8.00 | | | 10.00 | | | 10.00 | | | | 10.46 | | | 10.57 | | | 8.00 | | | 8.00 | | | 10.00 | | | 10.00 | |
Leverage ratio | | | 8.35 | | | 8.70 | | | 4.00 | | | 4.00 | | | 5.00 | | | 5.00 | | | | 8.77 | | | 8.35 | | | 4.00 | | | 4.00 | | | 5.00 | | | 5.00 | |
Bank of North Georgia | | | | | | | | | | | | | | | | | | | | |
Tier I capital | | $ | 283,613 | | | 243,906 | | | 120,228 | | | 107,778 | | | 180,343 | | | 161,667 | | |
Total risk-based capital | | | 316,432 | | | 274,580 | | | 240,457 | | | 215,556 | | | 300,571 | | | 269,445 | | |
Tier I capital ratio | | | 9.44 | % | | | 9.05 | | | 4.00 | | | 4.00 | | | 6.00 | | | 6.00 | | |
Total risk-based capital ratio | | | 10.53 | | | 10.19 | | | 8.00 | | | 8.00 | | | 10.00 | | | 10.00 | | |
Leverage ratio | | | 9.96 | | | 9.55 | | | 4.00 | | | 4.00 | | | 5.00 | | | 5.00 | | |
n/a - The prompt corrective actions are applicable at the bank level only. | | n/a - The prompt corrective actions are applicable at the bank level only. | | | | |
|
| |
Note 14 | Employment Expenses and Benefit Plans |
Synovus generally provides noncontributory money purchase and profit sharing plans, 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. AggregateSynovus made aggregate contributions to these money purchase, profit sharing, and 401(k) plans recorded as expense for the years ended December 31, 2006, 2005, and 2004 and 2003 wereof approximately $85.7 million, $85.5 million, $57.8 million, and $38.4$57.8 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 recorded as expense $12.8 million, $11.9 million, $10.3 million, and $9.5$10.3 million for contributions to these plans in 2006, 2005, 2004, and 2003,2004, respectively.
Synovus has entered into employment agreements with certain executive officersexecutives for past and future services which provide for current compensation in addition to salary in the form of
F-32
Notes to Consolidated Financial Statements 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
F-29
Notes to Consolidated Financial Statements benefit expense and accrued benefit cost is not material to the consolidated financial statements.
| |
Note 15 | Stock-BasedShare-Based Compensation |
General Description of Share-Based Compensation Plans
Synovus has various stock optionlong-term incentive plans under which the Compensation Committee of the Board of Directors has the authority to grant stock optionsshare-based compensation to Synovus employees. At December 31, 2005,2006, Synovus had 4,853,167a total of 4,220,937 shares of its authorized but unissued common stock reserved for future grants under the stock optiontwo long-term incentive plans. The general terms of each of these plans are substantially the existingsame, permitting the grant of share-based compensation including stock optionoptions, non-vested shares, and stock appreciation rights. These plans generally include vesting periods ranging from two to three years and exercise periodscontractual terms ranging from five to ten years. Such stockStock options are granted at exercise prices which equal the fair market value of a share of common stock on the grant-date. Synovus historically issues new shares to satisfy share option exercises.
Stock options granted in 2006 generally become exercisable over a three-year period, with one-third of the total grant date.amount vesting on each anniversary of the grant-date, and expire ten years from the date of grant. Vesting for stock options granted during 2006 accelerates upon retirement for plan participants who have reached age 62 and who also have no less than fifteen years of service at the date of their election to retire. For stock options granted in 2006, share-based compensation expense is recognized for plan participants on a straight-line basis over the shorter of the vesting period or the period until reaching retirement eligibility.
Stock options granted prior to 2006 generally become exercisable at the end of a two to three-year vesting period and expire seven to ten years from the date of grant. Vesting for stock options granted prior to 2006 accelerates upon retirement for plan participants who have reached age 50 and who also have no less than fifteen years of service at the date of their election to retire. Prior to adoption of SFAS No. 123R, share-based compensation expense was determined in Synovus’ pro forma disclosure over the nominal vesting period without consideration for retirement eligibility. Following adoption of SFAS No. 123R, share-based compensation expense for all new awards is recognized in income over the shorter of the vesting period or the period until reaching retirement eligibility.
Non-vested shares granted in 2006 vest over a three-year period, with one-third of the total grant amount vesting on each anniversary of the grant-date. For non-vested shares granted in 2006, share-based compensation expense is recognized for plan participants on a straight-line basis over the vesting period.
Total System Services, Inc. (TSYS), an 81% owned subsidiary, also grants share-based compensation to certain executives and non-employee directors in the form of options to purchase shares of TSYS common stock (TSYS stock options) or non-vested shares of TSYS common stock (TSYS non-vested shares), which are described below atTSYS Share-Based Compensation.
Share-Based Compensation Expense
Synovus’ share-based compensation costs are recorded as a component of salaries and other personnel expense in the Consolidated Statements of Income. Total share-based compensation expense recognized in income was $27.2 million, $2.0 million and $55 thousand for 2006, 2005 and 2004, respectively. The total income tax benefit recognized in the Consolidated Statements of Income for share-based compensation arrangements was $9.3 million, $665 thousand and $20 thousand for 2006, 2005 and 2004, respectively.
No share-based compensation costs have been capitalized as of December 31, 2006. Aggregate compensation expense recognized in 2006 with respect to Synovus stock options included $9.3 million that would have been recognized in previous years had the policy under SFAS No. 123R with respect to retirement eligibility been applied to awards granted prior to January 1, 2006.
As of December 31, 2006, there was total unrecognized compensation cost of approximately $32.0 million related to the unvested portion of share-based compensation arrangements involving shares of Synovus stock, and approximately $9.5 million related to the unvested portion of share-based compensation arrangements involving shares of TSYS stock.
Stock Option Awards
The weighted-average grant-date fair value of stock options granted to key Synovus employees during 2006, 2005 and 2004 was $6.40, $7.06 and $7.36, respectively. The fair value of the option grants was determined using the Black-Scholes-
F-33
Notes to Consolidated Financial Statements Merton option-pricing model with the following weighted-average assumptions:
| | | | | | | | | | | | |
| |
| | Years Ended December 31, | |
| | | |
| | 2006 | | | 2005 | | | 2004 | |
| | | | | | | | | |
Risk-free interest rate | | | 4.5% | | | | 4.1% | | | | 4.5% | |
Expected stock price volatility | | | 24.9 | | | | 21.4 | | | | 28.8 | |
Dividend yield | | | 2.8 | | | | 2.4 | | | | 2.6 | |
Expected life of options | | | 5.8 years | | | | 8.5 years | | | | 6.5 years | |
|
The expected volatility for stock option awards in 2006 was determined with equal weighting of implied volatility and historical volatility, and for awards prior to 2006, was determined using implied volatility. The expected life for stock options granted during 2006 was calculated using the “simplified” method, as prescribed by the SEC’s Staff Accounting Bulletin No. 107. Option awards for plan participants who met the early retirement provisions, as described above, on the grant-date were assigned an expected life of 5 years and all other option awards were assigned an expected life of 6 years. The expected life for stock options granted prior to 2006 was determined from historical experience.
Prior to the adoption of SFAS No. 123R, Synovus elected to calculate compensation cost for purposes of pro forma disclosure assuming that all options would vest and reverse any recognized compensation costs for forfeited awards when the awards were actually forfeited. SFAS No. 123R requires that compensation cost be recognized net of estimated forfeitures. The estimate of forfeitures is adjusted as actual forfeitures differ from estimates, resulting in compensation cost only for those awards that actually vest. The effect of the change in estimated forfeitures is recognized as compensation cost in the period of the change in estimate. In estimating the forfeiture rate, Synovus stratified its grantees and used historical experience to determine separate forfeiture rates for the different award grants. Currently, Synovus estimates forfeiture rates for its grantees in the range of 0% to 10%.
A summary of stock option activity (including performance-accelerated stock options as described below) and changes during the years ended December 31, 2006, 2005, and 2004 is presented below:
| | | | | | | | | | | | | | | | | | | | | | | | |
| |
| | 2006 | | | 2005 | | | 2004 | |
| | | | | | | | | |
| | | | Weighted- | | | | | Weighted- | | | | | Weighted- | |
| | | | Average | | | | | Average | | | | | Average | |
| | | | Exercise | | | | | Exercise | | | | | Exercise | |
Stock Options | | Shares | | | Price | | | Shares | | | Price | | | Shares | | | Price | |
| | | | | | | | | | | | | | | | | | |
Outstanding at beginning of year | | | 25,546,776 | | | $ | 22.66 | | | | 25,769,908 | | | $ | 21.51 | | | | 25,473,518 | | | $ | 20.23 | |
Options granted | | | 868,966 | | | | 27.66 | | | | 2,575,053 | | | | 29.02 | | | | 2,724,306 | | | | 26.03 | |
Options assumed in connection with acquisitions | | | 877,915 | | | | 8.36 | | | | — | | | | — | | | | 288,884 | | | | 7.49 | |
Options exercised | | | (3,418,550 | ) | | | 18.89 | | | | (2,551,310 | ) | | | 17.34 | | | | (2,495,858 | ) | | | 11.62 | |
Options forfeited | | | (173,050 | ) | | | 27.49 | | | | (209,842 | ) | | | 24.05 | | | | (136,264 | ) | | | 24.32 | |
Options expired | | | (62,796 | ) | | | 21.01 | | | | (37,033 | ) | | | 22.84 | | | | (84,678 | ) | | | 21.51 | |
| | | | | | | | | | | | | | | | | | |
Options outstanding at end of year | | | 23,639,261 | | | $ | 22.83 | | | | 25,546,776 | | | $ | 22.66 | | | | 25,769,908 | | | $ | 21.51 | |
| | | | | | | | | | | | | | | | | | |
Options exercisable at end of year | | | 14,179,889 | | | $ | 21.21 | | | | 12,415,332 | | | $ | 21.75 | | | | 12,452,702 | | | $ | 19.88 | |
| | | | | | | | | | | | | | | | | | |
|
F-34
Notes to Consolidated Financial Statements The following table summarizes information about Synovus’ stock options outstanding and exercisable at December 31, 2006.
| | | | | | | | | |
| |
| | As of December 31, 2006 | |
| | | |
| | Options | | | Options | |
| | Outstanding | | | Exercisable | |
| | | | | | |
Weighted-average remaining | | | | | | | | |
| contractual life | | | 4.51 years | | | | 3.95 years | |
| | | | | | |
Aggregate intrinsic value | | $ | 189,183,148 | | | $ | 136,437,439 | |
| | | | | | |
|
The intrinsic value of stock options exercised during the years ended December 31, 2006, 2005 and 2004 was $31.8 million, $27.8 million and $35.7 million, respectively. The total fair value of stock options vested during 2006 was $27.8 million. At December 31, 2006, there was approximately $17.7 million of total unrecognized compensation cost related to non-vested stock options. This cost is expected to be recognized over a weighted-average remaining period of 1.27 years.
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.grant-date. The grant-date fair value is being amortized on a straight-line basis over seven years with the portion related to periods prior to 2006 having previously been included in pro forma disclosures and the portion related to periods from January 1, 2006 to the respective vesting dates being recognized in the Consolidated Statements of Income.
Summary information regarding these performance-accelerated stock options is presented below. There were no performance-accelerated stock options granted during 2006, 2005, 2004, or 2003.
| | | | | | | | | | | | | | | |
| | | | | | Options | | |
Year Options | | | Number of | | | Exercise Price | | | Outstanding | | |
Granted | | | Stock Options | | | Per Share | | | at December 31, 2005 | | |
| | | | | | | | | | | | | | | | | | | | | |
| 2000 | | | 4,100,000 | | $17.69 - 18.06 | | | 4,100,000 | | | |
| 2001 | | | 2,600,000 | | | 28.99 | | | 2,600,000 | | | | Options | |
Year | | | Number | | | Exercise | | Outstanding at | |
Options | | | of Stock | | | Price | | December 31, | |
Granted | | | Options | | | Per Share | | 2006 | |
| | | | | | | | | |
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, 2005, 2004, and 2003 and changes during the years then ended is presented below:Non-Vested Shares
| | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| | 2005 | | | 2004 | | | 2003 | |
| | | | | | | | | |
| | | | Weighted | | | | | Weighted | | | | | Weighted | |
| | | | Average | | | | | Average | | | | | Average | |
| | | | Exercise | | | | | Exercise | | | | | Exercise | |
| | Shares | | | Price | | | Shares | | | Price | | | Shares | | | Price | |
| | | | | | | | | | | | | | | | | | |
Options outstanding at beginning of period | | | 25,769,908 | | | $ | 21.51 | | | | 25,473,518 | | | $ | 20.23 | | | | 25,874,237 | | | $ | 19.59 | |
Options granted | | | 2,575,053 | | | | 29.02 | | | | 2,724,306 | | | | 26.03 | | | | 2,242,276 | | | | 19.21 | |
Options assumed in connection with acquisitions | | | — | | | | — | | | | 288,884 | | | | 7.49 | | | | 590,622 | | | | 9.02 | |
Options exercised | | | (2,551,310 | ) | | | 17.34 | | | | (2,495,858 | ) | | | 11.62 | | | | (2,730,176 | ) | | | 10.93 | |
Options cancelled | | | (246,875 | ) | | | 23.88 | | | | (220,942 | ) | | | 23.25 | | | | (503,441 | ) | | | 19.94 | |
| | | | | | | | | | | | | | | | | | |
| Options outstanding at end of period | | | 25,546,776 | | | $ | 22.66 | | | | 25,769,908 | | | $ | 21.51 | | | | 25,473,518 | | | $ | 20.23 | |
| | | | | | | | | | | | | | | | | | |
| Options exercisable at end of period | | | 12,415,332 | | | $ | 21.75 | | | | 12,452,702 | | | $ | 19.88 | | | | 12,722,235 | | | $ | 17.54 | |
| | | | | | | | | | | | | | | | | | |
|
The following is a summary of stock options outstanding at December 31, 2005:
| | | | | | | | | | | | | | | | | | | | |
| |
| | Options Outstanding | | | Options Exercisable | |
| | | | | | |
| | Number of | | | Weighted Avg. | | | Weighted Average | | | Number of | | | Weighted Avg. | |
Range of Exercise Prices | | Options | | | Remaining Term | | | Exercise Price | | | Options | | | Exercise Price | |
| | | | | | | | | | | | | | | |
$ 1.75 - $ 4.71 | | | 10,067 | | | | 3.5 years | | | $ | 3.35 | | | | 10,067 | | | $ | 3.35 | |
$ 4.89 - $ 7.50 | | | 26,135 | | | | 2.4 years | | | $ | 5.78 | | | | 26,135 | | | $ | 5.78 | |
$ 7.83 - $11.51 | | | 324,556 | | | | 2.9 years | | | $ | 9.67 | | | | 324,556 | | | $ | 9.67 | |
$12.26 - $18.38 | | | 7,096,863 | | | | 3.7 years | | | $ | 17.49 | | | | 3,496,385 | | | $ | 17.18 | |
$18.69 - $27.98 | | | 13,385,945 | | | | 5.4 years | | | $ | 23.47 | | | | 8,051,689 | | | $ | 23.84 | |
$28.99 - $32.57 | | | 4,703,210 | | | | 7.2 years | | | $ | 29.22 | | | | 506,500 | | | $ | 29.02 | |
|
In addition to the stock options described above, non-transferable, restrictednon-vested shares of Synovus common stock have been awarded to certain key executivesSynovus employees and non-employee directors of Synovus. The weighted-average grant-date fair value of non-vested shares granted during 2006 and 2005 was $27.19 and $27.28, respectively. The total fair value of shares vested during 2006 was $235 thousand. There were no grants of non-vested shares during 2004. Except for the grant of 63,386 performance-vesting shares described in the following paragraph,below, the market value of the common stock at the date of issuance is amortized as compensation expense using the straight-line method over the vesting period of the awards. Dividends are declared for these non-vested shares during the holding period. These non-vested shares are titled with voting rights.
A summary of non-vested shares outstanding (excluding the 63,386 performance-vesting shares as described below) and changes during the years ended December 31, 2006 and 2005 is presented below:
| | | | | | | | |
| |
| | Weighted- | |
| | Average | |
| | Grant-Date | |
Non-Vested Shares | | Shares | | | Fair Value | |
| | | | | | |
Outstanding at January 1, 2005 | | | — | | | $ | — | |
Granted | | | 82,583 | | | | 27.28 | |
Vested | | | — | | | | — | |
Forfeited | | | — | | | | — | |
| | | | | | |
Outstanding at December 31, 2005 | | | 82,583 | | | | 27.28 | |
Granted | | | 616,495 | | | | 27.19 | |
Vested | | | (8,520 | ) | | | 27.62 | |
Forfeited | | | (6,004 | ) | | | 27.13 | |
| | | | | | |
Outstanding at December 31, 2006 | | | 684,554 | | | $ | 27.19 | |
| | | | | | |
|
As of December 31, 2006, there was approximately $14.2 million of total unrecognized compensation cost related to the foregoing non-vested share based compensation arrangements. This cost is expected to be recognized over a weighted-average remaining period of 1.75 years.
During 2005, Synovus grantedauthorized a total grant of 63,386 shares of restrictednon-vested stock to a key executive with a performance-vesting schedule. The restrictedschedule (performance-vesting shares). These performance-vesting shares have seven one-year performance periods (2005-2011) during each of which the Compensation Committee establishes an earnings per share goal and, if such goal is attained during any performance period, 20% of the performance-vesting shares will vest. Compensation expense for each tranche of this grant is measured based on the quoted market value of Synovus’ stock as of the date that each period’s earnings per share goal is determined and is recorded as a charge to expense on a straight-line basis during each year in which the performance criteria is expected to be met. The total fair value of performance-vesting shares vested during 2006 was $340 thousand.
F-30F-35
Notes to Consolidated Financial Statements
goal The following is attained during any performance period, 20%a summary of the restrictedperformance-vesting shares will vest. Compensation expense for this grant is measuredoutstanding at the endDecember 31, 2006 and 2005:
| | | | | | | | |
| |
| | Weighted- | |
| | Average | |
| | Grant-Date | |
Performance-Vesting Shares | | Shares | | | Fair Value | |
| | | | | | |
Outstanding at January 1, 2005 | | | — | | | $ | — | |
Granted | | | 12,677 | | | | 26.82 | |
Vested | | | — | | | | — | |
Forfeited | | | — | | | | — | |
| | | | | | |
Outstanding at December 31, 2005 | | | 12,677 | | | | 26.82 | |
Granted | | | 12,677 | | | | 27.72 | |
Vested | | | (12,677 | ) | | | 26.82 | |
Forfeited | | | — | | | | — | |
| | | | | | |
Outstanding at December 31, 2006 | | | 12,677 | | | $ | 27.72 | |
| | | | | | |
|
At December 31, 2006, there remained 38,032performance-vesting shares to be granted between 2007 and 2011.
Cash received from option exercises under all share-based payment arrangements of each period based on the quoted market value of Synovus’Synovus common stock and is accrued as a charge to compensation expense during the performance period.
Aggregate compensation expense with respect to the foregoing Synovus restricted stock awards was approximately $862 thousand, $55 thousand, and $55 thousand for the years ended December 31, 2006, 2005, and 2004 was $65.5 million, $43.1 million, and 2003,$23.5 million, respectively. Summary
As stock options for the purchase of Synovus common stock are exercised and non-vested shares vest, Synovus recognizes a tax benefit which is recorded as a component of additional paid-in capital within shareholders’ equity. Synovus recognized such tax benefits in the amount of $11.4 million, $9.5 million and $12.7 million for the years 2006, 2005, and 2004, respectively.
Synovus elected to adopt the alternative method of calculating the beginning pool of excess tax benefits as permitted by FASB Staff Position (FSP) No. SFAS 123R-3, “Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards.” This is a simplified method to determine the pool of excess tax benefits that is used in determining the tax effects of share-based compensation in the Consolidated Statements of Income and cash flow reporting for awards that were outstanding as of the adoption of SFAS No. 123R.
Pro forma
Had Synovus determined compensation expense based on the fair value at the grant date for its stock option grants under SFAS No. 123, net income would have been reduced to the pro forma amounts indicated in the following table for 2005 and 2004. Due to the adoption of SFAS No. 123R in 2006, such proforma information regardingis not applicable for 2006.
| | | | | | | | | | |
| |
| | Years Ended | |
| | December 31, | |
| | | |
| | 2005 | | | 2004 | |
(In thousands, except per share data) | | | | | | |
Net income as reported | | $ | 516,446 | | | | 437,033 | |
Add: Share-based employee compensation expense recognized, net of tax | | | 1,117 | | | | 35 | |
Deduct: Total share-based employee compensation expense determined under fair value based methods for all awards, net of related tax effects | | | (15,167 | ) | | | (13,379 | ) |
| | | | | | |
| | Pro forma | | $ | 502,396 | | | | 423,689 | |
| | | | | | |
Earnings per share: | | | | | | | | |
| Basic-as reported | | $ | 1.66 | | | | 1.42 | |
| Basic-pro forma | | | 1.61 | | | | 1.38 | |
| Diluted-as reported | | | 1.64 | | | | 1.41 | |
| Diluted-pro forma | | | 1.60 | | | | 1.36 | |
|
TSYS Share-Based Compensation
TSYS granted 7,000 TSYS stock options during the year ended December 31, 2004 with a grant-date fair value of $200 thousand. TSYS did not grant any TSYS stock options during 2006 or 2005. At December 31, 2006, there were 1,066,000 TSYS stock options outstanding restrictedwith a weighted-average exercise price of $15.53, weighted-average remaining contractual life of 2.2 years, and an aggregate intrinsic value of $11.6 million. Of these 1,066,000 stock awardsoptions, 1,058,000 were exercisable at December 31, 2005 is presented below:
| | | | | | | | |
Year Awards | | Market Value | | | Vesting | |
Granted | | at Award Date | | | Period | |
| | | | | | |
2002 | | $ | 177,786 | | | | 5 years | |
2005 | | | 3,952,644 | | | | 3-7 years | |
|
The following table provides aggregate information regarding grants under all Synovus equity compensation plans through December 31, 2005.
| | | | | | | | | | | | |
| | | | | | (c) | |
| | (a) | | | (b) | | | Number of shares | |
| | Number of securities | | | Weighted-average | | | remaining available for | |
| | to be issued | | | exercise price of | | | issuance excluding | |
| | upon exercise of | | | outstanding | | | shares reflected | |
Plan Category(1) | | outstanding options | | | options | | | in column (a) | |
| | | | | | | | | |
Shareholder approved equity compensation plans | | | 25,039,614 | (2) | | $ | 22.90 | | | | 4,853,167 | (3) |
Non-shareholder approved equity compensation plans | | | — | | | | — | | | | — | |
| | | | | | | | | |
Total | | | 25,039,614 | | | $ | 22.90 | | | | 4,853,167 | |
| | | | | | | | | |
(1) Does not include information for equity compensation plans assumed by Synovus in mergers. A total of 507,162 shares of common stock was issuable upon exercise of options granted under plans assumed in mergers and outstanding at December 31, 2005. The weighted average2006 with a weighted-average exercise price of all options granted under plans assumed in mergers$15.46, a weighted-average remaining contractual life of 2.2 years, and outstanding atan aggregate intrinsic value of $11.6 million. At December 31, 20052006, there was $11.12. Synovus cannot grant additional awards under these assumed plans.
(2) Does not include an aggregateapproximately $41 thousand of 145,969 sharestotal unrecognized compensation cost related to TSYS stock options that is expected to be recognized over a remaining weighted-average period of restricted stock which will vest over the remaining years through 2011.
(3) Includes 4,853,167 shares available for future grants as restricted stock awards under the 2002 Plan.
________________________________________________________________________________
0.9 years.
During the years ended December 31, 2006 and 2005, TSYS grantedissued 425,925 and 100,815 restrictedTSYS non-vested shares with a grant-date fair value of TSYS common stock$9.6 million and $2.3 million, respectively, to certain key executives and directors. The market valuenon-employee directors of the common stock at the dateTSYS. There were no non-vested TSYS shares issued in 2004. At December 31, 2006, there was approximately $9.5 million of issuancetotal unrecognized compensation cost related to TSYS’ non-vested share based compensation arrangements. This cost is being amortized as compensation expense using the straight-line methodexpected to be recognized over the vestinga remaining weighted-average period of the awards.2.6 years.
F-36
Notes to Consolidated Financial Statements Additionally, during the year ended December 31, 2005, TSYS granted 126,087 TSYS non-vested shares of restricted stock to certaintwo key executives with a performance-vesting schedule. The restrictedschedule (TSYS performance-vesting shares). There were no performance-vesting shares granted in 2006 or 2004. These performance-vesting shares have seven one-year performance periods (2005-2011) during each of which the TSYS Compensation Committee of TSYS’ Board of Directors establishes an earnings per share goal and, if such goal is attained during any performance period, 20% of the restrictedperformance-vesting shares will vest. Compensation expense for each tranche of this grant is measured at the end of each period based on the quoted market value of TSYS’ common stock as of the date that each period’s earnings per share goal is determined and is accruedrecorded as a charge to compensation expense on a straight-line basis during each year in which the performance period.criteria is expected to be met. At December 31, 2006, there were 25,217 non-vested TSYS performance-vesting shares outstanding, with a weighted-average grant-date fair value of $20.00 per share. At December 31, 2006, there remained 75,651 TSYS performance-vesting shares to be granted between 2007 and 2011.
AggregateThe following table provides aggregate information regarding grants under all Synovus equity compensation expense in 2005 with respect to the foregoing TSYS restricted stock awards was $1.1 million.plans through December 31, 2006.
| | | | | | | | | | | | |
| | | | | | (c) | |
| | (a) | | | (b) | | | Number of shares | |
| | Number of securities | | | Weighted-average | | | remaining available for | |
| | to be issued | | | exercise price of | | | issuance excluding | |
| | upon exercise of | | | outstanding | | | shares reflected | |
Plan Category(1) | | outstanding options | | | options | | | in column (a) | |
| | | | | | | | | |
Shareholder approved equity compensation plans for shares of Synovus stock | | | 22,809,794 | (2) | | $ | 23.31 | | | | 4,220,937 | (3) |
Non-shareholder approved equity compensation plans | | | — | | | | — | | | | — | |
| | | | | | | | | |
Total | | | 22,809,794 | | | $ | 23.31 | | | | 4,220,937 | |
| | | | | | | | | |
| |
(1) | Does not include information for equity compensation plans assumed by Synovus in mergers. A total of 829,467 shares of common stock was issuable upon exercise of options granted under plans assumed in mergers and outstanding at December 31, 2006. The weighted average exercise price of all options granted under plans assumed in mergers and outstanding at December 31, 2006 was $9.62. Synovus cannot grant additional awards under these assumed plans. |
|
(2) | Does not include an aggregate of 735,263 shares of restricted stock which will vest over the remaining years through 2011. |
|
(3) | Includes 4,220,937 shares available for future grants as share awards under the 2002 and 2000 Plans. |
| |
Note 16 | Fair Value of Financial Instruments |
The following table presents the carrying and estimated fair values of on-balance sheet financial instruments at December 31, 20052006 and 2004.2005. 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 discussed in Note 12.
The fair value of derivative instruments, consisting of interest rate contracts, is equal to the estimated amount that Synovus would receive or pay to terminate the interest rate swap contracts at the reporting date, taking into account current interest rates and the credit-worthiness of the counterparties. The fair value of derivative instruments consisting of commitments to fund and sell fixed-rate mortgage loans is determined based on quoted market prices.
Cash and due from banks, interest earning deposits with banks, and federal funds sold and securities purchased under resale agreements are repriced on a short-term basis; as such, the carrying value closely approximates fair value.
The fair values of trading account assets and available for sale investment securities is determined based on quoted market prices. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.
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 commercialCommercial 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 offixed-rate loans the loan portfolio is calculated by discounting contractual cash flows using estimated market discount rates which reflect the credit and interest rate risk inherent in the loan.
F-31F-37
Notes to Consolidated Financial Statements
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 estimated to be 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.
| | | | | | | | | | | | | | | | | | |
| | | |
| | | | | | | | | | | | | | | | | | | | 2006 | | | 2005 | |
| | | | | | | | | |
| | | 2005 | | | 2004 | | | | Carrying | | | Estimated | | | Carrying | | | Estimated | |
| | | | | | | | | | Value | | | Fair Value | | | Value | | | Fair Value | |
(In thousands) | (In thousands) | | Carrying | | | Estimated | | | Carrying | | | Estimated | | (In thousands) | | | | | | | | | | | | |
Financial assets: | | Financial assets: | | | | | | | | | | | | | |
| | | Value | | | Fair Value | | | Value | | | Fair Value | | Cash and due from banks | | $ | 889,975 | | | 889,975 | | | 880,886 | | | 880,886 | |
| | | | | | | | | | | | | |
Financial assets: | | | | | | | | | | | | | | |
| Cash and due from banks | | $ | 880,886 | | | 880,886 | | | 683,035 | | | 683,035 | | Interest earning deposits with banks | | | 19,389 | | | 19,389 | | | 2,980 | | | 2,980 | |
| Interest earning deposits with banks | | | 2,980 | | | 2,980 | | | 4,153 | | | 4,153 | | Federal funds sold and securities purchased under resale agreements | | | 101,091 | | | 101,091 | | | 68,922 | | | 68,922 | |
| Federal funds sold and securities purchased under resale agreements | | | 68,922 | | | 68,922 | | | 135,471 | | | 135,471 | | Trading account assets | | | 15,266 | | | 15,266 | | | 27,322 | | | 27,322 | |
| Trading account assets | | | 27,322 | | | 27,322 | | | — | | | — | | Mortgage loans held for sale | | | 175,042 | | | 175,277 | | | 143,144 | | | 143,283 | |
| Mortgage loans held for sale | | | 143,144 | | | 143,283 | | | 120,186 | | | 120,301 | | Investment securities available for sale | | | 3,352,357 | | | 3,352,357 | | | 2,958,320 | | | 2,958,320 | |
| Investment securities available for sale | | | 2,958,320 | | | 2,958,320 | | | 2,695,593 | | | 2,695,593 | | Loans, net | | | 24,340,093 | | | 24,315,920 | | | 21,102,735 | | | 21,066,751 | |
| Loans, net | | | 21,102,735 | | | 21,066,751 | | | 19,214,651 | | | 19,187,678 | | Derivative asset positions | | | 67,652 | | | 67,652 | | | 20,401 | | | 20,401 | |
Financial liabilities: | Financial liabilities: | | | | | | | | | | | | | | Financial liabilities: | | | | | | | | | | | | | |
| Non-interest bearing deposits | | | 3,700,750 | | | 3,700,750 | | | 3,337,908 | | | 3,337,908 | | Non-interest bearing deposits | | | 3,538,598 | | | 3,538,598 | | | 3,700,750 | | | 3,700,750 | |
| Interest bearing deposits | | | 17,083,615 | | | 17,043,482 | | | 15,239,560 | | | 15,236,498 | | Interest bearing deposits | | | 20,755,849 | | | 20,732,125 | | | 17,083,615 | | | 17,043,482 | |
| Federal funds purchased and securities sold under repurchase agreements | | | 1,158,669 | | | 1,158,669 | | | 1,208,080 | | | 1,208,080 | | Federal funds purchased and securities sold under repurchase agreements | | | 1,572,809 | | | 1,572,809 | | | 1,158,669 | | | 1,158,669 | |
| Long-term debt | | | 1,933,638 | | | 1,927,525 | | | 1,879,583 | | | 1,876,806 | | Long-term debt | | | 1,350,139 | | | 1,327,894 | | | 1,933,638 | | | 1,927,525 | |
| | Derivative liability positions | | | 48,270 | | | 48,270 | | | 37,493 | | | 37,493 | |
| | |
Note 17 Income Taxes
For the years ended December 31, 2006, 2005, 2004, and 2003,2004, income tax expense (benefit) consists of:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | |
| | | 2005 | | | 2004 | | | 2003 | | | | 2006 | | | 2005 | | | 2004 | |
(In thousands) | (In thousands) | | | | | | | | | | (In thousands) | | | | | | | | | |
Current: | Current: | | | | | | | | | | | Current: | | | | | | | | | | |
| Federal | | $ | 331,807 | | | 215,633 | | | 189,901 | | Federal | | $ | 371,469 | | | 331,807 | | | 215,633 | |
| State | | | 24,657 | | | 12,767 | | | 5,896 | | State | | | 26,435 | | | 24,657 | | | 12,767 | |
| Foreign | | | 4,687 | | | 1,447 | | | — | | Foreign | | | 3,682 | | | 4,687 | | | 1,447 | |
| | | | | | | | | | | | | | | | |
| | | | 361,151 | | | 229,847 | | | 195,797 | | | | | 401,586 | | | 361,151 | | | 229,847 | |
| | | | | | | | | | | | | | | | |
Deferred: | Deferred: | | | | | | | | | | | Deferred: | | | | | | | | | | |
| Federal | | | (46,394 | ) | | | 19,120 | | | 19,137 | | Federal | | | (44,872 | ) | | | (46,394 | ) | | | 19,120 | |
| State | | | (5,054 | ) | | | 1,491 | | | 7,642 | | State | | | 178 | | | (5,054 | ) | | | 1,491 | |
| Foreign | | | (2,127 | ) | | | 1,790 | | | — | | Foreign | | | (276 | ) | | | (2,127 | ) | | | 1,790 | |
| | | | | | | | | | | | | | | | |
| | | | (53,575 | ) | | | 22,401 | | | 26,779 | | | | | (44,970 | ) | | | (53,575 | ) | | | 22,401 | |
| | | | | | | | | | | | | | | | |
| | Total income tax expense | | $ | 307,576 | | | 252,248 | | | 222,576 | | | Total income tax expense | | $ | 356,616 | | | 307,576 | | | 252,248 | |
| | | | | | | | | | | | | | | | |
|
F-32
Notes to Consolidated Financial Statements 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:
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | 2005 | | | 2004 | | | 2003 | | | |
| | | | | | | | | | | | | 2006 | | | 2005 | | | 2004 | |
(Dollars in thousands) | (Dollars in thousands) | | | | | | | | | | | (Dollars in thousands) | | | | | | | | | |
Taxes at statutory federal income tax rate | Taxes at statutory federal income tax rate | | $ | 288,408 | | | 241,248 | | | 214,025 | | Taxes at statutory federal income tax rate | | $ | 340,737 | | | 288,408 | | | 241,248 | |
Tax-exempt income | Tax-exempt income | | | (3,745 | ) | | | (4,124 | ) | | | (4,553 | ) | Tax-exempt income | | | (3,964 | ) | | | (3,745 | ) | | | (4,124 | ) |
State income taxes, net of federal income tax benefit | State income taxes, net of federal income tax benefit | | | 12,742 | | | 9,268 | | | 8,800 | | State income taxes, net of federal income tax benefit | | | 17,298 | | | 12,742 | | | 9,268 | |
Minority interest | Minority interest | | | 13,083 | | | 10,053 | | | 9,440 | | Minority interest | | | 16,836 | | | 13,083 | | | 10,053 | |
Tax credits | Tax credits | | | (5,793 | ) | | | (1,980 | ) | | | (2,403 | ) | Tax credits | | | (9,355 | ) | | | (5,793 | ) | | | (1,980 | ) |
Other permanent differences, net | | | 2,881 | | | (2,217 | ) | | | (2,733 | ) | |
Other, net | | Other, net | | | (4,936 | ) | | | 2,881 | | | (2,217 | ) |
| | | | | | | | | | | | | | | | |
| Total income tax expense | | $ | 307,576 | | | 252,248 | | | 222,576 | | Total income tax expense | | $ | 356,616 | | | 307,576 | | | 252,248 | |
| | | | | | | | | | | | | | | | |
| Effective income tax rate | | | 37.33 | % | | | 36.60 | | | 36.40 | | Effective income tax rate | | | 36.63 | % | | | 37.33 | | | 36.60 | |
| | | | | | | | | | | | | | | | |
|
F-38
Notes to Consolidated Financial Statements At December 31, 20052006 and 2004,2005, Synovus had state income tax credit carryforwards of $8.8$3.9 million and $7.7$8.8 million, respectively. The credits will begin to expire in the year 2010. 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, 2005.2006. The valuation allowance for deferred tax assets was $2.2$4.1 million and $1.9$2.2 million at December 31, 20052006 and 2004,2005, respectively. The increase in the valuation allowance for deferred income tax assets was $300,000$1.8 million for the year ended December 31, 2005.2006. The increase relates to new state tax credits earnedand foreign losses recognized in the year 2005,2006, which more likely than not will not be realized in later years.
For the year ended December 31, 2005,2006, net deferred tax assets of $1.2 million$849 thousand were added as a result of the acquisition of Vital. For the year ended December 31, 2004, net deferred tax liabilities of $2.7 million were added as a result of the acquisition of Peoples Bank, Trust One,Riverside and Clarity.
F-33
Notes to Consolidated Financial Statements First Florida.
The tax effects of temporary differences that gave rise to significant portions of the deferred income tax assets and liabilities at December 31, 20052006 and 20042005 are presented below:
| | | | | | | | | | |
| |
| | 2005 | | | 2004 | |
| | | | | | |
(In thousands) | | | | | | | | |
|
Deferred income tax assets: | | | | | | | | |
Provision for losses on loans | | $ | 119,850 | | | | 107,808 | |
Finance lease transactions | | | 25,998 | | | | — | |
Net operating loss and income tax credit carryforwards | | | 16,081 | | | | 20,485 | |
Deferred revenue | | | 11,265 | | | | — | |
Deferred compensation | | | 5,051 | | | | 5,299 | |
Net unrealized loss on cash flow hedges | | | 3,957 | | | | 2,527 | |
Net unrealized loss on investment securities available for sale | | | 17,831 | | | | 83 | |
Other | | | 9,245 | | | | 15,209 | |
| | | | | | |
| Total gross deferred income tax assets | | | 209,278 | | | | 151,411 | |
Less valuation allowance | | | (2,241 | ) | | | (1,853 | ) |
| | | | | | |
| Total net deferred income tax assets | | $ | 207,037 | | | | 149,558 | |
| | | | | | |
Deferred income tax liabilities: | | | | | | | | |
Finance lease transactions | | | — | | | | (29,250 | ) |
Differences in depreciation | | | (116,097 | ) | | | (79,891 | ) |
Computer software development costs | | | (37,160 | ) | | | (38,154 | ) |
Purchase accounting adjustments | | | (14,916 | ) | | | (17,229 | ) |
Differences in revenue recognition | | | — | | | | (11,374 | ) |
Foreign currency translation | | | (3,424 | ) | | | (8,754 | ) |
Ownership interest in partnership | | | (2,739 | ) | | | (6,062 | ) |
Other | | | (12,100 | ) | | | (17,439 | ) |
| | | | | | |
| Total gross deferred income tax liabilities | | | (186,436 | ) | | | (208,153 | ) |
| | | | | | |
| | Net deferred income tax asset (liability) | | $ | 20,601 | | | | (58,595 | ) |
| | | | | | |
|
| | | | | | | | | | | |
| |
| | 2006 | | | 2005 | |
(In thousands) | | | | | | |
Deferred income tax assets: | | | | | | | | |
| Provision for losses on loans | | $ | 128,339 | | | | 119,850 | |
| Finance lease transactions | | | 12,484 | | | | 25,998 | |
| Net operating loss and income tax credit carryforwards | | | 9,898 | | | | 16,081 | |
| Deferred revenue | | | 17,160 | | | | 11,265 | |
| Deferred compensation | | | 11,620 | | | | 5,051 | |
| Share-based compensation | | | 10,236 | | | | 657 | |
| Impact of adoption of SFAS No. 158 | | | 2,067 | | | | — | |
| Unrealized loss on derivative instruments | | | 3,941 | | | | — | |
| Net unrealized loss on cash flow hedges | | | 1,698 | | | | 3,957 | |
| Net unrealized loss on investment securities available for sale | | | 9,525 | | | | 17,831 | |
| Other | | | 25,188 | | | | 8,588 | |
| | | | | | |
| | Total gross deferred income tax assets | | | 232,156 | | | | 209,278 | |
| Less valuation allowance | | | (4,081 | ) | | | (2,241 | ) |
| | | | | | |
| | Total net deferred income tax assets | | | 228,075 | | | | 207,037 | |
| | | | | | |
Deferred income tax liabilities: | | | | | | | | |
| Computer software development costs | | | (46,686 | ) | | | (37,160 | ) |
| Excess tax over financial statement depreciation | | | (83,295 | ) | | | (116,097 | ) |
| Purchase accounting adjustments | | | (17,228 | ) | | | (14,916 | ) |
| TSYS stock repurchase | | | (1,918 | ) | | | — | |
| Foreign currency translation | | | (4,333 | ) | | | (3,424 | ) |
| Ownership interest in partnership | | | (5,010 | ) | | | (2,739 | ) |
| Other | | | (11,660 | ) | | | (12,100 | ) |
| | | | | | |
| | Total gross deferred income tax liabilities | | | (170,130 | ) | | | (186,436 | ) |
| | | | | | |
| | | Net deferred income tax assets | | $ | 57,945 | | | | 20,601 | |
| | | | | | |
|
F-39
Notes to Consolidated Financial Statements | |
Note 18 | Operating Segments |
Synovus has two reportable segments: Financial Services and Transaction Processing Services (TSYS). The Financial Services segment provides financial services including banking, financial management, insurance, mortgage and leasing services through 3940 wholly-owned affiliate banks and other Synovus offices in Georgia, Alabama, South Carolina, Florida, and Tennessee. Through online accounting and electronic payment processing systems, TSYS provides electronic payment processing and related services, primarily through TSYS’ cardholder systems, TS1 and TS2, to financial institutions and other related services to banks and other card-issuing institutions inorganizations throughout the United States, Mexico, Canada, Honduras, Puerto Rico and Europe.internationally. TSYS currently offers merchant services to financial institutions and other organizations in the United States through TSYS Acquiring and in Japan through Vital and GPNet.GP Net. 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.
F-34
Notes to Consolidated Financial Statements Segment information for the years ended December 31, 2006, 2005, 2004, and 20032004 is presented in the following table.
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | Financial | | | | | | | | | | Financial | | | |
| | | Year | | | Services | | | TSYS(a) | | | Eliminations | | | Consolidated | | | | Year | | | Services | | | TSYS(a) | | | Eliminations | | | Consolidated | |
(In thousands) | (In thousands) | | | | | | | | | | | | | | | | (In thousands) | | | | | | | | | | | | | | | |
Interest income | Interest income | | | 2005 | | $ | 1,496,262 | | | 3,873 | | | (3,910 | )(b) | | | 1,496,225 | | Interest income | | | 2006 | | $ | 2,016,466 | | | 8,238 | | | (8,238 | )(b) | | | 2,016,466 | |
| | | | 2004 | | | 1,159,020 | | | 1,348 | | | (1,348 | )(b) | | | 1,159,020 | | | | | 2005 | | | 1,496,262 | | | 3,873 | | | (3,910 | )(b) | | | 1,496,225 | |
| | | | 2003 | | | 1,061,522 | | | 747 | | | (777 | )(b) | | | 1,061,492 | | | | | 2004 | | | 1,159,020 | | | 1,348 | | | (1,348 | )(b) | | | 1,159,020 | |
Interest expense | Interest expense | | | 2005 | | | 531,046 | | | 242 | | | (3,910 | )(b) | | | 527,378 | | Interest expense | | | 2006 | | | 890,677 | | | 153 | | | (8,238 | )(b) | | | 882,592 | |
| | | | 2004 | | | 299,489 | | | 200 | | | (1,348 | )(b) | | | 298,341 | | | | | 2005 | | | 531,046 | | | 242 | | | (3,910 | )(b) | | | 527,378 | |
| | | | 2003 | | | 299,066 | | | 139 | | | (777 | )(b) | | | 298,428 | | | | | 2004 | | | 299,489 | | | 200 | | | (1,348 | )(b) | | | 298,341 | |
Net interest income | Net interest income | | | 2005 | | | 965,216 | | | 3,631 | | | — | | | 968,847 | | Net interest income | | | 2006 | | | 1,125,789 | | | 8,085 | | | — | | | 1,133,874 | |
| | | | 2004 | | | 859,531 | | | 1,148 | | | — | | | 860,679 | | | | | 2005 | | | 965,216 | | | 3,631 | | | — | | | 968,847 | |
| | | | 2003 | | | 762,456 | | | 608 | | | — | | | 763,064 | | | | | 2004 | | | 859,531 | | | 1,148 | | | — | | | 860,679 | |
Provision for losses on loans | Provision for losses on loans | | | 2005 | | | 82,532 | | | — | | | — | | | 82,532 | | Provision for losses on loans | | | 2006 | | | 75,148 | | | — | | | — | | | 75,148 | |
| | | | 2004 | | | 75,319 | | | — | | | — | | | 75,319 | | | | | 2005 | | | 82,532 | | | — | | | — | | | 82,532 | |
| | | | 2003 | | | 71,777 | | | — | | | — | | | 71,777 | | | | | 2004 | | | 75,319 | | | — | | | — | | | 75,319 | |
Net interest income after provision | Net interest income after provision | | | 2005 | | | 882,684 | | | 3,631 | | | — | | | 886,315 | | Net interest income after provision | | | 2006 | | | 1,050,641 | | | 8,085 | | | — | | | 1,058,726 | |
| for losses on loans | | | 2004 | | | 784,212 | | | 1,148 | | | — | | | 785,360 | | for losses on loans | | | 2005 | | | 882,684 | | | 3,631 | | | — | | | 886,315 | |
| | | | 2003 | | | 690,679 | | | 608 | | | — | | | 691,287 | | | | | 2004 | | | 784,212 | | | 1,148 | | | — | | | 785,360 | |
Total non-interest income | Total non-interest income | | | 2005 | | | 327,412 | | | 1,611,897 | | | (20,830 | )(c) | | | 1,918,479 | | Total non-interest income | | | 2006 | | | 359,430 | | | 1,798,519 | | | (24,363 | )(c) | | | 2,133,586 | |
| | | | 2004 | | | 327,441 | | | 1,212,414 | | | (18,844 | )(c) | | | 1,521,011 | | | | | 2005 | | | 327,412 | | | 1,611,897 | | | (20,830 | )(c) | | | 1,918,479 | |
| | | | 2003 | | | 311,023 | | | 1,074,457 | | | (16,151 | )(c) | | | 1,369,329 | | | | | 2004 | | | 327,441 | | | 1,212,414 | | | (18,844 | )(c) | | | 1,521,011 | |
Total non-interest expense | Total non-interest expense | | | 2005 | | | 646,757 | | | 1,317,464 | | | (20,830 | )(c) | | | 1,943,391 | | Total non-interest expense | | | 2006 | | | 764,533 | | | 1,430,507 | | | (24,363 | )(c) | | | 2,170,677 | |
| | | | 2004 | | | 621,674 | | | 985,536 | | | (18,844 | )(c) | | | 1,588,366 | | | | | 2005 | | | 646,757 | | | 1,317,464 | | | (20,830 | )(c) | | | 1,943,391 | |
| | | | 2003 | | | 575,407 | | | 862,887 | | | (16,151 | )(c) | | | 1,422,143 | | | | | 2004 | | | 621,674 | | | 985,536 | | | (18,844 | )(c) | | | 1,588,366 | |
Income before taxes | | | 2005 | | | 563,339 | | | 298,064 | | | (37,381 | )(d) | | | 824,022 | | |
Income before income taxes | | Income before income taxes | | | 2006 | | | 645,538 | | | 376,097 | | | (48,102 | )(d) | | | 973,533 | |
| | | | 2004 | | | 489,979 | | | 228,026 | | | (28,724 | )(d) | | | 689,281 | | | | | 2005 | | | 563,339 | | | 298,064 | | | (37,381 | )(d) | | | 824,022 | |
| | | | 2003 | | | 426,295 | | | 212,178 | | | (26,972 | )(d) | | | 611,501 | | | | | 2004 | | | 489,979 | | | 228,026 | | | (28,724 | )(d) | | | 689,281 | |
Income tax expense | Income tax expense | | | 2005 | | | 204,289 | | | 103,287 | | | — | | | 307,576 | | Income tax expense | | | 2006 | | | 230,435 | | | 126,181 | | | — | | | 356,616 | |
| | | | 2004 | | | 175,039 | | | 77,209 | | | — | | | 252,248 | | | | | 2005 | | | 204,289 | | | 103,287 | | | — | | | 307,576 | |
| | | | 2003 | | | 151,709 | | | 70,867 | | | — | | | 222,576 | | | | | 2004 | | | 175,039 | | | 77,209 | | | — | | | 252,248 | |
Net income | Net income | | | 2005 | | | 359,050 | | | 194,777 | | | (37,381 | )(d) | | | 516,446 | | Net income | | | 2006 | | | 415,103 | | | 249,916 | | | (48,102 | )(d) | | | 616,917 | |
| | | | 2004 | | | 314,940 | | | 150,817 | | | (28,724 | )(d) | | | 437,033 | | | | | 2005 | | | 359,050 | | | 194,777 | | | (37,381 | )(d) | | | 516,446 | |
| | | | 2003 | | | 274,586 | | | 141,311 | | | (26,972 | )(d) | | | 388,925 | | | | | 2004 | | | 314,940 | | | 150,817 | | | (28,724 | )(d) | | | 437,033 | |
Total assets | Total assets | | | 2005 | | | 26,401,125 | | | 1,395,633 | | | (176,086 | )(e) | | | 27,620,672 | | Total assets | | | 2006 | | | 30,496,950 | | | 1,612,684 | | | (254,861 | )(e) | | | 31,854,773 | |
| | | | 2004 | | | 23,966,347 | | | 1,241,797 | | | (157,966 | )(e) | | | 25,050,178 | | | | | 2005 | | | 26,401,125 | | | 1,395,633 | | | (176,086 | )(e) | | | 27,620,672 | |
| | | | 2003 | | | 20,715,606 | | | 1,000,836 | | | (83,813 | )(e) | | | 21,632,629 | | | | | 2004 | | | 23,966,347 | | | 1,241,797 | | | (157,966 | )(e) | | | 25,050,178 | |
| | |
(a) | | Includes equity in income of joint ventures which is included in non-interest income. |
|
(b) | | InterestPrimarily, interest on TSYS’ cash deposits with the Financial Services segment and on TSYS’ line of credit with a Synovus bank.segment. |
|
(c) | | Primarily, electronic payment processing services and other services provided by TSYS to the Financial Services segment. |
|
(d) | | Minority interest in TSYS and GP Net (a TSYS subsidiary). |
|
(e) | | Primarily TSYS’ cash deposits with the Financial Services segment. |
F-35F-40
Notes to Consolidated Financial Statements
Segment information for the changes in the carrying amount of goodwill for the years ended December 31, 20052006 and 20042005 are shown in the following table. There were no impairment losses for the years ended December 31, 20052006 and 2004.2005.
| | | | | | | | | | | | | | | | | | | | | | |
| | Financial | | | | | | | Financial | | | | | |
| | Services | | | TSYS | | | Consolidated | | | Services | | | TSYS | | | Consolidated | |
(In thousands) | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2003 | | $ | 219,242 | | | 29,626 | | | 248,868 | | |
Goodwill acquired | | | 126,480 | | | 40,931 | | | 167,411 | | |
Impairment losses | | | — | | | — | | | — | | |
Currency translation adjustments(3) | | | — | | | 4 | | | 4 | | |
| | | | | | | | |
Balance as of December 31, 2004 | | $ | 345,722 | | | 70,561 | | | 416,283 | | | $ | 345,722 | | | 70,561 | | | 416,283 | |
Goodwill acquired | | | 235 | (1) | | | 43,632 | (2) | | | 43,867 | | | | 235 | (1) | | | 43,632 | (2) | | | 43,867 | |
Impairment losses | | | — | | | — | | | — | | | | — | | | — | | | — | |
Currency translation adjustments(3) | | | — | | | (16 | ) | | | (16 | ) | | | — | | | (16 | ) | | | (16 | ) |
Other | | | (440 | )(4) | | | (1,312 | )(5) | | | (1,752 | ) | | | (440 | )(4) | | | (1,312 | )(5) | | | (1,752 | ) |
| | | | | | | | | | | | | | |
Balance as of December 31, 2005 | | $ | 345,517 | | | 112,865 | | | 458,382 | | | | 345,517 | | | 112,865 | | | 458,382 | |
Goodwill acquired | | | | 177,271 | (1)(6) | | | 41,381 | (7)(8)(9) | | | 218,652 | |
Impairment losses | | | | — | | | — | | | — | |
Currency translation adjustments(3) | | | | — | | | (805 | ) | | | (805 | ) |
Other | | | | (238 | )(10) | | | (6,476 | )(11) | | | (6,714 | ) |
| | | | | | | | | | | | | | |
Balance as of December 31, 2006 | | | $ | 522,550 | | | 146,965 | | | 669,515 | |
| | | | | | | | |
| |
(1) | $226During 2005, $226 thousand pertains to contingent consideration relating to the GLOBALT acquisition. The remaining $9 thousand pertains to additional acquisition expenses related to the Trust One acquisition. See Note 2 for additional information on these business combinations. During 2006, $585 thousand pertains to contingent consideration relating to the GLOBALT acquisition. |
|
(2) | Goodwill acquired during 2005 consists of $36.7 million in goodwill based on the preliminary purchase price allocation for the Vital acquisition which was completed on March 1, 2005. $4.9 million in additional goodwill consists of fifty percent of the previously recorded goodwill on Vital’s balance sheet, which is now being consolidated in TSYS’ balance sheet. The remaining $2.0 million in goodwill relates to the acquisition of Merlin Solutions, L.L.C. See Note 2 for additional information regarding these acquisitions. |
|
(3) | Consists of foreign currency translation adjustments for GP Net. |
|
(4) | During 2005, Synovus recorded a reduction in goodwill of $440 thousand associated with the sale of two bank charters. |
|
(5) | On August 2, 2004, TSYS completed the acquisition of Clarity. During 2005, TSYS recorded a final adjustment to the purchase price allocation, which resulted in a $1.3 million reduction in other liabilities with a corresponding $1.3 million decrease in goodwill. |
|
(6) | Goodwill acquired during 2006 includes $122.1 million resulting from the Riverside acquisition on March 25, 2006, and $54.6 million resulting from the First Florida acquisition on April 1, 2006. See Note 2 for additional information regarding these acquisitions. |
|
(7) | Goodwill acquired during 2006 includes $27.4 million resulting from TSYS’ acquisition of TSYS Card Tech. See Note 2 for additional information regarding this acquisition. |
|
(8) | On November 16, 2006, TSYS acquired 55% of TSYS Managed Services. TSYS has preliminary allocated approximately $323 thousand to goodwill. See Note 2 for additional information regarding this acquisition. |
|
(9) | During 2006, the TSYS Board of Directors announced a plan to repurchase up to 2 million shares of TSYS common stock over the next two years. Goodwill of $13.6 million recorded during 2006 is associated with 1.1 million shares of TSYS common stock repurchased by TSYS. |
| |
(10) | During 2006, Synovus recorded a reduction in goodwill of $238 thousand associated with the dissolution of a bank owned leasing company. |
|
(11) | On March 1, 2005, TSYS completed the acquisition of TSYS Acquiring. During 2006, TSYS recorded a final adjustment to the purchase price allocation, which resulted in a $6.5 million decrease in goodwill. See Note 2 for additional information regarding this acquisition. |
F-36F-41
Notes to Consolidated Financial Statements
| |
Note 19 | Condensed Financial Information of Synovus Financial Corp. (Parent Company only) |
Condensed Balance Sheets
| | | | | | | | | | | | | | | | | | | | |
Condensed Balance Sheets | | | | | |
| | | | December 31, | |
| | | | | |
| | | December 31, | | | | 2006 | | | 2005 | |
(In thousands) | (In thousands) | | | | (In thousands) | | | | | | |
| | 2005 | | | 2004 | | |
| | | | �� | | | |
Assets | Assets | | | | | | | | Assets | | | | | | | |
| Cash | | $ | 1,747 | | | 4,911 | | Cash | | $ | 3,294 | | | 1,747 | |
| Investment in consolidated bank subsidiaries, at equity (including TSYS) | | | 3,383,050 | | | 3,018,729 | | Investment in consolidated bank subsidiaries, at equity (including TSYS) | | | 4,162,387 | | | 3,383,050 | |
| Investment in consolidated nonbank subsidiaries, at equity | | | 53,829 | | | 29,698 | | Investment in consolidated nonbank subsidiaries, at equity | | | 57,541 | | | 53,829 | |
| Notes receivable from bank subsidiaries | | | 197,677 | | | 27,278 | | Notes receivable from bank subsidiaries | | | 167,439 | | | 197,677 | |
| Notes receivable from nonbank subsidiaries | | | 4,014 | | | 1,630 | | Notes receivable from nonbank subsidiaries | | | 3,773 | | | 4,014 | |
| Other assets | | | 137,009 | | | 143,916 | | Other assets | | | 192,410 | | | 137,009 | |
| | | | | | | | | | | | |
| | Total assets | | $ | 3,777,326 | | | 3,226,162 | | | Total assets | | $ | 4,586,844 | | | 3,777,326 | |
| | | | | | | | | | | | |
Liabilities and Shareholders’ Equity | Liabilities and Shareholders’ Equity | | | | | | | | Liabilities and Shareholders’ Equity | | | | | | | |
| Liabilities: | | | | | | | | Liabilities: | | | | | | | |
| | Long-term debt | | $ | 759,369 | | | 513,203 | | | Long-term debt | | $ | 771,285 | | | 759,369 | |
| | Other liabilities | | | 68,628 | | | 71,670 | | | Other liabilities | | | 106,909 | | | 68,628 | |
| | | | | | | | | | | | |
| | Total liabilities | | | 827,997 | | | 584,873 | | | Total liabilities | | | 878,194 | | | 827,997 | |
| | | | | | | | | | | | |
| Shareholders’ equity: | | | | | | | | Shareholders’ equity: | | | | | | | |
| | Common stock | | | 318,301 | | | 315,636 | | | Common stock | | | 331,214 | | | 318,301 | |
| | Surplus | | | 686,447 | | | 628,396 | | | Additional paid-in capital | | | 1,033,055 | | | 686,447 | |
| | Treasury stock | | | (113,944 | ) | | | (113,944 | ) | | Treasury stock | | | (113,944 | ) | | | (113,944 | ) |
| | Unearned compensation | | | (3,126 | ) | | | (106 | ) | | Unearned compensation | | | — | | | (3,126 | ) |
| | Accumulated other comprehensive income (loss) | | | (29,536 | ) | | | 8,903 | | | Accumulated other comprehensive loss | | | (2,129 | ) | | | (29,536 | ) |
| | Retained earnings | | | 2,091,187 | | | 1,802,404 | | | Retained earnings | | | 2,460,454 | | | 2,091,187 | |
| | | | | | | | | | | | |
| | Total shareholders’ equity | | | 2,949,329 | | | 2,641,289 | | | Total shareholders’ equity | | | 3,708,650 | | | 2,949,329 | |
| | | | | | | | | | | | |
| | Total liabilities and shareholders’ equity | | $ | 3,777,326 | | | 3,226,162 | | | Total liabilities and shareholders’ equity | | $ | 4,586,844 | | | 3,777,326 | |
| | | | | | | | | | | | |
|
F-37F-42
Notes to Consolidated Financial Statements
Condensed Statements of Income
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
Condensed Statements of Income | | | |
| | | Years Ended December 31, | | | | Years Ended December 31, | |
| | | | | | | | |
| | | 2005 | | | 2004 | | | 2003 | | | | 2006 | | | 2005 | | | 2004 | |
(In thousands) | (In thousands) | | | | | | | | | | (In thousands) | | | | | | | | | |
Income: | Income: | | | | | | | | | | | Income: | | | | | | | | | | |
| Dividends received from bank subsidiaries (including TSYS) | | $ | 251,202 | | | 228,586 | | | 230,580 | | Dividends received from bank subsidiaries (including TSYS) | | $ | 245,687 | | | 251,202 | | | 228,586 | |
| Information technology fees from affiliates | | | 68,890 | | | 63,205 | | | 62,301 | | Management and information technology fees from affiliates | | | 107,133 | | | 85,092 | | | 78,945 | |
| Securities gains (losses), net | | | 166 | | | — | | | (209 | ) | Securities gains, net | | | — | | | 166 | | | — | |
| Interest income | | | 3,698 | | | 7,308 | | | 10,591 | | Interest income | | | 5,503 | | | 3,698 | | | 7,308 | |
| Other income | | | 33,534 | | | 45,035 | | | 21,873 | | Other income | | | 29,996 | | | 17,332 | | | 29,295 | |
| | | | | | | | | | | | | | | | |
| | Total income | | | 357,490 | | | 344,134 | | | 325,136 | | | Total income | | | 388,319 | | | 357,490 | | | 344,134 | |
| | | | | | | | | | | | | | | | |
Expenses: | Expenses: | | | | | | | | | | | Expenses: | | | | | | | | | | |
| Interest expense | | | 41,560 | | | 27,200 | | | 31,807 | | Interest expense | | | 41,343 | | | 41,560 | | | 27,200 | |
| Other expenses | | | 166,856 | | | 141,603 | | | 125,964 | | Other expenses | | | 218,803 | | | 166,856 | | | 141,603 | |
| | | | | | | | | | | | | | | | |
| | Total expenses | | | 208,416 | | | 168,803 | | | 157,771 | | | Total expenses | | | 260,146 | | | 208,416 | | | 168,803 | |
| | | | | | | | | | | | | | | | |
| | Income before income taxes and equity in undistributed income of subsidiaries | | | 149,074 | | | 175,331 | | | 167,365 | | | Income before income taxes and equity in undistributed income of subsidiaries | | | 128,173 | | | 149,074 | | | 175,331 | |
Allocated income tax benefit | Allocated income tax benefit | | | (38,471 | ) | | | (20,513 | ) | | | (23,832 | ) | Allocated income tax benefit | | | (45,260 | ) | | | (38,471 | ) | | | (20,513 | ) |
| | | | | | | | | | | | | | | | |
| | Income before equity in undistributed income of subsidiaries | | | 187,545 | | | 195,844 | | | 191,197 | | | Income before equity in undistributed income of subsidiaries | | | 173,433 | | | 187,545 | | | 195,844 | |
Equity in undistributed income of subsidiaries | Equity in undistributed income of subsidiaries | | | 328,901 | | | 241,189 | | | 197,728 | | Equity in undistributed income of subsidiaries | | | 443,484 | | | 328,901 | | | 241,189 | |
| | | | | | | | | | | | | | | | |
| Net income | | $ | 516,446 | | | 437,033 | | | 388,925 | | Net income | | $ | 616,917 | | | 516,446 | | | 437,033 | |
| | | | | | | | | | | | | | | | |
|
F-38F-43
Notes to Consolidated Financial Statements
Condensed Statements of Cash Flows
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Years ended December 31, | |
Condensed Statements of Cash Flows | | | |
| | | | | |
| | | Years ended December 31, | | | | 2006 | | | 2005 | | | 2004 | |
(In thousands) | (In thousands) | | | | (In thousands) | | | | | | | | | |
Operating Activities | | Operating Activities | | | | | | | | | | |
| | | 2005 | | | 2004 | | | 2003 | | Net income | | $ | 616,917 | | | 516,446 | | | 437,033 | |
| | | | | | | | | | | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | |
Operating Activities | | | | | | | | | | | |
| Net income | | $ | 516,446 | | | 437,033 | | | 388,925 | | | Equity in undistributed income of subsidiaries | | | (443,484 | ) | | | (328,901 | ) | | | (241,189 | ) |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | Depreciation, amortization, and accretion, net | | | 22,235 | | | 17,243 | | | 17,365 | |
| | Equity in undistributed income of subsidiaries | | | (328,901 | ) | | | (241,189 | ) | | | (197,728 | ) | | Share-based compensation | | | 9,889 | | | 862 | | | 55 | |
| | Depreciation, amortization, and accretion, net | | | 17,243 | | | 17,365 | | | 16,428 | | | Net increase (decrease) in other liabilities | | | 43,158 | | | (3,029 | ) | | | 20,784 | |
| | Net increase (decrease) in other liabilities | | | (3,029 | ) | | | 20,784 | | | 5,469 | | | Net (increase) decrease in other assets | | | (37,106 | ) | | | 7,302 | | | (15,522 | ) |
| | Net (increase) decrease in other assets | | | 7,302 | | | (15,522 | ) | | | (23,762 | ) | | Gain on sale of other assets | | | (1,940 | ) | | | — | | | — | |
| | Other, net | | | (508 | ) | | | (10,180 | ) | | | 2,871 | | | Other, net | | | 9,416 | | | (1,370 | ) | | | (10,235 | ) |
| | | | | | | | | | | | | | | | |
| | Net cash provided by operating activities | | | 208,553 | | | 208,291 | | | 192,203 | | | Net cash provided by operating activities | | | 219,085 | | | 208,553 | | | 208,291 | |
| | | | | | | | | | | | | | | | |
Investing Activities | Investing Activities | | | | | | | | | | | Investing Activities | | | | | | | | | | |
| Net investment in subsidiaries | | | (85,887 | ) | | | (73,920 | ) | | | (52,864 | ) | Net investment in subsidiaries | | | (33,757 | ) | | | (85,887 | ) | | | (73,920 | ) |
| Cash paid for acquisitions | | | (10 | ) | | | (32,077 | ) | | | (80,400 | ) | Cash paid for acquisitions | | | — | | | (10 | ) | | | (32,077 | ) |
| Cash proceeds from sales of subsidiaries | | | — | | | 26,164 | | | 5,181 | | Cash proceeds from sales of subsidiaries | | | — | | | — | | | 26,164 | |
| Purchases of premises & equipment | | | (17,503 | ) | | | (18,364 | ) | | | (14,201 | ) | Purchases of premises and equipment | | | (26,941 | ) | | | (17,503 | ) | | | (18,364 | ) |
| Net (increase) decrease in short-term notes receivable from bank subsidiaries | | | (170,399 | ) | | | 81,559 | | | 9,212 | | Proceeds from sale of other assets | | | 2,135 | | | — | | | — | |
| Net (increase) decrease in short-term notes receivable from nonbank subsidiaries | | | (2,384 | ) | | | (899 | ) | | | 1,634 | | Net decrease (increase) in short-term notes receivable from bank subsidiaries | | | 30,238 | | | (170,399 | ) | | | 81,559 | |
| | | | | | | | | Net decrease (increase) in short-term notes receivable from nonbank subsidiaries | | | 241 | | | (2,384 | ) | | | (899 | ) |
| | Net cash used in investing activities | | | (276,183 | ) | | | (17,537 | ) | | | (131,438 | ) | | | | | | | | |
| | | | | | | | | | Net cash used in investing activities | | | (28,084 | ) | | | (276,183 | ) | | | (17,537 | ) |
| | | | | | | | | |
Financing Activities | Financing Activities | | | | | | | | | | | Financing Activities | | | | | | | | | | |
| Dividends paid to shareholders | | | (224,303 | ) | | | (209,883 | ) | | | (194,177 | ) | Dividends paid to shareholders | | | (244,654 | ) | | | (224,303 | ) | | | (209,883 | ) |
| Purchase of treasury stock | | | — | | | (4 | ) | | | (112,655 | ) | Purchase of treasury stock | | | — | | | — | | | (4 | ) |
| Principal repayments on long-term debt | | | (200,000 | ) | | | — | | | (81,959 | ) | Principal repayments on long-term debt | | | (10,310 | ) | | | (200,000 | ) | | | — | |
| Proceeds from issuance of long-term debt | | | 445,644 | | | — | | | 300,000 | | Proceeds from issuance of long-term debt | | | — | | | 445,644 | | | — | |
| Proceeds from issuance of common stock | | | 43,125 | | | 23,465 | | | 28,070 | | Proceeds from issuance of common stock | | | 65,510 | | | 43,125 | | | 23,465 | |
| | | | | | | | | | | | | | | | |
| | Net cash provided by (used in) financing activities | | | 64,466 | | | (186,422 | ) | | | (60,721 | ) | | Net cash (used in) provided by financing activities | | | (189,454 | ) | | | 64,466 | | | (186,422 | ) |
| | | | | | | | | | | | | | | | |
Increase (decrease) in cash | Increase (decrease) in cash | | | (3,164 | ) | | | 4,332 | | | 44 | | Increase (decrease) in cash | | | 1,547 | | | (3,164 | ) | | | 4,332 | |
Cash at beginning of period | | | 4,911 | | | 579 | | | 535 | | |
Cash at beginning of year | | Cash at beginning of year | | | 1,747 | | | 4,911 | | | 579 | |
| | | | | | | | | | | | | | | | |
Cash at end of period | | $ | 1,747 | | | 4,911 | | | 579 | | |
Cash at end of year | | Cash at end of year | | $ | 3,294 | | | 1,747 | | | 4,911 | |
| | | | | | | | | | | | | | | | |
| | |
For the years ended December 31, 2006, 2005, 2004, and 2003,2004, the Parent Company paid income taxes (net of refunds received) of $315$380.9 million, $182$315.0 million, and $175$181.0 million, and interest in the amount of $40$41.7 million, $29$41.3 million, and $26$27.4 million, respectively.
F-44
On April 14, 2003, the Synovus Board of Directors approved a two-year $200 million share repurchase plan. During the term of the plan, which expired on April 14, 2005, 5.5 million shares were repurchased at a total cost of $112.7 million. There were no share repurchases under this plan in 2005 or 2004.
Notes to Consolidated Financial Statements
Note 20 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, | | | | Years ended December 31, | |
| | | | | | | | |
| | | 2005 | | | 2004 | | | 2003 | | | | 2006 | | | 2005 | | | 2004 | |
(In thousands) | (In thousands) | | | | | | | | | | (In thousands) | | | | | | | | | |
Income: | | | | | | | | | | | |
| Equity in income of joint ventures | | $ | 6,135 | | | 23,736 | | | 17,810 | | |
Expenses: | Expenses: | | | | | | | | | | | Expenses: | | | | | | | | | | |
| Stationery, printing, and supplies | | | 37,245 | | | 33,273 | | | 34,128 | | Stationery, printing, and supplies | | $ | 35,870 | | | 37,245 | | | 33,273 | |
| Third-party processing services | | | 66,464 | | | 30,057 | | | 27,518 | | Third-party processing services | | | 71,639 | | | 66,464 | | | 30,057 | |
| Attorney commissions and court costs | | | 32,116 | | | 33,930 | | | 12,433 | | Attorney commissions and court costs | | | 25,935 | | | 32,116 | | | 33,930 | |
| Consulting fees | | | 33,954 | | | 15,594 | | | 11,376 | | Consulting fees | | | 29,225 | | | 33,954 | | | 15,594 | |
|
F-39F-45
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2005 and 2004, 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, 2005. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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 as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Synovus’ internal control over financial reporting as of December 31, 2005, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 3, 2006 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.
Atlanta, Georgia
March 3, 2006
F-40
MANAGEMENT’S REPORT ON INTERNAL
CONTROL OVER FINANCIAL REPORTING
The management of Synovus Financial Corp. (the Company) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control — Integrated Framework.
In conducting the Company’s evaluation of the effectiveness of its internal control over financial reporting, the Company has excluded the acquisition of Vital Processing Services, L.L.C. (Vital) by the Company’s majority owned subsidiary, Total System Services, Inc., which was completed in 2005. This acquisition constituted less than 1% of consolidated assets as of December 31, 2005 and 8.9% and 4.2% of consolidated total revenue and consolidated net income, respectively, for the year then ended. Please refer to Note 2 to the consolidated financial statements for further discussion of this acquisition and its impact on Synovus’ consolidated financial statements.
Based on our assessment, we believe that, as of December 31, 2005, the Company’s internal control over financial reporting is effective based on the criteria set forth inInternal Control — Integrated Framework.
Management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2005 has been audited by KPMG LLP, the independent registered public accounting firm which also audited the Company’s consolidated financial statements. KPMG LLP’s attestation report on management’s assessment of the Company’s internal control over financial reporting appears on page F-42 hereof.
| | |
| | |
Richard E. Anthony | | Thomas J. Prescott |
President & | | Executive Vice President & |
Chief Executive Officer | | Chief Financial Officer |
F-41
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Synovus Financial Corp.:
We have audited the accompanying consolidated balance sheets of Synovus Financial Corp. and subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of income, changes in shareholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2006. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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 as of December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.
As discussed in the Notes 1 and 15 to the consolidated financial statements, effective January 1, 2006, the Company adopted the fair value method of accounting for share-based compensation as required by Statement of Financial Accounting Standards No. 123(R),Share-Based Payment.
As discussed in Note 1 to the consolidated financial statements, the Company adopted the recognition and disclosure provisions of Statement of Financial Accounting Standards No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, as of December 31, 2006.
Also, as discussed in Note 1 to the consolidated financial statements, the Company elected application of Staff Accounting Bulletin No. 108,Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,in December 2006.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Synovus’ internal control over financial reporting as of December 31, 2006, based on criteria established inInternal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 1, 2007 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.
Atlanta, Georgia
March 1, 2007
F-46
MANAGEMENT’S REPORT ON INTERNAL
CONTROL OVER FINANCIAL REPORTING
The management of Synovus Financial Corp. (the Company) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control — Integrated Framework.
In conducting the Company’s evaluation of the effectiveness of its internal control over financial reporting, the Company has excluded the following acquisitions completed by the Company in 2006: TSYS Card Tech, Ltd., TSYS Managed Services EMEA, Ltd., and Banking Corporation of Florida. Combined, these acquisitions constituted 1.67% of consolidated assets as of December 31, 2006 and 0.85% and 0.34% of consolidated total revenue and consolidated net income, respectively, for the year then ended. Please refer to Note 2 to the consolidated financial statements for further discussion of these acquisitions and their impact on Synovus’ consolidated financial statements.
Based on our assessment, we believe that, as of December 31, 2006, the Company’s internal control over financial reporting is effective based on the criteria set forth inInternal Control — Integrated Framework.
Management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2006 has been audited by KPMG LLP, the independent registered public accounting firm which also audited the Company’s consolidated financial statements. KPMG LLP’s attestation report on management’s assessment of the Company’s internal control over financial reporting appears on page F-48 hereof.
| | |
| | |
Richard E. Anthony | | Thomas J. Prescott |
Chairman & | | Executive Vice President & |
Chief Executive Officer | | Chief Financial Officer |
F-47
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Synovus Financial Corp.:
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Synovus Financial Corp. and subsidiaries (Synovus) maintained effective internal control over financial reporting as of December 31, 2005,2006, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Synovus’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of Synovus’ internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Synovus maintained effective internal control over financial reporting as of December 31, 2005,2006, is fairly stated, in all material respects, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, Synovus maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005,2006, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Synovus’ majority owned subsidiary, Total SystemDuring 2006, Synovus acquired TSYS Card Tech, Ltd., TSYS Managed Services Inc.EMEA, Ltd., acquired Vital Processing Services, L.L.C. (Vital) during 2005.and Banking Corporation of Florida (the Acquisitions). Management excluded from its assessment of the effectiveness of Synovus’ internal control over financial reporting as of December 31, 2005, Vital’s2006, the Acquisitions’ internal control over financial reporting associated with total assets of less than 1%reporting. Combined, these Acquisitions constituted 1.67% of consolidated total assets of Synovus as of December 31, 20052006 and total revenue0.85% and net income of 8.9% and 4.2%0.34% of consolidated total revenue and consolidated net income, respectively, of Synovus for the year then ended. Our audit of internal control over financial reporting of Synovus also excluded an evaluation of the internal control over financial reporting of Vital.the Acquisitions.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Synovus as of December 31, 20052006 and 2004,2005, and the related consolidated statements of income, changes in shareholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2005,2006, and our report dated March 3, 20061, 2007 expressed an unqualified opinion on those consolidated financial statements. Our report refers to a change in accounting for share-based payments and postretirement benefits after the adoption of Statement of Financial Accounting Standards No. 123(R),Share-Based Payment, and Statement of Financial Accounting Standards No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, respectively, in 2006, and application of Staff Accounting Bulletin No. 108,Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, in 2006.
Atlanta, Georgia
March 3, 20061, 2007
F-42F-48
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | |
| | | Years Ended December 31, | | | | Years Ended December 31, | |
| | | | | | | | |
| | | 2005 | | | 2004 | | | 2003 | | | 2002 | | | 2001 | | | | 2006 | | | 2005 | | | 2004 | | | 2003 | | | 2002 | |
(In thousands, except per share data) | (In thousands, except per share data) | | | | | | | | | | | | | | | | (In thousands, except per share data) | | | | | | | | | | | | | | | |
Income Statement: | Income Statement: | | | | | | | | | | | | | | | | | Income Statement: | | | | | | | | | | | | | | | | |
| Total revenues (a) | | $ | 2,886,863 | | | 2,381,615 | | | 2,129,902 | | | 1,949,688 | | | 1,792,286 | | Total revenues(a) | | $ | 3,269,578 | | | 2,886,863 | | | 2,381,615 | | | 2,129,902 | | | 1,949,688 | |
| Net interest income | | | 968,847 | | | 860,679 | | | 763,064 | | | 717,504 | | | 629,791 | | Net interest income | | | 1,133,874 | | | 968,847 | | | 860,679 | | | 763,064 | | | 717,504 | |
| Provision for losses on loans | | | 82,532 | | | 75,319 | | | 71,777 | | | 65,327 | | | 51,673 | | Provision for losses on loans | | | 75,148 | | | 82,532 | | | 75,319 | | | 71,777 | | | 65,327 | |
| Non-interest income | | | 1,918,479 | | | 1,521,011 | | | 1,369,329 | | | 1,234,822 | | | 1,164,217 | | Non-interest income | | | 2,133,586 | | | 1,918,479 | | | 1,521,011 | | | 1,369,329 | | | 1,234,822 | |
| Non-interest expense | | | 1,943,391 | | | 1,588,366 | | | 1,422,143 | | | 1,299,470 | | | 1,232,483 | | Non-interest expense | | | 2,170,677 | | | 1,943,391 | | | 1,588,366 | | | 1,422,143 | | | 1,299,470 | |
| Net income | | | 516,446 | | | 437,033 | | | 388,925 | | | 365,347 | | | 311,616 | | Net income | | | 616,917 | | | 516,446 | | | 437,033 | | | 388,925 | | | 365,347 | |
Per share data: | Per share data: | | | | | | | | | | | | | | | | | Per share data: | | | | | | | | | | | | | | | | |
| Net income - basic | | | 1.66 | | | 1.42 | | | 1.29 | | | 1.23 | | | 1.07 | | Net income — basic | | | 1.92 | | | 1.66 | | | 1.42 | | | 1.29 | | | 1.23 | |
| Net income - diluted | | | 1.64 | | | 1.41 | | | 1.28 | | | 1.21 | | | 1.05 | | Net income — diluted | | | 1.90 | | | 1.64 | | | 1.41 | | | 1.28 | | | 1.21 | |
| Cash dividends declared | | | 0.73 | | | 0.69 | | | 0.66 | | | 0.59 | | | 0.51 | | Cash dividends declared | | | 0.78 | | | 0.73 | | | 0.69 | | | 0.66 | | | 0.59 | |
| Book value | | | 9.43 | | | 8.52 | | | 7.43 | | | 6.79 | | | 5.75 | | Book value | | | 11.39 | | | 9.43 | | | 8.52 | | | 7.43 | | | 6.79 | |
Balance Sheet: | Balance Sheet: | | | | | | | | | | | | | | | | | Balance Sheet: | | | | | | | | | | | | | | | | |
| Investment securities | | | 2,958,320 | | | 2,695,593 | | | 2,529,257 | | | 2,237,725 | | | 2,088,287 | | Investment securities | | | 3,352,357 | | | 2,958,320 | | | 2,695,593 | | | 2,529,257 | | | 2,237,725 | |
| Loans, net of unearned income | | | 21,392,347 | | | 19,480,396 | | | 16,464,914 | | | 14,463,909 | | | 12,417,917 | | Loans, net of unearned income | | | 24,654,552 | | | 21,392,347 | | | 19,480,396 | | | 16,464,914 | | | 14,463,909 | |
| Deposits | | | 20,784,365 | | | 18,577,468 | | | 15,941,609 | | | 13,928,834 | | | 12,146,198 | | Deposits | | | 24,294,447 | | | 20,784,365 | | | 18,577,468 | | | 15,941,609 | | | 13,928,834 | |
| Long-term debt | | | 1,933,638 | | | 1,879,583 | | | 1,575,777 | | | 1,336,200 | | | 1,052,943 | | Long-term debt | | | 1,350,139 | | | 1,933,638 | | | 1,879,583 | | | 1,575,777 | | | 1,336,200 | |
| Shareholders’ equity | | | 2,949,329 | | | 2,641,289 | | | 2,245,039 | | | 2,040,853 | | | 1,694,946 | | Shareholders’ equity | | | 3,708,650 | | | 2,949,329 | | | 2,641,289 | | | 2,245,039 | | | 2,040,853 | |
| Average total shareholders’ equity | | | 2,799,496 | | | 2,479,404 | | | 2,166,777 | | | 1,855,492 | | | 1,548,030 | | Average total shareholders’ equity | | | 3,369,954 | | | 2,799,496 | | | 2,479,404 | | | 2,166,777 | | | 1,855,492 | |
| Average total assets | | | 26,291,484 | | | 23,275,001 | | | 20,412,853 | | | 17,414,654 | | | 15,375,004 | | Average total assets | | | 29,831,172 | | | 26,291,490 | | | 23,275,001 | | | 20,412,853 | | | 17,414,654 | |
Performance ratios and other data: | Performance ratios and other data: | | | | | | | | | | | | | | | | | Performance ratios and other data: | | | | | | | | | | | | | | | | |
| Return on average assets | | | 1.96 | % | | | 1.88 | | | 1.91 | | | 2.10 | | | 2.03 | | Return on average assets | | | 2.07 | % | | | 1.96 | | | 1.88 | | | 1.91 | | | 2.10 | |
| Return on average equity | | | 18.45 | | | 17.63 | | | 17.95 | | | 19.69 | | | 20.13 | | Return on average equity | | | 18.31 | | | 18.45 | | | 17.63 | | | 17.95 | | | 19.69 | |
| Net interest margin, before fees | | | 4.05 | | | 3.92 | | | 3.90 | | | 4.27 | | | 4.28 | | Net interest margin, before fees | | | 4.15 | | | 4.05 | | | 3.92 | | | 3.90 | | | 4.27 | |
| Net interest margin, after fees | | | 4.19 | | | 4.22 | | | 4.26 | | | 4.65 | | | 4.65 | | Net interest margin, after fees | | | 4.30 | | | 4.19 | | | 4.22 | | | 4.26 | | | 4.65 | |
| Efficiency ratio(b) | | | 49.79 | | | 52.06 | | | 53.34 | | | 52.07 | | | 53.80 | | Efficiency ratio(b) | | | 51.18 | | | 49.79 | | | 52.06 | | | 53.34 | | | 52.07 | |
| Dividend payout ratio(c) | | | 44.51 | | | 48.94 | | | 51.56 | | | 48.76 | | | 48.57 | | Dividend payout ratio(c) | | | 40.99 | | | 44.51 | | | 48.94 | | | 51.56 | | | 48.76 | |
| Average shareholders’ equity to average assets | | | 10.65 | | | 10.65 | | | 10.61 | | | 10.65 | | | 10.07 | | Average shareholders’ equity to average assets | | | 11.37 | | | 10.65 | | | 10.65 | | | 10.61 | | | 10.65 | |
| Average shares outstanding, basic | | | 311,495 | | | 307,262 | | | 302,010 | | | 297,325 | | | 290,304 | | Average shares outstanding, basic | | | 321,241 | | | 311,495 | | | 307,262 | | | 302,010 | | | 297,325 | |
| Average shares outstanding, diluted | | | 314,815 | | | 310,330 | | | 304,928 | | | 301,197 | | | 295,850 | | Average shares outstanding, diluted | | | 324,232 | | | 314,815 | | | 310,330 | | | 304,928 | | | 301,197 | |
| | |
(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-43F-49
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 $27$31 billion in assets. Synovus operates two business segments: the Financial Services and the Transaction Processing Services (TSYS) segments. The Financial Services segment provides integrated financial services including banking, financial management, insurance, mortgage and leasing services through 3940 banks and other Synovus offices in five southeastern states. At December 31, 2005,2006, our banks ranged in size from $38$69.2 million to $4.8$5.79 billion in total assets. The Transaction Processing Services segment provides electronic payment processing services through our 81% owned subsidiary Total System Services, Inc. (TSYS), one of the world’s largest companies for outsourced payment services. Our ownership in TSYS gives us a unique mix: for 2005,2006, 55% of our consolidated revenues and 30%33% of our consolidated 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
| | |
• Loan Growth | | • Credit Quality |
• Deposit Growth | | • Fee Income Growth |
• Net Interest Margin | | • Expense Management |
TSYS
| | |
• Revenue Growth | | • Expense Management |
20052006 Financial Performance vs. 20042005
Consolidated
| | |
| • | Net income $516.4$616.9 million, up 18.2%19.5% |
|
| • | Diluted earnings per share (EPS) $1.64,$1.90, up 16.5%16.0% |
Financial Services
| | |
| • | Loan growth: 9.8%15.2% (11.4% excluding the impact of the acquisition of Riverside and First Florida) |
|
| • | Deposit growth: 11.9% (13.6%16.9% (11.1% excluding brokered deposits)deposits and the impact of the acquisition of Riverside and First Florida). |
|
| • | Net interest margin before fees: 4.05%margin: 4.30%, up 1311 basis points from 3.92%4.19% in 2004. |
|
| • | Net interest margin after fees: 4.19%, down 3 basis points from 4.22% in 2004.2005. |
|
| • | Credit quality: |
| | |
| • | Nonperforming assets (NPA) ratio of .46%.50%, down from .52%compared to .46% at year-end 2004,2005, and |
|
| • | Past dues over 90 days as a percentage of total loans of .07%.14% compared to .09%.07% at year-end 2004,2005, and |
|
| • | Net charge-off ratio of .29%.26%, compared to .23%.29% for 2004.2005. |
| | |
| • | Fee income growth: Unchanged$359.4 million, up 9.8% from 20042005 (up 5.1%9.3% excluding the $15.8 million pre-tax gain from the saleimpact of the Quincy bank operations in 2004)acquisitions). |
|
| • | General and administrative expenses: up 4% (9.4%18.2% (13.4% increase excluding the impact of acquisitions and change in classification methodology relating to loan origination costs)share-based compensation). |
|
| • | Net income growth: 14.0%15.6% |
|
| • | Return on assets: 1.45% compared to 1.43% for 2005. |
|
| • | Return on equity: 16.77% compared to 17.59% for 2005. |
Additionally, during 2006:
| | |
| • | Synovus acquired Riverside Bank on March 25, 2006 and acquired First Florida Bank on April 1, 2006. |
|
| • | Synovus opened 17 new banking locations, all in markets with high growth potential. |
TSYS
| | |
| • | Net income growth: 29.2%28.1% |
|
| • | Revenue growth before reimbursable items: 34.8% (10.3% excluding the impact of the acquisition of Vital and TSYS Prepaid).11.2% |
|
| • | Expense growth before reimbursable items: 32.9% (10.2% excluding the impact of the acquisition of Vital and TSYS Prepaid).7.4% |
|
| • | Accounts on file processed on TSYS’ systems increased 22.4%decreased 4.9% to 416.4 million at December 31, 2006, compared to 437.9 million at December 31, 2005, compared to 357.6 million at December 31, 2004. |
Additionally, during 2005:
| | |
| • | TSYS acquired the remaining 50% interest in Vital Processing Services, L.L.C. (Vital) from Visa U.S.A. (Visa) effective March 1, 2005. |
|
| • | TSYS signed an agreement with Capital One Financial Corporation (Capital One) to provide processing |
F-44F-50
Additionally during 2006:
| | |
| • | servicesTSYS’ Board of Directors approved a share repurchase plan for its North American portfolioup to 2 million shares of consumer and small business credit card accounts.TSYS common stock. |
|
| • | TSYS successfully converted the vast majority of the Capital One Financial Corporation (Capital One) account portfolio onto its TS2 platform. In a related transaction, Capital One became the first client on the new TSYS Loyalty Platform, and is currently processing loyalty transactions on this industry-leading platform. |
|
| • | TSYS reached a long-term agreement with Wachovia Corporation to provide core-processing and other related services in support of JPMorgan Chase &their re-entry into the consumer credit-card line of business. |
|
| • | TSYS deconverted the Sears consumer MasterCard and private-label accounts in June 2006, as well as deconverted the Bank of America consumer card portfolio in October 2006. |
|
| • | TSYS received a contract termination fee of $68.9 million from Bank of America in the fourth quarter of 2006, which was partially offset by approximately $6.0 million in accelerated amortization of contract acquisition costs related to the Bank of America consumer card portfolio. |
|
| • | TSYS announced Toyota Finance Corporation as TSYS’ first processing relationship in Japan. |
|
| • | TSYS increased its equity interest in China UnionPay Data Services Co. (Chase), Ltd. (CUP Data) to 44.56%. |
|
| • | TSYS concluded its negotiations with Citibank related to continuing its processing services for the Sears, Roebuck and Co. card portfolio. TSYS received official notification that Citibank plans to migrate all of the Sears consumer MasterCard and private label accounts from TSYS in a deconversion that is scheduled to occur in May 2006. TSYS expects to continue supporting commercial-card accounts for Citibank, as well as Citibank’s Banamex USA consumer accounts, according to the terms of the existing agreements for these portfolios. |
|
| • | In December 2005, TSYS received official notification from Bank of Americacontinued expansion of its intent to shift the processing of its consumer card portfolio in house in October 2006 in connectionglobal footprint with the acquisition of MBNA Corporation (MBNA).London-based Card Tech, Ltd., now known as TSYS Card Tech. |
Synovus exceeded its expectations for 2006 with excellent growth momentum in both its Financial Services segment and TSYS. An important initiative focused on accelerating commercial and industrial loan growth began implementation in the second half of 2006, and is expected to broaden existing relationships with the cross sales and penetration of specialty products such as corporate cash management, asset-based loans, and capital markets products. Synovus’ retail banking initiative, which was implemented in 2005, was an excellent year, with both segments of our Company reporting very strong financial performance.has exceeded expectations in 2006 by expanding core retail deposit growth, home equity loan growth, and fee income from retail product sales this year. Diluted earnings per share was $1.64,$1.90, a 16.5%16.0% increase from 2004. For2005. Key drivers for the Financial Services segment the key drivers were loan growth of 9.8% (in line with our target)15.2% (11.4% excluding the impact of acquisitions); deposit growth (excludingof 16.9% (11.1% excluding brokered deposits)deposits and the impact of 13.6% (above our expectations)acquisitions); a 13an 11 basis point increase in the net interest margin before fees (slightly above our expectations);margin; and good credit quality with a NPA ratio of .46%..50% at year-end, (down from .52% last year), a net charge-off ratio of .29% (in line with our goal of less than ..30%).26%, and past dues greater than 90 days of .07% (the lowest level in our history).14%. TSYS was another key driver in our financial results, with a net income increase of 29.2%28.1% (above our original expectation of 19%-22%21%-23%).
20062007 Earnings Outlook
Synovus expects its2007 diluted earnings per share growth for 2006 to be withinin the 12%-14% range of $1.96 to $1.98, based in part upon the following assumptions:
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| • | Modest increases inStable to modestly lower short-term interest rates.rates as compared to the fourth quarter of 2006. |
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| • | Annual net interest margin near fourth quarter 2006 net interest margin of 4.20% (with compression during the first half of the year followed by some expansion). |
|
| • | A favorable credit environment. |
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| • | TSYS’ earningsnet income growth, excluding the Bank of America termination fee and associated amortization of contract acquisition costs in 2006, in the 21%14% to 23%17% range. |
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| • | Incremental (as compared to 2005) equity-based compensation expenseFinancial Services segment net income growth of approximately 5 cents10%. |
Excluding the aforementioned Bank of America termination fee and associated amortization of contract acquisition costs in 2006 (of $33 million, net of tax and after minority interest), Synovus’ earnings per share is expected to increase between 9% and 10% in 2007.
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Presentation of net income and diluted earnings per share excluding the Bank of America termination fee, net of acceleration of amortization of related contract acquisition costs, are non-GAAP financial measures. The following table reconciles the range of changes from 2006 to 2007, comparing non-GAAP financial measures to GAAP financial measures.
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|
| | 2007 | | |
| | Earnings | | 2006 | | % Increase |
| | Guidance | | Actual | | (Decrease) |
(Dollars in thousands, except per diluted share or 3.2%data) | | | | | | |
TSYS net income before minority interest | | $238 to $243 | | $249 | | (5%) to (3%) |
Less: Termination fee net of reported 2005 diluted earnings per share.acceleration of amortization of related contract acquisition costs and income taxes | | | | $(41) | | |
| | | | | | |
TSYS net income, excluding impact of termination fee, net of acceleration of amortization of contract acquisition costs | | $238 to $243 | | $208 | | 14% to 17% |
| | | | | | |
| | | | | | |
|
| | 2007 | | |
| | Earnings | | 2006 | | % Increase |
| | Guidance | | Actual | | (Decrease) |
(Dollars in thousands, except per share data) | | | | | | |
Financial Services net income | | $456 | | $415 | | 10% |
TSYS net income, net of minority interest | | $193 to $197 | | $202 | | (5%) to (3%) |
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Synovus consolidated net income | | $649 to $653 | | $617 | | 5% to 6% |
Less: Termination fee net of acceleration of amortization of related contract acquisition costs, minority interest, and income taxes | | | | $(33) | | |
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Synovus consolidated net income, excluding impact of termination fee, net of acceleration of amortization of contract acquisition costs | | $649 to $653 | | $584 | | 11% to 12% |
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Synovus earnings per share — diluted | | $1.96 to $1.98 | | $1.90 | | 3% to 4% |
Less: Termination fee, net of acceleration of amortization of related contract acquisition costs, minority interest, and income taxes | | | | $(0.10) | | |
| | | | | | |
Synovus earnings per share — diluted, excluding impact of termination fee, net of acceleration of amortization of contract acquisition costs, minority interest, and income taxes | | $1.96 to $1.98 | | $1.80 | | 9% to 10% |
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Synovus believes that the above non-GAAP financial measures provide meaningful information to assist investors in understanding Synovus’ financial estimates for changes in net income and diluted earnings per share from 2006 to 2007 as a result of TSYS’ deconversion of the Bank of America consumer card portfolio as the non-GAAP financial measures exclude amounts that Synovus does not consider part of ongoing operating results. The non-GAAP percentage changes should not be considered by themselves or as a substitute for the GAAP percentage changes year over year. The non-GAAP measures should be considered as an additional view of the way Synovus’ financial measures are affected by the one-time Bank of America contract termination fee, net of acceleration of amortization of related contract acquisition costs.
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Critical Accounting Policies
The accounting and financial reporting policies of Synovus conform to accounting principlesU.S. generally accepted in the United States of Americaaccounting principles 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
Note 5 in the notes to Synovus’ consolidated financial statements contains a discussion of the 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 therisk ratingsfor loans in the commercial loan portfolio and thevaluationof the collateral for loans that are classified as impaired loans.
Commercial Loans –— Risk Ratings and Loss Factors
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 represent 83.9%85.3% of total loans at December 31, 2005.2006. The corresponding allowance for these loans was $190.3$227.4 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 ofspecial 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.
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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 lossesimpairment 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. Mostimpairment. The majority of our collateral-dependentSynovus’ 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.
Retail Loans — Loss Factors
The allocated allowance for loan losses 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 Loss Factors
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,allowance for loan losses for loans not considered impaired and dispersionfor large pools of any economic recession all have an impact onsmaller-balance, homogeneous loans is established through consideration of such factors as changes in the credit risk profilenature and volume of the portfolio, overall portfolio quality, individual loan portfolio.risk ratings, loan concentrations and historical charge-off trends. Additionally, a rapidly rising interest rate environment could have a material impact on certain borrowers’ ability to pay.
Revenue Recognition
TSYS’ electronic payment processing services revenues are derived from long-term processing contracts with financial institutions and nonfinancial institutions and are generally recognized as the services are performed. Electronic payment processing services revenues are generated primarily from charges based on the number of accounts on file, transactions and authorizations processed, statements mailed, cards embossed and 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 and provide for penalties for early termination.
TSYS recognizes revenues in accordance with Staff Accounting Bulletin No. 104 (SAB No. 104), “Revenue Recognition.” SAB No. 104 sets forth guidance as to when revenue is realized or realizable and earned when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been performed; (3) the seller’s price to the buyer is fixed or determinable; and (4) collectibility is reasonably assured.
TSYS evaluates its contractual arrangements that provide services to clients through a bundled sales arrangement in accordance with the Financial Accounting Standards Board’s (FASB’s) Emerging Issues Task Force Issue No. 00-21 (EITF 00-21), “Revenue Arrangements with Multiple Deliverables.” EITF 00-21 addresses the determination of whether an arrangement involving more than one deliverable contains more than one unit of accounting and how the arrangement consideration should be measured and allocated to separate units of accounting.
A deliverable in multiple element arrangements indicates any performance obligation on the part of the seller and includes any combination of obligations to perform different services, grant licenses or other rights. Revenue is allocated to the separate units of accounting in a multiple element arrangement based on relative fair values, provided the delivered element has standalone value to the customer, the fair value of any undelivered items is probable and substantially within TSYS’ control. Evidence of fair value must be objective and reliable. An item has value to the customer on a standalone basis if it is sold separately by any vendor or the customer could resell the deliverable on a standalone basis.
On March 3, 2003, TSYS announced that Bank One Corp. (Bank One) had selected TSYS to upgrade its credit card processing. Under the long-term software licensing and services agreement, TSYS was to provide electronic payment processing services to Bank One’s credit card accounts for at least two years starting in 2004 (excluding statement and card production services). Following the provision of processing services, TSYS was to license a modified version of its TS2 consumer and commercial software to Bank One through a perpetual license with a six-year payment term. TSYS used
F-46F-53
the percentage-of-completion accounting method for its agreement with Bank One and recognized revenues in proportion to costs incurred. This agreement has been superseded by the agreement with Chase described below.Asset Impairment
On July 1, 2004, Bank One and Chase merged under the name Chase. On October 13, 2004, TSYS finalized a definitive agreement with Chase to service the combined card portfolios of Chase Card Services and to upgrade its card-processing technology. The agreement extended a relationship that started with TSYS and the former Bank One in March 2003. Pursuant to the revised agreement, the first phase of the project was executed successfully, and Bank One’s remaining accounts were converted to the modified TS2 processing platform during the fourth quarter of 2004, according to the project’s original schedule. Chase converted its consumer accounts to a modified version of TS2 in July 2005. TSYS expects to maintain the card-processing functions of Chase Card Services for at least two years. Chase Card Services then has the option to either extend the processing agreement for up to five additional two-year periods or migrate the portfolio in-house, under a perpetual license of a modified version of TS2 with a six-year payment term. TSYS’ revenues from Chase were less than 10% of TSYS’ total revenues for the year ended December 31, 2005.
As a result of the revised agreement with Chase, TSYS discontinued its use of the percentage-of-completion accounting method for the original agreement with Bank One. The revised agreement is accounted for in accordance with EITF 00-21, and other applicable guidance.
TSYS recognizes software license revenue in accordance with Statement of Position (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 as this is the best measure of progress. 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 considered fixed or determinable, the license revenue is recognized as payments become due.
TSYS’ merchant services revenues are derived from long-term processing contracts with large financial institutions and other merchant acquirers which generally range from three to eight years and provide for penalties for early termination. Merchant services revenues are generated primarily from processing all payment forms including credit, debit, electronic benefits transfer and check truncation for merchants of all sizes across a wide array of retail market segments. The products and services offered include authorization and capture of electronic transactions, clearing and settlement of electronic transactions, information reporting services related to electronic transactions, merchant billing services, and point-of-sale terminal sales and services. TSYS recognizes merchant services revenue as those services are performed, primarily on a per unit basis. Revenues on point-of-sale terminal equipment are recognized upon the transfer of ownership and shipment of product.
TSYS’ other service revenues are derived from recovery collections work, bankruptcy process management, legal account management, skip tracing, commercial printing activities, targeted loyalty programs, and customer relationship management services, such as call center activities for card activation, balance transfer requests, customer service and collection. The contract terms for these services are generally shorter in nature as compared with TSYS’ long-term processing contracts. Revenue is recognized on these other services as the services are performed either on a per unit or a fixed price basis.
Contract Acquisition Costs
TSYS capitalizes contract acquisition costs related to signing or renewing long-term contracts. TSYS capitalizes internal conversion costs in accordance with FASB Technical Bulletin No. 90-1, “Accounting for Separately Priced Extended Warranty and Product Maintenance Contracts.” The capitalization of costs related to cash payments for rights to provide processing services is capitalized in accordance with the FASB’s EITF Issue No. 01-9, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendors Products),” and SAB No. 104. These costs are amortized using the straight-line method over the contract term beginning when the client’s cardholder accounts are con-
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verted 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 associated with each customer for impairment 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 the TSYS’ actual results differ from its estimates of future cash flows. If the actual cash flows are not consistent with the TSYS’ estimates, a material impairment charge may result.
Note 6 in the notes Synovus’ Consolidated Financial Statements contains a discussion of contract acquisition costs. The net carrying value of contract acquisition costs on Synovus’ Consolidated Balance Sheets as of December 31, 2006 was $167.4 million.
Software Development Costs
In accordance with FASB Statement No. 86, “Computer Software to be Sold, Leased or Otherwise Marketed,” software development costs are capitalized once technological feasibility of the software product has been established. Costs incurred prior to establishing technological feasibility are expensed as incurred. Technological feasibility is established when TSYS has completed a detailed program design and has determined that a product can be produced to meet its design specifications, including functions, features and technical performance requirements. Capitalization of costs ceases when the product is generally available to clients. At each balance sheet date, TSYS evaluates the unamortized capitalized costs of software development for impairment as compared to the net realizable value of the software product which is determined by expected 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 costsIf the actual cash flows are amortized usingnot consistent with TSYS’ estimates, a material write-off may result.
Note 6 in the greaternotes to Synovus’ Consolidated Financial Statements contains a discussion of (1)internally developed software costs. The net carrying value of TSYS’ computer software on Synovus’ Consolidated Balance Sheets as of December 31, 2006 was $216.5 million.
Goodwill
Under Statement of Financial Accounting Standards Board No. 142 (SFAS 142), goodwill is required to be tested for impairment annually. The combination of the straight-lineincome approach utilizing the discounted cash flow (DCF) method over its estimated useful life, which ranges from three to ten years or (2)and the ratio of current revenues to total anticipated revenues over its useful life.
TSYS also develops software thatmarket approach, utilizing readily available market valuation multiples, is used internally. These software development costs are capitalized based upon SOP 98-1, “Accounting forto estimate the Costsfair value.
Under the DCF method, the fair value of Computer Software Developed or Obtained for Internal Use.” Internal-use software development costs are capitalized once (1) the preliminary project stage is completed, (2) management authorizesreporting unit reflects the present value of the projected earnings that will be generated by each reporting unit after taking into account the revenues and commits to funding a computer software project, and (3) it is probableexpenses associated with the reporting unit, the relative risk that the projectcash flows will occur, the contribution of other assets, and an appropriate discount rate to reflect the value of invested capital. Cash flows are estimated for future periods based on historical data and projections provided by management. If the actual cash flows are not consistent with the Company’s estimates, a material impairment charge may result.
Notes 2 and 18 in the notes to Synovus’ Consolidated Financial Statements contain a discussion of goodwill. The net carrying value of goodwill on the Synovus’ Consolidated Balance Sheets as of December 31, 2006 was $669.5 million.
Long-Lived Assets and Other Intangibles
The Company reviews long-lived assets, such as property and equipment and other intangibles subject to amortization, including core deposit premiums and customer relationships, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be completed,recoverable. Recoverability of assets to be held 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 five years. Software development costs may become impaired in situations where development efforts are abandoned due to the viabilitymeasured by a comparison of the planned project becoming doubtful or duecarrying amount of an asset to technological obsolescence ofestimated undiscounted future cash flows expected to be generated by the planned software product.asset. If the actual cash flows are not consistent with the Company’s estimates, a material impairment charge may result.
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 itsTSYS’ contracts, progress towards milestones and known processing errors not covered by insurance.
These accrualsIf the actual performance penalties incurred are included in other liabilities in the accompanying consolidated balance sheets. Increases and decreases in transaction processing provisions are charged to other processing expenses in the consolidated statements of income, and payments or credits fornot consistent with TSYS’ estimates, performance penalties and processing errors, which are charged against the accrual.recorded in other operating expenses, may be materially different than was initially recorded. TSYS’ experience and extensive data accumulated historically indicates that these estimates have proven reliable over time.
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Acquisitions
Table 1 summarizes the acquisitions completed during the past three years.
(Dollars in thousands)
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Table 1 Acquisitions | | |
(Dollars in thousands) | | | | Total | | | Shares | | | |
Company and Location | | Date Closed | | | Assets | | | Issued | | | Cash | |
| | | | | | | | | | | | |
Vital Processing Services, L.L.C. (Vital) | | | March 1, 2005 | | | $ | 128,679 | | | | — | | | $ | 95,794 | |
| Tempe, Arizona | | | | | | | | | | | | | | | | |
Clarity Payment Solutions, Inc. (TSYS Prepaid, Inc.) | | | August 2, 2004 | | | | 74,430 | | | | — | | | | 53,000 | |
| New York, New York | | | | | | | | | | | | | | | | |
Trust One Bank | | | June 1, 2004 | | | | 513,000 | | | | 3,841,302 | | | | — | |
| Memphis, Tennessee | | | | | | | | | | | | | | | | |
Peoples Florida Banking Corporation | | | January 30, 2004 | | | | 324,000 | | | | 1,636,827 | | | | 32,100 | |
| Palm Harbor, Florida | | | | | | | | | | | | | | | | |
Enhancement Services Corporation | | | April 28, 2003 | | | | 43,230 | | | | — | | | | 36,000 | |
| Roswell, Georgia | | | | | | | | | | | | | | | | |
United Financial Holdings, Inc. | | | February 28, 2003 | | | | 490,000 | | | | 2,388,087 | | | | 34,000 | |
| St. Petersburg, Florida | | | | | | | | | | | | | | | | |
FNB Newton Bancshares, Inc. | | | February 27, 2003 | | | | 445,000 | | | | 2,253,627 | | | | 46,408 | |
| Covington, Georgia | | | | | | | | | | | | | | | | |
GLOBALT, Inc. | | | May 31, 2002 | | | | 23,000 | | | | 702,433 | | | | — | |
| Atlanta, Georgia | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | Total | | | Shares | | | |
Company and Location | | Date Closed | | | Assets | | | Issued | | | Cash | |
| | | | | | | | | | | | |
TSYS Managed Services EMEA, Ltd. | | | November 16, 2006 | | | $ | 13,281 | | | | — | | | $ | 2,530 | |
| Milton Keynes, England | | | | | | | | | | | | | | | | |
Card Tech, Ltd. (TSYS Card Tech) | | | July, 11 2006 | | | | 69,980 | | | | — | | | | 59,291 | |
| London, England | | | | | | | | | | | | | | | | |
Banking Corporation of Florida | | | April 1, 2006 | | | | 417,528 | | | | 2,938,791 | | | | — | |
| Naples, Florida | | | | | | | | | | | | | | | | |
Riverside Bancshares, Inc. | | | March 25, 2006 | | | | 766,257 | | | | 5,883,427 | | | | — | |
| Marietta, GA | | | | | | | | | | | | | | | | |
Vital Processing Services, L.L.C. (TSYS Acquiring Solutions, L.L.C.) | | | March 1, 2005 | | | | 127,673 | | | | — | | | | 95,794 | |
| Tempe, Arizona | | | | | | | | | | | | | | | | |
Clarity Payment Solutions, Inc. (TSYS Prepaid, Inc.) | | | August 2, 2004 | | | | 74,430 | | | | — | | | | 53,000 | |
| New York, New York | | | | | | | | | | | | | | | | |
Trust One Bank | | | June 1, 2004 | | | | 513,000 | | | | 3,841,302 | | | | — | |
| Memphis, Tennessee | | | | | | | | | | | | | | | | |
Peoples Florida Banking Corporation | | | January 30, 2004 | | | | 324,000 | | | | 1,636,827 | | | | 32,100 | |
| Palm Harbor, Florida | | | | | | | | | | | | | | | | |
This information is discussed in further detail in Note 2 of the consolidated financial statements.
Earning Assets, Sources of Funds, and Net Interest Income
Earning Assets and Sources of Funds
Average total assets for 20052006 were $26.3$29.83 billion or 13.0%13.5% over 20042005 average total assets of $23.3$26.29 billion. Average earning assets for 20052006 were $23.3$26.52 billion, which represented 88.5%88.9% of average total assets. Average earning assets increased $2.7$3.25 billion, or 13.1%14.0%, over 2004.2005. The $2.7$3.25 billion increase consisted primarily of a $2.5$2.82 billion increase in average net loans and a $240$382.8 million increase in average investment securities available for sale. The primary funding source for this earning asset growth was a $2.6$3.01 billion increase in average deposits. Average shareholders’ equity for 20052006 was $2.8$3.39 billion, which represents an increase of $320$592.3 million over 2004.2005.
For 2004,2005, average total assets increased $2.9$3.01 billion, or 14.0%13.0% from 2003.2004. Average earning assets for 20042005 were $20.6$23.27 billion, which represented 88.4%88.5% of average total assets. For more detailed information on the average balance sheets for the years ended December 31, 2006, 2005, 2004, and 2003,2004, refer to Table 3.
Net Interest Income
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 customer deposits 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 funding sources.
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Net interest income for 20052006 was $968.8 million,$1.13 billion, up $108.2$165.0 million, or 12.6%17.0%, from 2004.2005. On a taxable-equivalent basis, net interest income was $975.3 million,$1.14 billion, up $107.6$164.4 million, or 12.4%16.9%, over 2004.2005. During 2005,2006, average interest earning assets increased $2.7$3.25 billion, or 13.1%14.0%, with the majority of this increase attributable to loan growth. Increases in the level of deposits and other borrowed funds were the primary funding sources for the increase in earning assets.
During the third quarter of 2004, Synovus reassessed the standard loan origination costs and classification methodology used in conjunction with its accounting for loan origination fees and costs. As part of this assessment, Synovus changed its methodology and now recognizes these costs netted against origination fees over the life of the respective loans as an adjustment of yield (interest income). Synovus had previously recognized fee income over the life of its loans after recognizing a portion of fee income upon loan origination to offset origination costs. The new methodology was implemented on a prospective basis effective October 18, 2004. The change was not material to Synovus’ financial position, results of operations, or cash flows. The new methodology did, however, result in a decrease in general and administrative expenses of $37.7 million for 2005 as compared to 2004 with a corresponding decrease (of approximately the same amount) in interest income and the net interest margin compared to 2004.
Net Interest Margin
The net interest margin after fees was 4.30% for 2006, up 11 basis points from 2005. The yield on earning assets increased 116 basis points, which was partially offset by a 105 basis point increase in the effective cost of funds, which includes non-interest bearing funding sources, primarily demand deposits.
The primary increase in the yield on earning assets came from increased yields on loans, which increased 127 basis points, primarily due to increased yields on the variable rate portion of the loan portfolio. These loan yields were favorably impacted by a 177 basis point increase in the average prime rate in 2006 as compared to 2005. The primary factors driving the 105 basis point increase in the effective cost of funds were a 137 basis point increase in the cost of non-brokered time deposits and a 156 basis point increase in the cost of money market accounts. These rate increases were a result of the higher interest rate environment and growth in these accounts as consumer preference continued to favor higher yielding deposit accounts. A more competitive pricing environment in our marketplace also contributed to the increase in the cost of funds.
The net interest margin was 4.19% for 2005, down 3 basis points from 2004. This decrease was due to the aforementioned change in classification methodology for loan origination fees and costs. The net interest margin before fees was 4.05% in 2005, up 13 basis points from 3.92% in 2004. This increase resulted from a 95 basis point increase in the yield on earning assets, which was partially offset by an 82 basis point increase in the effective cost of funds, which includes non-interest bearing funding sources, primarily demand deposits.
The primary increase in the yield on earning assets came from increased yields on loans before fees. Loan yields, which increased by 105 basis points, primarily due to increased yields on the variable rate portion of the loan portfolio, which was approximately 65% of total loans in 2005. These loan yields were favorably impacted by a 185 basis point increase in the average prime rate in 2005 as compared to 2004. The primary factors driving the 82 basis point increase in the effective cost of funds wereincreased by 82 basis points, primarily due to an 86 basis point increase in the cost of time deposits (including brokered time deposits) and a 135 basis point increase in the cost of money market accounts. These rate increases were a result of the higher interest rate environment as well as strong growth in these accounts as consumer behavior shifted to take advantage of higher yielding deposit accounts.
The net interest margin was 4.22% for 2004, down 4 basis points from 2003. This decrease resulted from a 24 basis point decrease in the yield on earning assets, which was partially offset by a 20 basis point decrease in the effective cost of funds. The primary earning assets of the Company, loans and investment securities, experienced declines in yields during 2004. Loan yields decreased 25 basis points, primarily due to the impact of the historically low interest rate environment on fixed rate loan yields and the continuation of a customer-driven shift in the loan portfolio to a higher level of variable rate loans. Investment security yields declined 33 basis points, primarily due to the maturity and runoff of older, higher yielding securities. Reinvestment of these cash flows at lower yields had a negative impact on realized securities yields.
Table 2 Net Interest Income
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | | | | Years Ended December 31, | |
(In thousands) | | | | |
| | | | | |
| | | 2005 | | | 2004 | | | 2003 | | | | 2006 | | | 2005 | | | 2004 | |
| | | | | | | | | | | | | | | | | | | | |
Interest income | Interest income | | $ | 1,496,225 | | | 1,159,020 | | | 1,061,492 | | Interest income | | $ | 2,016,466 | | | 1,496,225 | | | 1,159,020 | |
Taxable-equivalent adjustment | Taxable-equivalent adjustment | | | 6,439 | | | 6,960 | | | 7,388 | | Taxable-equivalent adjustment | | | 5,828 | | | 6,439 | | | 6,960 | |
| | | | | | | | | | | | | | | | |
| Interest income, taxable-equivalent | | | 1,502,664 | | | 1,165,980 | | | 1,068,880 | | Interest income, taxable-equivalent | | | 2,022,294 | | | 1,502,664 | | | 1,165,980 | |
Interest expense | Interest expense | | | 527,378 | | | 298,341 | | | 298,428 | | Interest expense | | | 882,592 | | | 527,378 | | | 298,341 | |
| | | | | | | | | | | | | | | | |
| Net interest income, taxable-equivalent | | $ | 975,286 | | | 867,639 | | | 770,452 | | Net interest income, taxable-equivalent | | $ | 1,139,702 | | | 975,286 | | | 867,639 | |
| | | | | | | | | | | | | | | | |
|
F-50F-56
| |
Table 3 | Consolidated Average Balances, Interest, and Yields |
(Dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2005 | | | 2004 | | | 2003 | | | | 2006 | | | 2005 | | | 2004 | |
| | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Average | | | | | Yield/ | | | Average | | | | | Yield/ | | | Average | | | | | Yield/ | | |
| | | | Average | | | | | Yield/ | | | Average | | | | | Yield/ | | | Average | | | | | Yield/ | |
| | | Balance | | | Interest | | | Rate | | | Balance | | | Interest | | | Rate | | | Balance | | | Interest | | | Rate | | | | Balance | | | Interest | | | Rate | | | Balance | | | Interest | | | Rate | | | Balance | | | Interest | | | Rate | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Assets | Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest earning assets: | Interest earning assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest earning assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Taxable loans, net(a)(b) | | $ | 20,406,102 | | | 1,372,428 | | | 6.73 | % | | $ | 17,881,572 | | | 1,048,337 | | | 5.86 | % | | $ | 15,556,295 | | | 948,351 | | | 6.10 | % | Taxable loans, net(a)(b) | | $ | 23,254,147 | | | 1,857,004 | | | 7.99 | % | | $ | 20,406,102 | | | 1,372,428 | | | 6.73 | % | | $ | 17,881,572 | | | 1,048,337 | | | 5.86 | % |
| Tax-exempt loans, net(a)(b)(c) | | | 63,582 | | | 4,265 | | | 6.71 | | | 71,394 | | | 4,257 | | | 5.96 | | | 69,924 | | | 4,950 | | | 7.08 | | Tax-exempt loans, net(a)(b)(c) | | | 61,791 | | | 4,413 | | | 7.14 | | | 63,582 | | | 4,265 | | | 6.71 | | | 71,394 | | | 4,257 | | | 5.96 | |
| Allowance for loan losses | | | (279,534 | ) | | | — | | | — | | | (247,054 | ) | | | — | | | — | | | (220,004 | ) | | | — | | | — | | Allowance for loan losses | | | (309,658 | ) | | | — | | | — | | | (279,534 | ) | | | — | | | — | | | (247,054 | ) | | | — | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Loans, net | | | 20,190,150 | | | 1,376,693 | | | 6.82 | | | 17,705,912 | | | 1,052,594 | | | 5.94 | | | 15,406,215 | | | 953,301 | | | 6.19 | | | Loans, net | | | 23,006,280 | | | 1,861,417 | | | 8.09 | | | 20,190,150 | | | 1,376,693 | | | 6.82 | | | 17,705,912 | | | 1,052,594 | | | 5.94 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Investment securities available for sale: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Investment securities available for sale: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Taxable investment securities | | | 2,609,113 | | | 98,728 | | | 3.78 | | | 2,366,631 | | | 88,560 | | | 3.74 | | | 2,065,924 | | | 83,727 | | | 4.05 | | | Taxable investment securities | | | 3,009,962 | | | 129,218 | | | 4.29 | | | 2,609,113 | | | 98,728 | | | 3.78 | | | 2,366,631 | | | 88,560 | | | 3.74 | |
| | Tax-exempt investment securities(c) | | | 216,773 | | | 15,044 | | | 6.94 | | | 230,815 | | | 16,268 | | | 7.05 | | | 235,401 | | | 16,920 | | | 7.19 | | | Tax-exempt investment securities(c) | | | 198,691 | | | 13,533 | | | 6.81 | | | 216,773 | | | 15,044 | | | 6.94 | | | 230,815 | | | 16,268 | | | 7.05 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total investment securities | | | 2,825,886 | | | 113,772 | | | 4.03 | | | 2,597,446 | | | 104,828 | | | 4.04 | | | 2,301,325 | | | 100,647 | | | 4.37 | | | Total investment securities | | | 3,208,653 | | | 142,751 | | | 4.45 | | | 2,825,886 | | | 113,772 | | | 4.03 | | | 2,597,446 | | | 104,828 | | | 4.04 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Trading account assets | | | 11,380 | | | 642 | | | 5.64 | | | — | | | — | | | — | | | — | | | — | | | — | | |
Trading account assets | | Trading account assets | | | 43,201 | | | 2,691 | | | 6.23 | | | 11,380 | | | 642 | | | 5.64 | | | — | | | — | | | — | |
| Interest earning deposits with banks | | | 6,362 | | | 172 | | | 2.70 | | | 4,197 | | | 32 | | | 0.76 | | | 4,515 | | | 25 | | | 0.55 | | Interest earning deposits with banks | | | 8,837 | | | 375 | | | 4.23 | | | 6,362 | | | 172 | | | 2.70 | | | 4,197 | | | 32 | | | 0.76 | |
| Federal funds sold and securities purchased under resale agreements | | | 120,809 | | | 4,082 | | | 3.38 | | | 148,685 | | | 1,945 | | | 1.31 | | | 111,893 | | | 1,546 | | | 1.38 | | Federal funds sold and securities purchased under resale agreements | | | 124,903 | | | 6,422 | | | 5.14 | | | 120,809 | | | 4,082 | | | 3.38 | | | 148,685 | | | 1,945 | | | 1.31 | |
| Mortgage loans held for sale | | | 113,969 | | | 7,303 | | | 6.41 | | | 117,479 | | | 6,581 | | | 5.60 | | | 254,240 | | | 13,361 | | | 5.26 | | Mortgage loans held for sale | | | 132,332 | | | 8,638 | | | 6.53 | | | 113,969 | | | 7,303 | | | 6.41 | | | 117,479 | | | 6,581 | | | 5.60 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total interest earning assets | | | 23,268,556 | | | 1,502,664 | | | 6.46 | | | 20,573,719 | | | 1,165,980 | | | 5.67 | | | 18,078,188 | | | 1,068,880 | | | 5.91 | | | Total interest earning assets | | | 26,524,206 | | | 2,022,294 | | | 7.62 | | | 23,268,556 | | | 1,502,664 | | | 6.46 | | | 20,573,719 | | | 1,165,980 | | | 5.67 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash and due from banks | | | 706,158 | | | | | | | | | 655,069 | | | | | | | | | 594,097 | | | | | | | | Cash and due from banks | | | 646,782 | | | | | | | | | 706,158 | | | | | | | | | 655,069 | | | | | | | |
| Premises and equipment, net | | | 913,551 | | | | | | | | | 855,197 | | | | | | | | | 714,255 | | | | | | | | Premises and equipment, net | | | 919,083 | | | | | | | | | 913,551 | | | | | | | | | 855,197 | | | | | | | |
| Other real estate | | | 22,690 | | | | | | | | | 26,420 | | | | | | | | | 28,273 | | | | | | | | Other real estate | | | 26,000 | | | | | | | | | 22,690 | | | | | | | | | 26,420 | | | | | | | |
| Other assets(d) | | | 1,380,535 | | | | | | | | | 1,164,596 | | | | | | | | | 998,040 | | | | | | | | Other assets(d) | | | 1,715,101 | | | | | | | | | 1,380,535 | | | | | | | | | 1,164,596 | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total assets | | $ | 26,291,490 | | | | | | | | $ | 23,275,001 | | | | | | | | $ | 20,412,853 | | | | | | | | | Total assets | | $ | 29,831,172 | | | | | | | | $ | 26,291,490 | | | | | | | | $ | 23,275,001 | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities and Shareholders’ Equity | Liabilities and Shareholders’ Equity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Liabilities and Shareholders’ Equity | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest bearing liabilities: | Interest bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest bearing demand deposits | | $ | 2,975,016 | | | 35,085 | | | 1.18 | | $ | 2,762,104 | | | 16,764 | | | 0.61 | | $ | 2,515,161 | | | 17,779 | | | 0.71 | | Interest bearing demand deposits | | $ | 3,006,308 | | | 57,603 | | | 1.92 | | $ | 2,975,016 | | | 35,085 | | | 1.18 | | $ | 2,762,104 | | | 16,764 | | | 0.61 | |
| Money market accounts | | | 5,193,943 | | | 132,739 | | | 2.56 | | | 4,481,042 | | | 54,387 | | | 1.21 | | | 3,695,601 | | | 41,086 | | | 1.11 | | Money market accounts | | | 6,388,862 | | | 263,334 | | | 4.12 | | | 5,193,943 | | | 132,739 | | | 2.56 | | | 4,481,042 | | | 54,387 | | | 1.21 | |
| Savings deposits | | | 555,205 | | | 1,958 | | | 0.35 | | | 548,736 | | | 1,002 | | | 0.18 | | | 502,246 | | | 1,243 | | | 0.25 | | Savings deposits | | | 542,793 | | | 3,538 | | | 0.65 | | | 555,205 | | | 1,958 | | | 0.35 | | | 548,736 | | | 1,002 | | | 0.18 | |
| Time deposits (less brokered time deposits) | | | 4,918,781 | | | 150,809 | | | 3.07 | | | 4,481,935 | | | 103,683 | | | 2.31 | | | 5,121,955 | | | 138,717 | | | 2.71 | | Time deposits (less brokered time deposits) | | | 6,340,959 | | | 281,211 | | | 4.43 | | | 4,918,781 | | | 150,809 | | | 3.07 | | | 4,481,935 | | | 103,683 | | | 2.31 | |
| Brokered time deposits | | | 2,557,660 | | | 86,714 | | | 3.39 | | | 1,730,937 | | | 40,448 | | | 2.34 | | | 726,316 | | | 18,736 | | | 2.58 | | Brokered time deposits | | | 2,855,191 | | | 134,263 | | | 4.70 | | | 2,557,660 | | | 86,714 | | | 3.39 | | | 1,730,937 | | | 40,448 | | | 2.34 | |
| Federal funds purchased and securities sold under repurchase agreements | | | 1,103,005 | | | 31,569 | | | 2.86 | | | 1,479,815 | | | 19,286 | | | 1.30 | | | 1,101,216 | | | 11,829 | | | 1.07 | | Federal funds purchased and securities sold under repurchase agreements | | | 1,534,312 | | | 71,439 | | | 4.66 | | | 1,103,005 | | | 31,569 | | | 2.86 | | | 1,479,815 | | | 19,286 | | | 1.30 | |
| Long-term debt | | | 2,087,749 | | | 88,504 | | | 4.24 | | | 1,718,556 | | | 62,771 | | | 3.65 | | | 1,639,487 | | | 69,038 | | | 4.21 | | Long-term debt | | | 1,519,997 | | | 71,204 | | | 4.68 | | | 2,087,749 | | | 88,504 | | | 4.24 | | | 1,718,556 | | | 62,771 | | | 3.65 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total interest bearing liabilities | | | 19,391,359 | | | 527,378 | | | 2.72 | | | 17,203,125 | | | 298,341 | | | 1.73 | | | 15,301,982 | | | 298,428 | | | 1.95 | | | Total interest bearing liabilities | | | 22,188,422 | | | 882,592 | | | 3.97 | | | 19,391,359 | | | 527,378 | | | 2.72 | | | 17,203,125 | | | 298,341 | | | 1.73 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Non-interest bearing demand deposits | Non-interest bearing demand deposits | | | 3,408,289 | | | | | | | | | 3,048,465 | | | | | | | | | 2,501,539 | | | | | | | | Non-interest bearing demand deposits | | | 3,488,580 | | | | | | | | | 3,408,289 | | | | | | | | | 3,048,465 | | | | | | | |
Other liabilities | Other liabilities | | | 692,346 | | | | | | | | | 544,007 | | | | | | | | | 442,555 | | | | | | | | Other liabilities | | | 784,216 | | | | | | | | | 692,346 | | | | | | | | | 544,007 | | | | | | | |
Shareholders’ equity | Shareholders’ equity | | | 2,799,496 | | | | | | | | | 2,479,404 | | | | | | | | | 2,166,777 | | | | | | | | Shareholders’ equity | | | 3,369,954 | | | | | | | | | 2,799,496 | | | | | | | | | 2,479,404 | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total liabilities and shareholders’ equity | | $ | 26,291,490 | | | | | | | | $ | 23,275,001 | | | | | | | | $ | 20,412,853 | | | | | | | | | Total liabilities and shareholders’ equity | | $ | 29,831,172 | | | | | | | | $ | 26,291,490 | | | | | | | | $ | 23,275,001 | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest income/margin | Net interest income/margin | | | | | | 975,286 | | | 4.19 | % | | | | | | 867,639 | | | 4.22 | % | | | | | | 770,452 | | | 4.26 | % | Net interest income/margin | | | | | | 1,139,702 | | | 4.30 | % | | | | | | 975,286 | | | 4.19 | % | | | | | | 867,639 | | | 4.22 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Taxable-equivalent adjustment | Taxable-equivalent adjustment | | | | | | (6,439 | ) | | | | | | | | | (6,960 | ) | | | | | | | | | (7,388 | ) | | | | | Taxable-equivalent adjustment | | | | | | (5,828 | ) | | | | | | | | | (6,439 | ) | | | | | | | | | (6,960 | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | �� |
Net interest income, actual | Net interest income, actual | | | | | $ | 968,847 | | | | | | | | $ | 860,679 | | | | | | | | $ | 763,064 | | | | | Net interest income, actual | | | | | $ | 1,133,874 | | | | | | | | $ | 968,847 | | | | | | | | $ | 860,679 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
(a) | Average loans are shown net of unearned income. Nonperforming loans are included. |
|
(b) | Interest income includes loan fees as follows: 2006 — $40.4 million, 2005 -— $33.5 million, 2004 -— $60.4 million, 2003 - $65.7 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 (losses) on investment securities available for sale of ($54.5) million, ($22.6) million, $12.6 million, and $48.8$12.6 million for the years ended December 31, 2006, 2005, 2004, and 2003,2004, respectively. |
F-51F-57
Table 4 Rate/Volume Analysis
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2005 Compared to 2004 | | | 2004 Compared to 2003 | | | | 2006 Compared to 2005 | | | 2005 Compared to 2004 | |
| | | | | | | | | | | | | | |
(In thousands) | | | | | |
| | | Change Due to (a) | | | Change Due to (a) | | | | Change Due to (a) | | | Change Due to (a) | |
| | | | | | | | | | | | | | |
| | | | | Yield/ | | | Net | | | | | Yield/ | | | Net | | | | | | Yield/ | | | Net | | | | | Yield/ | | | Net | |
| | | Volume | | | Rate | | | Change | | | Volume | | | Rate | | | Change | | | | Volume | | | Rate | | | Change | | | Volume | | | Rate | | | Change | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest earned on: | Interest earned on: | | | | | | | | | | | | | | | | | | | | Interest earned on: | | | | | | | | | | | | | | | | | | | |
| Taxable loans, net | | $ | 147,937 | | | 176,154 | | | 324,091 | | | 141,842 | | | (41,856 | ) | | | 99,986 | | Taxable loans, net | | $ | 191,673 | | | 292,903 | | | 484,576 | | | 147,937 | | | 176,154 | | | 324,091 | |
| Tax-exempt loans, net (b) | | | (466 | ) | | | 474 | | | 8 | | | 104 | | | (797 | ) | | | (693 | ) | Tax-exempt loans, net(b) | | | (120 | ) | | | 267 | | | 147 | | | (466 | ) | | | 474 | | | 8 | |
| Taxable investment securities | | | 9,069 | | | 1,099 | | | 10,168 | | | 12,179 | | | (7,346 | ) | | | 4,833 | | Taxable investment securities | | | 15,152 | | | 15,338 | | | 30,490 | | | 9,069 | | | 1,099 | | | 10,168 | |
| Tax-exempt investment securities (b) | | | (990 | ) | | | (234 | ) | | | (1,224 | ) | | | (330 | ) | | | (322 | ) | | | (652 | ) | Tax-exempt investment securities(b) | | | (1,255 | ) | | | (257 | ) | | | (1,512 | ) | | | (990 | ) | | | (234 | ) | | | (1,224 | ) |
| Trading account assets | | | 642 | | | — | | | 642 | | | — | | | — | | | — | | Trading account assets | | | 1,795 | | | 255 | | | 2,050 | | | 642 | | | — | | | 642 | |
| Interest earning deposits with banks | | | 16 | | | 124 | | | 140 | | | (2 | ) | | | 9 | | | 7 | | Interest earning deposits with banks | | | 67 | | | 135 | | | 202 | | | 16 | | | 124 | | | 140 | |
| Federal funds sold and securities purchased under resale agreements | | | (365 | ) | | | 2,502 | | | 2,137 | | | 508 | | | (109 | ) | | | 399 | | Federal funds sold and securities purchased under resale agreements | | | 138 | | | 2,203 | | | 2,341 | | | (365 | ) | | | 2,502 | | | 2,137 | |
| Mortgage loans held for sale | | | (197 | ) | | | 919 | | | 722 | | | (7,194 | ) | | | 414 | | | (6,780 | ) | Mortgage loans held for sale | | | 1,177 | | | 159 | | | 1,336 | | | (197 | ) | | | 919 | | | 722 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total interest income | | | 155,646 | | | 181,038 | | | 336,684 | | | 147,107 | | | (50,007 | ) | | | 97,100 | | | Total interest income | | | 208,627 | | | 311,003 | | | 519,630 | | | 155,646 | | | 181,038 | | | 336,684 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest paid on: | Interest paid on: | | | | | | | | | | | | | | | | | | | | Interest paid on: | | | | | | | | | | | | | | | | | | | |
| Interest bearing demand deposits | | | 1,299 | | | 17,022 | | | 18,321 | | | 1,753 | | | (2,768 | ) | | | (1,015 | ) | Interest bearing demand deposits | | | 369 | | | 22,149 | | | 22,518 | | | 1,299 | | | 17,022 | | | 18,321 | |
| Money market accounts | | | 8,626 | | | 69,726 | | | 78,352 | | | 8,718 | | | 4,583 | | | 13,301 | | Money market accounts | | | 30,590 | | | 100,006 | | | 130,596 | | | 8,626 | | | 69,726 | | | 78,352 | |
| Savings deposits | | | 12 | | | 944 | | | 956 | | | 116 | | | (357 | ) | | | (241 | ) | Savings deposits | | | (43 | ) | | | 1,623 | | | 1,580 | | | 12 | | | 944 | | | 956 | |
| Time deposits (excluding brokered time deposits) | | | 10,091 | | | 37,035 | | | 47,126 | | | (16,728 | ) | | | (18,306 | ) | | | (35,034 | ) | Time deposits (less brokered time deposits) | | | 43,661 | | | 86,741 | | | 130,402 | | | 10,091 | | | 37,035 | | | 47,126 | |
| Brokered time deposits | | | 19,345 | | | 26,921 | | | 46,266 | | | 26,536 | | | (4,824 | ) | | | 21,712 | | Brokered time deposits | | | 10,086 | | | 37,463 | | | 47,549 | | | 19,345 | | | 26,921 | | | 46,266 | |
| Federal funds purchased and securities sold under repurchase agreements | | | (4,899 | ) | | | 17,182 | | | 12,283 | | | 4,051 | | | 3,406 | | | 7,457 | | Federal funds purchased and securities sold under repurchase agreements | | | 12,335 | | | 27,535 | | | 39,870 | | | (4,899 | ) | | | 17,182 | | | 12,283 | |
| Other borrowed funds | | | 13,476 | | | 12,257 | | | 25,733 | | | 3,329 | | | (9,596 | ) | | | (6,267 | ) | Other borrowed funds | | | (24,073 | ) | | | 6,772 | | | (17,301 | ) | | | 13,476 | | | 12,257 | | | 25,733 | |
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| | Total interest expense | | | 47,950 | | | 181,087 | | | 229,037 | | | 27,775 | | | (27,862 | ) | | | (87 | ) | | Total interest expense | | | 72,925 | | | 282,289 | | | 355,214 | | | 47,950 | | | 181,087 | | | 229,037 | |
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| | Net interest income | | $ | 107,696 | | | (49 | ) | | | 107,647 | | | 119,332 | | | (22,145 | ) | | | 97,187 | | | Net interest income | | $ | 135,702 | | | 28,714 | | | 164,416 | | | 107,696 | | | (49 | ) | | | 107,647 | |
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(a) | | The change in interest due to both rate and volume has been allocated to the rate component. |
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(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 $2.13 billion, $1.92 billion, $1.52 billion, and $1.37$1.52 billion for the years ended December 31, 2006, 2005, 2004 and 2003,2004, respectively. TSYS’ combined revenues represented 82.9%83.2% of consolidated non-interest income in 20052006 compared to 78.5%82.9% in 2004.2005.
Non-interest income excluding reimbursable items totaled $1.6$1.78 billion in 2006, an increase of 10.9% from 2005. For 2005, non-interest income excluding reimbursable items was $1.61 billion, an increase of 24.4% from 2004. For 2004, non-interest income excluding reimbursable items was $1.3 billion, an increase of 12.9% from 2003. Revenues from electronic payment processing, merchant acquiring services, and other transaction processing services offered by TSYS were the largest contributors, increasing $336$143.8 million, or 11.2% in 2006, and increasing $336.4 million, or 35.3% in 2005 and increasing $130.8 million, or 15.9% in 2004 over the previous year. Reported Financial Services’ non-interest income was $359.4 million in 2006, up 9.8% compared to 2005. Excluding amounts related to acquisitions completed in 2006, Financial Services non-interest income was up $30.5 million or 9.3% over 2005. Financial Services’ non-interest income was $327.4 million in 2005, flat compared to 2004. Excluding amounts related to acquisitions and divestitures completed in 2005 and 2004, Financial Services non-interest income was up $15.3 million or 5% over 2004. Financial Services’ non-interest income was $327.4 million in 2004, an increase of $16.4 million or 5.3% over 2003.
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Transaction Processing Services
TSYS’ revenues are derived from providing electronic payment processing and related services to financial and
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nonfinancial institutions, generally under long-term processing contracts. TSYS’ services are provided primarily through TSYS’its cardholder systems, TS2 and TS1, to financial institutions and other organizations throughout the United States Mexico, Canada, Honduras, Puerto Rico and Europe.internationally. TSYS currently offers merchant acquiring services to financial institutions and other organizations in the United States and Japanmainly through its wholly owned subsidiary Vital and its majority owned subsidiary, GP Net.
Network Corporation (GP Net), and its wholly owned subsidiary, TSYS Acquiring Solutions, L.L.C. (TSYS Acquiring). The following table summarizes TSYS’ accounts on file at December 31, 2006, 2005, 2004, and 2003.2004.
Accounts on File (AOF) Information
(In millions)
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| | | | | | | | | | Percent Change | |
Accounts on File (AOF) Information | | | Percent Change | | |
(in millions) | | | | | |
| | | | | | | | | | |
| | 2005 | | | 2004 | | | 2003 | | | 2005 vs. 2004 | | | 2004 vs. 2003 | | | | | 2006 | | | 2005 | | | 2004 | | | 2006 vs. 2005 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At December 31 | | | 437.9 | | | 357.6 | | | 273.9 | | | 22.4 | % | | | 30.5 | % | | | 416.4 | | | 437.9 | | | 357.6 | | | (4.9 | )% | | | 22.4 | % |
YTD Average | | | 401.1 | | | 303.1 | | | 262.6 | | | 32.3 | | | 15.4 | | | | 415.6 | | | 401.1 | | | 303.1 | | | 3.6 | | | 32.3 | |
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Major Customers
A significant amount of TSYSTSYS’ revenues is derived from long-term contracts with large clients, including its major customer, Bank of America.customers. TSYS derives revenues from providing various processing and other services to this client,these clients, including processing of consumer and commercial accounts, and providing merchant acquiring services, as well as revenues for reimbursable items. With the acquisition of Vital on March 1, 2005,For 2006, TSYS’ revenues include revenues derived from providing merchant processing services tomajor customers included Bank of America.America and JP Morgan Chase & Co (Chase). Due to the deconversion of the Bank of America consumer card portfolio in October 2006, as discussed below, Bank of America is not expected to be a major customer in 2007.
On January 25, 2005, TSYS announced that it had extended its agreement with Bank of America for an additional five years through 2014. Additionally, during the third quarter ofon October 6, 2005, VitalTSYS Acquiring announced the renewal of its agreement to provide merchant processingacquiring services to Bank of America.
During the second quarter ofOn June 30, 2005, Bank of America announced its planned acquisition of MBNA. In December 2005, TSYS received official notification from Bank of America of its intent, pending its acquisition of MBNA, to shift the processing of its consumer card portfolio in house in October 2006. On January 1, 2006, Bank of America’s acquisition of MBNA was completed.completed and in October 2006 TSYS expectsdeconverted the Bank of America consumer card portfolio. TSYS continues to continue providingprovide commercial and small business card processing for Bank of America and MBNA, as well as merchant processingacquiring for Bank of America, according to the terms of the existing agreements for those services.
TSYS’ processing agreement with Bank of America provided that Bank of America could terminate its agreement with TSYS for consumer credit card services upon the payment of a termination fee, the amount of which was dependent upon several factors. This fee of approximately $68.9 million was received in October 2006 in conjunction with the Bank of America consumer card portfolio deconversion, and is included in income from electronic payment processing services in the 2006 consolidated statement of income. In 2005,anticipation of the deconversion, TSYS accelerated the amortization of approximately $6 million in contract acquisition costs (comprised of $4 million of amortization related to payments for processing rights, which was recorded as a reduction of revenues, and $2 million of amortization expense related to conversion costs). The loss of Bank of America could have a material adverse effect on TSYS’ financial position, results of operations and cash flows.
In 2006, all relationships with Bank of America and MBNA generated a combined total of $382.4$434.2 million in revenues, or 23.9%24.3% and 13.2%13.3% of TSYS and Synovus’ total revenues, respectively. TSYS projects an annualized loss of approximately $243.3$243.0 million in revenues uponwith the deconversion of the consumer card portfolio, that Bank of America plans to move in house, or approximately 15.2%13.6% of TSYS’ total revenues in 2005.2006. Excluding reimbursable items, TSYS projects an annualized reduction of approximately $143.8 million in revenues from the loss of the consumer card portfolio, which is approximately 11.1% and 5.6%10.0% of TSYS and Synovus’ totalTSYS’ revenues before reimbursables in 2005, respectively.
TSYS’ processing agreement with Bank of America provides that Bank of America may terminate its agreement with TSYS for consumer credit card services upon the payment of a termination fee, the amount of which is dependent upon several factors. Based upon the expected October 2006 deconversion date, this fee is estimated to be approximately $69 million. As a result of the expected deconversion in October 2006, TSYS will accelerate the amortization of approximately $7 million in contract acquisition costs.2006.
Bank of America accounted for approximately 22.3%24.3%, 18.5%22.3% and 18.2%18.5% of TSYS’ total revenues for the years ended December 31, 2006, 2005, and 2004, respectively. This amount consists of processing revenues for consumer, commercial and 2003, respectively.merchant acquiring services, as well as reimbursable items. Of the $434.2 million in revenues for the year ended December 31, 2006, approximately 29.8% was derived from Bank of America for reimbursable items. Bank of America accounted for approximately 17.8%21.2%, 14.9%17.8% and 14.6%14.9% of TSYS’ revenues before reimbursable items for the years ended December 31, 2006, 2005 2004 and 2003,2004, respectively. Bank of America accounted for approximately 12.4%13.3%, 9.2%12.4% and 9.0%9.2% of Synovus’ total revenues and accounted for approximately10.5%, 8.9%, and 6.6% and 6.3% of Synovus’ revenues before reimbursable items for the years ended December 31, 2006, 2005 2004 and 2003, respectively.2004. The majority of the increase in revenues including reimbursables derived from Bank of America for 2005, as compared to 2004, is the result of including Vital’sTSYS Acquiring’s revenues for merchant acquiring services from Bank of America. The lossWith the deconversion of the consumer card portfolio in 2006, TSYS believes that revenues from Bank of America could have a material adverse effect on Synovus andin 2007 will represent less than 10% of TSYS’ financial position, results of operations and cash flows. Synovus and TSYS’ management believe that the loss of revenues from the Bank of America consumer card portfolio for the months of 2006 subsequent to the expected deconversion, combined with decreased expenses from the reduction in hardware and software and the redeployment of personnel, should not have a material adverse effect on TSYS or Synovus’ financial position, results of operations or cash flows for the year ending December 31, 2006. However, TSYS’ management believes that the termination fee associated with the Bank of America deconversion, offset by the loss of processing revenues subsequent to the deconversion and the accelerated amortization of contract acquisition costs, will have a positiveconsolidated revenues.
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On October 13, 2004, TSYS finalized a definitive agreement with Chase to service the combined card portfolios of Chase Card Services and to upgrade its card-processing technology. Pursuant to the agreement, TSYS converted the consumer accounts of Chase to the modified version of TS2 in July 2005. TSYS expects to maintain the card-processing functions of Chase Card Services for at least two years. Chase Card Services then has the option to either extend the processing agreement for up to five additional two-year periods or migrate the portfolio in-house, under a perpetual license of a modified version of TS2 with a six-year payment term. TSYS expects that Chase will discontinue its processing agreement according to the original schedule and will license TSYS’ processing software in the third quarter of 2007.
Chase accounted for approximately 10.1%, 10.1% and 9.0% of TSYS’ total revenues for the years ended December 31, 2006, 2005 and 2004, respectively. The loss of Chase could have a material adverse effect on TSYS’ financial position, results of operations and cash flows for the year ending December 31, 2006.
TSYS has a long-term processing relationship with Providian Financial Corp. (Providian), one of the largest bankcard issuers in the nation, until 2013. On October 1, 2005, Washington Mutual Inc. (WAMU) completed the acquisition of Providian. WAMU accounted for approximately 3.9%, 8.0% and 10.4% of TSYS’ total revenues for the years ended December 31, 2005, 2004 and 2003, respectively. The decrease in revenues is the result of a change in the types of services TSYS offers to WAMU, such as statements and card personalization, as well as the decrease in the number of accounts processed.flows.
TSYS works to maintain a large and diverse customer base across various industries. However, in addition to its major customer,customers, TSYS has other large clients representing a significant portion of its total revenues. The loss of any one of TSYS’ large clients could have a material adverse effect on TSYS’ financial position, results of operations and cash flows.
International Revenue
Total revenues from clients based in Europe were $131.9$158.8 million for 2005,2006, a 29.8%19.9% increase over the $101.6$132.6 million in 2004,2005, which was a 48.1%29.2% increase over the $68.6$102.6 million in 2003.2004. The growth in revenues in 20052006 from clients based in Europe was a result of the growth of existing clients, the conversion of new accounts, the effect of currency translation and the increased use of value added products and services by clients in Europe.
Total revenues from clients based in Mexico were $12.3 million for 2006, a 60.8% increase over the $7.6 million forin 2005, which was a 32.0% decrease from the $11.2 million in 2004, which2004. The growth in revenues in 2006 from clients based in Mexico was a 64.2% decrease fromresult of the $31.4conversion of new accounts and the growth of existing clients.
International revenues for the year ended December 31, 2006 include revenues of approximately $13.1 million associated with TSYS Card Tech for several countries and regions, including Europe, Japan and others.
On July 11, 2006, TSYS acquired Card Tech, Ltd., a privately owned London-based payments firm, and related companies, increasing TSYS’ electronic payment processing and merchant acquiring capabilities and extending its geographic reach to Asia Pacific, Europe, the Middle East and Africa. TSYS paid an aggregate consideration of approximately $59.3 million, including direct acquisition costs. Card Tech, Ltd. was established in 2003. During 2003, TSYS’ largest client1989 and maintains service centers in Mexico notifiedLondon, England; Dubai, United Arab Emirates; Nicosia, Cyprus; and Kuala Lumpur, Malaysia. TSYS thatformed and/or acquired five companies in connection with the client would be utilizing its internalCard Tech, Ltd. acquisition, which TSYS collectively refers to as TSYS Card Tech.
TSYS Card Tech’s software applications are utilized globally. TSYS Card Tech offers a server-based system with an established global platformfootprint for comprehensive issuing and deconvertedacquiring services. TSYS Card Tech offers products and services for installment loans, credit, debit, merchant acquiring and prepaid payment platforms in the fourth quarter of 2003. This client represented approximately 70% of TSYS’ revenues from Mexico. Another Mexican client notifiedaddition to fraud, risk management, authorizations, chargebacks,e-commerce andm-commerce solutions. TSYS of its intentions to utilize its internal global platformCard Tech’s applications are browser-based, multilingual, multicurrency and deconverted in mid-2004. This client represented approximately 21% of TSYS’ revenues from Mexico prior to the deconversions. TSYS’ management believes that Mexico remains a viable market and plans to continue providing processing services to its existing clients in Mexico, as well as pursue additional business from potential clients in Mexico.multi-country (includingdouble-byte-enabled).
Value Added Products and Services
TSYS’ electronic payment processing services revenues are also impacted by the use of optional value added products and services that are integrated withinof 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 from period to period as clients subscribe to or cancel these services. Value added products and services are included mainlyprimarily in electronic payment processing services revenues.revenue.
For the years ended December 31, 2006, 2005, 2004 and 2003,2004, value added products and services represented 12.4%, 12.6%, 13.8% and 14.1%13.8%, respectively, of TSYS’ total revenues, respectively.revenues. Revenues from these products and services, which include some reimbursable items paid to third-party vendors, increased 9.7%, or $19.6 million, for 2006 compared to 2005, and increased 23.2%, or $38.0 million, for 2005 compared to 2004, and increased 10.8%, or $16.0 million, for 2004 compared to 2003.2004.
Electronic Payment Processing Services
Electronic payment processing services revenues are generated primarily from charges based on the number of accounts on file, transactions and authorizations processed, statements mailed, cards embossed and mailed, and other
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processing services for cardholder accounts on file. Cardholder accounts on file include active and inactive consumer credit, retail, debit, stored value, government services and commercial card accounts. Due to the numberstrong organic growth of cardholder accounts processed by TSYS clients 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.
Electronic payment processing services revenues increased 14.9%13.6%, or $112.6$118.0 million, for the year ended December 31, 2005,2006, compared to the year ended December 31, 2004,2005, which increased 7.7%14.9%, or $54.2$112.6 million, compared to the year ended December 31, 2003.2004. The impact of acquisitions on consolidated electronic payment processing services revenues was $24.4 million in 2006, $19.6 million in 2005 and $8.2 million in 2004.
In March 2004, Bank of America acquired FleetBoston. In connection with the extended agreement with Bank of America, TSYS converted the FleetBoston card portfolio to TSYS’ processing system in March 2005.
In August 2005, TSYS finalized a five year definitive agreement with Capital One to provide processing services for its North American portfolio of consumer and small business credit card accounts. TSYS plans to complete the conversion of Capital One’s portfolio from its in-housein house processing system to TS2 in phases, beginning in mid-2006July 2006 and ending in early 2007. In October 2006, TSYS converted the vast majority of the Capital One portfolio onto its TS2 platform. TSYS expects to maintain the card processing functions of Capital One for at least five years. After a minimum of three years of processing with TSYS, the agreement provides Capital One the opportunity to license TS2 under a long-term payment structure.
TSYS is in the process of completing the analysis of the accounting for the Capital One contract. Current 2006 earnings estimates assume that TSYS will defer revenues and costs associated with converting, processing and servicing the Capital One portfolio.
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On March 3, 2003, TSYS announced that Bank One had selected TSYS to upgrade its credit card processing. Under the long-term software licensing and services agreement, TSYS was to provide electronic payment processing services to Bank One’s credit card accounts for at least two years starting in 2004 (excluding statement and card production services). Following the provisions of processing services, TSYS was to license a modified version of its TS2 consumer and commercial software to Bank One under a perpetual license with a six-year payment term. This agreement has been superseded by the agreement with Chase described below. TSYS used the percentage-of-completion accounting method for its agreement with Bank One and recognized revenues in proportion to costs incurred. TSYS’ revenues from Bank One were less than 10% of TSYS’ total revenues in 2005 and 2004, respectively.
On January 20, 2004, Circuit City Stores, Inc. (Circuit City) announced an agreement to sell its private-label credit card business to Bank One.
On July 1, 2004, Bank One and Chase merged under the name Chase. On October 13, 2004, TSYS finalized a definitive agreement with Chase to service the combined card portfolios of Chase Card Services and to upgrade its card-processing technology. The new agreement replaced the agreement TSYS and the former Bank One agreed to in March 2003. Pursuant to the revised agreement, the first phase of the project was executed successfully, and Bank One’s remaining accounts were converted to the modified TS2 processing platform during the fourth quarter of 2004, according to the project’s original schedule. TSYS converted the consumer accounts of Chase to the modified version of TS2 in July 2005. TSYS expects to maintain the card-processing functions of Chase Card Services for at least two years. Chase Card Services then has the option to either extend the processing agreement for up to five additional two-year periods or migrate the portfolio in-house, under a perpetual license of a modified version of TS2 with a six-year payment term.
As a result of the new agreement with Chase, TSYS discontinued its use of the percentage-of-completion accounting method for the original agreement with Bank One. The revised agreement is being accounted for in accordance with EITF 00-21, which is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003, and other applicable guidance.
TSYS and Synovus’ management expects that the 2006 earnings per share (EPS) impact of the agreement will be $0.11-$0.12 per TSYS diluted share and $0.05-$0.06 per Synovus diluted share. Beyond 2006, the annual EPS impact of the agreement will depend upon Chase Card Services’ option to either extend the processing agreement for up to five additional two-year periods or to migrate the portfolio in-house under a perpetual license of a modified version of TS2 with a six-year payment term.
In October 2003, Circuit City announced that it had sold its Visa and MasterCard portfolio, which includes credit card receivables and related cash reserves, to FleetBoston. On March 31, 2004, Bank of America acquired FleetBoston. In connection with the extended agreement with Bank of America, TSYS converted the FleetBoston card portfolio to TSYS’ processing system in March 2005.
In July 2003, Sears and Citigroup announced an agreement for the sale by Sears to Citigroup of the Sears credit card and financial services businesses. During the year ended December 31, 2005, TSYS’ revenues from the agreement with Sears represented less than 10% of TSYS’ consolidated revenues. The TSYS/Sears agreement granted to Sears the one-time right to market test TSYS’ pricing and functionality after May 1, 2004, which right was exercised by Citigroup. In June 2005, TSYS announced that Citigroup willwould move the Sears consumer MasterCard and private-label accounts from TSYS in a deconversion that is expected to occuroccurred in MayJune 2006. During the year ended December 31, 2006, TSYS’ revenues from the agreement with Sears represented less than 10% of TSYS’ consolidated revenues. TSYS expects to continue supporting commercial card accounts for Citibank, as well as Citibank’s Banamex USA consumer accounts, according to the terms of the existing agreements for those portfolios. TSYS’ management believes that the loss of revenues from the Sears portfolio for the months of 2006 subsequent to the expected deconversion, combined with decreased expenses from the reduction in hardware and software and the redeployment of personnel, should not have a material adverse effect on TSYS’ financial position, results of operations or cash flows for the year ending December 31, 2006.
On August 2, 2004, TSYS completed the acquisition of Clarity Payment Solutions, Inc. (Clarity). Clarity was renamed TSYS Prepaid. TSYS Prepaid is a provider of prepaid card solutions that utilize the Visa, MasterCard, EFT and ATM networks for Fortune 500 companies as well as domestic and international financial institutions. For the year ended December 31, 2005, TSYS’ revenues include $19.6 million related to revenues from TSYS Prepaid, compared to $8.2 million in 2004, and are included in electronic payment processing services.
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Merchant Acquiring Services
Merchant acquiring services revenues are derived from providing electronic transaction processingacquiring solutions, related systems and integrated support services primarily to large financial institutions and other merchant acquirers. Revenues from merchant acquiring services include processing all payment forms including credit, debit, prepaid, electronic benefit transfer and electronic check truncation for merchants of all sizes across a wide array of retail market segments. Merchant services’ products andacquiring services include:include authorization and capture of electronic transactions; clearing and settlement of electronic transactions; information reporting services related to electronic transactions; merchant billing services; and point-of-sale terminalequipment sales and service.
On March 1, 2005, TSYS acquired the remaining 50% of TSYS Acquiring, formerly operating as Vital Processing Services, L.L.C., from Visa U.S.A. (Visa) for $95.8 million in cash, including $794,000 of direct acquisition costs. Vital is nowcosts of $794 thousand. TSYS Acquiring operates as a separate, wholly owned subsidiary of TSYS. As a result of the acquisition of control of Vital,TSYS Acquiring, TSYS changed from the equity method of accounting for the investment in VitalTSYS Acquiring and began consolidating Vital’sTSYS Acquiring’s balance sheet and results of operations.
Revenues from merchant acquiring services consist of revenuesare mainly generated by TSYS’ wholly owned subsidiary, Vital,TSYS Acquiring, and majority owned subsidiary, GP Net. Merchant acquiring services revenues increased 9.6%, or $22.9 million, for the year ended December 31, 2006, compared to the year ended December 31, 2005. Merchant acquiring services revenue for the years ended December 31, 2006, 2005, and 2004 were $260.3 million, $237.4 million, and $26.2 million, respectively. The increase is completely attributable to the consolidation of Vital’sTSYS Acquiring’s results effective March 1, 2005. Prior to the acquisition of Vital,TSYS Acquiring, TSYS’ revenues included fees TSYS charged to VitalTSYS Acquiring for back-endclearing and settlement processing support. The impact of acquisitions on consolidated merchant acquiring services revenues was $229.9 million in 2006 and $209.3 million in 2005.
Vital’sTSYS Acquiring’s results are driven by the authorization and capture transactions processed at thepoint-of-sale and the number of outgoingclearing and settlement transactions. Vital’s main point-of-sale service deals with authorizationsTSYS Acquiring’s authorization and data capture transactions are primarily throughdial-up or Internet connectivity.
During 2006, TSYS Acquiring renewed long-term agreements with five of its top 20 clients, as well as signed several new clients. TSYS Acquiring also announced plans to integrate clearing and settlement processing for Discover Network card acceptance into its offering for merchant acquirers and independent sales organizations.
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TSYS Acquiring also expanded its solution set during the Internet.year to include enhanced gift card, enhanced statements, new Internet-based reporting capabilities, contactless, merchant cash advance services and upgraded Dynamic Currency Conversion and multi-currency processing services.
In December 2005, TSYS Acquiring closed its point of sale terminal direct distribution sales office in San Diego, CA, resulting in a decrease of approximately $13.3 million in revenue in 2006, as compared to 2005. TSYS Acquiring is also experiencing moderate market price compression as well as client deconversions.
Other Transaction Processing Services Revenue
Revenues from other transaction processing services consist primarily of revenues generated by TSYS’ business process management services, as well as TSYS’ wholly owned subsidiaries not included in electronic payment processing services or merchant acquiring services, as well as TSYS’ business process management services. These services include mail and correspondence processing services, teleservicing, data documentation capabilities, offset printing, client service, collections and account solicitation services. TSYS provides clients, through its wholly owned subsidiary, Columbus Depot Equipment Company, with an option to lease certain equipment necessary for online communications and for the use of TSYS applications. Through its wholly owned subsidiary Columbus Productions, Inc., TSYS provides full-service commercial printing services to TSYS clients and others. TSYS Total Debt Management, Inc. (TDM) provides recovery collections work, bankruptcy process management, legal account management and skip tracing. ESC provides targeted loyalty consulting, as well as travel, gift card and merchandise reward programs to more than 40 national and regional financial institutions in the United States. TSYS Managed Services EMEA, Ltd. (TSYS Managed Services) provides specialized customer-servicing operations, including back-office, cross-selling and up-selling activities for financial institutions engaged in electronic payment processing and merchant acquiring activities.
OtherRevenues from other transaction processing services revenueincreased $3.0 million, or 1.6%, in 2006, compared to 2005. In 2005, revenues from other transaction processing services increased $12.5 million, or 7.3%, in 2005, compared to 2004. In 2004,Other services revenues from other services increased $50.4 million, or 41.8%, compared to 2003. Other transaction processing services revenue increased primarily as a result of increased debt collection services performed by TSYS Total Debt Management, Inc. (TDM)TDM, acquisitions and the revenues associated with Enhancement Services Corporation (ESC).ESC. The impact of acquisitions on consolidated other services revenues was $3.2 million in 2006, $1.2 million in 2005 and $0.1 million in 2004.
On April 28, 2003, In May 2006, TSYS’ collection subsidiary renegotiated a contract with its largest client. One of the provisions that was changed related to the handling of attorney fees and court costs. In reviewing the indicators set forth in EITF Issue No. 99-19,“Reporting Revenue Gross as a Principal versus Net as an Agent,”TSYS completedmet the acquisitionindicators of ESC. For“gross reporting,” specifically, TSYS is the yearprimary obligor and adds value as part of the service. Prior to the renegotiation, TSYS recognized $25.9 million, $32.1 million and $33.9 million of attorney fees and court costs for the years ended December 31, 2006, 2005 TSYS’ revenues include $27.1 million related to ESC’s revenues and are included in2004, respectively, as other transaction processing services revenue, comparedrevenues.
On November 16, 2006, TSYS announced a joint venture with Merchants, a customer-contact company and a wholly owned subsidiary of Dimension Data, to $21.5 million for 2004deliver a comprehensive range of managed services to financial institutions across Europe, the Middle East and $11.9 millionAfrica. The new venture is called TSYS Managed Services and includes existing Merchants centers that comprise more than 200 seats in 2003.
EquityMilton Keynes, England, near London, and Barneveld, The Netherlands, near Amsterdam. TSYS Managed Services is expected to add future centers in Income of Joint Venturesother countries throughout Europe and in South Africa.
Prior to the new agreement, TSYS contracted with Merchants to provide these services to TSYS’ share of income from its equity in joint ventures was $6.1 million, $23.7 millioninternational clients, and $17.8 million for 2005, 2004 and 2003, respectively. The decrease for 2005 isthese services were characterized as reimbursable items. With the result of TSYS’ purchase of the remaining 50% of the equity of Vital on March 1, 2005 and the subsequent inclusion of Vital’s operating results in TSYS’ statements of income. The increase in 2004 was primarily the result of improvements in Vital’s operating results from increased volumes. These amounts are reflectednew agreement, these services will be characterized as other transaction processing services revenues. TSYS Managed Services operates as a componentseparate, majority owned subsidiary of other operating income in the consolidated statements of income.TSYS.
Financial Services
Financial Services’ total non-interest income was $327.4$359.4 million, $327.4 million, and $311.0$327.4 million for the years ended December 31, 2006, 2005, 2004, and 2003,2004, respectively. Table 5 shows the principal components of Financial Services’ non-interest income.
Service charges on depositsrepresent the single largest fee income component for Financial Services. Service charges on deposits totaled $112.8$112.4 million in 2006, a increase of 2.2% from the previous year, and $110.0 million in 2005, a decrease of 7.1%7.3% from the previous year, and $121.5 million in 2004, an increase of 12.8% from 2003.2004. Service charges on deposit accounts consist of non-sufficient funds (NSF) fees (which represent approximately two–thirdstwo-thirds of the total), account analysis fees, and all other service charges. Account analysis fees were the primary driver for the decrease in service charges on deposits declining $4.5down $1.6 million or 22%9.9% from 20042005 levels. The decrease is mainly due to higher earnings credits on commercial demand deposit accounts (DDA). All other service charges on deposit accounts, which consist primarily of monthly fees on consumer DDA and savings accounts, were down $2.4$1.8 million or 8.5%7.8% compared to 2004.2005. The decline in all other service
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charges was largely due to growth in the number of checking accounts with no monthly service charge. As most of the industry, weWe experienced a decreasean increase in NSF fees, with a year-over-year decreaseincrease of $1.8$5.8 million or 2.4%8.2%. However, within the year, the trend continued to improve, as sequential quarter NSF fees (on a per business day basis) increased in each of the last three quarters of 2005.
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Bankcard feestotaled $37.6 million in 2005, an increase of 24.7% over the previous year, and $30.2 million in 2004, an increase of 17.2% from 2003. Bankcard fees consist of credit card merchant and interchange fees and debit card interchange fees. Debit card interchange fees were $15.2 million in 2005, an increase of 43.3% over 2004. Credit card fees were $22.4 million in 2005, up 14.7% compared to 2004.
Fiduciary and asset management feesare derived from providing estate administration, employee benefit plan administration, personal trust, corporate trust, investment management and financial planning services. At December 31, 20052006 and 2004,2005, the market value of assets under management was approximately $8.6$8.80 billion and $10.1$8.56 billion, respectively. Assets under management decreased 14.9% due primarily to the loss of one account.increased 2.8% over 2005. Assets under management consist of all assets where Synovus has investment authority as well as our proprietary mutual funds. Assets under advisement were approximately $3.6$3.82 billion and $2.6$3.60 billion at December 31, 20052006 and 2004,2005, respectively. Assets under advisement consist of non-managed assets as well as non-custody assets where Synovus earns a consulting fee. Assets under advisement increased 37.9%6.2% over 2004.2005. Total assets under management and advisement by Synovus were $12.2$12.63 billion in 20052006 compared to $12.7$12.16 billion in 2004.2005. The increase in fiduciary and asset management fees is primarily due to higher basis points on average being earned on managed assets in 2005.2006 as well as certain one-time termination fees recognized in 2006.
At December 31, 20042005 and 2003,2004, the market value of total assets under management and advisement was approximately $12.7$12.16 billion and $11.7$12.67 billion, respectively. These assets increased 8.7%decreased 4.0% primarily due to appreciationthe loss of one account in the equity markets as well as gross new business of $1.7 billion.2005.
Brokerage and investment banking revenuewas $24.5$26.7 million in 2005,2006, a 12.6%9.2% increase over the $21.7$24.5 million reported in 2004.2005. Brokerage assets were $4.2$4.14 billion and $3.1$4.18 billion as of December 31, 20052006 and 2004,2005, respectively. The increase in revenue was primarily due to the expansion of our Capital Markets unit during 2005 with a full year of operation in 2005.2006.
Total brokerage and investment banking revenue for 20042005 was $21.7$24.5 million, up 6.3%12.6% over 2003.2004. The increase in revenue was mainly driven by an increase in the amountexpansion of fee-based assets held versus assets in traditional brokerage accounts.our Capital Markets unit during 2005.
Mortgage banking incomewas $28.7$29.3 million in 2005,2006, a 9.1%2.0% increase from 20042005 levels. Mortgage production volume increased 9% to $1.5is $1.51 billion in 2005,2006, flat compared to $1.4 billion in 2004. Secondary marketing gains were the primary driver for the increase in mortgage banking income over 2004.2005.
Total mortgage banking income for 20042005 was $26.3$28.7 million, down 55.1%up 9.1% from 20032004 levels. Total mortgage production volume was $1.4$1.51 billion in 2004,2005, compared to $2.7$1.39 billion in 2003.2004.
Bankcard feestotaled $44.3 million in 2006, an increase of 14.1% over the previous year, and $38.8 million in 2005, an increase of 17.7% from 2004. Bankcard fees consist of credit card merchant and interchange fees and debit card interchange fees. Debit card interchange fees were $14.6 million in 2006, an increase of 21.0% over 2005. Credit card fees were $29.7 million in 2005, up 11.1% compared to 2005.
Other fee incomeincludes 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. The increase for 20052006 was primarily due to additional fee income generated from customer interest rate swap transactions of $3.0 million.$1.9 million, and $1.2 million in trading gains. For the year ended December 31, 2004, $3.12005, $3.0 million of the total increase was due to increases in letter of credit fees.customer swaps.
Other operating incomewas $45.0$61.5 million in 2005,2006, compared to $54.7$45.4 million in 2004.2005. The main components of other operating income are income from company-owned life insurance policies, insurance commissions, and other items discussed below.
Other operating income includes a$6.3 million and $4.1 million gainof gains from a private equity investmentinvestments in 2006 and 2005 respectively, and a $15.8 million gain from the sale of a banking location in 2004.
| |
Table 5 | Non-Interest Income - Financial Services Segment |
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2005 | | | 2004 | | | 2003 | | | | 2006 | | | 2005 | | | 2004 | |
(In thousands) | | | | | | | | | | |
| | | | | | | | | | | |
Service charges on deposits | Service charges on deposits | | $ | 112,788 | | | 121,450 | | | 107,697 | | Service charges on deposits | | $ | 112,417 | | | 109,960 | | | 118,649 | |
Fiduciary and asset management fees | Fiduciary and asset management fees | | | 45,453 | | | 43,757 | | | 39,922 | | Fiduciary and asset management fees | | | 48,627 | | | 45,453 | | | 43,757 | |
Brokerage and investment banking revenue | Brokerage and investment banking revenue | | | 24,487 | | | 21,748 | | | 20,461 | | Brokerage and investment banking revenue | | | 26,729 | | | 24,487 | | | 21,748 | |
Mortgage banking income | Mortgage banking income | | | 28,682 | | | 26,300 | | | 58,633 | | Mortgage banking income | | | 29,255 | | | 28,682 | | | 26,300 | |
Bankcard fees | Bankcard fees | | | 37,638 | | | 30,174 | | | 25,751 | | Bankcard fees | | | 44,303 | | | 38,813 | | | 32,975 | |
Securities gains, net | Securities gains, net | | | 463 | | | 75 | | | 2,491 | | Securities gains, net | | | (2,118 | ) | | | 463 | | | 75 | |
Other fee income | Other fee income | | | 32,914 | | | 29,227 | | | 23,682 | | Other fee income | | | 38,743 | | | 34,148 | | | 29,158 | |
Other operating income | Other operating income | | | 44,987 | | | 54,710 | | | 32,386 | | Other operating income | | | 61,474 | | | 45,406 | | | 54,779 | |
| | | | | | | | | | | | | | | | |
| Total non-interest income | | $ | 327,412 | | | 327,441 | | | 311,023 | | Total non-interest income | | $ | 359,430 | | | 327,412 | | | 327,441 | |
| | | | | | | | | | | | | | | | |
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, 2006, 2005, 2004, and 2003.2004.
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Financial Services
20052006 vs. 20042005
Reported total non-interest expense for the Financial Services segment increased $25$117.8 million or 4.0%18.2% over 2004.2005. This moderate increase reflects the impact of share-based compensation, required by SFAS No. 123R “Share-Based Payment,” which was effective January 1, 2006 as described in the “Notes To Consolidated Financial Statements” section titled “Note 15 Share-Based Compensation”. The increase for 2006, excluding share-based compensation and the impact of acquisitions, was 13.4%.
Total salaries and other personnel expenseincreased $80.2 million or 21.6% in 2006 compared to 2005. Total employees were 7,189 at December 31, 2006, up 550 from 6,639 employees at December 31, 2005. Excluding the impact of acquisitions, the net addition in the number of employees was 352. In addition to normal merit and promotional salary adjustments as well as increases in headcount, this category is impacted by certain items as follows:
| | |
| • | Incremental share-based compensation expense resulted in an increase in salaries and other personnel expense of $17.0 million. |
|
| • | Total performance-based incentive compensation was approximately $62.9 million in 2006, an $11.8 million increase from 2005 levels. |
|
| • | The total increase related to the net effect of acquisitions completed in 2006 was approximately $7.3 million. |
Net occupancy and equipment expenseincreased $9.7 million or 10.7% during 2006. Approximately $2.2 million of the total increase was related to the net effect of acquisitions completed in 2006. Rent expense increased by approximately $2.0 million during 2006. Depreciation increased by $3.0 million.
Other operating expensesincreased $27.9 million or 15.0% over 2005. Approximately $5.0 million of the total increase was related to the net effect of acquisitions completed in 2006. The largest expense category increase was from third party processing services. Excluding acquisitions, third party processing services increased $9.2 million, or 31.1%, in 2006 compared to 2005.
Theefficiency ratio(non-interest expense divided by the sum of federal taxable equivalent net interest income and non-interest income excluding net securities gains) was 51.18% for 2006 compared to 49.79% in 2005. Thenet overhead ratio(non-interest expense less non-interest income — excluding net securities gains divided by total average assets) was 1.41% for the year compared to 1.27% for 2005.
2005 vs. 2004
Non-interest expense increased $25.1 million, or 4.0% in 2005 over 2004.
Salaries and other personnel expensesincreased $5.7 million or 1.6%. Approximately $2.0 million of the total increase was related to the net effect of acquisitions and divestitures completed in 2004. The change in classification methodology for loan origination costs, which was implemented on a prospective basis on October 18, 2004, as describedresulted in the section titled “Earning Assets, Sources of Funds, and Net Interest Income”. The increase for 2005, excluding the impact of the changea decrease in loan origination costs classification methodology and the impact of acquisitions and divestitures, was 9.4%.
Total employees were 6,639 at December 31, 2005, up 189 from 6,450 employees at December 31, 2004.
Totalsalaries and other personnel expenseincreased $5.7 million or 1.6% in 2005 compared to 2004. In addition of $37.7 million. The remaining net increase related to normal merit and promotional salary adjustments, this category is impacted by certain items as follows:and performance-based incentive compensation.
| | |
| • | The change in classification methodology for recording loan origination fees and costs (described in “Earning Assets, Sources of Funds, and Net Interest Income”) resulted in a decrease in salaries and other personnel expense of $37.7 million. |
|
| • | Total performance-based incentive compensation was approximately $51.1 million in 2005, a $14.4 million increase from 2004 levels. |
|
| • | The total increase related to the net effect of acquisitions and divestitures completed in 2004 was $2.0 million. |
Net occupancy and equipment expenseincreased $8.4 million or 10.2% during 2005. Approximately $1.0 million of the total increase was related to the net effect of acquisitions and divestitures completed in 2004. Rent expense increased by approximately $1.1 million during 2005. Repairs and maintenance expense on equipment increased by $1.2 million. Amortization on theS-Link technology platform implemented in 2004 represented $1.3 million of the increase.
Other operating expensesincreased $11$11.0 million or 6.3% over 2004.during 2005. Approximately $1.8 million of the total increase was related to the net effect of acquisitions and divestitures completed in 2004. This comparison is also impacted by an $8.1 million expense recognized in 2004 related to an estimated loss from non-recovered credit card charge-backs. The largest single expense category increase was from professional fees.charge backs. Professional fees increased $4.4 million or 32.4%, in 2005 compared to 2004.
Theefficiency ratio(non-interest expense divided by the sum of federal taxable equivalent net interest income and non-interest income excluding net securities gains) was 49.79% for 2005 compared to 52.06% in 2004. Thenet overhead ratio(non-interest expense less non-interest income - excluding net securities gains divided by total average assets) improved to 1.27% for the year compared to 1.32% for 2004.
2004 vs. 2003
Non-interest expense increased $46.3 million, or 8.0% in 2004 over 2003.Salaries and other personnel expensesincreased $24.3 million or 7.1%. Approximately $5.1 million of the total increase was related to net effect of acquisitions and divestitures completed in 2004 and 2003. The change in classification methodology for loan origination costs, which was implemented on a prospective basis on October 18, 2004, resulted in a decrease in salaries and other personnel expense of $9.2 million. The remaining net increase related to normal merit and promotional salary adjustments, and performance-based incentive compensation.
Net occupancy and equipment expenseincreased $6.3 million or 8.3% during 2004. Approximately $1.2 million of the total increase was related to the net effect of acquisitions and divestitures completed in 2004 and 2003. Additionally, rent expense increased by approximately $2.1 million during 2004.
��Other operating expensesincreased $15.7 million or 9.8% during 2004. Approximately $3.0 million of the total increase was related to acquisitions and divestitures completed in 2004 and 2003 and an estimated loss of $8.1 million related to non-recovered credit card charge-backs.
Transaction Processing Services
During 2005,2006, TSYS’ operating expensesnon-interest expense as a percentage of revenues, increaseddecreased to 81.7%79.5%, compared to 81.7% and 81.3% for 2005 and 80.3%2004, respectively. As a percentage of revenues, the decrease in expenses for 2004the year ended December 31, 2006 and 2003,the increase for the year ended December 31, 2005, include an increase of $1.1 million and a decrease of $1.3 million related to the effects of currency translation of TSYS’ foreign based subsidiaries, branches and divisions, respectively. OperatingThe impact of acquisitions on consolidated total expenses increasedwas $251.8 million in 2006, $221.4 million in 2005, asand $9.8 million in 2004. Non-interest expense was $1.43 billion in 2006, compared to 2004 primarily due to the acquisition of Vital$1.32 billion in March 2005 and TSYS Prepaid$985.5 million in August 2004. Operating expenses increased in 2004 as compared to 2003 primarily due to the increase in costs associated with TSYS TDM’s debt collection arrangement, increased performance-based incentive benefit accruals and the write-off of TSYS’ double-byte software development project.
Salaries and other personnel expenseincreased 26.9%12.4%, or $99.0$58.1 million in 20052006 over 2004,2005, compared to 10.6%26.9% in 2004 over 2003. Of the $99.0 million increase in employment expenses in 2005 approximately $59.7 million related to Vital
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and TSYS Prepaid. A significant portionover 2004. The impact of TSYS’ operating expenses relates toacquisitions on consolidated salaries and other personnel expenses was $91.5 million in 2006, $64.4 million in 2005 and $3.3 million in 2004. In addition, the change in salaries and other personnel expense is associated with the normal salary increases and related benefits, offset by the level of employment costs capitalized as software development and contract acquisition costs. Salaries and other personnel expense include the accrual for performance-based incentive benefits, which includes salary bonuses, profit sharing and employer 401(k) expenses. For the years ended December 31, 2006, 2005 and 2004, TSYS accrued $39.0 million, $48.1 million and $22.5 million, respectively, of performance-based incentives.
TSYS’ salaries and other personnel expense is greatly influenced by the number of employees. During 2005,2006, the average number of employees increased to 6,3176,642 compared to 6,317 in 2005 and 5,598 in 20042004. The majority of the increase in the number of employees in 2006 as compared to 2005 is a result of the acquisitions of TSYS Card Tech and 5,494 in 2003.TSYS Managed Services, which added 265 employees. The majority of the increase in the number of employees in 2005 as compared to 2004 is a result of the acquisition of Vital. The majorityTSYS Acquiring.
Share-based compensation expenses include the impact of expensing the increasefair value of stock options in the number of employees2006, in 2004accordance with SFAS No. 123R, as compared to 2003 is a result of the acquisition of TSYS Prepaid, offset by the workforce reduction announced in February 2004. The growth in employmentwell as expenses is also impacted by the accrual for performance-based incentives, which includes salary bonuses, profit sharing and employer 401(k) expenses.associated with non-vested shares. For the yearsyear ended December 31, 2005, 2004 and 2003, TSYS accrued $48.12006, share-based compensation was $9.2 million, $22.5compared to $1.1 million and $8.4 million, respectively, of performance-based incentives.for the same period in 2005.
Net occupancy and equipment expenseincreased 13.1% in 2006 over 2005, compared to 15.9% in 2005 over 2004, compared to 16.4% in 2004 over 2003. Of the $38.1 million increase in2004. The impact of acquisitions on consolidated net occupancy and equipment expenseexpenses was $35.7 million in 2006, $24.6 million in 2005, over 2004, $22.6and $1.0 million related to Vital and TSYS Prepaid.in 2004.
Depreciation and amortization expense increased $27.2$26.6 million, or 33.5%24.6%, to $135.1 million for the year ended December 31, 2006, compared to $108.5 million for the year ended December 31, 2005, compared towhich increased $27.2 million, or 33.5%, from $81.3 million for the year ended December 31, 2004, which increased $4.7 million, or 6.1%, from $76.6 million for the year ended December 31, 2003.2004. Amortization expense of licensed computer software increased by $15.6$21.7 million, or 41.1%40.8%, in 20052006 over 20042005 as TSYS expanded its processing capacity. Amortization expense of licensed computer software decreasedincreased by $3.4$15.6 million in 20042005 compared to 2003.2004. TSYS has certain license agreements requiring increased license fees based upon achieving certain thresholds of processing capacity commonly referred to as millions of instructions per second or MIPS. These licenses are amortized using a units-of-production basis. As a result of the deconversions scheduled during 2006 and 2007, TSYS’ total future MIPS are expected to decline, resulting in an increase in software amortization for the periods prior to the deconversion dates. As it converted the vast majority of the Capital One portfolio, TSYS was operating at its highest production capacity in TSYS’ history. This capacity level was designed to maintain the service processing needs of all clients and was reduced as a certain client deconverted in October 2006. Amortization expense of developed software increased $327 thousand for the year ended December 31, 2006, as compared to the prior period in 2005, as a result of some of TSYS’ developed software becoming available for use in 2006 and being amortized. Amortization expense of developed software decreased $750 thousand for the year ended December 31, 2005, as compared to the prior period in 2004, as a result of some of the TSYS’ developed software becoming fully amortized during 2005 and 2004. As a result of the deconversion of a consumer portfolio in October 2006, TSYS accelerated the amortization of a mainframe software operating system dedicated solely to the processing of the deconverted portfolio. The acceleration resulted in an increase of approximately $11.0 million in software amortization and related prepaid maintenance in 2006.
Through December 2004, TSYS wasinvested a total of $6.3 million in developing its Integrated Payments (IP) Platform supporting the on-line and off-line debit and stored value markets, whichmarkets. IP Platform would have given clients access to all national and regional networks, EBT programs, ATM driving and switching services for onlineon-line debit processing. Through 2004, TSYS invested a total of $6.3 million since the project began.
Development relating specifically to the IP on-line debit platform primarily consisted of a third-partythird party software solution. During the first quarter of 2005, TSYS evaluated its debit solution and decided to modify its approach in the debit processing market. With the acquisition of VitalTSYS Acquiring and debit alternatives now available, TSYS determined that it would no longer market this third-party software product as its on-line debit solution. TSYS will continue to support this product for existing clients and will enhance and develop a new solution. As a result, TSYS recognized an impairment charge in net occupancy and equipment expense of approximately $3.1 million related to this asset.asset during the first quarter of 2005. As of December 31, 2005,2006, TSYS has $1.3 millionapproximately $500 thousand capitalized, net of amortization, related to this asset. In September 2005, TSYS also recognized an impairment loss on developed software of $482,000.$482 thousand.
During 2004, TSYS decided to change its approach for entry into the Asia-Pacific market. As a result, TSYS recognized a $10.1 million charge to net occupancy and equipment expense for the write-off of the double-byte software development project.
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TSYS’ equipment and software needs are fulfilled primarily through operating leases and software licensing arrangements. Equipment and software rental expense was $109.4 million for the year ended December 31, 2006, an increase of $12.9 million, or 13.4%, compared to $96.5 million for the year ended December 31, 2005, an increase of $7.8 million, or 8.7%, compared to $88.7 million for the year ended December 31, 2004, an increase of $3.0 million, or 3.5%, compared to $85.8 million for the year ended December 31, 2003.2004. TSYS’ equipment and software rentals increased in 2004 due2006, as compared to expanding2005, as a result of software licenses that are leased under processing capacity and transition costsor MIPS agreements, as well as increased equipment expenses associated with providing additional capacity for the opening of its new data centre in Europe.Capital One portfolio conversions.
Other operating expensesdecreased 8.0% in 2006 compared to 2005, and increased 75.8% in 2005 compared to 2004, and increased 48.8% in 2004 compared to 2003. Other operating expenses were impacted by the acquisition2004. The impact of Vital and TSYS Prepaid. Of the $112.0 million increase inacquisitions on consolidated other operating expenses was $78.3 million in 2006, $92.8 million in 2005, approximately $88.8and $4.7 million related toin 2004. The decrease of the acquisitionimpact of Vital in Marchacquisitions for other operating expenses between 2006 and 2005 andis the result of the closing of TSYS Prepaid in August 2004.Acquiring’s point of sale terminal direct distribution sales office at the beginning of 2006. Other operating expenses were also impacted by the court costs associated with a new debt collection arrangement, entered into by TDM, amortization of contract acquisition costs and the provision for transaction processing accruals. As a result of a new debt-collection agreement with an existing client in 2003, TSYS’ other expenses were impacted by an increase in court costs and attorney commissions for the years ended December 31, 2005 and 2004, respectively, some of which it expects to recover in future periods. Amortization of contract acquisition costs associated with conversions was $15.8$17.8 million, $15.9 million and $11.5 million in 2006, 2005, and $7.7 million in 2005, 2004, and 2003, respectively.
Other operating expenses also include, among other things, costs associated with delivering merchant acquiring services, professional advisory fees, charges for processing errors, contractual commitments, and bad debt expense. Management’s evaluation of the adequacy of its transaction processing reserves and allowance for doubtful accounts is based on a formal analysis which assesses the probability of losses related to contractual contingencies, processing errors and uncollectible accounts. Increases and decreases in transaction processing provisions and charges for bad debt expense are reflected in other operating expenses. For 2006, 2005, and 2004, and
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2003, transaction processing provisions were $11.0 million, $7.4 million, $9.9 million and $3.5$9.9 million, respectively. For the yearyears ended December 31, 2006 and 2005, TSYS had recoveries of bad debt expense of $164 thousand and provisions for bad debt expense of $3.5 million, respectively, and for the yearsyear ended December 31, 2004, and 2003, TSYS had recoveries of bad debt expense of $1.1 million and $1.0 million, respectively.million.
Table 6 Non-Interest Expense
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2005 * | | | 2004 * | | | 2003 * | | | | 2006 * | | | 2005 * | | | 2004 * | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | Transaction | | | | | Transaction | | | | | Transaction | | | | | | Transaction | | | | | Transaction | | | | | Transaction | |
| | | Financial | | | Processing | | | Financial | | | Processing | | | Financial | | | Processing | | | | Financial | | | Processing | | | Financial | | | Processing | | | Financial | | | Processing | |
| | | Services | | | Services | | | Services | | | Services | | | Services | | | Services | | | | Services | | | Services | | | Services | | | Services | | | Services | | | Services | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Salaries and other personnel expense | Salaries and other personnel expense | | $ | 370,223 | | | 466,901 | | | 364,514 | | | 367,881 | | | 340,219 | | | 332,616 | | Salaries and other personnel expense | | $ | 450,373 | | | 524,968 | | | 370,223 | | | 466,901 | | | 364,514 | | | 367,881 | |
Net occupancy and equipment expense | Net occupancy and equipment expense | | | 90,549 | | | 277,671 | | | 82,156 | | | 239,534 | | | 75,841 | | | 205,845 | | Net occupancy and equipment expense | | | 100,269 | | | 313,922 | | | 90,549 | | | 277,671 | | | 82,156 | | | 239,534 | |
Other operating expenses | Other operating expenses | | | 185,985 | | | 259,751 | | | 175,004 | | | 147,732 | | | 159,347 | | | 99,261 | | Other operating expenses | | | 213,891 | | | 238,879 | | | 185,985 | | | 259,751 | | | 175,004 | | | 147,732 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total non-interest expense before reimbursable items | | | 646,757 | | | 1,004,323 | | | 621,674 | | | 755,147 | | | 575,407 | | | 637,722 | | Total non-interest expense before reimbursable items | | | 764,533 | | | 1,077,769 | | | 646,757 | | | 1,004,323 | | | 621,674 | | | 755,147 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Reimbursable items | | | — | | | 313,141 | | | — | | | 230,388 | | | — | | | 225,165 | | Reimbursable items | | | — | | | 352,738 | | | — | | | 313,141 | | | — | | | 230,388 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total non-interest expense | | $ | 646,757 | | | 1,317,464 | | | 621,674 | | | 985,535 | | | 575,407 | | | 862,887 | | Total non-interest expense | | $ | 764,533 | | | 1,430,507 | | | 646,757 | | | 1,317,464 | | | 621,674 | | | 985,535 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
* | The added totals are greater than the consolidated totals due to inter-segment balances which are eliminated in consolidation. |
Investment Securities Available for Sale
The investment securities portfolio consists principally of debt and equity securities classified as available for sale. Investment securities available for sale 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, 2005,2006, approximately $2.4$2.90 billion of these investment securities were pledged as required collateral for certain deposits, securities sold under agreements to repurchase, and FHLB advances. See Table 8 for maturity and average yield information of the investment securities available for sale portfolio.
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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. Synovus’ interest rate risk management strategy during 2006 was to gradually reduce its asset sensitive positioning. In coordination with this strategy, Synovus increased the duration of the portfolio while simultaneously reducing overall prepayment sensitivity. The average duration of Synovus’ investment securities portfolio was 3.69 years at December 31, 2006 compared to 2.82 years at December 31, 2005.
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, 2005,2006, 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, 20052006 and 2004,2005, the estimated fair value of investment securities available for sale as a percentage of their amortized cost was 98.5%99.3% and 100.0%98.5%, respectively. The investment securities available for sale portfolio had gross unrealized gains of $8.8$13.9 million and gross unrealized losses of $55.1$38.7 million, for a net unrealized loss of $46.3$24.8 million as of December 31, 2005.2006. As of December 31, 2004,2005, the investment securities available for sale portfolio had a net unrealized loss of $224 thousand.$46.3 million. Shareholders’ equity included a net unrealized loss of $28.5$15.2 million and a net unrealized gainloss of $141 thousand$28.5 million on the available for sale portfolio as of December 31, 20052006 and 2004,2005, respectively.
During 2005,2006, the average balance of investment securities available for sale increased to $2.83$3.21 billion, compared to $2.60$2.83 billion in 2004.2005. Synovus earned a taxable-equivalent rate of 4.45% and 4.03% for 2006 and 4.04% for 2005, and 2004, respectively, on its investment securities available for sale portfolio. As ofFor the years ended December 31, 20052006 and 2004,2005, average investment securities available for sale represented 12.2%12.1% and 12.6%12.2%, respectively, of average interest earning assets.
The calculation of weighted average yields for investment securities available for sale 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
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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 7 Investment Securities Available for Sale
| |
Table 7 | Investment Securities Available for Sale |
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, | | | | December 31, | |
| | | | | | | | |
| | | 2005 | | | 2004 | | | 2003 | | | | 2006 | | | 2005 | | | 2004 | |
| | | | | | | | | | | | | | | | | | | | |
U.S. Treasury and U.S. Government agency securities | U.S. Treasury and U.S. Government agency securities | | $ | 1,624,612 | | | 1,305,471 | | | 1,353,825 | | U.S. Treasury and U.S. Government agency securities | | $ | 1,770,570 | | | 1,624,612 | | | 1,305,471 | |
Mortgage-backed securities | Mortgage-backed securities | | | 1,006,728 | | | 1,026,724 | | | 847,007 | | Mortgage-backed securities | | | 1,275,358 | | | 1,006,728 | | | 1,026,724 | |
State and municipal securities | State and municipal securities | | | 212,371 | | | 237,832 | | | 248,738 | | State and municipal securities | | | 196,185 | | | 212,371 | | | 237,832 | |
Other investments | Other investments | | | 114,609 | | | 125,566 | | | 79,687 | | Other investments | | | 110,244 | | | 114,609 | | | 125,566 | |
| | | | | | | | | | | | | | | | |
| Total | | $ | 2,958,320 | | | 2,695,593 | | | 2,529,257 | | Total | | $ | 3,352,357 | | | 2,958,320 | | | 2,695,593 | |
| | | | | | | | | | | | | | | | |
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| |
Table 8 | Maturities and Average Yields of Investment Securities Available for Sale |
(Dollars in thousands)
| | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2005 | | | | December 31, 2006 | |
(Dollars in thousands) | | | | |
| | | | | |
| | | Investment Securities | | | | Investment Securities | |
| | | Available for Sale | | | | Available for Sale | |
| | | | | | | | |
| | | Estimated | | | Average | | | | Estimated | | | Average | |
| | | Fair Value | | | Yield | | | | Fair Value | | | Yield | |
| | | | | | | | | | | | | | |
U.S. Treasury and U.S. Government agency securities: | U.S. Treasury and U.S. Government agency securities: | | | | | | | | U.S. Treasury and U.S. Government agency securities: | | | | | | | |
| Within 1 year | | $ | 295,922 | | | 2.94 | % | Within 1 year | | $ | 349,750 | | | 3.23 | % |
| 1 to 5 years | | | 1,164,529 | | | 3.84 | | 1 to 5 years | | | 1,056,858 | | | 4.47 | |
| 5 to 10 years | | | 139,969 | | | 4.92 | | 5 to 10 years | | | 284,815 | | | 5.43 | |
| More than 10 years | | | 24,192 | | | 5.80 | | More than 10 years | | | 79,147 | | | 5.69 | |
| | | | | | | | | | | | |
| | Total | | $ | 1,624,612 | | | 3.80 | | | Total | | $ | 1,770,570 | | | 4.43 | |
| | | | | | | | | | | | |
State and municipal securities: | State and municipal securities: | | | | | | | | State and municipal securities: | | | | | | | |
| Within 1 year | | $ | 19,722 | | | 6.71 | | Within 1 year | | $ | 21,402 | | | 6.52 | |
| 1 to 5 years | | | 83,639 | | | 6.84 | | 1 to 5 years | | | 70,814 | | | 6.93 | |
| 5 to 10 years | | | 79,172 | | | 7.45 | | 5 to 10 years | | | 78,004 | | | 7.38 | |
| More than 10 years | | | 29,838 | | | 7.61 | | More than 10 years | | | 25,965 | | | 7.24 | |
| | | | | | | | | | | | |
| | Total | | $ | 212,371 | | | 7.16 | | | Total | | $ | 196,185 | | | 7.10 | |
| | | | | | | | | | | | |
Other investments: | Other investments: | | | | | | | | Other investments: | | | | | | | |
| Within 1 year | | $ | 264 | | | 3.97 | | Within 1 year | | $ | 264 | | | 3.29 | |
| 1 to 5 years | | | 1,350 | | | 3.88 | | 1 to 5 years | | | 1,087 | | | 4.02 | |
| 5 to 10 years | | | — | | | — | | 5 to 10 years | | | 2,796 | | | 8.55 | |
| More than 10 years | | | 189 | | | — | | More than 10 years | | | 9,744 | | | 8.39 | |
| | | | | | | | | | | | |
| | Total | | $ | 1,803 | | | 3.49 | | | Total | | $ | 13,891 | | | 7.98 | |
| | | | | | | | | | | | |
Equity securities | Equity securities | | $ | 112,806 | | | 4.63 | | Equity securities | | $ | 96,353 | | | 5.68 | |
| | | | | | | | | | | | |
Mortgage-backed securities | Mortgage-backed securities | | $ | 1,006,728 | | | 4.22 | | Mortgage-backed securities | | $ | 1,275,358 | | | 4.70 | |
| | | | | | | | | | | | |
Total investment securities: | Total investment securities: | | | | | | | | Total investment securities: | | | | | | | |
| Within 1 year | | $ | 315,908 | | | 3.18 | | Within 1 year | | $ | 371,416 | | | 3.41 | |
| 1 to 5 years | | | 1,249,518 | | | 4.04 | | 1 to 5 years | | | 1,128,759 | | | 4.62 | |
| 5 to 10 years | | | 219,141 | | | 5.83 | | 5 to 10 years | | | 365,615 | | | 5.86 | |
| More than 10 years | | | 54,219 | | | 6.78 | | More than 10 years | | | 114,856 | | | 6.27 | |
| Equity securities | | | 112,806 | | | 4.63 | | Equity securities | | | 96,353 | | | 5.68 | |
| Mortgage-backed securities | | | 1,006,728 | | | 4.22 | | Mortgage-backed securities | | | 1,275,358 | | | 4.70 | |
| | | | | | | | | | | | |
| | Total | | $ | 2,958,320 | | | 4.21 | % | | Total | | $ | 3,352,357 | | | 4.73 | % |
| | | | | | | | | | | | |
|
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
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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, 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 operate its highly successful relationship banking model, and has continued to maintain and further develop a strong presence in each of its local markets. The loan portfolio spreads across five southeastern states with diverse economies. The Georgia banks represent a majority with 53%52.8% of the consolidated portfolio. The Alabama and South Carolina banks each represent 15%14.5%, followed by South Carolina with 14%, Florida with 13%13.9%, and Tennessee with 5%4.3%.
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 as1-4 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, 20052006 were $12.9$15.17 billion or 60.1%61.5% 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 $3.8$4.08 billion in loans for the purpose of financing owner-occupied properties and other properties such as churches and other charitable properties, healthcare facilities, restaurants, and recreational properties. The primary source of
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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 $2.7$3.42 billion, of which $637$772.0 million are investment property loans.
Total retail loans as of December 31, 20052006 were $3.3$3.66 billion. 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 acase-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.
Portfolio Growth
At December 31, 2005,2006, total loans outstanding were $21.4$24.65 billion, an increase of 9.8%15.2% over 2004.2005. Excluding the impact of acquisitions completed in 2006, total loans increased by 11.4% over year-end 2005. Average loans increased 14.02%13.9% or $2.5$2.85 billion compared to 2004,2005, representing 88%87.9% of average earning assets and 77.9%78.2% of average total assets. Growth in the commercial real estate portfolio continuescontinued to beoutpace growth in the primary driver of overall loan growth, thoughcommercial and industrial portfolio and the retail portfolio. However, the Company’s strong emphasisfocus on portfolio diversificationcommercial and industrial lending and retail lending should begincontinue to narrow the gap between commercial, financial, and agricultural loan growth and retail loan growth in relation to commercial real estate loan growth.lending. The growth for the second half of 2006 was almost evenly distributed among the three portfolios.
Total commercial real estate loans increased by $1.6$2.34 billion, or 13.9%18.3% from year-end 2004.2005. This growth includes $646.1 million in total loans added to our portfolio as a result of the acquisitions completed in 2006. Excluding the impact of these acquisitions, the commercial real estate portfolio grew by $1.70 billion or 13.2% over year-end 2005. The commercial real estate portfolio growth was led by strong growth in residential development and 1-4 family construction. The housing market remains strong in the Southeast, due in part to job growth and population growth. Synovus continues to monitor market conditions, including absorption rates, affordability index, foreclosure rates, and price appreciation to assess its portfolio risk and underwriting criteria. Credit quality trends remain favorable in this sector.
Retail loans increased by $181.3$309.7 million or 5.7%9.2% from year-end 2004.2005. Real estate mortgage loans grew $260.7$322.5 million, or 11.3%12.6%, driven by another year of strong growth in home equity loans. Home equity loans increased $175.2$148.4 million or 17.3%12.5% compared to a year ago.
Table 10 shows the maturity of selected loan categories as of December 31, 2005.2006. 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
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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.
(Dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, | | | | December 31, | |
| | | | | | | | |
| | | 2005 | | | 2004 | | | 2003 | | | 2002 | | | 2001 | | | | 2006 | | | 2005 | | | 2004 | | | 2003 | | | 2002 | |
(Dollars in thousands) | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | Amount | | | % * | | | Amount | | | % * | | | Amount | | | % * | | | Amount | | | % * | | | Amount | | | % * | | | | Amount | | | % * | | | Amount | | | % * | | | Amount | | | % * | | | Amount | | | % * | | | Amount | | | % * | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial: | Commercial: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial, financial, and agricultural | | $ | 5,231,150 | | | 24.5 | % | | | 5,064,828 | | | 26.0 | % | | | 4,651,864 | | | 28.3 | % | | | 4,382,558 | | | 30.3 | | | 4,004,042 | | | 32.2 | | Commercial, financial, and agricultural | | $ | 5,875,854 | | | 23.8 | % | | | 5,268,042 | | | 24.6 | % | | | 5,064,828 | | | 26.0 | % | | | 4,651,864 | | | 28.3 | % | | | 4,382,558 | | | 30.3 | |
| Real estate — construction | | | 6,394,161 | | | 29.9 | | | 5,173,275 | | | 26.6 | | | 3,958,649 | | | 24.1 | | | 3,119,508 | | | 21.6 | | | 2,665,877 | | | 21.5 | | Real estate — construction | | | 8,246,380 | | | 33.4 | | | 6,374,859 | | | 29.8 | | | 5,173,275 | | | 26.6 | | | 3,958,649 | | | 24.1 | | | 3,119,508 | | | 21.6 | |
| Real estate — mortgage | | | 6,465,915 | | | 30.1 | | | 6,116,308 | | | 31.4 | | | 5,095,247 | | | 30.9 | | | 4,304,024 | | | 29.8 | | | 3,138,748 | | | 25.3 | | Real estate — mortgage | | | 6,920,107 | | | 28.1 | | | 6,448,325 | | | 30.1 | | | 6,116,308 | | | 31.4 | | | 5,095,247 | | | 30.9 | | | 4,304,024 | | | 29.8 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total commercial | | | 18,091,226 | | | 84.5 | | | 16,354,411 | | | 84.0 | | | 13,705,760 | | | 83.2 | | | 11,806,090 | | | 81.7 | | | 9,808,667 | | | 79.0 | | | Total commercial | | | 21,042,341 | | | 85.3 | | | 18,091,226 | | | 84.5 | | | 16,354,411 | | | 84.0 | | | 13,705,760 | | | 83.2 | | | 11,806,090 | | | 81.7 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Retail: | Retail: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Retail: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Real estate — mortgage | | | 2,559,339 | | | 12.0 | | | 2,298,681 | | | 11.8 | | | 1,865,700 | | | 11.4 | | | 1,701,332 | | | 11.8 | | | 1,553,154 | | | 12.5 | | Real estate — mortgage | | | 2,881,880 | | | 11.8 | | | 2,559,339 | | | 12.0 | | | 2,298,681 | | | 11.8 | | | 1,865,700 | | | 11.4 | | | 1,701,332 | | | 11.8 | |
| Consumer loans — credit card | | | 268,348 | | | 1.3 | | | 256,298 | | | 1.3 | | | 232,931 | | | 1.4 | | | 223,613 | | | 1.5 | | | 234,651 | | | 1.9 | | Consumer loans — credit card | | | 276,269 | | | 1.1 | | | 268,348 | | | 1.3 | | | 256,298 | | | 1.3 | | | 232,931 | | | 1.4 | | | 223,613 | | | 1.5 | |
| Consumer loans — other | | | 521,521 | | | 2.4 | | | 612,957 | | | 3.1 | | | 691,557 | | | 4.2 | | | 757,625 | | | 5.2 | | | 843,169 | | | 6.8 | | Consumer loans — other | | | 500,757 | | | 2.0 | | | 521,521 | | | 2.4 | | | 612,957 | | | 3.1 | | | 691,557 | | | 4.2 | | | 757,625 | | | 5.2 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total retail | | | 3,349,208 | | | 15.7 | | | 3,167,936 | | | 16.2 | | | 2,790,188 | | | 17.0 | | | 2,682,570 | | | 18.5 | | | 2,630,974 | | | 21.2 | | | Total retail | | | 3,658,906 | | | 14.9 | | | 3,349,208 | | | 15.7 | | | 3,167,936 | | | 16.2 | | | 2,790,188 | | | 17.0 | | | 2,682,570 | | | 18.5 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total loans | | | 21,440,434 | | | | | | 19,522,347 | | | | | | 16,495,948 | | | | | | 14,488,660 | | | | | | 12,439,641 | | | | | | Total loans | | | 24,701,247 | | | | | | 21,440,434 | | | | | | 19,522,347 | | | | | | 16,495,948 | | | | | | 14,488,660 | | | | |
| Unearned income | | | (48,087 | ) | | | (0.2 | ) | | | (41,951 | ) | | | (0.2 | ) | | | (31,034 | ) | | | (0.2 | ) | | | (24,752 | ) | | | (0.2 | ) | | | (21,724 | ) | | | (0.2 | ) | Unearned income | | | (46,695 | ) | | | (0.2 | ) | | | (48,087 | ) | | | (0.2 | ) | | | (41,951 | ) | | | (0.2 | ) | | | (31,034 | ) | | | (0.2 | ) | | | (24,752 | ) | | | (0.2 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total loans, net of unearned income | | | 21,392,347 | | | 100.0 | | | 19,480,396 | | | 100.0 | | | 16,464,914 | | | 100.0 | | | 14,463,908 | | | 100.0 | | | 12,417,917 | | | 100.0 | | | Total loans, net of unearned income | | $ | 24,654,552 | | | 100.0 | | | 21,392,347 | | | 100.0 | | | 19,480,396 | | | 100.0 | | | 16,464,914 | | | 100.0 | | | 14,463,908 | | | 100.0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
* | Loan balance in each category, expressed as a percentage of total loans, net of unearned income. |
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| |
Table 10 | Loan Maturity and Interest Rate Sensitivity |
(inIn thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2005 | | | | December 31, 2006 | |
| | | | | | | | |
| | | | | Over One Year | | | Over | | | | | | | | Over One Year | | | Over | | | |
| | | One Year | | | Through Five | | | Five | | | | | | One Year | | | Through Five | | | Five | | | |
| | | Or Less | | | Years | | | Years | | | Total | | | | Or Less | | | Years | | | Years | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Selected loan categories: | Selected loan categories: | | | | | | | | | | | | | | Selected loan categories: | | | | | | | | | | | | | |
| Commercial, financial, and agricultural | | $ | 3,303,374 | | | 1,701,029 | | | 226,747 | | | 5,231,150 | | Commercial, financial, and agricultural | | $ | 3,637,134 | | | 1,955,511 | | | 283,209 | | | 5,875,854 | |
| Real estate-construction | | | 4,530,379 | | | 1,749,157 | | | 114,625 | | | 6,394,161 | | Real estate-construction | | | 6,089,475 | | | 2,009,308 | | | 147,597 | | | 8,246,380 | |
| | | | | | | | | | | | | | | | | | | | |
| | Total | | $ | 7,833,753 | | | 3,450,186 | | | 341,372 | | | 11,625,311 | | | Total | | $ | 9,726,609 | | | 3,964,819 | | | 430,806 | | | 14,122,234 | |
| | | | | | | | | | | | | | | | | | | | |
Loans due after one year: | Loans due after one year: | | | | | | | | | | | | | | Loans due after one year: | | | | | | | | | | | | | |
| Having predetermined interest rates | | | | | | | | | | | $ | 1,228,005 | | Having predetermined interest rates | | | | | | | | | | | $ | 1,642,932 | |
| Having floating interest rates | | | | | | | | | | | | 2,563,553 | | Having floating interest rates | | | | | | | | | | | | 2,752,693 | |
| | | | | | | | | | | | | | | | | | | | |
| | Total | | | | | | | | | | | $ | 3,791,558 | | | Total | | | | | | | | | | | $ | 4,395,625 | |
| | | | | | | | | | | | | | | | | | | | |
| | |
F-70
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 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 each 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 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 risk rating system. The resulting conclusions are reviewed and approved by senior management.
The allowance for loan losses consists of two 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
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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. Any deficiency of the collateral coverage is charged against the allowance. 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, 20052006
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, 2005,2006, the allocated component of the allowance for loan losses related to commercial real estate
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construction loans was $80.0 million, up 33.6% from $59.9 million up 19.2% from $50.2 million in 2004.2005. The increase is primarily due to a 23.6%29.4% increase in the related loan balances. As a percentage of commercial real estate construction loans, the allocated allowance in this category was .94%.97% at December 31, 2005,2006, compared to .97%.94% the previous year-end.
Commercial, financial and agricultural loans had an allocated allowance of $84.0$74.6 million or 1.61%1.27% of loans in the respective category at December 31, 2005,2006, compared to $77.3$84.0 million or 1.53%1.59% at December 31, 2004. The increase2005. Certain loans in this category, which were impaired at December 31, 2005, were charged-off to the allocated allowance is primarily due to an overall increase induring 2006. These charge-offs, together with improved risk ratings assigned to credits in this category.category resulted in the decrease in the allocated allowance.
The unallocated allowance is .25%.26% of total loans and 20.0% of the total allowance at December 31, 2006. This compares to ..25% of total loans and 18.2% of the total allowance at December 31, 2005. This compares to ..26% of total loans and 19.1% of the total allowance at December 31, 2004. 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 through the allocated allowance. Factors considered in determining the adequacy of the unallocated allowance include the concentration in commercial real estate loans, particularly the level of1-4 family construction and residential development loans, and the continued change in our footprint moving from rural markets into larger urban markets. Thesemarkets, which introduces more uncertainty into the allocation estimation. Other factors are tempered byinclude the positive credit quality indicators, the improvingnational and local economic environment, diversification within the commercial real estate portfolio, the continuing favorable performance within the commercial real estate portfolio, the knowledge and experience of our commercial lending staff, and the relationship banking philosophy maintained through our community bank structure.conditions.
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| |
Table 11 | Allowance for Loan Losses |
(Dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, | | | | December 31, | |
| | | | | | | | |
| | | 2005 | | | 2004 | | | 2003 | | | 2002 | | | 2001 | | | | 2006 | | | 2005 | | | 2004 | | | 2003 | | | 2002 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for loan losses at beginning of year | Allowance for loan losses at beginning of year | | $ | 265,745 | | | 226,059 | | | 199,841 | | | 170,769 | | | 147,867 | | Allowance for loan losses at beginning of year | | $ | 289,612 | | | 265,745 | | | 226,059 | | | 199,841 | | | 170,769 | |
Allowance for loan losses of acquired/divested subsidiaries, net | Allowance for loan losses of acquired/divested subsidiaries, net | | | — | | | 5,615 | | | 10,534 | | | 7,967 | | | 6,217 | | Allowance for loan losses of acquired/divested subsidiaries, net | | | 9,915 | | | — | | | 5,615 | | | 10,534 | | | 7,967 | |
Loans charged off: | Loans charged off: | | | | | | | | | | | | | | | | | Loans charged off: | | | | | | | | | | | | | | | | |
| Commercial: | | | | | | | | | | | | | | | | | Commercial: | | | | | | | | | | | | | | | | |
| | Commercial, financial, and agricultural | | | 38,087 | | | 30,697 | | | 37,535 | | | 28,338 | | | 17,806 | | | Commercial, financial, and agricultural | | | 44,676 | | | 38,087 | | | 30,697 | | | 37,535 | | | 28,338 | |
| | Real estate — construction | | | 1,367 | | | 383 | | | 2,918 | | | 444 | | | 307 | | | Real estate — construction | | | 5,174 | | | 1,367 | | | 383 | | | 2,918 | | | 444 | |
| | Real estate — mortgage | | | 6,575 | | | 3,145 | | | 2,533 | | | 1,745 | | | 1,294 | | | Real estate — mortgage | | | 6,215 | | | 6,575 | | | 3,145 | | | 2,533 | | | 1,745 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Total commercial | | | 46,029 | | | 34,225 | | | 42,986 | | | 30,527 | | | 19,407 | | | Total commercial | | | 56,065 | | | 46,029 | | | 34,225 | | | 42,986 | | | 30,527 | |
| | | | | | | | | | | | | | | | | | | �� | | | | | |
| Retail: | | | | | | | | | | | | | | | | | Retail: | | | | | | | | | | | | | | | | |
| | Real estate — mortgage | | | 4,393 | | | 2,327 | | | 2,972 | | | 1,375 | | | 1,750 | | | Real estate — mortgage | | | 3,604 | | | 4,393 | | | 2,327 | | | 2,972 | | | 1,375 | |
| | Consumer loans — credit card | | | 11,383 | | | 7,728 | | | 7,631 | | | 10,408 | | | 11,579 | | | Consumer loans — credit card | | | 8,270 | | | 11,383 | | | 7,728 | | | 7,631 | | | 10,408 | |
| | Consumer loans — other | | | 5,421 | | | 6,688 | | | 10,616 | | | 8,951 | | | 9,069 | | | Consumer loans — other | | | 4,867 | | | 5,421 | | | 6,688 | | | 10,616 | | | 8,951 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Total retail | | | 21,197 | | | 16,743 | | | 21,219 | | | 20,734 | | | 22,398 | | | Total retail | | | 16,741 | | | 21,197 | | | 16,743 | | | 21,219 | | | 20,734 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Total loans charged off | | | 67,226 | | | 50,968 | | | 64,205 | | | 51,261 | | | 41,805 | | | Total loans charged off | | | 72,806 | | | 67,226 | | | 50,968 | | | 64,205 | | | 51,261 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Recoveries on loans previously charged off: | Recoveries on loans previously charged off: | | | | | | | | | | | | | | | | | Recoveries on loans previously charged off: | | | | | | | | | | | | | | | | |
| Commercial: | | | | | | | | | | | | | | | | | Commercial: | | | | | | | | | | | | | | | | |
| | Commercial, financial, and agricultural | | | 3,890 | | | 5,334 | | | 3,454 | | | 2,512 | | | 2,448 | | | Commercial, financial, and agricultural | | | 7,304 | | | 3,890 | | | 5,334 | | | 3,454 | | | 2,512 | |
| | Real estate — construction | | | 50 | | | 172 | | | 189 | | | 50 | | | 38 | | | Real estate — construction | | | 132 | | | 50 | | | 172 | | | 189 | | | 50 | |
| | Real estate — mortgage | | | 483 | | | 826 | | | 325 | | | 284 | | | 132 | | | Real estate — mortgage | | | 914 | | | 483 | | | 826 | | | 325 | | | 284 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Total commercial | | | 4,423 | | | 6,332 | | | 3,968 | | | 2,846 | | | 2,618 | | | Total commercial | | | 8,350 | | | 4,423 | | | 6,332 | | | 3,968 | | | 2,846 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Retail: | | | | | | | | | | | | | | | | | Retail: | | | | | | | | | | | | | | | | |
| | Real estate — mortgage | | | 511 | | | 521 | | | 330 | | | 346 | | | 680 | | | Real estate — mortgage | | | 527 | | | 511 | | | 521 | | | 330 | | | 346 | |
| | Consumer loans — credit card | | | 1,828 | | | 1,612 | | | 1,467 | | | 1,554 | | | 1,166 | | | Consumer loans — credit card | | | 2,130 | | | 1,828 | | | 1,612 | | | 1,467 | | | 1,554 | |
| | Consumer loans — other | | | 1,799 | | | 1,255 | | | 2,347 | | | 2,293 | | | 2,353 | | | Consumer loans — other | | | 1,583 | | | 1,799 | | | 1,255 | | | 2,347 | | | 2,293 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Total retail | | | 4,138 | | | 3,388 | | | 4,144 | | | 4,193 | | | 4,199 | | | Total retail | | | 4,240 | | | 4,138 | | | 3,388 | | | 4,144 | | | 4,193 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Total loans recovered | | | 8,561 | | | 9,720 | | | 8,112 | | | 7,039 | | | 6,817 | | | Total loans recovered | | | 12,590 | | | 8,561 | | | 9,720 | | | 8,112 | | | 7,039 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net loans charged off | Net loans charged off | | | 58,665 | | | 41,248 | | | 56,093 | | | 44,222 | | | 34,988 | | Net loans charged off | | | 60,216 | | | 58,665 | | | 41,248 | | | 56,093 | | | 44,222 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Provision expense | Provision expense | | | 82,532 | | | 75,319 | | | 71,777 | | | 65,327 | | | 51,673 | | Provision expense | | | 75,148 | | | 82,532 | | | 75,319 | | | 71,777 | | | 65,327 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for loan losses at end of year | Allowance for loan losses at end of year | | $ | 289,612 | | | 265,745 | | | 226,059 | | | 199,841 | | | 170,769 | | Allowance for loan losses at end of year | | $ | 314,459 | | | 289,612 | | | 265,745 | | | 226,059 | | | 199,841 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for loan losses to loans, net of unearned income | Allowance for loan losses to loans, net of unearned income | | | 1.35 | % | | | 1.36 | | | 1.37 | | | 1.38 | | | 1.38 | | Allowance for loan losses to loans, net of unearned income | | | 1.28 | % | | | 1.35 | | | 1.36 | | | 1.37 | | | 1.38 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Ratio of net loans charged off to average loans outstanding, net of unearned income | Ratio of net loans charged off to average loans outstanding, net of unearned income | | | 0.29 | % | | | 0.23 | | | 0.36 | | | 0.33 | | | 0.30 | | Ratio of net loans charged off to average loans outstanding, net of unearned income | | | 0.26 | % | | | 0.29 | | | 0.23 | | | 0.36 | | | 0.33 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
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| |
Table 12 | Allocation of Allowance for Loan Losses |
(Dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, | | | | December 31, | |
| | | | | | | | |
| | | 2005 | | | 2004 | | | 2003 | | | 2002 | | | 2001 | | | | 2006 | | | 2005 | | | 2004 | | | 2003 | | | 2002 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Amount | | | % * | | | Amount | | | % * | | | Amount | | | % * | | | Amount | | | % * | | | Amount | | | % * | | | | Amount | | | % * | | | Amount | | | % * | | | Amount | | | % * | | | Amount | | | % * | | | Amount | | | % * | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial: | Commercial: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial, financial, and agricultural | | $ | 83,995 | | | 24.5 | | | 77,293 | | | 25.9 | | | 66,418 | | | 28.1 | | | 67,365 | | | 30.2 | | | 70,166 | | | 32.2 | | Commercial, financial, and agricultural | | $ | 74,649 | | | 23.8 | | | 83,995 | | | 24.6 | | | 77,293 | | | 25.9 | | | 66,418 | | | 28.1 | | | 67,365 | | | 30.2 | |
| Real estate — construction | | | 59,869 | | | 29.9 | | | 50,224 | | | 26.6 | | | 39,921 | | | 24.1 | | | 26,476 | | | 21.6 | | | 23,368 | | | 21.5 | | Real estate — construction | | | 79,971 | | | 33.4 | | | 59,869 | | | 29.8 | | | 50,224 | | | 26.6 | | | 39,921 | | | 24.1 | | | 26,476 | | | 21.6 | |
| Real estate — mortgage | | | 69,334 | | | 30.1 | | | 66,954 | | | 31.4 | | | 51,140 | | | 30.9 | | | 40,334 | | | 29.8 | | | 25,754 | | | 25.3 | | Real estate — mortgage | | | 72,823 | | | 28.1 | | | 69,334 | | | 30.1 | | | 66,954 | | | 31.4 | | | 51,140 | | | 30.9 | | | 40,334 | | | 29.8 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total commercial | | | 213,198 | | | 84.5 | | | 194,471 | | | 83.9 | | | 157,479 | | | 83.1 | | | 134,175 | | | 81.6 | | | 119,288 | | | 79.0 | | | Total commercial | | | 227,443 | | | 85.3 | | | 213,198 | | | 84.5 | | | 194,471 | | | 83.9 | | | 157,479 | | | 83.1 | | | 134,175 | | | 81.6 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Retail: | Retail: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Retail: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Real estate — mortgage | | | 6,445 | | | 12.0 | | | 5,335 | | | 11.8 | | | 4,032 | | | 11.3 | | | 3,951 | | | 11.8 | | | 1,503 | | | 12.5 | | Real estate — mortgage | | | 6,625 | | | 11.8 | | | 6,445 | | | 12.0 | | | 5,335 | | | 11.8 | | | 4,032 | | | 11.3 | | | 3,951 | | | 11.8 | |
| Consumer loans — credit card | | | 8,733 | | | 1.3 | | | 8,054 | | | 1.4 | | | 7,602 | | | 1.5 | | | 8,800 | | | 1.6 | | | 9,803 | | | 1.9 | | Consumer loans — credit card | | | 8,252 | | | 1.1 | | | 8,733 | | | 1.3 | | | 8,054 | | | 1.4 | | | 7,602 | | | 1.5 | | | 8,800 | | | 1.6 | |
| Consumer loans — other | | | 8,403 | | | 2.4 | | | 7,086 | | | 3.1 | | | 8,006 | | | 4.3 | | | 9,590 | | | 5.2 | | | 15,268 | | | 6.8 | | Consumer loans — other | | | 9,237 | | | 2.0 | | | 8,403 | | | 2.4 | | | 7,086 | | | 3.1 | | | 8,006 | | | 4.3 | | | 9,590 | | | 5.2 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total retail | | | 23,581 | | | 15.7 | | | 20,475 | | | 16.3 | | | 19,640 | | | 17.1 | | | 22,341 | | | 18.6 | | | 26,574 | | | 21.2 | | | Total retail | | | 24,114 | | | 14.9 | | | 23,581 | | | 15.7 | | | 20,475 | | | 16.3 | | | 19,640 | | | 17.1 | | | 22,341 | | | 18.6 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Unearned Income | | | | | | (0.2 | ) | | | | | | (0.2 | ) | | | | | | (0.2 | ) | | | | | | (0.2 | ) | | | | | | (0.2 | ) | Unearned Income | | | | | | (0.2 | ) | | | | | | (0.2 | ) | | | | | | (0.2 | ) | | | | | | (0.2 | ) | | | | | | (0.2 | ) |
| Unallocated | | | 52,833 | | | | | | 50,799 | | | | | | 48,940 | | | | | | 43,325 | | | | | | 24,907 | | | | | Unallocated | | | 62,902 | | | | | | 52,833 | | | | | | 50,799 | | | | | | 48,940 | | | | | | 43,325 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total allowance for loan losses | | $ | 289,612 | | | 100.0 | | | 265,745 | | | 100.0 | | | 226,059 | | | 100.0 | | | 199,841 | | | 100.0 | | | 170,769 | | | 100.0 | | | Total allowance for loan losses | | $ | 314,459 | | | 100.0 | | | 289,612 | | | 100.0 | | | 265,745 | | | 100.0 | | | 226,059 | | | 100.0 | | | 199,841 | | | 100.0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
* Loan balance in each category expressed as a percentage of total loans, net of unearned income.
| |
* | Loan balance in each category expressed as a percentage of total loans, net of unearned income. |
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 decreased $3.3increased $23.9 million to $98.7$122.5 million at December 31, 2005.2006. The nonperforming assets ratio decreasedincreased to .50% as of December 31, 2006 compared to .46% as of December 31, 2005 compared to .52% as of year-end 2004. Nonperforming2005. There were no non-performing assets over $5 million at December 31, 2005 consist of a $5.8 million loan to a healthcare company and a $5.6 million loan to a residential construction company.year-end 2006. The largest reductionincreases in nonperforming assets during 2005 resulted from2006 were a $3.4 million loan in the sale ofentertainment industry and a foreclosed asset (a golf courseresidential property in Florida) which hadORE with a recorded balance of $5.2 million at December 31, 2004.$3.3 million.
As a percentage of total loans outstanding, loans 90 days past due and still accruing interest declined to a historical low of .07%were .14%. This compares to ..07% at year-end 2005 and .09% at year-end 2004 and .13% at year-end 2003.2004. 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. Management further believes that the
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resolution of these delinquencies will not cause a material increase in nonperforming assets.
Impaired loans at December 31, 2006 and 2005 were $42.2 million and 2004 were $95.3 million, and $99.2 million, respectively. The decrease in
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impaired loans is the result of certain charge-offs of impaired loans during 2006 plus a change in the definition of what constitutes an impaired loan during 2006. The change had no material impact on provision expense or the allowance for loan losses.
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 the determination of nonperforming assets or impaired loans. Management further believes nonperforming assetsloans and impaired loans past due over 90 days and still accruing include all material loans in whichwhere known information about possible credit problems of borrowers causes management to have serious 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
| |
Table 13 | Nonperforming Assets and Past Due Loans |
(Dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, | | | | December 31, | |
| | | | | | | | |
| | | 2005 | | | 2004 | | | 2003 | | | 2002 | | | 2001 | | | | 2006 | | | 2005 | | | 2004 | | | 2003 | | | 2002 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Nonperforming loans(a) | Nonperforming loans(a) | | $ | 82,175 | | | 80,456 | | | 67,442 | | | 66,736 | | | 51,586 | | Nonperforming loans(a) | | $ | 96,622 | | | 82,175 | | | 80,456 | | | 67,442 | | | 66,736 | |
Other real estate | Other real estate | | | 16,500 | | | 21,492 | | | 28,422 | | | 26,517 | | | 15,867 | | Other real estate | | | 25,923 | | | 16,500 | | | 21,492 | | | 28,422 | | | 26,517 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Nonperforming assets | | $ | 98,675 | | | 101,948 | | | 95,864 | | | 93,253 | | | 67,453 | | Nonperforming assets | | $ | 122,545 | | | 98,675 | | | 101,948 | | | 95,864 | | | 93,253 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Loans 90 days past due and still accruing interest | Loans 90 days past due and still accruing interest | | | | | | | | | | | | | | | | | Loans 90 days past due and still accruing interest | | | | | | | | | | | | | | | | |
| Total outstanding | | $ | 16,023 | | | 18,138 | | | 21,138 | | | 30,192 | | | 27,134 | | Total outstanding | | $ | 34,495 | | | 16,023 | | | 18,138 | | | 21,138 | | | 30,192 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| As a % of loans | | | 0.07 | % | | | 0.09 | | | 0.13 | | | 0.21 | | | 0.22 | | As a % of loans | | | 0.14 | % | | | 0.07 | | | 0.09 | | | 0.13 | | | 0.21 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for loan losses | Allowance for loan losses | | $ | 289,612 | | | 265,745 | | | 226,059 | | | 199,841 | | | 170,769 | | Allowance for loan losses | | $ | 314,459 | | | 289,612 | | | 265,745 | | | 226,059 | | | 199,841 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for loan losses as a % of loans | Allowance for loan losses as a % of loans | | | 1.35 | % | | | 1.36 | | | 1.37 | | | 1.38 | | | 1.38 | | Allowance for loan losses as a % of loans | | | 1.28 | % | | | 1.35 | | | 1.36 | | | 1.37 | | | 1.38 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
As a % of loans and other real estate: | As a % of loans and other real estate: | | | | | | | | | | | | | | | | | As a % of loans and other real estate: | | | | | | | | | | | | | | | | |
| Nonperforming loans | | | 0.38 | % | | | 0.41 | | | 0.41 | | | 0.46 | | | 0.41 | | Nonperforming loans | | | 0.39 | % | | | 0.38 | | | 0.41 | | | 0.41 | | | 0.46 | |
| Other real estate | | | 0.08 | % | | | 0.11 | | | 0.17 | | | 0.18 | | | 0.13 | | Other real estate | | | 0.11 | | | 0.08 | | | 0.11 | | | 0.17 | | | 0.18 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Nonperforming assets | | | 0.46 | % | | | 0.52 | | | 0.58 | | | 0.64 | | | 0.54 | | Nonperforming assets | | | 0.50 | % | | | 0.46 | | | 0.52 | | | 0.58 | | | 0.64 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for loan losses to nonperforming loans | Allowance for loan losses to nonperforming loans | | | 352.43 | % | | | 330.30 | | | 335.19 | | | 299.45 | | | 331.04 | | Allowance for loan losses to nonperforming loans | | | 325.45 | % | | | 352.43 | | | 330.30 | | | 335.19 | | | 299.45 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | |
Interest income on nonperforming loans that would have been reported for the years ended December 31, 2006, 2005, 2004, and 20032004 is summarized as follows:
| | | | | | | | | | | | | |
| |
| | 2006 | | | 2005 | | | 2004 | |
(Dollars in thousands) | | | | | | | | | |
Interest at contractual rates(b) | | $ | 8,594 | | | | 5,205 | | | | 4,197 | |
Less interest recorded as income | | | 4,676 | | | | 2,713 | | | | 1,537 | |
| | | | | | | | | |
| Reduction of interest income | | $ | 3,918 | | | | 2,492 | | | | 2,660 | |
| | | | | | | | | |
| | | | | | | | | | | | | |
| | 2005 | | | 2004 | | | 2003 | |
| | | | | | | | | |
Interest at contractual rates(b) | | $ | 5,205 | | | | 4,197 | | | | 4,547 | |
Less interest recorded as income | | | 2,713 | | | | 1,537 | | | | 1,884 | |
| | | | | | | | | |
| Reduction of interest income | | $ | 2,492 | | | | 2,660 | | | | 2,663 | |
| | | | | | | | | |
| | |
(a) | | Nonperforming loans 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. |
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Table 14
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2005 | | | December 31, 2004 | | | | December 31, 2006 | | | December 31, 2005 | |
| | | | | | | | | | | | | | |
| | | | | Nonperforming | | | | | Nonperforming | | | | | | Nonperforming | | | | | Nonperforming | |
| | | Loans as a | | | Loans as a | | | Loans as a | | | Loans as a | | | | Loans as a | | | Loans as a | | | Loans as a | | | Loans as a | |
| | | Percentage | | | Percentage | | | Percentage | | | Percentage | | | | Percentage | | | Percentage of | | | Percentage | | | Percentage of | |
| | | of Total | | | of Total | | | of Total | | | of Total | | | | of Total | | | Total | | | of Total | | | Total | |
| | | Loans | | | Nonperforming | | | Loans | | | Nonperforming | | | | Loans | | | Nonperforming | | | Loans | | | Nonperforming | |
Loan Type | Loan Type | | Outstanding | | | Loans | | | Outstanding | | | Loans | | Loan Type | | Outstanding | | | Loans | | | Outstanding | | | Loans | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial Real Estate | Commercial Real Estate | | | | | | | | | | | | | | Commercial Real Estate | | | | | | | | | | | | | |
| Multi-family | | | 2.5 | % | | | 0.3 | | | 2.8 | % | | | 1.0 | | Multi-family | | | 2.0 | % | | | 0.2 | % | | | 2.5 | % | | | 0.3% | |
| Hotels | | | 3.2 | | | — | | | 4.2 | | | 3.6 | | Hotels | | | 2.6 | | | 1.3 | | | 3.2 | | | — | |
| Office buildings | | | 3.5 | | | 6.1 | | | 4.0 | | | — | | Office buildings | | | 3.6 | | | 4.5 | | | 3.5 | | | 6.1 | |
| Shopping centers | | | 3.1 | | | — | | | 3.0 | | | 0.2 | | Shopping centers | | | 3.1 | | | — | | | 3.1 | | | — | |
| Commercial development | | | 4.1 | | | 0.7 | | | 3.5 | | | 0.1 | | Commercial development | | | 3.6 | | | — | | | 4.0 | | | 0.7 | |
| Other investment property | | | 1.6 | | | 0.8 | | | 1.4 | | | 0.1 | | Other investment property | | | 1.8 | | | 0.1 | | | 1.7 | | | 0.8 | |
| | | | | | | | | | | | | | | | | | | | |
| Total Investment Properties | | | 18.0 | | | 7.9 | | | 18.9 | | | 5.0 | | | Total Investment Properties | | | 16.7 | | | 6.1 | | | 18.0 | | | 7.9 | |
| | | | | | | | | | | | | | | | | | | | |
1-4 family construction | | | 7.3 | | | 2.4 | | | 6.2 | | | 1.1 | | |
1-4 family perm/mini-perm | | | 5.1 | | | 3.3 | | | 5.1 | | | 8.2 | | |
Residential development | | | 7.0 | | | 9.3 | | | 5.6 | | | 0.2 | | |
1-4 Family Properties | | 1-4 Family Properties | | | | | | | | | | | | | |
| | 1-4 family construction | | | 9.5 | | | 5.8 | | | 7.3 | | | 2.4 | |
| | 1-4 family perm/mini-perm | | | 4.8 | | | 8.0 | | | 5.1 | | | 3.3 | |
| | Residential development | | | 8.3 | | | 2.0 | | | 7.0 | | | 9.3 | |
| | | | | | | | | | | | | | | | | | | | |
| Total 1-4 Family Properties | | | 19.4 | | | 15.0 | | | 16.9 | | | 9.5 | | | Total 1-4 Family Properties | | | 22.6 | | | 15.8 | | | 19.4 | | | 15.0 | |
Land Acquisition | Land Acquisition | | | 4.9 | | | 0.5 | | | 4.8 | | | 0.2 | | Land Acquisition | | | 5.7 | | | 8.7 | | | 5.3 | | | 0.5 | |
| | | | | | | | | | | | | | | | | | | | |
| Total Investment-Related Real Estate | | | 42.3 | | | 23.4 | | | 40.6 | | | 14.7 | | Total Investment-Related Real Estate | | | 45.0 | | | 30.6 | | | 42.7 | | | 23.4 | |
| | | | | | | | | | | | | | | | | | | | |
Owner-Occupied | Owner-Occupied | | | 12.6 | | | 13.7 | | | 11.6 | | | 8.8 | | Owner-Occupied | | | 12.7 | | | 10.1 | | | 12.6 | | | 13.7 | |
Other Property | Other Property | | | 5.1 | | | 6.6 | | | 5.8 | | | 9.8 | | Other Property | | | 3.8 | | | 5.9 | | | 4.6 | | | 6.6 | |
| | | | | | | | | | | | | | | | | | | | |
| Total Commercial Real Estate | | | 60.0 | | | 43.7 | | | 58.0 | | | 33.3 | | Total Commercial Real Estate | | | 61.5 | | | 46.6 | | | 59.9 | | | 43.7 | |
Commercial & Industrial | | | 24.5 | | | 46.6 | | | 25.9 | | | 58.1 | | |
Consumer | | | 15.7 | | | 9.7 | | | 16.3 | | | 8.6 | | |
Commercial and Industrial | | Commercial and Industrial | | | 23.8 | | | 43.3 | | | 24.6 | | | 46.6 | |
Retail (consumer) | | Retail (consumer) | | | 14.9 | | | 10.1 | | | 15.7 | | | 9.7 | |
Unearned Income | Unearned Income | | | (0.2 | ) | | | — | | | (0.2 | ) | | | — | | Unearned Income | | | (0.2 | ) | | | — | | | (0.2 | ) | | | — | |
| | | | | | | | | | | | | | | | | | | | |
| Total | | | 100.0 | % | | | 100.0 | | | 100.0 | % | | | 100.0 | | Total | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0% | |
| | | | | | | | | | | | | | | | | | | | |
| | |
Table 14 shows the composition of the loan portfolio and nonperforming loans classified by loan type as of December 31, 20052006 and 2004.2005. The commercial real estate category is further segmented into the various property types determined in accordance with the purpose of the loan. Owner-occupied and other property loans represent 17.7%16.5% of total loans, or 29.7%26.9% of total commercial real estate loans at December 31, 2005.2006. Other property includes loans secured by non-investment real estate, including charitable, recreational, educational and healthcare facilities. Like owner-occupied loans, these loans depend upon the underlying business cash flow for repayment. Investment-related real estate represents 42.3%45.0% of total loans and is diversified among many property types. These include commercial investment properties, 1-4 family properties, and land acquisition. Commercial investment properties, as shown in Table 14, represent 18.0%16.7% of total loans and 30.0%27.1% of total commercial real estate loans at December 31, 2005.2006. No category of commercial investment properties exceeds 5% of the total loan portfolio. The greatest concentration in commercial real estate is 1-4 family properties, which include 1-4 family construction, commercial 1-4 family mortgages, and residential development loans. These properties are further diversified geographically; approximately 27%29% of 1-4 family property loans are secured by properties in the Atlanta market and approximately 14%15% are secured by properties in coastal markets. Land acquisition represents less than 5%6% of total loans.
At December 31, 2005, commercial real estate (CRE) loans represent 60.0% of the total portfolio, while CRE nonperforming loans represent 43.7% or $35.9 million of total nonperforming loans. The largest loans in this category are a $5.6 million loan to a residential construction company and a $3.6 million loan to a residential developer. No other CRE nonperforming loans exceed $3 million.
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At December 31, 2006, commercial real estate (CRE) loans represent 61.5% of the total portfolio, while CRE nonperforming loans represent 46.6% or $45.0 million of total nonperforming loans. The largest loan in this category is a $3.0 million loan to a residential construction company. No other CRE nonperforming loans exceed $3 million.
Commercial and industrial nonperforming loans represent 46.6%43.3% or $38.3$41.9 million of total nonperforming loans at December 31, 2005.2006. The largest loansloan in this category areis a $5.8$3.4 million loan to a healthcare company and a $4.5 million loan to a waste management company.in the entertainment industry. No other non-performing commercial and industrial loans exceed $3 million.
Deposits
Deposits provide the most significant funding source for interest earning assets. Table 15 shows the relative composition of average deposits for 2006, 2005, 2004, and 2003.2004. Refer to Table 16 for the maturity distribution of time deposits of $100,000 or more. These larger deposits represented 25.2%29.2% and 25.0%25.2% of total deposits at December 31, 20052006 and 2004,2005, respectively. Synovus continues to maintain a strong base of large denomination time deposits from customers within the local market areas of subsidiary banks. Synovus also utilizes national market brokered time 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, 2006, 2005, and 2004 and 2003 were $5.2$7.10 billion, $4.6$5.24 billion, and $3.6$4.64 billion, respectively. Interest expense for the years ended December 31, 2006, 2005, 2004, and 2003,2004, on these large denomination deposits was $299.5 million, $171.5 million, $94.3 million, and $94.2$94.3 million, respectively.
GrowingIn 2006, Synovus continued to focus on growing in-market core deposits, with the objective of diversifying the composition of deposits and reducing reliance on wholesale funding. Core deposits (total deposits excluding brokered time deposits) at a faster rate than loans was onegrew 15.0% from December 31, 2005 to December 31, 2006, and grew 11.1% during the same period excluding the impact of our key corporate goals in 2005. We achieved this goal, withacquisitions plus brokered time deposits. From December 31, 2004 to December 31, 2005, core deposit growth ofdeposits grew 13.6% for the year compared to a loan growth of 9.8%.
Average deposits increased $2.6$3.01 billion or 15.0%15.4%, to $19.6$22.62 billion from $17.1$19.61 billion in 2004.2005. Average interest bearing deposits, which include interest bearing demand deposits, money market accounts, savings deposits, and time deposits, increased $2.2$2.93 billion or 15.7%18.1% from 2004.2005. Average non-interest bearing demand deposits increased $359.8$80.29 million or 11.8%2.4% during 2005.2006. Average interest bearing deposits increased $1.4$2.20 billion or 11.5%15.7% from 20032004 to 2004,2005, while average non-interest bearing demand deposits increased $546.9$359.82 million, or 21.9%11.8%. See Table 3 for further information on average deposits, including average rates paid in 2006, 2005, 2004, and 2003.2004.
Table 15 Average Deposits
(Dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2005 | | | % * | | | 2004 | | | % * | | | 2003 | | | % * | | | | 2006 | | | % * | | | 2005 | | | % * | | | 2004 | | | % * | |
(Dollars in thousands) | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Non-interest bearing demand deposits | Non-interest bearing demand deposits | | $ | 3,408,289 | | | 17.4 | | | 3,048,465 | | | 17.9 | | | 2,501,539 | | | 16.6 | | Non-interest bearing demand deposits | | $ | 3,488,580 | | | 15.4 | | | 3,408,289 | | | 17.4 | | | 3,048,465 | | | 17.9 | |
Interest bearing demand deposits | Interest bearing demand deposits | | | 2,975,016 | | | 15.2 | | | 2,762,104 | | | 16.2 | | | 2,515,161 | | | 16.7 | | Interest bearing demand deposits | | | 3,006,308 | | | 13.3 | | | 2,975,016 | | | 15.2 | | | 2,762,104 | | | 16.2 | |
Money market accounts | Money market accounts | | | 5,193,943 | | | 26.5 | | | 4,481,042 | | | 26.3 | | | 3,695,601 | | | 24.6 | | Money market accounts | | | 6,388,862 | | | 28.3 | | | 5,193,943 | | | 26.5 | | | 4,481,042 | | | 26.3 | |
Savings deposits | Savings deposits | | | 555,205 | | | 2.8 | | | 548,736 | | | 3.2 | | | 502,246 | | | 3.3 | | Savings deposits | | | 542,793 | | | 2.4 | | | 555,205 | | | 2.8 | | | 548,736 | | | 3.2 | |
Time deposits under $100,000 | Time deposits under $100,000 | | | 2,294,158 | | | 11.7 | | | 2,223,854 | | | 13.0 | | | 2,399,371 | | | 15.9 | | Time deposits under $100,000 | | | 2,791,759 | | | 12.3 | | | 2,294,158 | | | 11.7 | | | 2,223,854 | | | 13.0 | |
Time deposits $100,000 and over | Time deposits $100,000 and over | | | 2,624,623 | | | 13.4 | | | 2,258,081 | | | 13.2 | | | 2,722,584 | | | 18.1 | | Time deposits $100,000 and over | | | 3,549,200 | | | 15.7 | | | 2,624,623 | | | 13.4 | | | 2,258,081 | | | 13.2 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 17,051,234 | | | 87.0 | | | 15,322,282 | | | 89.8 | | | 14,336,502 | | | 95.2 | | | | | 19,767,502 | | | 87.4 | | | 17,051,234 | | | 87.0 | | | 15,322,282 | | | 89.8 | |
Brokered time deposits ($100,000 and over) | Brokered time deposits ($100,000 and over) | | | 2,557,660 | | | 13.0 | | | 1,730,937 | | | 10.2 | | | 726,316 | | | 4.8 | | Brokered time deposits ($100,000 and over) | | | 2,855,191 | | | 12.6 | | | 2,557,660 | | | 13.0 | | | 1,730,937 | | | 10.2 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total average deposits | | $ | 19,608,894 | | | 100.0 | | | 17,053,219 | | | 100.0 | | | 15,062,818 | | | 100.0 | | Total average deposits | | $ | 22,622,693 | | | 100.0 | | | 19,608,894 | | | 100.0 | | | 17,053,219 | | | 100.0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
* Average deposits balance in each category expressed as percentage of total average deposits.
| |
* | Average deposits balance in each category expressed as percentage of total average deposits. |
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| |
Table 16 | Cash Maturity Distribution of Time Deposits of $100,000 or More |
(In thousands)
| | | | | | | | | | |
| | | December 31, 2005 | | | | December 31, 2006 | |
| | | | | | | | |
3 months or less | 3 months or less | | $ | 1,353,327 | | 3 months or less | | $ | 2,181,771 | |
Over 3 months through 6 months | Over 3 months through 6 months | | | 1,048,691 | | Over 3 months through 6 months | | | 1,824,929 | |
Over 6 months through 12 months | Over 6 months through 12 months | | | 1,263,435 | | Over 6 months through 12 months | | | 1,926,367 | |
Over 12 months | Over 12 months | | | 1,571,041 | | Over 12 months | | | 1,142,939 | |
| | | | | | | | |
| Total outstanding | | $ | 5,236,494 | | Total outstanding | | $ | 7,076,006 | |
| | | | | | | | |
| | |
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’ most significant market risk is interest rate risk. This risk arises primarily from Synovus’ core community banking activities of extending loans and accepting deposits.
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
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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. Synovus manages its exposure to fluctuations in interest rates through policies established by its Asset Liability Management Committee (ALCO) and approved by the Board of Directors. ALCO meets periodically and has responsibility for developing asset liability management policies, reviewing the interest rate sensitivity of the Company, and developing and implementing strategies to improve balance sheet structure and interest rate risk positioning.
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. The baseline forecast assumes an unchanged or flat interest rate environment. These simulations include all of our earning assets, liabilities and derivative instruments. Forecasted balance sheet changes, primarily reflecting loan and deposit growth forecasts prepared by each bank, are included in the periods modeled. Projected rates for new loans and deposits are also provided by each bank and are primarily based on management’s outlook and local market conditions.
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. Synovus is also able to model expected changes in the shape of interest rate yield curves for each rate scenario. Simulation also enables Synovus to capture the effect of expected prepayment level changes on selected assets and liabilities subject to prepayment.
As of December 31, 2005, Synovus maintainedentered 2006 with an asset sensitive interest rate risk position.positioning. This positioning would be expected to result in an increase in net interest income in a rising interest rate environment and a decrease in net interest income in a declining rate environment. This is generally due to a greater proportion of interest earning assets repricing on a variable rate basis as compared to variable rate funding sources. This position was maintained in anticipation of further increases in short-term rates. As these expected increases occurred, Synovus gradually reduced this asset sensitive positioning. In addition to actions taken by Synovus management, customer demand for more market rate sensitive deposit products served to increase the rate sensitivity of our deposit base and reduce overall asset sensitivity. As a result of these activities, Synovus ended the year in a more neutral position with respect to interest rate sensitivity.
Synovus’ rate sensitivity position is indicated by selected results of Synovus’ net interest income simulations. In these simulations, Synovus has modeled the impact of a gradual increase and decrease in short-term interest rates of 100 and 200 basis points to determine the sensitivity of net interest income for the next twelve months. As illustrated in Table 17,18, the net interest income sensitivity model indicates that, compared with a net interest income forecast assuming stable rates, net interest income is projected to increase by 1.9%0.3% and 4.4%2.5% if interest rates increased by 100 and 200 basis points, respectively, and decrease by 2.2%1.0% and 4.8%2.7% if interest rates decreased by 100 and 200 basis points, respectively. These changes were within Synovus’ policy limit of a maximum 5% negative change. Synovus anticipates some further increases in short-term rates in 2006 followed by a period of stable rates. Synovus expects to gradually reduce its asset sensitivitymaintaining this relatively neutral positioning during 2006 in order to position itself properly for an environment of stable to potentially declining rates.2007.
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
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loan, deposit, and wholesale funding pricing would also be a primary determinant in the realized level of net interest income.
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 1819 reflects the gap positions of the consolidated balance sheets at December 31, 20052006 and 2004,2005, 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 rateexpectation for repricing behavior and runoff characteristics 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. 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 analysis would indicate an asset sensitive positioning over both short and longer term time horizons. 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’ electronic payment processing subsidiary, TSYS, is subject to market risk due to its international operations. TSYS is exposed to foreign exchange risk because it has assets, liabilities, revenues and expenses denominated in foreign currencies including the Euro, British Pounds Sterling (BPS), Mexican Peso, Canadian Dollar, Japanese Yen, Chinese Renminbi, Brazilian Real, Cypriot Pounds and Malaysian Ringgets. These currencies 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 rate for each reporting period. Net exchange gains or losses resulting from the translation of assets and liabilities of TSYS’ foreign operations, net of tax, are accumulated in a separate section of shareholders’ equity titled accumulated other comprehensive income. The amount of other comprehensive income (loss), net of minority interest related to foreign currency translation for the years ended December 31, 2006, 2005, and 2004 was $12.9 million, ($7.8) million, and $5.7 million, respectively.
TSYS also records foreign currency translation adjustments associated with other balance sheet accounts. TSYS maintains several cash accounts denominated in foreign currencies, primarily in Euros and BPS. As TSYS translates the foreign-denominated cash balances into US dollars, the translated cash balance is adjusted upward or downward depending upon the foreign currency exchange movements. The upward or downward adjustment is recorded as a gain or loss on foreign currency translation in the consolidated statements of income. The balance of the foreign-denominated cash accounts subject to risk of translation gains or losses at December 31, 2006 was approximately $32.8 million, the majority of which is denominated in Euros.
TSYS also provides financing to its international operations in Europe and Japan through intercompany loans that requires each operation to repay the financing in U.S. dollars. The functional currency of each operation is the respective local currency. As TSYS translates the foreign currency denominated financial statements into US dollars, the translated balance of the financing (liability) is adjusted upward or downward to match the US-dollar obligation (receivable) on the consolidated financial statements. The upward or downward adjustment is recorded as a gain or loss on foreign currency translation. The balance of the financing arrangements at December 31, 2006 was approximately $64.0 million.
The following table represents the potential effect on income before income taxes of hypothetical shifts in the foreign currency exchange rates between the local currencies and the U.S. dollar of plus or minus 100 basis points, 500 basis points and 1,000 basis points based on the intercompany loan balance and the foreign denominated cash account at December 31, 2006. TSYS does not currently utilize foreign exchange forward contracts or other derivative instruments to reduce its exposure to foreign currency rate changes.
| |
Table 17 | Foreign Currency Exchange Rates Effect of Basis Point Change on Income before Taxes |
(Dollars in thousands)
| | | | | |
| | Effect on | |
| | Income | |
| | before Taxes | |
| | | |
Increase in basis points of: | | | | |
| 100 | | $ | (253 | ) |
| 500 | | | (1,263 | ) |
| 1,000 | | | (2,526 | ) |
Decrease in basis points of: | | | | |
| 100 | | | 253 | |
| 500 | | | 1,263 | |
| 1,000 | | | 2,526 | |
|
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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
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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 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 1718 | Twelve Month Net Interest Income Sensitivity |
| | | | | | | | | | | | | | | | |
Change in | Change in | | | Estimated | | Change in | | | Estimated change in Net Interest Income | |
Short-Term | Short-Term | | | Change in | | Short-Term | | | | |
Interest Rates | Interest Rates | | | Net Interest | | Interest Rates | | | As of | | | As of | |
(In basis points) | (In basis points) | | | Income | | (In basis points) | | | December 31, 2006 | | | December 31, 2005 | |
| | | | | | | | | | | | | |
| + 200 | | | 4.4 | % | + 200 | | | 2.5 | % | | | 4.4 | % |
| + 100 | | | 1.9 | % | + 100 | | | 0.3 | % | | | 1.9 | % |
| Flat | | | — | | Flat | | | — | | | — | |
| - 100 | | | (2.2 | )% | - 100 | | | (1.0 | )% | | | (2.2 | )% |
| - 200 | | | (4.8 | )% | - 200 | | | (2.7 | )% | | | (4.8 | )% |
| | |
| |
Table 19 | Interest Rate Sensitivity |
(Dollars in millions)
| | | | | | | | | | | | | | | | | | |
| | December 31, 2006 | |
| | | |
| | 0-3 | | | 4-12 | | | 1-5 | | | Over 5 | |
| | Months | | | Months | | | Years | | | Years | |
| | | | | | | | | | | | |
Investment securities available for sale* | | $ | 270.9 | | | | 429.8 | | | | 1,811.9 | | | | 864.5 | |
Loans, net of unearned income | | | 16,848.6 | | | | 2,614.3 | | | | 4,616.8 | | | | 574.8 | |
Mortgage loans held for sale | | | 175.0 | | | | — | | | | — | | | | — | |
Other | | | 135.7 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | |
| Interest sensitive assets | | | 17,430.2 | | | | 3,044.1 | | | | 6,428.7 | | | | 1,439.3 | |
| | | | | | | | | | | | |
Deposits | | | 8,787.2 | | | | 6,097.1 | | | | 5,378.2 | | | | 483.1 | |
Other borrowings | | | 1,637.5 | | | | 211.5 | | | | 238.4 | | | | 835.6 | |
| | | | | | | | | | | | |
| Interest sensitive liabilities | | | 10,424.7 | | | | 6,308.6 | | | | 5,616.6 | | | | 1,318.7 | |
| | | | | | | | | | | | |
| Interest rate swaps | | | (2,367.5 | ) | | | 930.0 | | | | 970.0 | | | | 467.5 | |
| | | | | | | | | | | | |
| | Interest sensitivity gap | | $ | 4,638.0 | | | | (2,334.5 | ) | | | 1,782.1 | | | | 588.1 | |
| | | | | | | | | | | | |
| | Cumulative interest sensitivity gap | | $ | 4,638.0 | | | | 2,303.5 | | | | 4,085.6 | | | | 4,673.7 | |
| | | | | | | | | | | | |
| | Cumulative interest sensitivity gap as a percentage of total interest sensitive assets | | | 16.4 | % | | | 8.1 | | | | 14.4 | | | | 16.5 | |
| | | | | | | | | | | | |
F-72F-80
| |
Table 18 | Interest Rate Sensitivity |
| | | | | | | | | | | | | | | | | | |
| | December 31, 2005 | |
(Dollars in millions) | | | |
| | 0-3 | | | 4-12 | | | 1-5 | | | Over 5 | |
| | Months | | | Months | | | Years | | | Years | |
| | | | | | | | | | | | |
Investment securities available for sale* | | $ | 273.1 | | | | 417.5 | | | | 1,886.1 | | | | 428.0 | |
Loans, net of unearned income | | | 15,258.6 | | | | 2,091.7 | | | | 3,569.1 | | | | 473.0 | |
Mortgage loans held for sale | | | 143.1 | | | | — | | | | — | | | | — | |
Other | | | 99.2 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | |
| Interest sensitive assets | | | 15,774.0 | | | | 2,509.2 | | | | 5,455.2 | | | | 901.0 | |
| | | | | | | | | | | | |
Deposits | | | 7,902.8 | | | | 3,780.6 | | | | 4,885.8 | | | | 514.4 | |
Other borrowings | | | 1,851.2 | | | | 110.6 | | | | 236.9 | | | | 893.6 | |
| | | | | | | | | | | | |
| Interest sensitive liabilities | | | 9,754.0 | | | | 3,891.2 | | | | 5,122.7 | | | | 1,408.0 | |
| | | | | | | | | | | | |
| Interest rate swaps | | | (1,107.5 | ) | | | 295.0 | | | | 395.0 | | | | 417.5 | |
| | | | | | | | | | | | |
| | Interest sensitivity gap | | $ | 4,912.5 | | | | (1,087.0 | ) | | | 727.5 | | | | (89.5 | ) |
| | | | | | | | | | | | |
| | Cumulative interest sensitivity gap | | $ | 4,912.5 | | | | 3,825.5 | | | | 4,553.0 | | | | 4,463.5 | |
| | | | | | | | | | | | |
| | Cumulative interest sensitivity gap as a percentage of total interest sensitive assets | | | 19.9 | % | | | 15.5 | | | | 18.5 | | | | 18.1 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2004 | | | | December 31, 2005 | |
| | | | | | | | |
| | | 0-3 | | | 4-12 | | | 1-5 | | | Over 5 | | | | 0-3 | | | 4-12 | | | 1-5 | | | Over 5 | |
| | | Months | | | Months | | | Years | | | Years | | | | Months | | | Months | | | Years | | | Years | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Investment securities available for sale* | Investment securities available for sale* | | $ | 287.7 | | | 249.6 | | | 1,659.8 | | | 498.7 | | Investment securities available for sale* | | $ | 273.1 | | | 417.5 | | | 1,886.1 | | | 428.0 | |
Loans, net of unearned income | Loans, net of unearned income | | | 13,800.4 | | | 1,965.9 | | | 3,337.3 | | | 376.9 | | Loans, net of unearned income | | | 15,258.6 | | | 2,091.7 | | | 3,569.1 | | | 473.0 | |
Mortgage loans held for sale | Mortgage loans held for sale | | | 120.2 | | | — | | | — | | | — | | Mortgage loans held for sale | | | 143.1 | | | — | | | — | | | — | |
Other | Other | | | 139.5 | | | — | | | — | | | — | | Other | | | 99.2 | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | | | | |
| Interest sensitive assets | | | 14,347.8 | | | 2,215.5 | | | 4,997.1 | | | 875.6 | | Interest sensitive assets | | | 15,774.0 | | | 2,509.2 | | | 5,455.2 | | | 901.0 | |
| | | | | | | | | | | | | | | | | | | | |
Deposits | Deposits | | | 7,326.8 | | | 2,693.3 | | | 4,640.7 | | | 578.8 | | Deposits | | | 7,902.8 | | | 3,780.6 | | | 4,885.8 | | | 514.4 | |
Other borrowings | Other borrowings | | | 1,870.0 | | | 329.6 | | | 390.8 | | | 497.3 | | Other borrowings | | | 1,851.2 | | | 110.6 | | | 236.9 | | | 893.6 | |
| | | | | | | | | | | | | | | | | | | | |
| Interest sensitive liabilities | | | 9,196.8 | | | 3,022.9 | | | 5,031.5 | | | 1,076.1 | | Interest sensitive liabilities | | | 9,754.0 | | | 3,891.2 | | | 5,122.7 | | | 1,408.0 | |
| | | | | | | | | | | | | | | | | | | | |
| Interest rate swaps | | | (977.5 | ) | | | 300.0 | | | 330.0 | | | 347.5 | | Interest rate swaps | | | (1,107.5 | ) | | | 295.0 | | | 395.0 | | | 417.5 | |
| | | | | | | | | | | | | | | | | | | | |
| | Interest sensitivity gap | | $ | 4,173.5 | | | (507.4 | ) | | | 295.6 | | | 147.0 | | | Interest sensitivity gap | | $ | 4,912.5 | | | (1,087.0 | ) | | | 727.5 | | | (89.5 | ) |
| | | | | | | | | | | | | | | | | | | | |
| | Cumulative interest sensitivity gap | | $ | 4,173.5 | | | 3,666.1 | | | 3,961.7 | | | 4,108.7 | | | Cumulative interest sensitivity gap | | $ | 4,912.5 | | | 3,825.5 | | | 4,553.0 | | | 4,463.5 | |
| | | | | | | | | | | | | | | | | | | | |
| | Cumulative interest sensitivity gap as a percentage of total interest sensitive assets | | | 18.6 | % | | | 16.3 | | | 17.7 | | | 18.3 | | | Cumulative interest sensitivity gap as a percentage of total interest sensitive assets | | | 19.9 | % | | | 15.5 | | | 18.5 | | | 18.1 | |
| | | | | | | | | | | | | | | | | | | | |
| |
* | Excludes net unrealized losses of $46.3$24.8 million and net unrealized losses of $224 thousand$46.3 million at December 31, 20052006 and 2004,2005, respectively. |
F-73
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 derivative contracts utilized by Synovus include end-user activities designed as hedges, all of which are linked todesignated as hedging specific assets or liabilities as part ofliabilities. These hedges are executed and managed in coordination with the overall interest rate risk management practices.function. Management believes that the utilization of these instruments provides greater financial flexibility and is a very efficient tool forefficiency in 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, 2006 and 2005 was $2.78 billion and 2004 was $1.2$1.16 billion, in both years, respectively. The notional amounts represent the amount on which calculations of interest payments to be exchanged are based. Although
Entering into interest rate derivatives contracts potentially exposes Synovus is not exposed to credit risk equal to the notional amounts, there is exposurerisk of counterparties’ failure to fulfill their legal obligations including, but not limited to, potential credit risks equal to the fairamounts due or replacement values of the swaps if the counterparty fails to perform.payable under each derivative contract. This credit risk is normally a very small percentage of the notional amount and fluctuates asbased on changes in interest rates change.rates. Synovus analyzes and approves credit risk for all potential derivative counterparties prior to execution of any derivative transaction. Synovus minimizes thiscredit 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 agreementscollateralization for exposureexposures above certain predetermined limits.
A summary of these interest rate contracts and their terms at December 31, 20052006 and 20042005 is shown in Table 19.20. The fair value (net unrealized gains and losses) of these contracts has been recorded on the consolidated balance sheets.
During 2005,2006, there were eight maturities and one termination of interest rate contracts. There were seven maturities and two terminations of interest rate contracts. There were four maturities and one termination in 2004.2005. Interest rate contracts contributed additionalresulted in net interest expense of $8.0 million and a three basis point decrease in the net interest margin for 2006. For 2005, interest rate contracts resulted in net interest income of $910 thousand and less than a one basis point increase in the net interest margin for 2005. For 2004, interest rate contracts contributed to an increase in net interest income of $16.9 million and an eight basis point increase to the net interest margin.
F-81
| |
Table 1920 | Interest Rate Contracts |
(Dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Weighted | | | Weighted | | | Weighted | | | | | | | Net | | | | | | Weighted | | | Weighted | | | Weighted | | | | | | | Net | |
(Dollars in thousands) | | | | Average | | | Average | | | Average | | | | | | | Unrealized | | |
| | | | | | Average | | | Average | | | Average | | | | | | | Unrealized | |
| | | | Notional | | | Receive | | | Pay | | | Maturity | | | Unrealized | | | Unrealized | | | Gains | |
| | | | Amount | | | Rate | | | Rate * | | | In Months | | | Gains | | | Losses | | | (Losses) | |
| | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2006 | | December 31, 2006 | | | | | | | | | | | | | | | | | | | | | | |
Receive fixed swaps: | | Receive fixed swaps: | | | | | | | | | | | | | | | | | | | | | | |
Fair value hedges | | Fair value hedges | | $ | 2,082,500 | | | 4.91% | | | 5.11% | | | 31 | | $ | 32,686 | | | (14,787 | ) | | | 17,899 | |
Cash flow hedges | | Cash flow hedges | | | 700,000 | | | 7.91% | | | 8.25% | | | 38 | | | 4,265 | | | (2,253 | ) | | | 2,012 | |
| | | Notional | | | Receive | | | Pay | | | Maturity | | | Unrealized | | | Unrealized | | | Gains | | | | | | | | | | | | | | | | | |
| | | Amount | | | Rate | | | Rate * | | | In Months | | | Gains | | | Losses | | | (Losses) | | Total | | $ | 2,782,500 | | | 5.66% | | | 5.90% | | | 32 | | $ | 36,951 | | | (17,040 | ) | | | 19,911 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2005 | December 31, 2005 | | | | | | | | | | | | | | | | | | | | | | | December 31, 2005 | | | | | | | | | | | | | | | | | | | | | | |
Receive fixed swaps: | Receive fixed swaps: | | | | | | | | | | | | | | | | | | | | | | | Receive fixed swaps: | | | | | | | | | | | | | | | | | | | | | | |
Fair value hedges | Fair value hedges | | $ | 807,500 | | | 4.38% | | | 4.28% | | | 70 | | $ | 1,270 | | | (14,804 | ) | | | (13,534 | ) | Fair value hedges | | $ | 807,500 | | | 4.38% | | | 4.28% | | | 70 | | $ | 1,270 | | | (14,804 | ) | | | (13,534 | ) |
Cash flow hedges | Cash flow hedges | | | 350,000 | | | 6.10% | | | 7.25% | | | 18 | | | 117 | | | (3,667 | ) | | | (3,550 | ) | Cash flow hedges | | | 350,000 | | | 6.10% | | | 7.25% | | | 18 | | | 117 | | | (3,667 | ) | | | (3,550 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 1,157,500 | | | 4.90% | | | 5.18% | | | 54 | | $ | 1,387 | | | (18,471 | ) | | | (17,084 | ) | Total | | $ | 1,157,500 | | | 4.90% | | | 5.18% | | | 54 | | $ | 1,387 | | | (18,471 | ) | | | (17,084 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2004 | | | | | | | | | | | | | | | | | | | | | | | |
Receive fixed swaps: | | | | | | | | | | | | | | | | | | | | | | | |
Fair value hedges | | $ | 477,500 | | | 4.24% | | | 2.33% | | | 88 | | $ | 3,435 | | | (5,214 | ) | | | (1,779 | ) | |
Cash flow hedges | | | 500,000 | | | 5.12% | | | 5.25% | | | 12 | | | — | | | (4,090 | ) | | | (4,090 | ) | |
| | | | | | | | | | | | | | | | |
| Sub Total | | | 977,500 | | | 4.69% | | | 3.83% | | | 49 | | | 3,435 | | | (9,304 | ) | | | (5,869 | ) | |
Forward starting swap — cash flow hedges | | | 200,000 | | | — | | | — | | | 123 | | | 293 | | | (2,109 | ) | | | (1,816 | ) | |
| | | | | | | | | | | | | | | | |
| Total | | $ | 1,177,500 | | | | | | | | | | | $ | 3,728 | | | (11,413 | ) | | | (7,685 | ) | |
| | | | | | | | | | | | | | | | |
| |
* | Variable pay rate based upon contract rates in effect at December 31, 20052006 and 2004.2005. |
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.
F-74
ALCO,The Synovus Asset Liability Management Committee (ALCO), operating under liquidity and funding policies approved by the Board of Directors, actively analyzes and manages the liquidity position in coordination with the subsidiary banks. These subsidiaries maintain liquidity in the form of cash, investment securities, 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 flows 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 across a broad geographic base to enhance their liquidity and funding positions. An additional liquidity source for selected Synovus subsidiary banks is available through their membership in the Federal Home Loan Bank.Bank System. At year-end 2005,2006, these banks had access to additionalsignificant incremental funding, of approximately $3 billion, subject to available collateral and Federal Home Loan Bank credit policies, through utilization of Federal Home Loan Bank advances.
Certain Synovus subsidiary banks maintain correspondent banking relationships with various national and regional financial organizations. These relationships providehave access to short-term borrowings throughovernight federal funds lines which allowswith various financial institutions. These lines allow Synovus banks to meet immediate liquidity needs if required. These lines total approximately $3.5$3.9 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, selected Synovus banks maintain additional sources of liquidity including collateralized borrowing accounts with the Federal Reserve Bank.
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. Synovus had no borrowings outstanding on this line of credit at December 31, 2006. The Parent Company also 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. This ability was utilized during 2005 by issuing $450 million in twelve year maturity subordinated debt. This debt bears a coupon interest rate of 5.125% and is rated “A-” by Standard and Poors Corp. and “A3” by Moody’s Investor Service. Utilization of the proceeds of this issue included the repayment of $30 million in short term borrowings and $200 million in senior debt at its maturity date in December 2005. Maintaining adequate credit ratings is essential to Synovus’ continued cost effective access to these capital market funding sources.
F-82
The consolidated statements of cash flows detail cash flows from operating, investing, and financing activities. Net cash provided by operating activities was $620$779.7 million for the year ended December 31, 2005,2006, while financing activities provided $2.03$2.25 billion. Investing activities used $2.45$3.02 billion of these amounts, resulting in a net increase in cash and cash equivalents of $198$9.1 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 regulatory agencies which, if they were to be implemented, would have such effect. Table 2021 sets forth certain information about contractual cash obligations at December 31, 2005.2006.
| |
Table 2021 | Contractual Cash Obligations |
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Payments Due After December 31, 2005 | | |
| | | Payments Due After December 31, 2006 | |
| | | | | | |
| | 1 Year or Less | | | Over 1 - 3 Years | | | 4 - 5 Years | | | After 5 Years | | | Total | | | 1 Year or Less | | | Over 1 - 3 Years | | | 4 - 5 Years | | | After 5 Years | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Long-term debt | | $ | 679,500 | | | 252,069 | | | 74,780 | | | 913,921 | | | 1,920,270 | | | $ | 251,625 | | | 184,447 | | | 48,579 | | | 852,428 | | | 1,337,079 | |
Capital lease obligations | | | 2,296 | | | 3,844 | | | 788 | | | 3,771 | | | 10,699 | | | | 3,015 | | | 3,971 | | | 1,389 | | | 3,549 | | | 11,924 | |
Operating leases | | | 130,967 | | | 167,574 | | | 38,516 | | | 46,846 | | | 383,903 | | | | 118,009 | | | 120,372 | | | 48,701 | | | 97,031 | | | 384,113 | |
| | | | | | | | | | | | | | | | | | | | | | |
Total contractual cash obligations | | $ | 812,763 | | | 423,487 | | | 114,084 | | | 964,538 | | | 2,314,872 | | | $ | 372,649 | | | 308,790 | | | 98,669 | | | 953,008 | | | 1,733,116 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | |
F-75
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 $2.9$3.70 billion represented 10.68%11.64% of total assets at December 31, 2005.2006.
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. Approximately 12% 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, 2005,2006, Synovus and all subsidiary banks were in excess of the minimum capital requirements with a consolidated Tier I capital ratio of 10.23%10.87% and a total risk-based capital ratio of 14.23%14.43%, compared to Tier I and total risk-based capital ratios of 10.04%10.23% and 12.44%14.23%, respectively, in 20042005 as shown in Table 21. The increase at December 31, 2005 is primarily attributed to the addition of $450 million in subordinated debt.22.
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 10.64% at December 31, 2006 and 9.99% at December 31, 2005, and 9.78% at December 31, 2004, significantly exceeding regulatory requirements.
The 81% ownership of TSYS is an important aspect of the market price of Synovus common stock and should be considered in a comparison of the relative market price of Synovus common stock to other financial services companies. As of February 21, 2006,20, 2007, there were approximately 23,84723,837 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 2223 displays high and low stock price quotations of Synovus common stock which are based on actual transactions.
| | | | | | | | | | | |
| | December 31, | |
| | | |
| | 2005 | | | 2004 | |
(Dollars in thousands) | | | | | | |
Tier I capital: | | | | | | | | |
| Shareholders’ equity | | $ | 2,949,329 | | | | 2,641,289 | |
| Net unrealized loss on investment securities available for sale | | | 28,495 | | | | 142 | |
| Net unrealized loss on cash flow hedges | | | 5,674 | | | | 3,434 | |
| Disallowed intangibles | | | (532,295 | ) | | | (457,976 | ) |
| Disallowed deferred tax asset | | | (6,939 | ) | | | (6,075 | ) |
| Deferred tax liability on core deposit premium related to acquisitions | | | 9,215 | | | | 10,937 | |
| Minority interest | | | 196,973 | | | | 167,284 | |
| Qualifying trust preferred securities | | | 10,252 | | | | 10,297 | |
| | | | | | |
| | | Total Tier I capital | | | 2,660,704 | | | | 2,369,332 | |
| | | | | | |
Tier II capital: | | | | | | | | |
| Qualifying subordinated debt | | | 750,000 | | | | 300,000 | |
| Eligible portion of the allowance for loan losses | | | 289,612 | | | | 265,745 | |
| | | | | | |
| | | Total Tier II capital | | | 1,039,612 | | | | 565,745 | |
| | | | | | |
Total risk-based capital | | $ | 3,700,316 | | | | 2,935,077 | |
| | | | | | |
Total risk-adjusted assets | | $ | 26,008,796 | | | | 23,590,520 | |
| | | | | | |
Tier I capital ratio | | | 10.23 | % | | | 10.04 | |
Total risk-based capital ratio | | | 14.23 | | | | 12.44 | |
Leverage ratio | | | 9.99 | | | | 9.78 | |
Regulatory minimums (for well-capitalized status): | | | | | | | | |
| | Tier I capital ratio | | | 6.00 | % | | | 6.00 | |
| | Total risk-based capital ratio | | | 10.00 | | | | 10.00 | |
| | Leverage ratio | | | 5.00 | | | | 5.00 | |
|
F-76F-83
(Dollars in thousands)
| | | | | | | | | | | |
| | December 31, | |
| | | |
| | 2006 | | | 2005 | |
| | | | | | |
Tier I capital: | | | | | | | | |
| Shareholders’ equity | | $ | 3,708,650 | | | $ | 2,949,329 | |
| Net unrealized loss on investment securities available for sale | | | 15,227 | | | | 28,495 | |
| Net unrealized loss on cash flow hedges | | | 4,410 | | | | 5,674 | |
| Disallowed intangibles | | | (733,129 | ) | | | (532,295 | ) |
| Disallowed deferred tax asset | | | (5,935 | ) | | | (6,939 | ) |
| Other deductions from Tier 1 Capital | | | (2,855 | ) | | | — | |
| Deferred tax liability on core deposit premium related to acquisitions | | | 11,035 | | | | 9,215 | |
| Minority interest | | | 236,709 | | | | 196,973 | |
| Qualifying trust preferred securities | | | 20,491 | | | | 10,252 | |
| | | | | | |
| | | Total Tier I capital | | | 3,254,603 | | | | 2,660,704 | |
| | | | | | |
Tier II capital: | | | | | | | | |
| Qualifying subordinated debt | | | 750,000 | | | | 750,000 | |
| Eligible portion of the allowance for loan losses | | | 314,459 | | | | 289,612 | |
| | | | | | |
| | | Total Tier II capital | | | 1,064,459 | | | | 1,039,612 | |
| | | | | | |
Total risk-based capital | | $ | 4,319,062 | | | $ | 3,700,316 | |
| | | | | | |
Total risk-adjusted assets | | $ | 29,930,284 | | | $ | 26,008,796 | |
| | | | | | |
Tier I capital ratio | | | 10.87 | % | | | 10.23 | % |
Total risk-based capital ratio | | | 14.43 | | | | 14.23 | |
Leverage ratio | | | 10.64 | | | | 9.99 | |
Regulatory minimums (for well-capitalized status): | | | | | | | | |
| | Tier I capital ratio | | | 6.00 | % | | | 6.00 | % |
| | Total risk-based capital ratio | | | 10.00 | | | | 10.00 | |
| | Leverage ratio | | | 5.00 | | | | 5.00 | |
|
| |
Table 23 | Market and Stock Price Information |
| | | | | | | | | | |
| | | | | |
| | | | High | | | Low | |
| | | | | | | | |
2006 | | 2006 | | | | | | | |
| | | | | | | | Quarter ended December 31, 2006 | | $ | 30.99 | | | 28.99 | |
| | | | | Quarter ended September 30, 2006 | | | 29.73 | | | 25.83 | |
| | | High | | | Low | | Quarter ended June 30, 2006 | | | 28.00 | | | 25.77 | |
| | | | | | | | Quarter ended March 31, 2006 | | | 28.61 | | | 26.51 | |
2005 | 2005 | | | | | | | | 2005 | | | | | | | |
| Quarter ended December 31, 2005 | | $ | 28.42 | | | 26.49 | | Quarter ended December 31, 2005 | | $ | 28.42 | | | 26.49 | |
| Quarter ended September 30, 2005 | | | 29.95 | | | 27.02 | | Quarter ended September 30, 2005 | | | 29.95 | | | 27.02 | |
| Quarter ended June 30, 2005 | | | 29.49 | | | 26.98 | | Quarter ended June 30, 2005 | | | 29.49 | | | 26.98 | |
| Quarter ended March 31, 2005 | | | 28.51 | | | 26.59 | | Quarter ended March 31, 2005 | | | 28.51 | | | 26.59 | |
2004 | | | | | | | | |
| Quarter ended December 31, 2004 | | $ | 28.89 | | | 26.50 | | |
| Quarter ended September 30, 2004 | | | 26.50 | | | 24.49 | | |
| Quarter ended June 30, 2004 | | | 25.75 | | | 23.31 | | |
| Quarter ended March 31, 2004 | | | 28.82 | | | 22.67 | | |
| |
Dividends
Synovus (and its predecessor companies) has paid cash dividends on its common stock in every year since 1891. Synovus’ dividend payout ratio was 44.51%40.99%, 48.94%44.51%, and 51.56%48.94%, in 2006, 2005, 2004, and 2003,2004, respectively. It is the present intention of the Synovus Board of Directors to continue to pay cash dividends on its common stock in an amount that results in a dividend payout ratio of at least 40%. In addition to the Company’s general financial condition, Synovus’the Synovus Board of Directors considers other factors in determining the amount of dividends to be paid each year. These factors include consideration of capital and liquidity needs based on projected balance sheet growth, acquisition activity, earnings growth, as well as the capital position of the individual business segments (Financial Services and TSYS).
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Table 2324 presents information regarding dividends declared during the years ended December 31, 20052006 and 2004.2005.
| | | | | | | | | |
| | | | Per Share | |
Date Declared | | Date Paid | | | Amount | |
| |
20052006
| | | | | | | | |
| November 21, 2006 | | | January 2, 2007 | | | $ | .1950 | |
| August 15, 2006 | | | October 2, 2006 | | | | .1950 | |
| May 16, 2006 | | | July 1, 2006 | | | | .1950 | |
| February 22, 2006 | | | April 1, 2006 | | | | .1950 | |
2005 | | | | | | | | |
| November 15, 2005 | | | January 2, 2006 | | | $ | .1825 | |
| August 16, 2005 | | | October 1, 2005 | | | | .1825 | |
| May 24, 2005 | | | July 1, 2005 | | | | .1825 | |
| February 23, 2005 | | | April 1, 2005 | | | | .1825 | |
2004 | | | | | | | | |
| November 16, 2004 | | | January 3, 2005 | | | $ | .1733 | |
| August 19, 2004 | | | October 1, 2004 | | | | .1733 | |
| May 19, 2004 | | | July 1, 2004 | | | | .1733 | |
| February 26, 2004 | | | April 1, 2004 | | | | .1733 | |
|
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 2425 and Note 9 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 opinionordinary course of management, based in part upon the advice of legal counsel, all mattersbusiness, Synovus and its subsidiaries are believedalso subject 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.regulatory examinations, information gathering requests, inquiries and investigations. Synovus establishes reserves for expected future litigation exposuresand regulatory matters when those matters present loss contingencies that Synovus determines to be both probable and reasonably estimable.
TSYS received notification from In the United States Attorneys’ Officepending regulatory matter described below, loss contingencies are not both probable and reasonably estimable in the view of management, and, accordingly, a reserve has not been established for the Northern Districtthis matter. Based on current knowledge, advice of Californiacounsel and/or available insurance coverage, management does not believe that the United States Departmenteventual outcome of Justice was investigating whether TSYS and/or one of its large credit card processing clients violatedpending litigation and regulatory matters, including the False Claims Act, 31 U.S.C. §§3729-33, in connection with mailings madepending regulatory matter described below, will have a material adverse effect on behalf of the client from July 1997 through November 2001. The subject matter of the investigation related 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. TSYS produced documents and information in response to a subpoena that it received from the Office of the Inspector General of the United States Postal Service and otherwise cooperated with the Department of Justice during the investigation. The involved parties agreed to a settlement of the matter without any party admitting liability. The matter was settled during the third quarter of 2005 for amounts that were not material to TSYS’Synovus’ consolidated financial condition, results of operations or cash flows. However, in the event of unexpected future developments, it is possible that the ultimate resolution of these matters, if unfavorable, may be material to Synovus’ results of operations for any particular period.
Columbus Bank and Trust Company (“CB&T”), a wholly owned banking subsidiary of Synovus, and CompuCredit Corporation (“CompuCredit”) have agreed to an Assurance of Discontinuance (“Agreement”) with the New York State Attorney General’s office regarding allegations that CB&T and CompuCredit were in violation of New York state law with respect to identified marketing, servicing and collection practices pertaining to the Aspire credit card program. CB&T issues Aspire credit cards that are marketed and serviced by CompuCredit. Among other things, the Agreement provides for a civil penalty of $500,000 and requires specified restitution to cardholders.
Synovus and CB&T did not incur any financial loss in connection with the Agreement as CompuCredit agreed to be responsible for all amounts to be paid pursuant to the Agreement. A provision of the Affinity Agreement between CB&T and CompuCredit, pursuant to which CB&T issues the Aspire credit card, generally requires CompuCredit to indemnify CB&T for losses incurred as a result of the failure of the Aspire credit card program to comply with applicable law. Synovus is subject to a per event 10% share of any such loss, but Synovus’ 10% payment obligation is limited to a cumulative total of $2 million for all losses incurred. CompuCredit waived Synovus’ 10% payment obligation in connection with the Agreement.
In addition, the FDIC is currently conducting an investigation of the policies, practices and procedures used by CB&T in connection with the credit card programs offered pursuant to the Affinity Agreement with CompuCredit. CB&T is cooperating with the FDIC’s investigation. Synovus cannot predict the eventual outcome of the FDIC’s investigation; however, the investigation has resulted in material changes to CB&T’s policies, practices and procedures in connection with the credit card programs offered pursuant to the Affinity Agreement. It is probable that the investigation will result in further changes to CB&T’s policies, practices and procedures in connection with the credit card programs offered pursuant to the Affinity Agreement and the imposition of one or more regulatory sanctions, including a civil money penalty and/or restitution of certain fees to affected cardholders. At this
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time, management of Synovus does not expect the ultimate resolution of the investigation to have a material adverse effect on its consolidated financial condition, results of operations or cash flows as a result of the expected performance by CompuCredit of its indemnification obligations described in the paragraph above.
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 2425 | Short-Term Borrowings |
(Dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2005 | | | 2004 | | | 2003 | | | 2006 | | | 2005 | | | 2004 | |
(Dollars in thousands) | | | | | | | | | | |
| | | | | | | | | | |
Balance at December 31 | | $ | 1,158,669 | | | 1,208,080 | | | 1,354,887 | | | $ | 1,572,809 | | | 1,158,669 | | | 1,208,080 | |
Weighted average interest rate at December 31 | | | 3.69 | % | | | 1.95 | % | | | 0.93 | % | | | 5.00 | % | | | 3.69 | % | | | 1.95 | % |
Maximum month end balance during the year | | $ | 1,918,797 | | | 1,749,923 | | | 1,459,818 | | | $ | 1,974,272 | | | 1,918,797 | | | 1,749,923 | |
Average amount outstanding during the year | | $ | 1,103,005 | | | 1,479,815 | | | 1,101,216 | | | $ | 1,534,312 | | | 1,103,005 | | | 1,479,815 | |
Weighted average interest rate during the year | | | 2.86 | % | | | 1.30 | % | | | 1.07 | % | | | 4.66 | % | | | 2.86 | % | | | 1.30 | % |
|
Income Tax Expense
Income tax expense was $356.6 million in 2006, up from $307.6 million in 2005, up fromand $252.2 million in 2004, and $222.6 million in 2003.2004. The effective income tax rate was 37.3%36.6%, 36.6%37.3%, and 36.4%36.6%, in 2006, 2005, and 2004, respectively. The calculation of the effective tax rate is determined based upon pre-tax income after minority interest in subsidiaries’ net income.
In July 2006, TSYS changed the structure of its European operation from a branch structure to a statutory structure that will facilitate continued expansion in the European region. TSYS adopted the permanent reinvestment exception under Accounting Principles Board Opinion No. 23 (APB 23), “Accounting for Income Taxes — Special Areas,” with respect to future earnings of certain foreign subsidiaries. As a result, TSYS now considers foreign earnings related to these foreign operations to be permanently reinvested.
The new statutory structure provides TSYS with marketing and 2003, respectively.personnel hiring advantages when compared to the former branch office, as well as providing TSYS with certain U.S. and foreign tax benefits. As a result of the new structure, during the third quarter of 2006, TSYS recorded a reduction of previously established income tax liabilities in the amount of $5.6 million, as these amounts would no longer be required under the new structure. Additionally, during the third quarter of 2006, TSYS reassessed its contingencies for federal and state tax exposures, which resulted in an increase in tax contingency amounts of approximately $1.5 million. The aforementioned items resulted in a decrease in 2006 income tax expense (net of minority interest) for Synovus of approximately $3.3 million.
In the normal course of business, Synovus is subject to examinations from various tax authorities. These examinations may alter the timing or amount of taxable income or deductions or the allocation of income among tax jurisdictions. During 2006, Synovus received notices of adjustment relating to taxes due for the years 2000 through 2003. As a result, Synovus recorded a reduction of previously recorded income tax liabilities, which reduced income tax expense (net of minority interest) in the amount of $3.7 million.
Synovus continually monitors and evaluates the potential impact of current events and circumstances on the estimates and assumptions used in the analysis of its income tax positions, and accordingly, Synovus’ effective tax rate may fluctuate in the future. See Note 17 to the consolidated financial statements for a detailed analysis of income taxes.
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 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
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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 $355$445.0 million in dividends could be paid in 20062007 to the Parent Company from its subsidiary banks without prior regulatory approval. Synovus expects to receive regulatory approval to allow certain subsidiaries to pay dividends in excess of their respective regulatory limits.
Share Repurchase PlanIssuer Purchases of Equity Securities
On April 14, 2003, the Synovus Board of Directors approveddoes not currently have a $200 millionpublicly announced share repurchase plan. During the term of the plan, which expired on April 14, 2005, 5.5 million shares were purchased for a total cost of $112.7 million. There were no share repurchases under this plan in 2005.
The following table sets forth information regarding Synovus’ purchasesplace. Synovus did not repurchase any shares of its common stock on a monthly basis during the three months ended December 31, 2005 and 2004:
| | | | | | | | | | | | | | | | | |
| |
| | Maximum | |
| | Number of | |
| | Total Number of | | | Shares That | |
| | Total | | | | | Shares Purchased | | | May Yet Be | |
| | Number | | | | | as Part of Publicly | | | Purchased | |
| | of Shares | | | Average Price | | | Announced Plans | | | Under the Plans | |
Month | | Purchased | | | Paid per Share | | | or Programs | | | or Programs | |
| | | | | | | | | | | | |
October 2005 | | | — | | | $ | — | | | | — | | | | — | (2) |
November 2005 | | | — | | | | — | | | | — | | | | — | (2) |
December 2005 | | | 726 | (1) | | | 28.21 | | | | — | | | | — | (2) |
| | | | | | | | | | | | |
| Total | | | 726 | (1) | | $ | 28.21 | | | | — | | | | — | (2) |
| | | | | | | | | | | | |
| |
(1) | Consists of delivery of previously owned shares to Synovus in payment of the exercise price of stock options. |
|
(2) | Amount is now zero as the aforementioned share repurchase plan expired on April 14, 2005. |
Recently Issued Accounting Standards
On November 13, 2003, the EITF reached a consensus on EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” This guidance was to be applied in other-than-temporary impairment evaluations performed in reporting periods beginning after June 15, 2004. Disclosures were effective in annual financial statements for fiscal years ended after December 15, 2003, for investments accounted for under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and SFAS No. 124, “Accounting for Certain Investments Held by Not-for-Profit Organizations.” In 2005, the FASB issued FASB Staff Position (FSP) No. 115-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” which nullifies certain provisions of EITF Issue No. 03-1, while retaining the disclosure requirements that have
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previously been adopted by Synovus. The adoption of FSP No. 115-1 did not have a material impact on Synovus’ financial statements.
In December 2003, the Accounting Standards Executive Committee issued SOP No. 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer.” SOP No. 03-3 addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans or debt securities (loans) acquired in a transfer or business combination if those differences are attributable, at least in part, to credit quality. SOP No. 03-3 is effective for loans acquired in years beginning after December 15, 2004. Synovus has not determined the impact that SOP No. 03-3 will have on its financial statements and believes that such determination will not be meaningful until Synovus completes a business combination with a financial institution and/or acquires a future loan portfolio.
In December 2004,February 2006, the FASB issued SFAS No. 123R, “Share-Based Payment.155, “Accounting for Certain Hybrid Financial Instruments.” SFAS No. 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. This statement requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award.
155 amends SFAS No. 123R applies to all awards granted after the required effective date133, “Accounting for Derivative Instruments and to awards modified, repurchased, or cancelled after that date. Compensation cost will be recognized on or after the required effective date for the portion of outstanding awards for which the requisite service has not yet been rendered, based on the grant-date fair value of those awards calculated under SFAS No. 123 for either recognition or pro forma disclosures.
On March 29, 2005, the SEC issued Staff Accounting Bulletin No. 107 (SAB 107), “Share-Based Payment”. SAB 107 expresses the views of the SEC staff regarding the interaction between SFAS No. 123R and certain SEC rules and regulations, provides the staff’s views regarding the valuation of share-based payments by public companies, and provides guidance regarding share-based payments with non-employees.
On April 14, 2005, the SEC amended Rule 4-01(a) of Regulation S-X that amended the compliance date for SFAS No. 123R. The SEC’s new rule allows companies to implement SFAS No. 123R at the beginning of their next fiscal year, instead of the next reporting period that begins after June 15, 2005. Synovus adopted SFAS No. 123R effective January 1, 2006.
Synovus estimates that the adoption of SFAS No. 123R, including the effect of stock options to be granted in 2006, will result in an additional expense in 2006 of approximately $14.0 million, net of tax, relating to the expensing of stock options. Additionally, Synovus will incur an incremental (as compared to 2005) after-tax expense of approximately $3.0 million in 2006, for restricted stock awards, including the effect of restricted stock awards to be granted in 2006. While stock options have been the primary method of equity-based compensation historically, going forward, restricted stock awards are expected to be Synovus’ primary method of equity-based compensation.
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS No. 154 replaces APB Opinion No. 20, “Accounting Changes,Hedging Activities,” and SFAS No. 3, “Reporting Accounting Changes in Interim140, “Accounting for Transfers and Servicing of Financial Statements,”Assets and changes the requirements for the accounting for and reportingExtinguishments of a change in accounting principle.Liabilities.” SFAS No. 154 applies155 resolves issues addressed in Statement 133 Implementation Issue No. D1, “Application of Statement 133 to all voluntary changesBeneficial Interests in accounting principle by requiring retrospective applicationSecuritized Financial Assets.” SFAS No. 155 eliminates the exemption from applying SFAS No. 133 to prior periods’interests in securitized financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effectassets so that similar instruments are accounted for similarly regardless of the change.form of the instruments. SFAS No. 155 also permits election of fair value measurement at acquisition, at issuance, or when a previously recognized financial instrument is subject to a re-measurement event, on an instrument-by-instrument basis. The provisions of this statement are effective for accounting changes and correctionsall financial instruments acquired or issued after the beginning of errors made inthe entity’s first fiscal years beginningyear that begins after DecemberSeptember 15, 2005.2006. Synovus does not expect the impact of SFAS No. 154155 on its financial position, results of operations or cash flows to be material.
In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets.” SFAS No. 156 amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” with respect to the accounting for separately recognized servicing assets and servicing liabilities. SFAS No. 156 requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in certain situations and requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. The provisions of this statement are effective as of the beginning of the first fiscal year that begins after September 15, 2006. Synovus does not expect the impact of SFAS No. 156 on its financial position, results of operations or cash flows to be material.
In June 2005,2006, the EITF reached a consensus on EITF IssueFASB issued FASB Interpretation No. 05-6 (EITF 05-6)48 (FIN 48), “Determining“Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109.” FIN 48 clarifies the Amortization Periodaccounting for Leasehold Improvements.” This guidance provides that leasehold improvements acquireduncertainty in income taxes recognized in a business combinationcompany’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and those acquired aftermeasurement attribute for the inceptionfinancial statement recognition and measurement of a lease shouldtax position taken or expected to be amortized overtaken in a tax return.
FIN 48 provides a two-step process in the shorterevaluation of a tax position. The first step is recognition. A company determines whether it ismore-likely-than-not that a tax position will be sustained upon examination, including a resolution of any related appeals or litigation processes, based upon the technical merits of the useful life ofposition. The second step is measurement. A tax position that meets the assets or a term that includes renewals that are reasonably assuredmore-likely-than-not recognition threshold is measured at the datelargest amount of acquisitionbenefit that is greater than 50 percent likely of the leasehold improvements. The guidancebeing realized upon ultimate settlement.
FIN 48 is effective for periodsfiscal years beginning after June 29, 2005.December 15, 2006. Synovus has not determinedexpects the impact of adopting FIN 48 will not be material to its financial position, results of operations or cash flows.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This statement does not require any new fair value measurements, but applies under other accounting pronouncements, the Board having previously concluded in those accounting pronouncements that EITF 05-6 will havefair value is the relevant measurement attribute. The provisions of this statement are effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Synovus does not expect the impact of SFAS No. 157 on its financial statementsposition, results of operations or cash flows to be material.
In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and believes that such determination will not be meaningful until Synovus completes a business combination that includes leasehold improvements.
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Other Postretirement Plans.” SFAS No. 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity. This statement provides different effective dates for the recognition and related disclosure provisions and for the required change to a fiscal year-end measurement date. An employer with publicly traded equity securities shall apply the requirement to recognize the funded status of a benefit plan and the disclosure requirements at the end of the first fiscal year ended after December 15, 2006, and shall apply the requirement to measure plan assets and benefit obligations as of the date of the employers’ fiscal year-end statement of financial position for fiscal years ending after December 15, 2008. In December, 2006, Synovus adopted the recognition provisions of SFAS No. 158, and recognized an accrued liability of $3.2 million, net of tax, in connection with its unfunded postretirement health benefit obligation.
In September 2006, the EITF reached a consensus on EITF Issue No. 06-4 (EITF 06-4), “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements.” EITF 06-4 requires an employer to recognize a liability for future benefits based on the substantive agreement with the employee. EITF 06-4 requires a company to use the guidance prescribed in FASB Statement No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions” and Accounting Principles Board Opinion No. 12, “Omnibus Opinion,” when entering into an endorsement split-dollar life insurance agreement and recognizing the liability. EITF 06-4 is effective for fiscal periods beginning after December 15, 2007. Synovus is currently evaluating the impact of adopting EITF 06-4 on its financial position, results of operations and cash flows, but has yet to complete its assessment.
In September 2006, the EITF reached a consensus on EITF Issue No. 06-5 (EITF 06-5), “Accounting for Purchases of Life Insurance — Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4.” EITF 06-5 requires that a determination of the amount that could be realized under an insurance contract should (1) consider any additional amounts beyond cash surrender value included in the contractual terms of the policy and (2) be based on an assumed surrender at the individual policy or certificate level, unless all policies or certificates are required to be surrendered as a group. EITF 06-5 is effective for fiscal periods beginning after December 15, 2006. Synovus is currently evaluating the impact of adopting EITF 06-5 on its financial position, results of operations and cash flows, but has yet to complete its assessment.
In September 2006, the SEC issued SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in the Current Year Financial Statements.” In December 2006, Synovus adopted the provisions of SAB No. 108, which clarifies the way that a company should evaluate an identified unadjusted error for materiality. SAB No. 108 requires that the effect of misstatements that were not corrected at the end of the prior year be considered in quantifying misstatements in the current year financial statements. Two techniques were identified as being used by companies in practice to accumulate and quantify misstatements — the “rollover” approach and the “iron curtain” approach. The rollover approach, which is the approach that Synovus previously used, quantifies a misstatement based on the amount of the error originating in the current year income statement. Thus, this approach ignores the effects of correcting the portion of the current year balance sheet misstatement that originated in prior years. The iron curtain approach quantifies a misstatement based on the effects of correcting the misstatement existing in the balance sheet at the end of the current year, irrespective of the misstatement’s year(s) of origination. The primary weakness of the iron curtain approach is that it does not consider the correction of prior year misstatements in the current year to be errors.
Using the rollover approach resulted in an accumulation of misstatements to Synovus’ balance sheets that were deemed immaterial to Synovus’ financial statements because the amounts that originated in each year were quantitatively and qualitatively immaterial. Synovus has elected, as allowed under SAB No. 108, to reflect the effect of initially applying this guidance by adjusting the carrying amount of the impacted accounts as of the beginning of 2006 and recording an offsetting adjustment to the opening balance of retained earnings in 2006. Accordingly, Synovus recorded a cumulative adjustment to increase retained earnings by $3.4 million upon the adoption of SAB No. 108.
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The following table presents a description of the individual adjustments included in the cumulative adjustment to retained earnings:
| | | | | | | | | | |
| | | | Nature of Error | | Years | |
| | Adjustment | | | Being Corrected | | Impacted | |
(In millions) | | | | | | | | |
Brokered time deposits | | $ | (10.3 | ) | | Adjusted to reflect incorrect use of hedges | | | 2003 - 2005 | |
Deferred income tax liability | | | 3.8 | | | Adjusted to reflect tax effect of incorrect use of hedges | | | 2003 - 2005 | |
Accumulated other comprehensive loss | | | (0.8 | ) | | Adjusted to reflect incorrect use of hedges | | | 2004 - 2005 | |
Deferred income tax liability | | | 10.7 | | | Adjusted to reflect impact of calculation errors | | | 1993 - 2005 | |
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Total increase in retained earnings | | $ | 3.4 | | | | | | | |
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In the first quarter of 2003, Synovus entered into interest rate swaps to hedge the fair value of certain brokered time deposits. Effectiveness was measured using the short-cut method. Upon further review of these arrangements at September 30, 2005, Synovus determined that these hedges did not qualify for the shortcut method of hedge accounting as the broker placement fee for the related certificates of deposit was factored into the pricing of the swaps. The hedging relationships were redesignated on September 30, 2005, using the cumulative dollar offset method to measure ineffectiveness. The prior years’ adjustments were evaluated under the rollover approach and the correction of these misstatements was not material to Synovus’ results of operations in any of the years impacted. Brokered time deposits were increased by the amount of the cumulative fair value basis adjustment and the associated deferred tax liability was removed, resulting in a net decrease in shareholders’ equity of $6.5 million, to correct the incorrect use of hedge accounting.
In the fourth quarter of 2004, Synovus entered into certain forward starting interest rate swaps to hedge the future interest payments on debt forecasted to be issued in 2005. Synovus accounted for these arrangements as cash flow hedges. Upon further review of these arrangements, during the second quarter of 2005, it was determined that the swaps did not qualify for hedge accounting treatment. The hedging relationships were redesignated during the second quarter of 2005. The prior years’ adjustments were evaluated under the rollover approach and the correction of these misstatements was not material to Synovus’ results of operations in any of the years impacted. Accumulated other comprehensive losses were decreased and retained earnings were increased by $0.8 million, respectively, to correct the incorrect use of hedge accounting.
From 1993 through 2005, Synovus had errors in its calculation of deferred taxes for temporary differences related to certain business combinations and premises and equipment. The prior years’ errors were evaluated under the rollover approach and the correction of these misstatements was not material to Synovus results of operations in any of the years impacted. The deferred income tax liability was reduced by $10.7 million to correct the calculation errors.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS No. 159 permits entities to make an irrevocable election, at specified election dates, to measure eligible financial instruments and certain other items at fair value. This statement also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. The provisions of this statement are effective as of the beginning of the first fiscal year that begins after November 15, 2007. Synovus is currently evaluating the impact of adopting SFAS No. 159, but has yet to complete its assessment.
Forward-Looking Statements
Certain statements contained in this document 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: (i) management’s belief with respect to the adequacy of the allowance for loan losses; (ii) the expected financial impact of recent accounting pronouncements, including the expected after-tax expense for both option and restricted stock awards in 2006;pronouncements; (iii) the expected closing dates of pending acquisitions; (iv) TSYS’ belief with respect to its ability to meet its contractual commitments; (v)(iv) management’s belief with respect to legal proceedings and other claims; (vi) TSYS’ expectation that it will deconvert Citibank’s Sears and Bank of America’s consumer accounts in May and October of 2006, respectively; (vii)claims, including the pending regulatory matter with respect to credit card programs offered by CB&T pursuant to its agreement with CompuCredit; (v) TSYS’ expectation that it will continue to process commercial card accounts for Citibank, as well as Citibank’s Banamex USA consumer accounts; (viii)(vi) TSYS’ expectation that it will maintain the card-processing functions of Chase for at least two years; (ix) TSYS’ expectationyears and that itChase will continue providing commercial and small business card processing for Bank of America and MBNA, as well as merchant processing for Bank of America; (x) TSYS’ projected amount of annualized revenue loss as a result of Bank of America shifting the processing of its consumer card portfolio in house and the estimated termination fee to be paid by Bank of America in connection with termination ofdiscontinue its processing agreement; (xi) Synovusagreement according to the original schedule and license TSYS’ belief thatprocessing software in the lossthird quarter of revenues from2007; (vii) TSYS’ projections with respect to the impact of the Bank of America consumer card portfolio for 2006 should not have a material adverse effectdeconversion on Synovus or TSYS for 2006 and that the payment of the termination fee associated with the deconversion should have a positive effect on TSYS for 2006; (xii)revenues; (viii) TSYS’ expectation that it will convert Capital One’s portfolio in phases beginning inmid-2006 and ending in early 2007; (xiii)(ix) TSYS’ expectation that it will maintain card processing functions of Capital One for at least five years; (xiv) TSYS and Synovus’ expectation with respect to the impact of the Chase contract on its earnings per share for 2006; (xv) TSYS’ belief that the loss of revenue from the Sears portfolio for 2006 should not have a material adverse effect on TSYS for 2006; (xvi)(x) management’s belief with respect to the adequacy of unallocated allowance for loan losses; (xvii)(xi) management’s belief with respect to the existence of
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sufficient collateral for past due loans, 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; (xviii)(xii) management’s belief with respect to the use of derivatives to manage interest rate risk; (xix)(xiii) the Board of Directors’ present intent to continue to pay cash dividends; (xx)(xiv) management’s belief with respect to having sufficient capital, liquidity, and future cash flows from operations to meet operating needs over the next year; (xxi)(xv) Synovus’ expected growth in diluted earnings per share for 2006; (xxii) TSYS’ belief that Mexico remains a viable market2007, and the assumptions underlying such statements, including with respect to Synovus’ expected increase in diluted earnings per share for 2006,2007: stable to modestly lower short-term interest rates will increase modestly;as compared to the fourth quarter of 2006; an annual net interest margin near fourth quarter 2006 net interest margin of 4.20% (with compression during the first half of the year followed by some expansion); a favorable credit environment will remain favorable;environment; TSYS’ earningsnet income growth, will beexcluding the Bank of America termination fee and associated amortization of contract acquisition costs in 2006, in the 21% – 23%14% to 17% range; and the incremental expenseFinancial Services segment net income growth of equity-based compensation will be approximately 5 cents per diluted share.10%. 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,” “estimates,” “projects,” “plans,” “may,” “could,” “should,” “would,” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.
These statements are based on the current beliefs and expectations of Synovus’ management and are subject to significant risks and uncertainties. Actual results may differ materially from those contemplated by such forward-looking statements. A number of factors could cause actual results to differ materially from those contemplated by the forward-looking statements in this document. Many of these factors are beyond Synovus’ ability to control or predict. These factors include, but are not limited to: (i) competitive pressures arising from aggressive competition from other financial service providers; (ii) factors that affect the delinquency rate of Synovus’ loans and the rate at which Synovus’ loans are charged off; (iii) changes in the cost and availability of funding due to changes in the deposit market and credit market, or the way in which Synovus is perceived in such markets, including a reduction in our debt ratings; (iv) TSYS’ inability to achieve its earnings goals for 2006;2007; (v) the strength of the U.S. economy in general and the strength of the local economies in which operations are conducted may be different than expected; (vi) the effects of and changes in trade, monetary
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and fiscal policies, and laws, including interest rate policies of the Federal Reserve Board; (vii) inflation, interest rate, market and monetary fluctuations; (viii) the timely development of and acceptance of new products and services and perceived overall value of these products and services by users; (ix) changes in consumer spending, borrowing, and saving habits; (x) technological changes are more difficult or expensive than anticipated; (xi) acquisitions are more difficult to integrate than anticipated; (xii) the ability to increase market share and control expenses; (xiii) the effect of changes in governmental policy, laws and regulations, (including laws and regulations concerning taxes,or the interpretation or application thereof, including restrictions, limitations and/or penalties arising from banking, securities and insurance) with which Synovusinsurance laws, regulations and its subsidiaries must comply;examinations; (xiv) the impact of the application of and/or 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; (xv) changes in Synovus’ organization, compensation, and benefit plans; (xvi) the costs and effects of litigation, investigations or similar matters, or adverse facts and developments related thereto; (xvii) a deterioration in credit quality or a reduced demand for credit; (xviii) Synovus’ inability to successfully manage any impact from slowing economic conditions or consumer spending; (xix) TSYS does not maintain the card-processing functions of Chase and Capital One for at least two and five years respectively, as expected; (xx) the merger of TSYS clients with entities that are not TSYS clients or the sale of portfolios by TSYS clients to entities that are not TSYS clients; (xxi) successfully managing the potential both for patent protection and patent liability in the context of rapidly developing legal framework for expansive software patent protection; (xxii) the impact on Synovus’ business, as well as on the risks set forth above, of various domestic or international military or terrorist activities or conflicts; and (xxiii) the success of Synovus at managing the risks involved in the foregoing.
These forward-looking statements speak only as of the date on which the statements are made, and Synovus undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made to reflect the occurrence of unanticipated events.
F-81F-90
Summary of Quarterly Financial Data (Unaudited)
Presented below is a summary of the unaudited consolidated quarterly financial data for the years ended December 31, 20052006 and 2004.2005.
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(In thousands, except per share data) | (In thousands, except per share data) | | Fourth | | | Third | | | Second | | | First | | (In thousands, except per share data) | | Fourth | | | Third | | | Second | | | First | |
| | | | Quarter | | | Quarter | | | Quarter | | | Quarter | |
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2006 | | 2006 | | | | | | | | | | | | | |
| | Interest income | | $ | 545,630 | | | 533,629 | | | 497,713 | | | 439,493 | |
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| | Net interest income | | | 291,632 | | | 292,602 | | | 287,203 | | | 262,436 | |
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| | Provision for losses on loans | | | 18,675 | | | 18,390 | | | 18,534 | | | 19,549 | |
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| | Income before income taxes | | | 282,620 | | | 236,840 | | | 242,843 | | | 211,228 | |
| | | | | | | | | | | |
| | Net income | | | 175,547 | | | 154,066 | | | 152,797 | | | 134,506 | |
| | | | | | | | | | | |
| | Net income per share, basic | | | .54 | | | .48 | | | .47 | | | .43 | |
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| | | Quarter | | | Quarter | | | Quarter | | | Quarter | | Net income per share, diluted | | | .54 | | | .47 | | | .47 | | | .43 | |
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2005 | 2005 | | | | | | | | | | | | | | 2005 | | | | | | | | | | | | | |
| Interest income | | $ | 419,332 | | | 386,412 | | | 359,175 | | | 331,306 | | Interest income | | $ | 419,332 | | | 386,412 | | | 359,175 | | | 331,306 | |
| | | | | | | | | | | | | | | | | | | | |
| Net interest income | | | 260,095 | | | 244,825 | | | 237,065 | | | 226,862 | | Net interest income | | | 260,095 | | | 244,825 | | | 237,065 | | | 226,862 | |
| | | | | | | | | | | | | | | | | | | | |
| Provision for losses on loans | | | 20,787 | | | 19,639 | | | 22,823 | | | 19,283 | | Provision for losses on loans | | | 20,787 | | | 19,639 | | | 22,823 | | | 19,283 | |
| | | | | | | | | | | | | | | | | | | | |
| Income before income taxes | | | 218,309 | | | 215,845 | | | 204,251 | | | 185,617 | | Income before income taxes | | | 218,309 | | | 215,845 | | | 204,251 | | | 185,617 | |
| | | | | | | | | | | | | | | | | | | | |
| Net income | | | 137,260 | | | 133,992 | | | 128,460 | | | 116,734 | | Net income | | | 137,260 | | | 133,992 | | | 128,460 | | | 116,734 | |
| | | | | | | | | | | | | | | | | | | | |
| Net income per share, basic | | | .44 | | | .43 | | | .41 | | | .38 | | Net income per share, basic | | | .44 | | | .43 | | | .41 | | | .38 | |
| | | | | | | | | | | | | | | | | | | | |
| Net income per share, diluted | | | .44 | | | .43 | | | .41 | | | .37 | | Net income per share, diluted | | | .44 | | | .43 | | | .41 | | | .37 | |
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2004 | | | | | | | | | | | | | | |
| Interest income | | $ | 312,316 | | | 299,747 | | | 277,266 | | | 269,691 | | |
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| Net interest income | | | 224,036 | | | 223,434 | | | 210,462 | | | 202,747 | | |
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| Provision for losses on loans | | | 20,855 | | | 21,192 | | | 17,548 | | | 15,724 | | |
| | | | | | | | | | |
| Income before income taxes | | | 185,289 | | | 173,349 | | | 166,102 | | | 164,541 | | |
| | | | | | | | | | |
| Net income | | | 118,722 | | | 109,008 | | | 105,141 | | | 104,162 | | |
| | | | | | | | | | |
| Net income per share, basic | | | .38 | | | .35 | | | .34 | | | .34 | | |
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| Net income per share, diluted | | | .38 | | | .35 | | | .34 | | | .34 | | |
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F-82F-91
SYNOVUS FINANCIAL CORP.
EXECUTIVE CASH BONUS PLANSynovus Financial Corp.
ARTICLE I2007 Omnibus Plan
OBJECTIVE OF THE PLANEffective April 25, 2007
Contents
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Article 1. Establishment, Purpose, and Duration | | | 1 | |
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Article 2. Definitions | | | 1 | |
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Article 3. Administration | | | 6 | |
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Article 4. Shares Subject to This Plan and Maximum Awards | | | 7 | |
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Article 5. Eligibility and Participation | | | 9 | |
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Article 6. Stock Options | | | 9 | |
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Article 7. Stock Appreciation Rights | | | 11 | |
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Article 8. Restricted Stock and Restricted Stock Units | | | 12 | |
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Article 9. Performance Units/Performance Shares | | | 13 | |
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Article 10. Cash-Based Awards and Other Stock-Based Awards | | | 14 | |
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Article 11. Transferability of Awards | | | 15 | |
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Article 12. Performance Measures | | | 15 | |
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Article 13. Nonemployee Director Awards | | | 16 | |
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Article 14. Dividends and Dividend Equivalents | | | 17 | |
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Article 15. Change of Control | | | 17 | |
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Article 16. Rights of Participants | | | 17 | |
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Article 17. Amendment, Modification, Suspension, and Termination | | | 18 | |
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Article 18. Withholding | | | 18 | |
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Article 19. Successors | | | 19 | |
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Article 20. General Provisions | | | 19 | |
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Synovus Financial Corp.
2007 Omnibus Plan
Effective April 25, 2007
Article 1. Establishment, Purpose, and Duration
The purposes of this1.1 Establishment. Synovus Financial Corp. Executive Cash Bonus Plan (“Plan”(hereinafter referred to as the “Company”) arehereby establishes an incentive compensation plan to reward selected officers ofbe known as Synovus Financial Corp. 2007 Omnibus Plan (hereinafter referred to as the “Plan”), as set forth in this document.
The Plan permits the grant of Nonqualified Stock Options, Incentive Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, Performance Shares, Performance Units, Covered Employee annual incentive awards, Cash-Based Awards, and Other Stock-Based Awards.
The Plan shall become effective on the date that it is approved by the Company’s shareholders (the “Company”“Effective Date”) and certainshall remain in effect as provided in Section 1.3 hereof.
1.2 Purpose of its subsidiaries (“Subsidiaries”) for superior corporate performance measured by achievementthe Plan. The purpose of financial performance and strategic corporate objectives and to attract and retain top quality executives.
ARTICLE II
PLAN ADMINISTRATION
Thisthe Plan is administered byto advance the Compensation Committee (the “Committee”) of the Company’s Board of Directors (the “Board”); provided, however, that with respect to matters involving employees of any publicly-traded Subsidiary of the Company, the “Committee” shall be the compensation committee of such publicly-traded Subsidiary. The Committee (and the compensation committee of any publicly-traded Subsidiary of the Company) shall be composed of two or more outside directors as defined in Section 162(m) of the Internal Revenue Code of 1986, as amended (“Code”).
ARTICLE III
PARTICIPANTS
Participation is limited to the Chief Executive Officer and the four highest compensated officersinterests of the Company and any publicly-traded Subsidiaryits shareholders through Awards that give Employees and Directors a personal stake in the Company’s growth, development and financial success. Awards under the Plan will motivate Employees and Directors to devote their best efforts to the business of the Company. They will also help the Company attract and retain the services of Employees and Directors who are in a position to make significant contributions to the Company’s future success.
1.3 Duration of the Plan. Unless sooner terminated as selectedprovided herein, the Plan shall terminate ten (10) years from year-to-yearthe Effective Date. After the Plan’s termination, no new Awards may be granted, but Awards previously granted shall remain outstanding in accordance with their applicable terms and conditions, including the terms and conditions of the Plan. Notwithstanding the foregoing, no Incentive Stock Options may be granted more than ten (10) years after the earlier of: (a) the date the Plan is adopted by the membersBoard, or (b) the Effective Date.
1.4 No More Grants Under Prior Plan. After the Effective Date, no more grants will be made under the Prior Plan.
Article 2. Definitions
Whenever used in this Plan, the following terms shall have the meanings set forth below, and when the meaning is intended, the initial letter of the Committee (“Participants”).
ARTICLE IV
PERFORMANCE OBJECTIVES
Each fiscal year, the Committeeword shall establishbe capitalized:
(i) | 2.1 | | performance objectives“Affiliate”shall mean any corporation or other entity (including, but not limited to, a partnership or a limited liability company) that is affiliated with the Company through stock or equity ownership or otherwise, and is designated as an Affiliate for purposes of this Plan by the Committee. |
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| 2.2 | | “Annual Award Limit”or“Annual Award Limits”have the meaning set forth in Section 4.3. |
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| 2.3 | | “Award”means, individually or collectively, a grant under this Plan of Nonqualified Stock Options, Incentive Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, Performance Shares, Performance Units, Covered Employee annual incentive awards, Cash-Based Awards, or Other Stock-Based Awards, in each case subject to the terms of this Plan. |
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| 2.4 | | “Award Agreement”means either: (a) a written agreement entered into by the Company and a Participant setting forth the terms and provisions applicable to an Award granted under this Plan, or (b) a written or electronic statement issued by the Company to a Participant describing the terms and provisions of such and/Award, including any amendment or the succeeding fiscal yearmodification thereof. The Committee may provide for the use of electronic, Internet, or other nonpaper Award Agreements, and the use of electronic, Internet, or other nonpaper means for the acceptance thereof and actions thereunder by a Participant. |
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| 2.5 | | “Beneficial Owner”or“Beneficial Ownership”shall have the meaning ascribed to such terms in Rule 13d-3 promulgated under the Exchange Act. |
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| 2.6 | | “Board”or“Board of Directors”means the Board of Directors of the Company. |
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| 2.7 | | “Cash-Based Award”means an Award, denominated in cash, granted to a Participant as described in Article 10. |
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| 2.8 | | “Change of Control” means any of the following events:(a) the acquisition by any “person,” as such term is used in Section 13(d) and 14(d) of the Exchange Act (other than the Company any Subsidiary,or a subsidiary or any business segmentCompany employee benefit plan (including its trustee)), of “beneficial ownership” (as defined in Rule 13d-3 under the Exchange Act), directly or business unitindirectly, of securities of the Company representing 20% or more of the total number of shares of the Company’s then outstanding securities; (b) individuals who, as of the date hereof, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least two-thirds (2/3) of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least two-thirds (2/3) of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; (c) consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets or stock of the Company (a “Business Combination”), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the total number of shares of the Company’s outstanding securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than sixty percent (60%) of, respectively, the total number of shares of the then outstanding securities of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, |
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| | | immediately prior to such Business Combination, of the total number of shares of the Company’s outstanding securities, (ii) no Person (excluding any corporation resulting from such Business Combination, or any employee benefit plan (including its trustee) of the Company or such corporation resulting from such Business Combination beneficially owns, directly or indirectly, 20% or more of, respectively, the total number of shares of the then outstanding securities of the corporation resulting from such Business Combination except to the extent that such ownership existed prior to the Business Combination and (iii) at least two-thirds (2/3) of the members of the board of directors of the Corporation resulting from such Business Combination. |
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| | | A “Change of Control” shall not result from any Subsidiary, based upon such criteriatransaction precipitated by the Company’s insolvency, appointment of a conservator, or determination by a regulatory agency that the Company is insolvent, nor from any transaction initiated by the Company in regard to converting from a publicly traded company to a privately held company. |
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| 2.9 | | “Code”means the U.S. Internal Revenue Code of 1986, as mayamended from time to time. For purposes of this Plan, references to sections of the Code shall be deemed to include references to any applicable regulations thereunder and any successor or similar provision. |
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| 2.10 | | “Committee”means the Compensation Committee of the Board or a subcommittee thereof, or any other committee designated by the Board to administer this Plan. The members of the Committee shall be appointed from time to time consideredand shall serve at the discretion of the Board. If the Committee does not exist or cannot function for any reason, the Board may take any action under the Plan that would otherwise be the responsibility of the Committee. |
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| 2.11 | | “Company”means Synovus Financial Corp., a Georgia corporation, and any successor thereto as provided in Article 19 herein. |
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| 2.12 | | “Covered Employee”means any key Employee who is or may become a “Covered Employee,” as defined in Code Section 162(m), and who is designated, either as an individual Employee or class of Employees, by the Committee which criteria maywithin the shorter of: (a) ninety (90) days after the beginning of the Performance Period, or (b) twenty-five percent (25%) of the Performance Period has elapsed, as a “Covered Employee” under this Plan for such applicable Performance Period. |
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| 2.13 | | “Director”means any individual who is a member of the Board of Directors of the Company. |
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| 2.14 | | “Effective Date”has the meaning set forth in Section 1.1. |
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| 2.15 | | “Employee”means any individual designated as an employee of the Company, its Affiliates, and/or its Subsidiaries on the payroll records thereof. An Employee shall not include notany individual during any period he or she is classified or treated by the Company, Affiliate, and/or Subsidiary as an independent contractor, a consultant, or any employee of an employment, consulting, or temporary agency or any other entity other than the Company, Affiliate, and/or Subsidiary, without regard to whether such |
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| | | individual is subsequently determined to have been, or is subsequently retroactively reclassified as, a common-law employee of the Company, Affiliate, and/or Subsidiary during such period. |
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| 2.16 | | “Exchange Act”means the Securities Exchange Act of 1934, as amended from time to time, or any successor act thereto. |
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| 2.17 | | “Fair Market Value”or“FMV”means a price that is based on the closing price of a Share reported on the New York Stock Exchange (“NYSE”) or other established stock exchange (or exchanges) on the applicable date, or an average of trading days, as determined by the Committee in its discretion. Unless the Committee determines otherwise, Fair Market Value shall be deemed to be equal to the exclusionreported closing price of other criteria, criteria that has been approveda Share on the most recent date on which Shares were publicly traded. In the event Shares are not publicly traded at the time a determination of their value is required to be made hereunder, the determination of their Fair Market Value shall be made by the shareholdersCommittee in such manner as it deems appropriate. |
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| 2.18 | | “Freestanding SAR”means a SAR that is granted independently of any Options, as described in Article 7. |
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| 2.19 | | “Full-Value Award”means an Award other than in the form of an ISO, NQSO, or SAR, and which is settled by the issuance of Shares. |
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| 2.20 | | “Grant Price”means the price established at the time of grant of a SAR pursuant to Article 7, used to determine whether there is any payment due upon exercise of the SAR. |
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| 2.21 | | “Incentive Stock Option” or “ISO”means an Option to purchase Shares granted under Article 6 to an Employee and that is designated as an Incentive Stock Option that is intended to meet the requirements of Code Section 422 or any successor provision. |
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| 2.22 | | “Insider”shall mean an individual who is, on the relevant date, an officer or Director of the Company, or the shareholdersa more than ten percent (10%) Beneficial Owner of any publicly-traded Subsidiaryclass of the Company’s equity securities that is registered pursuant to Section 12 of the Exchange Act, as determined by the Board in accordance with Section 16 of the Exchange Act. |
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| 2.23 | | “Nonemployee Director”means a Director who is not an Employee. |
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| 2.24 | | “Nonemployee Director Award”means any NQSO, SAR, or Full-Value Award granted, whether singly, in combination, or in tandem, to a Participant who is a Nonemployee Director pursuant to such applicable terms, conditions, and limitations as the Board or Committee may establish in accordance with this Plan. |
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| 2.25 | | “Nonqualified Stock Option”or“NQSO”means an Option that is not intended to meet the requirements of Code Section 422, or that otherwise does not meet such requirements. |
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| 2.26 | | “Option”means an Incentive Stock Option or a Nonqualified Stock Option, as described in Article 6. |
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| 2.27 | | “Option Price”means the price at which a Share may be purchased by a Participant pursuant to an Option. |
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| 2.28 | | “Other Stock-Based Award”means an equity-based or equity-related Award not otherwise described by the terms of this Plan, granted pursuant to Article 10. |
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| 2.29 | | “Participant”means any eligible individual as set forth in Article 5 to whom an Award is granted. |
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| 2.30 | | “Performance-Based Compensation”with respect to Covered Employees, means compensation under an Award that is intended to satisfy the requirements of Code Section 162(m) for certain performance-based compensation. Notwithstanding the foregoing, nothing in this Plan shall be construed to mean that an Award which does not satisfy the requirements for performance-based compensation under Code Section 162(m) does not constitute performance-based compensation for other purposes, including Code Section 409A. |
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| 2.31 | | “Performance Measures”means measures as described in Article 12 on which the performance goals are based and which are approved by the Company’s shareholders pursuant to this Plan in order to qualify Awards as Performance-Based Compensation. |
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| 2.32 | | “Performance Period”means the period of time during which the performance goals must be met in order to determine the degree of payout and/or vesting with respect to an Award. |
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| 2.33 | | “Performance Share”means an Award under Article 9 herein and subject to the terms of this Plan, denominated in Shares, the value of which at the time it is payable is determined as a function of the extent to which corresponding performance criteria have been achieved. |
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| 2.34 | | “Performance Unit”means an Award under Article 9 herein and subject to the terms of this Plan, denominated in units, the value of which at the time it is payable is determined as a function of the extent to which corresponding performance criteria have been achieved. |
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| 2.35 | | “Period of Restriction”means the period when Restricted Stock or Restricted Stock Units are subject to a substantial risk of forfeiture (based on the passage of time, the achievement of performance goals, or upon the occurrence of other events as determined by the Committee, in its discretion), as provided in Article 8. |
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| 2.36 | | “Person”shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof, including a “group” as defined in Section 13(d) thereof. |
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| 2.37 | | “Plan”means the Synovus Financial Corp. 2007 Omnibus Plan. |
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| 2.38 | | “Plan Year”means the calendar year. |
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| 2.39 | | “Prior Plan”means the Synovus Financial Corp. 2000 Long-Term Incentive Plan and the Synovus Financial Corp. 2002 Long-Term Incentive Plan. |
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| 2.40 | | “Restricted Stock” means an Award of Shares granted to a Participant pursuant to Article 8. |
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| 2.41 | | “Restricted Stock Unit”means an Award granted to a Participant pursuant to Article 8, except no Shares are actually awarded to the Participant on the date of grant. |
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| 2.42 | | “Share”means a share of common stock of the Company, par value $1.00 per share. |
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| 2.43 | | “Stock Appreciation Right”or “SAR” means an Award, designated as a SAR, pursuant to the terms of Article 7 herein. |
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| 2.44 | | “Subsidiary”means any corporation or other entity, whether domestic or foreign, in which the Company has or obtains, directly or indirectly, a proprietary interest of more than fifty percent (50%) by reason of stock ownership or otherwise. |
Article 3. Administration
3.1 General. The Plan shall be administered by the Committee, subject to this Article 3 and the other provisions of this Plan. The Committee may employ attorneys, consultants, accountants, agents, and other individuals or entities, any of which may be an Employee, and the Committee, the Company, and its officers and Directors shall be entitled to rely upon the advice, opinions, or valuations of any such persons. All actions taken and all interpretations and determinations made by the Committee shall be final and binding on the Participants, the Company, and all other interested individuals.
3.2 Authority of the Committee. The Committee is authorized and empowered to administer the Plan and, subject to the provisions of the Plan, shall have full power to (i) designate Employees and Directors to be recipients of Awards; (ii) determine the type and size of Awards; (iii) determine the terms and conditions of Awards; (iv) certify satisfaction of performance goals for purposes of satisfying the requirements of Code Section 162(m); (v) construe and interpret the terms of the Plan and any Award Agreement or other instrument entered into under the Plan; (vi) establish, amend, or waive rules and regulations for the Plan’s administration; (vii) subject to the provisions of Section 4.4., authorize conversion or substitution under the Plan of any or all outstanding option or other awards held by service providers of an entity acquired by the Company on terms determined by the Committee (without regard to limitations set forth in Section 6.3 and 7.5); (viii) subject to the provisions of Articles 15 and 17, amend the terms and conditions of any outstanding Award; (ix) grant Awards as an alternative to, or as the form of payment for, grants or rights earned or due under compensation plans or similar arrangements of the Company; and (x) make any other determination and take any other action that it deems necessary or desirable for the administration of the Plan.
3.3 Delegation. To the extent permitted by law and applicable rules of a stock exchange, the Committee may, by resolution, authorize one or more officers of the Company to do one or both of the following on the same basis as can the Committee: (a) designate Employees to be recipients of Awards; and (b) determine the type and size of any such Awards; provided, however: (i) the authority to make Awards to any Nonemployee Director or to any Employee who is considered an
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Insider may not be delegated; (ii) the resolution providing such authorization shall set forth the total number of Shares and Awards such officer(s) may grant; and (iii) the officer(s) shall report periodically to the Committee regarding the nature and scope of the Awards granted pursuant to the authority delegated.
Article 4. Shares Subject to This Plan and Maximum Awards
4.1 Number of Shares Available for Awards.
| (a) | | Subject to adjustment as provided in Section 4.4 herein, the maximum number of Shares available for issuance to Participants under this Plan (the “Share Authorization”) shall be: |
| (i) | | 18,000,000 Shares, plus |
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| (ii) | | The number of Shares subject to outstanding awards under the Prior Plan as of the Effective Date, that, after the Effective Date, cease to be outstanding other than by reason of their having been exercised for, or settled in, vested and nonforfeitable Shares. |
| (b) | | The maximum number of Shares of the Share Authorization that may be issued pursuant to Full Value Awards under this Plan shall be 9,000,000. |
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| (c) | | The maximum number of Shares of the Share Authorization that may be issued pursuant to ISOs under this Plan shall be 9,000,000. |
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| (d) | | Subject to adjustment in Section 4.4, the maximum number of Shares of the Share Authorization that may be issued to Nonemployee Directors shall be 500,000 Shares, and no Nonemployee Director may be granted an Award covering more than 10,000 Shares in any Plan Year, except that this annual limit on Nonemployee Director Awards shall be increased to 50,000 Shares for any Nonemployee Director serving as Chairman of the Board; provided, however, that in the Plan Year in which an individual is first appointed or elected to the Board as a Nonemployee Director, such individual may be granted an Award covering up to an additional 50,000 Shares (a “New Nonemployee Director Award”). |
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| (e) | | Except with respect to a maximum of five percent (5%) of the Share Authorization, any Full Value Awards which vest on the basis of the Employee’s continued employment with or provision of service to the Company shall not provide for vesting which is any more rapid than annual pro rata vesting over a three- (3-) year period and any Full Value Awards which vest upon the attainment of performance goals shall provide for a Performance Period of at least twelve (12) months. |
4.2 Share Usage. Shares covered by an Award shall only be counted as used to the extent they are actually issued. Any Shares related to Awards which terminate by expiration, forfeiture, cancellation, or otherwise without the issuance of such Shares, are settled in cash in lieu of Shares, or are exchanged with the Committee’s permission, prior to the issuance of Shares, for Awards not
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involving Shares, shall be available again for grant under this Plan. However, the full number of Stock Appreciation Rights granted that are to be settled by the issuance of Shares shall be counted against the number of Shares available for award under the Plan, regardless of the number of Shares actually issued upon settlement of such Stock Appreciation Rights. Further, any Shares withheld to satisfy tax withholding obligations on Awards issued under the Plan, Shares tendered to pay the exercise price of Awards under the Plan, and Shares repurchased on the open market with the proceeds of an Option exercise will no longer be eligible to be returned as available Shares under the Plan. Any Shares related to Awards which terminate by expiration, forfeiture, cancellation, or otherwise without the issuance of such Shares, are settled in cash in lieu of Shares, or are exchanged with the Committee’s permission, prior to the issuance of Shares, for Awards not involving Shares, shall be available again for grant under this Plan. The Shares available for issuance under this Plan may be authorized and unissued Shares or treasury Shares.
4.3 Annual Award Limits. Unless and until the Committee determines that an Award to a Covered Employee shall not be designed to qualify as Performance-Based Compensation, the following limits (each an “Annual Award Limit” and, collectively, “Annual Award Limits”) shall apply to grants of such Awards under this Plan:
| (a) | | Options: The maximum aggregate number of Shares subject to Options granted in any one Plan Year to any one Participant shall be 4,000,000. |
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| (b) | | SARs: The maximum number of Shares subject to Stock Appreciation Rights granted in any one Plan Year to any one Participant shall be 4,000,000. |
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| (c) | | Restricted Stock or Restricted Stock Units: The maximum aggregate grant with respect to Awards of Restricted Stock or Restricted Stock Units in any one Plan Year to any one Participant shall be 2,000,000. |
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| (d) | | Performance Units or Performance Shares: The maximum aggregate Award of Performance Units or Performance Shares that a Participant may receive in any one Plan Year shall be 2,000,000 Shares if such Award is payable in Shares, or equal to the value of 100,000 Shares if such Award is payable in cash or property other than Shares, determined as of the earlier of the vesting or the payout date, as applicable. |
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| (e) | | Cash-Based Awards: The maximum aggregate amount awarded or credited with respect to Cash-Based Awards to any one Participant in any one Plan Year may not exceed $2,000,000.00. |
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| (f) | | Other Stock-Based Awards.The maximum aggregate grant with respect to Other Stock-Based Awards pursuant to Section 10.2 in any one Plan Year to any one Participant shall be 2,000,000. |
4.4 Adjustments in Authorized Shares. In the event of any corporate event or transaction (including, but not limited to, a change in the Shares of the Company or the capitalization of the Company) such as a merger, consolidation, reorganization, recapitalization, separation, partial or complete liquidation, stock dividend, stock split, reverse stock split, split up, spin-off, or other distribution of stock or property of the Company, combination of Shares, exchange of Shares, dividend in-kind, or other like change in capital structure, number of outstanding Shares or
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distribution (other than normal cash dividends) to shareholders of the Company, or any similar corporate event or transaction, the Committee, in order to prevent dilution or enlargement of Participants’ rights under this Plan, shall substitute or adjust the number and kind of Shares that may be issued under this Plan or under particular forms of Awards, the number and kind of Shares subject to outstanding Awards, the Option Price or Grant Price applicable to outstanding Awards, the Annual Award Limits, or other value determinations applicable to outstanding Awards, with the specific adjustments to be determined by the Committee in its sole discretion.
The Committee shall make appropriate adjustments to any other terms of any outstanding Awards under this Plan to reflect such changes or distributions, including modifications of performance goals and changes in the length of Performance Periods. The determination of the Committee as to the foregoing adjustments, if any, shall be conclusive and binding on Participants under this Plan.
Subject to the provisions of Article 17 and notwithstanding anything else herein to the contrary, without affecting the number of Shares reserved or available hereunder, the Committee may authorize the issuance or assumption of benefits under this Plan in connection with any merger, consolidation, acquisition of property or stock, or reorganization upon such terms and conditions as it may deem appropriate (including, but not limited to, a conversion of equity awards into Awards under this Plan in a manner consistent with paragraph 53 of FASB Interpretation No. 44), subject to compliance with the rules under Code Sections 422 and 424, as and where applicable.
Article 5. Eligibility and Participation
5.1 Eligibility. Individuals eligible to participate in this Plan include all Employees and Directors.
5.2 Actual Participation. Subject to the provisions of this Plan, the Committee may, from time to time in its sole discretion, select from the individuals eligible to participate, those to whom Awards shall be granted.
Article 6. Stock Options
6.1 Grant of Options. Subject to the terms and provisions of this Plan, Options may be granted to Participants in such number, and upon such terms, and at any time and from time to time as shall be determined by the Committee, in its sole discretion, provided that ISOs may be granted only to eligible Employees of the Company or of any parent or subsidiary corporation (as permitted under Code Sections 422 and 424). However, an Employee who is employed by an Affiliate and/or Subsidiary and is subject to Code Section 409A may only be granted Options to the extent the Affiliate and/or Subsidiary is part of the Company’s consolidated group for United States federal tax purposes.
6.2 Award Agreement. Each Option grant shall be evidenced by an Award Agreement that shall specify the Option Price, the maximum duration of the Option, the number of Shares to which the Option pertains, the conditions upon which an Option shall become vested and exercisable, and such other provisions as the Committee shall determine which are not inconsistent with the terms of this Plan. The Award Agreement also shall specify whether the Option is intended to be an ISO or an NQSO.
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6.3 Option Price. The Option Price for each grant of an Option under this Plan shall be determined by the Committee in its sole discretion and shall be specified in the Award Agreement; provided, however, the Option Price on the date of grant must be at least equal to one hundred percent (100%) of the FMV of the Shares as determined on the date of grant.
6.4 Term of Options. Each Option granted to a Participant shall expire at such time as the Committee shall determine at the time of grant; provided, however, no Option shall be exercisable later than the tenth (10th) anniversary date of its grant.
6.5 Exercise of Options. Options granted under this Article 6 shall be exercisable at such times and be subject to such restrictions and conditions as the Committee shall in each instance approve, which terms and restrictions need not be the same for each grant or for each Participant.
Options granted under this Article 6 shall be exercised by the delivery of a notice of exercise to the Company or an agent designated by the Company in a form specified or accepted by the Committee setting forth the number of Shares with respect to which the Option is to be exercised, accompanied by full payment for the Shares, or by complying with any alternative exercise procedures the Committee may authorize.
6.6 Payment. A condition of the issuance of the Shares as to which an Option shall be exercised shall be the payment of the Option Price. The Option Price of any Option shall be payable to the Company in full either: (a) in cash or its equivalent; (b) by tendering (either by actual delivery or attestation) previously acquired Shares having an aggregate Fair Market Value at the time of exercise equal to the Option Price (provided that except as otherwise determined by the Committee, the Shares that are tendered must have been held by the Participant for at least six (6) months (or such other period, if any, as the Committee may permit) prior to their tender to satisfy the Option Price if acquired under this Plan or any other compensation plan maintained by the Company or have been purchased on the open market); (c) by a cashless (broker-assisted) exercise; (d) by a combination of (a), (b), and/or (c); or (e) any other method approved or accepted by the Committee in its sole discretion.
Subject to any governing rules or regulations, as soon as practicable after receipt of written notification of exercise and full payment (including satisfaction of any applicable tax withholding), the Company shall deliver to the Participant evidence of book entry Shares, or upon the Participant’s request, Share certificates in an appropriate amount based upon the number of Shares purchased under the Option(s).
Unless otherwise determined by the Committee, all payments under all of the methods indicated above shall be paid in United States dollars.
6.7 Restrictions on Share Transferability. The Committee may impose such restrictions on any Shares acquired pursuant to the exercise of an Option granted under this Article 6 as it may deem advisable, including, without limitation, minimum holding period requirements, restrictions under applicable federal securities laws, under the requirements of any stock exchange or market upon which such Shares are then listed and/or traded, or under any blue sky or state securities laws applicable to such Shares.
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6.8 Termination of Employment/Service. Each Participant’s Award Agreement shall set forth the extent to which the Participant shall have the right to exercise the Option following termination of the Participant’s employment or provision of services to the Company, its Affiliates, and/or its Subsidiaries, as the case may be. Such provisions shall be determined in the sole discretion of the Committee, shall be included in the Award Agreement entered into with each Participant, need not be uniform among all Options issued pursuant to this Article 6, and may reflect distinctions based on the reasons for termination.
Article 7. Stock Appreciation Rights
7.1 Grant of SARs. Subject to the terms and conditions of this Plan, Freestanding SARs may be granted to Participants at any time and from time to time as shall be determined by the Committee. However, an Employee who is employed by an Affiliate and/or Subsidiary and is subject to Code Section 409A may only be granted SARs to the extent the Affiliate and/or Subsidiary is part of the Company’s consolidated group for United States federal tax purposes.
Subject to the terms and conditions of this Plan, the Committee shall have complete discretion in determining the number of SARs granted to each Participant and, consistent with the provisions of this Plan, in determining the terms and conditions pertaining to such SARs.
The Grant Price for each grant of a Freestanding SAR shall be determined by the Committee and shall be specified in the Award Agreement; provided, however, the Grant Price on the date of grant must be at least equal to one hundred percent (100%) of the FMV of the Shares as determined on the date of grant.
7.2 SAR Agreement. Each SAR Award shall be evidenced by an Award Agreement that shall specify the Grant Price, the term of the SAR, and such other provisions as the Committee shall determine.
7.3 Term of SAR. The term of a SAR granted under this Plan shall be determined by the Committee, in its sole discretion, and except as determined otherwise by the Committee and specified in the SAR Award Agreement, no SAR shall be exercisable later than the tenth (10th) anniversary date of its grant.
7.4 Exercise of Freestanding SARs. Freestanding SARs may be exercised upon whatever terms and conditions the Committee, in its sole discretion, imposes.
7.5 Settlement of SAR Amount. Upon the exercise of a SAR, a Participant shall be entitled to receive payment from the Company in an amount determined by multiplying:
| (a) | | The excess of the Fair Market Value of a Share on the date of exercise over the Grant Price; by |
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| (b) | | The number of Shares with respect to which the SAR is exercised. |
At the discretion of the Committee, the payment upon SAR exercise may be in cash, Shares, or any combination thereof, or in any other manner approved by the Committee in its sole discretion. The Committee’s determination regarding the form of SAR payout shall be set forth in the Award Agreement pertaining to the grant of the SAR.
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7.6 Termination of Employment/Service. Each Award Agreement shall set forth the extent to which the Participant shall have the right to exercise the SAR following termination of the Participant’s employment with or provision of services to the Company, its Affiliates, and/or its Subsidiaries, as the case may be. Such provisions shall be determined in the sole discretion of the Committee, shall be included in the Award Agreement entered into with Participants, need not be uniform among all SARs issued pursuant to this Plan, and may reflect distinctions based on the reasons for termination.
7.7 Other Restrictions.The Committee shall impose such other conditions and/or restrictions on any Shares received upon exercise of a SAR granted pursuant to this Plan as it may deem advisable or desirable. These restrictions may include, but shall not be limited to, a requirement that the Participant hold the Shares received upon exercise of a SAR for a specified period of time.
Article 8. Restricted Stock and Restricted Stock Units
8.1 Grant of Restricted Stock or Restricted Stock Units. Subject to the terms and provisions of this Plan, the Committee, at any time and from time to time, may grant Shares of Restricted Stock and/or Restricted Stock Units to Participants in such amounts as the Committee shall determine. Restricted Stock Units shall be similar to Restricted Stock except that no Shares are actually awarded to the Participant on the date of grant.
8.2 Restricted Stock or Restricted Stock Unit Agreement. Each Restricted Stock and/or Restricted Stock Unit grant shall be evidenced by an Award Agreement that shall specify the Period(s) of Restriction, the number of Shares of Restricted Stock or the number of Restricted Stock Units granted, and such other provisions as the Committee shall determine.
8.3 Other Restrictions. The Committee shall impose such other conditions and/or restrictions on any Shares of Restricted Stock or Restricted Stock Units granted pursuant to this Plan as it may deem advisable including, without limitation, a requirement that Participants pay a stipulated purchase price for each Share of Restricted Stock or each Restricted Stock Unit, restrictions based upon the achievement of specific performance goals, time-based restrictions on vesting following the attainment of the performance goals, time-based restrictions, and/or restrictions under applicable laws or under the requirements of any stock exchange or market upon which such Shares are listed or traded, or holding requirements or sale restrictions placed on the Shares by the Company upon vesting of such Restricted Stock or Restricted Stock Units.
To the extent deemed appropriate by the Committee, the Company may retain the certificates representing Shares of Restricted Stock in the Company’s possession until such time as all conditions and/or restrictions applicable to such Shares have been satisfied or lapse.
Except as otherwise provided in this Article 8, Shares of Restricted Stock covered by each Restricted Stock Award shall become freely transferable by the Participant after all conditions and restrictions applicable to such Shares have been satisfied or lapse (including satisfaction of any applicable tax withholding obligations), and Restricted Stock Units shall be paid in cash, Shares, or a combination of cash and Shares as the Committee, in its sole discretion, shall determine.
8.4 Certificate Legend. In addition to any legends placed on certificates pursuant to Section 8.3, each certificate representing Shares of Restricted Stock granted pursuant to this Plan
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may bear a legend such as the following or as otherwise determined by the Committee in its sole discretion:
“The transferability of this certificate and the shares of stock represented hereby are subject to the terms and conditions (including forfeiture) of the Synovus Financial Corp. 2007 Omnibus Plan and a Restricted Stock Award Agreement entered into between the registered owner and Synovus Financial Corp. Copies of such Plan and Agreement are on file in the offices of Synovus Financial Corp., 1111 Bay Avenue, Suite 500, Columbus, Georgia, 31901.”
8.5 Voting Rights. Unless otherwise determined by the Committee and set forth in a Participant’s Award Agreement, to the extent permitted or required by law, as determined by the Committee, Participants holding Shares of Restricted Stock granted hereunder may be granted the right to exercise full voting rights with respect to those Shares during the Period of Restriction. A Participant shall have no voting rights with respect to any Restricted Stock Units granted hereunder.
8.6 Termination of Employment/Service. Each Award Agreement shall set forth the extent to which the Participant shall have the right to retain Restricted Stock and/or Restricted Stock Units following termination of the Participant’s employment with or provision of services to the Company, its Affiliates, and/or its Subsidiaries, as the case may be. Such provisions shall be determined in the sole discretion of the Committee, shall be included in the Award Agreement entered into with each Participant, need not be uniform among all Shares of Restricted Stock or Restricted Stock Units issued pursuant to this Plan, and may reflect distinctions based on the reasons for termination.
8.7Section 83(b) Election. The Committee may provide in an Award Agreement that the Award of Restricted Stock is conditioned upon the Participant making or refraining from making an election with respect to the Award under Code Section 83(b). If a Participant makes an election pursuant to Code Section 83(b) concerning a Restricted Stock Award, the Participant shall be required to file promptly a copy of such election with the Company.
Article 9. Performance Units/Performance Shares
9.1 Grant of Performance Units/Performance Shares. Subject to the terms and provisions of this Plan, the Committee, at any time and from time to time, may grant Performance Units and/or Performance Shares to Participants in such amounts and upon such terms as the Committee shall determine.
9.2 Value of Performance Units/Performance Shares. Each Performance Unit shall have an initial value that is established by the Committee at the time of grant. Each Performance Share shall have an initial value equal to the Fair Market Value of a Share on the date of grant. The Committee shall set performance goals in its discretion which, depending on the extent to which they are met, will determine the value and/or number of Performance Units/Performance Shares that will be paid out to the Participant.
9.3 Earning of Performance Units/Performance Shares. Subject to the terms of this Plan, after the applicable Performance Period has ended, the holder of Performance Units/Performance Shares shall be entitled to receive payout on the value and number of Performance Units/Performance Shares earned by the Participant over the Performance Period, to be determined as a function of the extent to which the corresponding performance goals have been achieved.
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9.4 Form and Timing of Payment of Performance Units/Performance Shares. Payment of earned Performance Units/Performance Shares shall be as determined by the Committee and as evidenced in the Award Agreement. Subject to the terms of this Plan, the Committee, in its sole discretion, may pay earned Performance Units/Performance Shares in the form of cash or in Shares (or in a combination thereof) equal to the value of the earned Performance Units/Performance Shares at the close of the applicable Performance Period, or as soon as practicable after the end of the Performance Period. Any Shares may be granted subject to any restrictions deemed appropriate by the Committee. The determination of the Committee with respect to the form of payout of such Awards shall be set forth in the Award Agreement pertaining to the grant of the Award.
9.5 Termination of Employment/Service. Each Award Agreement shall set forth the extent to which the Participant shall have the right to retain Performance Units and/or Performance Shares following termination of the Participant’s employment with or provision of services to the Company, its Affiliates, and/or its Subsidiaries, as the case may be. Such provisions shall be determined in the sole discretion of the Committee, shall be included in the Award Agreement entered into with each Participant, need not be uniform among all Awards of Performance Units or Performance Shares issued pursuant to this Plan, and may reflect distinctions based on the reasons for termination.
Article 10. Cash-Based Awards and Other Stock-Based Awards
10.1 Grant of Cash-Based Awards. Subject to the terms and provisions of the Plan, the Committee, at any time and from time to time, may grant Cash-Based Awards to Participants in such amounts and upon such terms as the Committee may determine.
10.2 Other Stock-Based Awards. The Committee may grant other types of equity-based or equity-related Awards not otherwise described by the terms of this Plan (including the grant or offer for sale of unrestricted Shares) in such amounts and subject to such terms and conditions as the Committee shall determine. Such Awards may involve the transfer of actual Shares to Participants, or payment in cash or otherwise of amounts based on the value of Shares, and may include, without limitation, Awards designed to comply with or take advantage of the applicable local laws of jurisdictions other than the United States.
10.3 Value of Cash-Based and Other Stock-Based Awards. Each Cash-Based Award shall specify a payment amount or payment range as determined by the Committee. Each Other Stock-Based Award shall be expressed in terms of Shares or units based on Shares, as determined by the Committee. The Committee may establish performance goals in its discretion. If the Committee exercises its discretion to establish performance goals, the number and/or value of Cash-Based Awards or Other Stock-Based Awards that will be paid out to the Participant will depend on the extent to which the performance goals are met.
10.4 Payment of Cash-Based Awards and Other Stock-Based Awards. Payment, if any, with respect to a Cash-Based Award or any Other Stock-Based Award shall be made in accordance with the terms of the Award, in cash or Shares as the Committee determines.
10.5 Termination of Employment/Service. The Committee shall determine the extent to which the Participant shall have the right to receive Cash-Based Awards or Other Stock-Based Awards following termination of the Participant’s employment with or provision of services to the Company, its Affiliates, and/or its Subsidiaries, as the case may be. Such provisions shall be
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determined in the sole discretion of the Committee, such provisions may be included in an agreement entered into with each Participant, but need not be uniform among all Awards of Cash-Based Awards or Other Stock-Based Awards issued pursuant to the Plan, and may reflect distinctions based on the reasons for termination.
Article 11. Transferability of Awards
11.1 Transferability. Except as provided in Section 11.2 below, during a Participant’s lifetime, his or her Awards shall be exercisable only by the Participant. Awards shall not be transferable other than by will or the laws of descent and distribution; no Awards shall be subject, in whole or in part, to attachment, execution, or levy of any kind; and any purported transfer in violation hereof shall be null and void. The Committee may establish such procedures as it deems appropriate for a Participant to designate a beneficiary to whom any amounts payable or Shares deliverable in the event of, or following, the Participant’s death may be provided.
11.2 Committee Action. The Committee may, in its discretion, determine that notwithstanding Section 11.1, any or all Awards (other than ISOs) shall be transferable to and exercisable by such transferees, and subject to such terms and conditions, as the Committee may deem appropriate; provided, however, no Award may be transferred for value (as defined in the General Instructions to Form S-8).
Article 12. Performance Measures
12.1 Performance Measures. The performance goals upon which the payment or vesting of an Award to a Covered Employee that is intended to qualify as Performance-Based Compensation shall be limited to the following Performance Measures:
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| | (a) | | Net earnings or net income (before or after taxes); |
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| | (b) | | Earnings per share; |
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| | (c) | | Net sales or revenue growth; |
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| | (d) | | Net operating profit; |
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| | (e) | | Return measures (including, but not limited to, return on assets, capital, invested capital, equity, sales, or revenue); |
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| | (f) | | Cash flow (including, but not limited to, operating cash flow, free cash flow, cash generation, cash flow return on equity, and cash flow return on investment); |
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| | (g) | | Earnings before or after taxes, interest, depreciation, and/or amortization; |
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| | (h) | | Gross or operating margins; |
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| | (i) | | Productivity ratios; |
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| | (j) | | Share price (including, but not limited to, growth measures and total shareholder return); |
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| | (k) | | Expense targets; |
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| | (l) | | Margins; |
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| | (m) | | Operating efficiency; |
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| | (n) | | Market share; |
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| | (o) | | Customer satisfaction; |
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| | (p) | | Unit volume; |
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| | (q) | | Working capital targets and change in working capital; |
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| | (r) | | Economic value added or EVA® (net operating profit after tax minus the sum of capital multiplied by the cost of capital); |
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| | (s) | | Asset growth; |
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| | (t) | | Non-interest expense as a percentage of total expense; |
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| | (u) | | Loan charge-offs as a percentage of total loans; |
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| | (v) | | Number of cardholder, merchant and/or other customer accounts processed or converted; and |
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| | (w) | | Successful negotiation or renewal of contracts with new or existing customers. |
Any Performance Measure(s) may be used to measure the performance of the Company, Subsidiary, and/or Affiliate as a whole or any business unit of the Company, Subsidiary, and/or Affiliate or any combination thereof, as the Committee may deem appropriate, or any of the above Performance Measures as compared to the performance of a group of comparator companies, or published or special index that the Committee, in its sole discretion, deems appropriate, or the Company may select Performance Measure (j) above as compared to various stock market indices. The Committee also has the authority to provide for accelerated vesting of any Award based on the achievement of performance goals pursuant to the Performance Measures specified in this Article 12.
12.2 Evaluation of Performance. The Committee may provide in any such Award that any evaluation of achievement of Performance Measures may include or exclude any of the following events that occur during a Performance Period: (a) asset write-downs, (b) litigation or claim judgments or settlements, (c) the effect of changes in tax laws, accounting principles, or other laws or provisions affecting reported results, (d) any reorganization and restructuring programs, (e) extraordinary nonrecurring items as described in Accounting Principles Board Opinion No. 30 and/or in management’s discussion and analysis of financial condition and results of operations appearing in the Company’s annual report to shareholders for the applicable year, (f) acquisitions or divestitures, and (g) foreign exchange gains and losses. To the extent such inclusions or exclusions affect Awards to Covered Employees, they shall be prescribed in a form that meets the requirements of Code Section 162(m) for deductibility.
12.3 Adjustment of Performance-Based Compensation. Awards that are intended to qualify as Performance-Based Compensation may not be adjusted upward. The Committee shall retain the discretion to adjust such Awards downward, either on a formula or discretionary basis, or any combination, as the Committee determines.
12.4 Committee Discretion. In the event that applicable tax and/or securities laws change to permit Committee discretion to alter the governing Performance Measures without obtaining shareholder approval of such changes, the Committee shall have sole discretion to make such changes without obtaining shareholder approval. In addition, in the event that the Committee determines that it is advisable to grant Awards that shall not qualify as Performance-Based Compensation, the Committee may make such grants without satisfying the requirements of Code Section 162(m) and base vesting on Performance Measures other than those set forth in Section 12.1.
Article 13. Nonemployee Director Awards
From time to time, the Board shall set the amount(s) and type(s) of equity awards that shall be granted to all Nonemployee Directors on a periodic, nondiscriminatory basis pursuant to the Plan, as well as any additional amount(s), if any, to be awarded, also on a periodic, nondiscriminatory basis, based on each of the following: (i) the number of Board committees on which a Nonemployee Director serves; (ii) service of a Nonemployee Director as the chair of a Board committee; (iii)
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service of a Nonemployee Director as Chairman of the Board; or (iv) the initial selection or appointment of an individual to the Board as a Nonemployee Director. Subject to the foregoing, the Board shall grant such Awards to Nonemployee Directors, as it shall from time to time determine.
Article 14. Dividends and Dividend Equivalents
Any Participant selected by the Committee may be granted dividends or dividend equivalents based on the dividends declared on Shares that are subject to any Award, to be credited as of dividend payment dates, during the period between the date the Award is granted and the date the Award is exercised, vests, or expires, as determined by the Committee. The dividends or dividend equivalents may be subject to any limitations and/or restrictions determined by the Committee. Such dividend equivalents shall be converted to cash or additional Shares by such formula and at such time and subject to such limitations as may be determined by the Committee.
Article 15. Change of Control
Notwithstanding any other provision of the Plan to the contrary, unless the Committee specifies otherwise in an Award Agreement, in the event of a Change of Control: (i) any Options and Stock Appreciation Rights which are outstanding immediately prior to the date such Change of Control is determined to have occurred, and which are not then exercisable and vested, shall become fully exercisable and vested to the full extent of the original grant; (ii) the restrictions and deferral limitations applicable to any Restricted Stock shall lapse, and such Restricted Stock shall become free of all restrictions and limitations and become fully vested and transferable to the full extent of the original grant; and (iii) the restrictions and deferral limitations and other conditions applicable to any other Awards under the Plan shall lapse, and such other Awards shall become free of all restrictions, limitations or conditions and become fully vested and transferable to the full extent of the original grant.
Article 16. Rights of Participants
16.1 Employment/Service. Nothing in this Plan or an Award Agreement shall interfere with or limit in any way the right of the Company, its Affiliates, and/or its Subsidiaries to terminate any Participant’s employment or service on the Board or to the Company at any time or for any reason not prohibited by law, nor confer upon any Participant any right to continue his employment or service as a Director for any specified period of time.
Neither an Award nor any benefits arising under this Plan shall constitute an employment contract with the Company, its Affiliates, and/or its Subsidiaries and, accordingly, subject to Articles 3 and 17, this Plan and the benefits hereunder may be terminated at any time in the sole and exclusive discretion of the Committee without giving rise to any liability on the part of the Company, its Affiliates, and/or its Subsidiaries.
16.2 Participation. No individual shall have the right to be selected to receive an Award under this Plan or, having been so selected, to be selected to receive a future Award.
16.3 Rights as a Shareholder. Except as otherwise provided herein or in any Award Agreement, a Participant shall have none of the rights of a shareholder with respect to Shares covered by any Award until the Participant becomes the record holder of such Shares.
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Article 17. Amendment, Modification, Suspension, and Termination
17.1 Amendment, Modification, Suspension, and Termination. Subject to Section 17.3, the Committee may, at any time and from time to time, alter, amend, modify, suspend, or terminate this Plan and any Award Agreement in whole or in part; provided, however, that without the prior approval of the Company’s shareholders and except as provided in Section 4.4, Options or SARs issued under this Plan will not be repriced, replaced, repurchased for cash when the Fair Market Value of a Share is lower than the Option Price of a previously granted Option or the Grant Price of a previously granted SAR, or regranted through cancellation, or by lowering the Option Price of a previously granted Option or the Grant Price of a previously granted SAR, and no material amendment of this Plan shall be made without shareholder approval if shareholder approval is required by law, regulation, or stock exchange rule.
17.2 Adjustment of Awards Upon the Occurrence of Certain Unusual or Nonrecurring Events. The Committee may make adjustments in the terms and conditions of, and the criteria included in, Awards in recognition of unusual or nonrecurring events, other than those described in Section 4.4 hereof, affecting the Company or the financial statements of the Company or of changes in applicable laws, regulations, or accounting principles, whenever the Committee determines that such adjustments are appropriate in order to prevent unintended dilution or enlargement of the benefits or potential benefits intended to be made available under this Plan. The determination of the Committee as to the foregoing adjustments, if any, shall be conclusive and binding on Participants under this Plan.
17.3 Awards Previously Granted. Notwithstanding any other provision of this Plan to the contrary (other than Section 17.4), no termination, amendment, suspension, or modification of this Plan or an Award Agreement shall adversely affect in any material way any Award previously granted under this Plan, without the written consent of the Participant holding such Award.
17.4 Amendment to Conform to Law. Notwithstanding any other provision of this Plan to the contrary, the Board of Directors may amend the Plan or an Award Agreement, to take effect retroactively or otherwise, as deemed necessary or advisable for the purpose of conforming the Plan or an Award Agreement to any present or future law relating to plans of this or similar nature (including, but not limited to, Code Section 409A), and to the administrative regulations and rulings promulgated thereunder.
Article 18. Withholding
18.1 Tax Withholding. The Company shall have the power and the right to deduct or withhold, or require a Participant to remit to the Company, the minimum statutory amount to satisfy federal, state, and local taxes, domestic or foreign, required by law or regulation to be withheld with respect to any taxable event arising as a result of this Plan.
18.2 Share Withholding. With respect to withholding required upon the exercise of Options or SARs, upon the lapse of restrictions on Restricted Stock and Restricted Stock Units, or upon the achievement of performance goals related to Performance Shares, or any other taxable event arising as a result of an Award granted hereunder, Participants may elect, subject to the approval of the Committee, to satisfy the withholding requirement, in whole or in part, by having the Company withhold Shares having a Fair Market Value on the date the tax is to be determined equal to the minimum statutory total tax that could be imposed on the transaction. All such elections shall be
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irrevocable, made in writing, and signed by the Participant, and shall be subject to any restrictions or limitations that the Committee, in its sole discretion, deems appropriate.
Article 19. Successors
All obligations of the Company under this Plan with respect to Awards granted hereunder shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business and/or assets of the Company.
Article 20. General Provisions
20.1 Forfeiture Events.
| (a) | | The Committee may specify in an Award Agreement that the Participant’s rights, payments, and benefits with respect to an Award shall be subject to reduction, cancellation, forfeiture, or recoupment upon the occurrence of certain specified events, in addition to any otherwise applicable vesting or performance conditions of an Award. Such events may include, but shall not be limited to, termination of employment for cause, termination of the Participant’s provision of services to the Company, Affiliate, and/or Subsidiary, violation of material Company, Affiliate, and/or Subsidiary policies, breach of noncompetition, confidentiality, or other restrictive covenants that may apply to the Participant, or other conduct by the Participant that is detrimental to the business or reputation of the Company, its Affiliates, and/or its Subsidiaries. |
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| (b) | | If the Company is required to prepare an accounting restatement due to the material noncompliance of the Company, as a result of misconduct, with any financial reporting requirement under the securities laws, any Participant who is subject to automatic forfeiture under Section 304 of the Sarbanes-Oxley Act of 2002 shall reimburse the Company the amount of any payment in settlement of an Award earned or accrued during the twelve (12) month period following the first public issuance or filing with the United States Securities and Exchange Commission (whichever just occurred) of the financial document embodying such financial reporting requirement. |
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| | | In addition, in the event of an accounting restatement, the Committee in its sole and exclusive discretion may require that any Participant reimburse the Company all or part of the amount of any payment in settlement of any Award granted hereunder. |
20.2 Legend. The certificates for Shares may include any legend that the Committee deems appropriate to reflect any restrictions on transfer of such Shares.
20.3 Gender and Number. Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine, the plural shall include the singular, and the singular shall include the plural.
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20.4 Severability. In the event any provision of this Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of this Plan, and this Plan shall be construed and enforced as if the illegal or invalid provision had not been included.
20.5 Requirements of Law. The granting of Awards and the issuance of Shares under this Plan shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies, the NYSE or other national securities exchanges as may be required.
20.6 Delivery of Title. The Company shall have no obligation to issue or deliver evidence of title for Shares issued under this Plan prior to:
| (a) | | Obtaining any approvals from governmental agencies that the Company determines are necessary or advisable; and |
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| (b) | | Completion of any registration or other qualification of the Shares under any applicable national or foreign law or ruling of any governmental body that the Company determines to be necessary or advisable. |
20.7 Inability to Obtain Authority. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company’s counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained.
20.8 Investment Representations. The Committee may require any individual receiving Shares pursuant to an Award under this Plan to represent and warrant in writing that the individual is acquiring the Shares for investment and without any present intention to sell or distribute such Shares.
20.9 Employees Based Outside of the United States. Notwithstanding any provision of this Plan to the contrary, in order to comply with the laws in other countries in which the Company, its Affiliates, and/or its Subsidiaries operate or have Employees or Directors, the Committee, in its sole discretion, shall have the power and authority to:
| (a) | | Determine which Affiliates and Subsidiaries shall be covered by this Plan. |
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| (b) | | Determine which Employees or Directors outside the United States are eligible to participate in this Plan. |
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| (c) | | Modify the terms and conditions of any Award granted to Employees or Directors outside the United States to comply with applicable foreign laws. |
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| (d) | | Establish subplans and modify exercise procedures and other terms and procedures, to the extent such actions may be necessary or advisable. Any subplans and modifications to Plan terms and procedures established under this Section 20.9 by the Committee shall be attached to this Plan document as appendices. |
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| (e) | | Take any action, before or after an Award is made, that it deems advisable to obtain approval or comply with any necessary local government regulatory exemptions or approvals. |
Notwithstanding the above, the Committee may not take any actions hereunder, and no Awards shall be granted that would violate applicable law.
20.10 Uncertificated Shares. To the extent that this Plan provides for issuance of certificates to reflect the transfer of Shares, the transfer of such Shares may be effected on a noncertificated basis, to the extent not prohibited by applicable law or the rules of any stock exchange.
20.11 Unfunded Plan. Participants shall have no right, title, or interest whatsoever in or to any investments that the Company and/or its Subsidiaries and/or its Affiliates may make to aid it in meeting its obligations under this Plan. Nothing contained in this Plan, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind, or a fiduciary relationship between the Company and any Participant, beneficiary, legal representative, or any other individual. To the extent that any individual acquires a right to receive payments from the Company, its Subsidiaries, and/or its Affiliates under this Plan, such right shall be no greater than the right of an unsecured general creditor of the Company, a Subsidiary, or an Affiliate, as the case may be. All payments to be made hereunder shall be paid from the general funds of the Company, a Subsidiary, or an Affiliate, as the case may be, and no special or separate fund shall be established and no segregation of assets shall be made to assure payment of such amounts except as expressly set forth in this Plan.
20.12 No Fractional Shares. No fractional Shares shall be issued or delivered pursuant to this Plan or any Award. The Committee shall determine whether cash, Awards, or other property shall be issued or paid in lieu of fractional Shares or whether such fractional Shares or any rights thereto shall be forfeited or otherwise eliminated.
20.13 Retirement and Welfare Plans. Neither Awards made under this Plan nor Shares or cash paid pursuant to such Awards, except pursuant to Covered Employee annual incentive awards, may be included as “compensation” for purposes of computing the benefits payable to any Participant under the Company’s or any Subsidiary’s or Affiliate’s retirement plans (both qualified and nonqualified) or welfare benefit plans unless such other plan expressly provides that such compensation shall be taken into account in computing a Participant’s benefit.
20.14 Deferred Compensation.Notwithstanding any other provision of the Plan, the Committee may cause any Award to comply with or to be exempt from Section 409A of the Code and may interpret this Plan in any manner necessary to ensure that Awards under the Plan comply with or are exempt from Section 409A of the Code. In the event that the Committee determines that an Award should comply with or be exempt from Section 409A and that a Plan provision or Award Agreement provision is necessary to ensure that such Award complies with or is exempt from Section 409A of the Code, such provision shall be deemed included in the Plan or such Award Agreement.
20.15 Nonexclusivity of This Plan. The adoption of this Plan shall not be construed as creating any limitations on the power of the Board or Committee to adopt such other compensation arrangements as it may deem desirable for any Participant.
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20.16 No Constraint on Corporate Action. Nothing in this Plan shall be construed to: (a) limit, impair, or otherwise affect the Company’s or a Subsidiary’s or an Affiliate’s right or power to make adjustments, reclassifications, reorganizations, or changes of its capital or business structure, or to merge or consolidate, or dissolve, liquidate, sell, or transfer all or any part of its business or assets; or, (b) limit the right or power of the Company or a Subsidiary or an Affiliate to take any action which such entity deems to be necessary or appropriate.
20.17 Governing Law. The Plan and each Award Agreement shall be governed by the laws of the State of Georgia, excluding any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this Plan to the substantive law of another jurisdiction. Unless otherwise provided in the Award Agreement, recipients of an Award under this Plan are deemed to submit to the exclusive jurisdiction and venue of the federal or state courts of Georgia to resolve any and all issues that may arise out of or relate to this Plan or any related Award Agreement.
20.18 Indemnification. Subject to requirements of Georgia law, each individual who is or shall have been a member of the Board, or a committee appointed by the Board, or an officer of the Company to whom authority was delegated in accordance with Article 3, shall be indemnified and held harmless by the Company against and from any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by the Participant in connection with or resulting from any claim, action, suit, or proceeding to which the Participant may be a party or in which the Participant may be involved by reason of any action taken or failure to act under this Plan and against and from any and all amounts paid by the Participant in settlement thereof, with the Company’s approval, or paid by the Participant in satisfaction of any judgment in any such action, suit, or proceeding against the Participant, provided the Participant shall give the Company an opportunity, at its own expense, to handle and defend the same before the Participant undertakes to handle and defend it on the Participant’s own behalf, unless such loss, cost, liability, or expense is a result of the Participant’s own willful misconduct or except as expressly provided by statute.
The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such individuals may be entitled under the Company’s Certificate of Incorporation or Bylaws, as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless.
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PROXY | | | | Mark Here for Address Change or Comments SEE REVERSE SIDE | | o |
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(ii) | | a system which equatesCERTIFICATE OF BENEFICIAL OWNER |
THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” PROPOSALS 1, 2 AND 3 AND “AGAINST’ PROPOSAL 4. | | INSTRUCTIONS: Please provide the attainmentrequired information. THIS CERTIFICATE MUST BE SIGNED TO BE VALID. If you do not complete and sign this Certificate of various performance objectivesBeneficial Owner, your shares covered by the Company and Subsidiaries for such and/orProxy to the succeeding fiscal year into various percentagesleft will be voted on the basis of the base salaries of eligible officers of the Company and Subsidiaries for such and/or the succeeding fiscal year which may be awarded to such Employees who are selected to be Participants in the Plan as bonuses.one vote per share. |
The maximum award under this Plan to any participant for any performance period shall be $2,000,000.
ARTICLE V
AWARD OF BONUSES
As soon as practicable after each fiscal year for which performance objectives have, pursuant to Article IV, been established, the Committee shall determine whether the Company and each Subsidiary attained the previously-established performance objectives. Assuming such performance objectives shall be attained, the Committee shall determine, in its sole and exclusive discretion, whether any bonuses shall be awarded for such fiscal year. In determining the amount of bonuses to be awarded under the Plan, the Committee shall have the right to exercise negative discretion or decrease an award otherwise payable to a Participant, but the Committee shall have no discretion to increase the amount of any award under the Plan. Such bonuses shall be awarded as soon as practicable thereafter and the officers who are determined to be entitled to receive such bonuses shall be promptly notified of the award thereof.
ARTICLE VI
DEFERRAL OF BONUSES
Any bonus or any portion of any bonus awarded to a Participant may, at the election of such Participant, be deferred pursuant to the provisions of the Synovus Financial Corp./Total System Services, Inc. Deferred Compensation Plan (“Deferred Plan”), as such Deferred Plan may be amended from time to time. All bonus amounts deferred under the Deferred Plan shall be paid in accordance with the distribution provisions of the Deferred Plan, as such provisions may be amended from time to time.
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ARTICLE VII
NO ENTITLEMENT TO BONUS
Participants are entitled to a distribution under this Plan only upon the approval of the award by the Committee and no Participant shall be entitled to a bonus under the Plan due to the attainment of performance objectives. In addition, any Participant not employed by the Company or a Subsidiary on December 31 of any fiscal year will not be entitled to a bonus unless otherwise determined by the Committee.
ARTICLE VIII
TERMINATION OF PLAN
The Company Board of Directors may amend or terminate the Plan at any time and for any reason without prior notice.
ARTICLE IX
PARTICIPANT’S RIGHT OF ASSIGNABILITY
Bonus amounts hereunder shall not be subject to assignment, pledge or other disposition, nor shall such amounts be subject to garnishment, attachment, transfer by operation of law, or any legal process.
ARTICLE X
GOVERNING LAW
The validity, construction, performance and effect of the Plan shall be governed by Georgia law.
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PROXY
THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” PROPOSALS 1, 2, 3, AND 4 AND “AGAINST’ PROPOSAL 5.
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1. | | To elect the following 18 individuals as directors to serve until the Annual Meeting of Shareholders in 2009:directors: | | For o | | Withhold o | | For All Except
o |
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(01) Richard Y. Bradley | | |
(02) Frank W. Brumley | | (05) John P. Illges, III |
(03) Elizabeth W. Camp | | (06) J. Neal Purcell |
(04) T. Michael Goodrich | | (07) William B. Turner, Jr. |
INSTRUCTION: To withhold authority to vote for any individual nominee, mark the “For All Except” box and strike a line through the nominee’s name in the list above. Your shares will be voted for the remaining nominee(s).
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2. | | To amend Synovus’ Articles of Incorporation and bylaws to declassify the Board of Directors. | | For o | | Against
o | | Abstain
o |
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3. | | To approve the Synovus Financial Corp. Executive Cash Bonus Plan. | | For
o | | Against
o | | Abstain
o |
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4. | | To ratify the appointment of KPMG LLP as Synovus’ independent auditor for the year 2006. | | For
o | | Against
o | | Abstain
o |
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5. | | To consider a shareholder proposal regarding director election by majority vote. | | For
o | | Against
o | | Abstain
o |
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PLEASE BE SURE TO SIGN AND DATE THIS PROXY.
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Mark Here
for Address Change or Comments
SEE REVERSE SIDE
| | o |
CERTIFICATE OF BENEFICIAL OWNER
INSTRUCTIONS: Please provide the required information. THIS CERTIFICATE MUST BE SIGNED TO BE VALID. If you do not complete and sign this Certificate of Beneficial Owner, your shares covered by the Proxy to the left will be voted on the basis of one vote per share.
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A. Are you the beneficial owner, in all capacities, of more than 1,139,063 shares of Synovus Common Stock? If you answered “No” to Question A, do not answer B or C. Your shares represented by the Proxy to the left are entitled to ten votes per share. | | Yes o | | No o |
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(01) Daniel P. Amos | | (10) V. Nathaniel Hansford | | |
(02) Richard E. Anthony | | (11) Alfred W. Jones III | | |
(03) James H. Blanchard | | (12) Mason H. Lampton | | |
(04) Richard Y. Bradley | | (13) Elizabeth C. Ogie | | |
(05) Frank W. Brumley | | (14) H. Lynn Page | | |
(06) Elizabeth W. Camp | | (15) J. Neal Purcell | | |
(07) Gardiner W. Garrard, Jr. | | (16) Melvin T. Stith | | |
(08) T. Michael Goodrich | | (17) William B. Turner, Jr. | | |
(09) Frederick L. Green, III | | (18) James D. Yancey | | |
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INSTRUCTION: To withhold authority to vote for any individual nominee, mark the “For All Except” box and strike a line through the nominee’s name in the list above. Your shares will be voted for the remaining nominee(s). | | B. If your answer to question A was “Yes”, have you acquired more than 1,139,063 shares of Synovus Common Stock since February 21, 200220, 2003 (including shares received as a stock dividend)? If you answered “No” to Question B, do not answer Question C. Your shares represented by the Proxy to the left are entitled to ten votes per share. | | Yes o | | No o |
C. If you answered “Yes” to Question B, please describe below the date and nature of your acquisition of all shares of Synovus Common Stock you have acquired since February 21, 2002
2. | | To approve the Synovus Financial Corp. 2007 Omnibus Plan. | | For o | | Against o | | Abstain o | | |
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3. | | To ratify the appointment of KPMG LLP as Synovus’ independent auditor for the year 2007. | | For o | | Against o | | Abstain o | | C. If you answered “Yes” to Question B, please describe below the date and nature of your acquisition of all shares of Synovus Common Stock you have acquired since February 20, 2003 (including shares acquired as a result of a stock dividend). Your response to Question C will determine which of the shares represented by the Proxy will be entitled to ten votes per share. |
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| | To consider a shareholder proposal regarding director election by majority vote. | | For o | | Against o | | Abstain o | |
| | 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 these shares and I agree to provide such evidence if so requested. |
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PLEASE BE SURE TO SIGN AND DATE THIS PROXY. | | |
NOTE BOTH SIGNATURE LINES ARE REQUIRED WHEN CERTIFYING YOUR SHARES
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Shareholder sign here | | | | Date | | | | Shareholder sign here | | | | Date | | |
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Co-owner sign here | | | | Date | | | | Co-owner sign here | | | | Date | | |
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| | Sign Here to Vote Your
Shares | | | | | | | | Sign Here to Certify
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| | Shares | | | | | | | | Your Shares | | | | |
▲∆ FOLD AND DETACH HERE ▲∆
ChooseMLinksm for fast, easy and secure 24/7 online access to your future proxy materials, investment
plan statements, tax documents and more. Simply log on toInvestor ServiceDirect(R) at
www.melloninvestor.com/isd where step-by-step instructions will prompt you through enrollment.
Vote by Internet or Telephone or Mail — 24 Hours a Day, 7 Days a Week
Internet and telephone voting are available through 11:59 PM 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.
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Internet | | | | Telephone | | | | Mail |
http://www.proxyvoting.com/snv | | | | 1-866-540-5760 | | | | Mail |
Use the Internet to vote your proxy. Have your proxy card in hand when you access the web site. | | OR | | Use any touch-tone telephone to vote your proxy. Have your proxy card in hand when you call. | | OR | | Mark, sign and date |
proxy. Have your proxy card in | | | | telephone to vote your | | | | your proxy card |
hand when you access the web | | | | proxy. Have your proxy | | | | and |
site. | | | | card in hand when you call. | | | | return it in the enclosed postage-paid envelope. |
| | | | | | | | enclosed postage-paid |
| | | | | | | | envelope. |
If you vote your proxy on the 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/annual2005annual2006
SYNOVUS FINANCIAL CORP.
POST OFFICE BOX 120, COLUMBUS, GEORGIA 31902-0120
ANNUAL MEETING OF SHAREHOLDERS TO BE HELD APRIL 27, 200625, 2007
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 21, 200620, 2007 at the Annual Meeting of Shareholders to be held on April 27, 200625, 2007 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)
▲5 FOLD AND DETACH HERE ▲5
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.