FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 1998
Commission File Number 1-10312
SYNOVUS FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
Georgia 58-1134883
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
901 Front Avenue
P. O. Box 120
Columbus, Georgia 31902
(Address of principal executive offices)
(706) 649-2401
(Registrants' telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES X NO
At October 31, 1998, 267,301,062 shares of the Registrant's Common Stock,
$1.00 par value, were outstanding.
SYNOVUS FINANCIAL CORP.
INDEX
Page
Part I. Financial Information Number
Item 1. Financial Statements
Consolidated Balance Sheets (unaudited)
September 30, 1998 and December 31, 1997 3
Consolidated Statements of Income (unaudited)
Nine and Three Months Ended September 30, 1998 and 1997 4
Consolidated Statements of Cash Flows (unaudited)
Nine Months Ended September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Part II. Other Information
Item 6. (a) Exhibits 20
(b) Report on Form 8-K 20
Signature Page 21
Exhibit Index 22
(11) Statement re Computation of Per Share Earnings 23
(27) Financial Data Schedule (for SEC purposes only,
not enclosed herewith)
PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
SYNOVUS FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
(In thousands, except share and per share data) 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 319,737 388,134
Interest earning deposits with banks 675 1,272
Federal funds sold 42,728 93,392
Investment securities available for sale 1,372,847 1,325,036
Investment securities held to maturity 310,187 330,137
Loans 7,200,029 6,615,584
Less unearned income (8,217) (5,712)
Less reserve for loan losses (110,458) (103,050)
- -------------------------------------------------------------------------------------------
Loans, net 7,081,354 6,506,822
- -------------------------------------------------------------------------------------------
Premises and equipment, net 346,334 297,227
Other assets 366,904 318,311
- -------------------------------------------------------------------------------------------
Total assets $ 9,840,766 9,260,331
===========================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing $ 1,299,742 1,256,639
Interest bearing 6,726,848 6,451,288
- -------------------------------------------------------------------------------------------
Total deposits 8,026,590 7,707,927
Federal funds purchased and securities sold under
agreement to repurchase 417,361 305,868
Long-term debt 129,502 126,174
Other liabilities 202,566 174,065
- -------------------------------------------------------------------------------------------
Total liabilities 8,776,019 8,314,034
- -------------------------------------------------------------------------------------------
Minority interest in consolidated subsidiary 48,837 42,641
Shareholders' equity:
Common stock - $1.00 par value; Authorized 600,000,000
shares; issued 267,436,581 in 1998 and 262,983,414
in 1997; outstanding 267,261,317 in 1998 and
262,808,150 in 1997 267,437 262,983
Surplus 27,775 17,777
Less treasury stock - 175,264 shares in 1998 and 1997 (1,285) (1,285)
Less unamortized restricted stock (2,760) (3,734)
Accumulated other comprehensive income 16,619 5,700
Retained earnings 708,124 622,215
- -------------------------------------------------------------------------------------------
Total shareholders' equity 1,015,910 903,656
- -------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 9,840,766 9,260,331
===========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
SYNOVUS FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
- --------------------------------------------------------------------------------------------------
(In thousands, except per share data) 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $ 488,139 457,270 166,869 157,962
Investment securities:
U.S. Treasury and U.S. Government agencies 59,397 60,326 19,109 20,465
Mortgage-backed securities 12,074 13,093 4,152 4,157
State and municipal 5,411 4,857 1,898 1,625
Other investments 1,761 962 617 336
Federal funds sold 2,859 1,302 1,002 489
Interest earning deposits with banks 40 60 12 13
- --------------------------------------------------------------------------------------------------
Total interest income 569,681 537,870 193,659 185,047
- --------------------------------------------------------------------------------------------------
Interest expense:
Deposits 228,886 211,823 77,068 73,437
Federal funds purchased and securities
sold under agreement to repurchase 10,185 15,144 3,690 4,836
Long-term debt 5,569 5,297 1,862 1,931
- --------------------------------------------------------------------------------------------------
Total interest expense 244,640 232,264 82,620 80,204
- --------------------------------------------------------------------------------------------------
Net interest income 325,041 305,606 111,039 104,843
Provision for losses on loans 20,329 22,884 5,731 7,604
- --------------------------------------------------------------------------------------------------
Net interest income after provision
for losses on loans 304,712 282,722 105,308 97,239
- --------------------------------------------------------------------------------------------------
Non-interest income:
Data processing services 271,868 252,018 94,223 87,839
Service charges on deposit accounts 45,150 41,058 15,647 14,055
Fees for trust services 11,104 9,426 3,747 3,137
Credit card fees 9,276 7,832 3,649 2,888
Securities gains (losses), net 750 (20) 427 (18)
Other operating income 64,652 47,170 23,334 16,419
- --------------------------------------------------------------------------------------------------
Total non-interest income 402,800 357,484 141,027 124,320
- --------------------------------------------------------------------------------------------------
Non-interest expense:
Salaries and other personnel expense 278,584 252,542 94,499 84,578
Net occupancy and equipment expense 112,521 103,304 39,506 35,097
Other operating expenses 102,254 92,650 35,188 32,208
Minority interest in subsidiary's net income 7,139 6,099 2,922 2,546
- --------------------------------------------------------------------------------------------------
Total non-interest expense 500,498 454,595 172,115 154,429
- --------------------------------------------------------------------------------------------------
Income before income taxes 207,014 185,611 74,220 67,130
Income tax expense 74,151 67,381 26,782 24,029
- --------------------------------------------------------------------------------------------------
Net income $ 132,863 118,230 47,438 43,101
==================================================================================================
Net income per share :
Basic $ 0.50 0.45 0.18 0.16
==================================================================================================
Assuming dilution 0.50 0.45 0.18 0.16
==================================================================================================
Weighted average shares outstanding:
Basic 263,554 262,081 264,646 262,395
==================================================================================================
Assuming dilution 267,538 265,529 268,862 265,926
==================================================================================================
Dividends declared per share $ 0.22 0.18 0.07 0.06
==================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
SYNOVUS FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
- --------------------------------------------------------------------------------
(In thousands) 1998 1997
- --------------------------------------------------------------------------------
<C> <S> <S>
Operating Activities
Net Income $ 132,863 118,230
Adjustments to reconcile net income
to net cash provided by
operating activities:
Provision for losses on loans 20,329 22,884
Depreciation, amortization, and accretion, net 42,860 36,737
Deferred income tax benefit (3,697) (1,982)
Increase in interest receivable (3,810) (6,219)
Increase in interest payable 6,252 6,951
Minority interest in subsidiary's net income 7,139 6,099
Increase in mortgage loans held for sale (28,725) (6,308)
Other, net 8,460 1,270
- --------------------------------------------------------------------------------
Net cash provided by operating activities 181,671 177,662
- --------------------------------------------------------------------------------
Investing Activities
Cash acquired from acquisition 13,231 ---
Net decrease in interest earning deposits with banks 597 1,081
Net decrease (increase) in federal funds sold 52,143 (7,187)
Proceeds from maturities and principal collections
of investment securities available for sale 414,637 191,329
Proceeds from sales of investment securities
available for sale 66,351 58,531
Purchases of investment securities available for
sale (510,990) (274,298)
Proceeds from maturities and principal collections
of investment securities held to maturity 125,623 57,457
Purchases of investment securities held to
maturity (70,373) (30,894)
Net increase in loans (284,686) (415,298)
Purchases of premises and equipment (75,329) (46,992)
Disposals of premises and equipment 637 912
Proceeds from sales of other real estate 7,090 3,820
Additions to contract acquisition costs (16,283) (16,378)
Additions to computer software (24,520) (10,079)
- --------------------------------------------------------------------------------
Net cash used in investing activities (301,872) (487,996)
- --------------------------------------------------------------------------------
Financing Activities
Net increase in demand and savings deposits 95,916 70,342
Net (decrease) increase in certificates of
deposit (99,631) 126,004
Net increase in federal funds purchased and
securities sold under agreement to repurchase 110,872 60,241
Principal repayments on long-term debt (12,646) (7,419)
Proceeds from issuance of long-term debt 11,900 36,700
Dividends paid to shareholders (58,175) (47,186)
Proceeds from issuance of common stock 3,568 2,765
- --------------------------------------------------------------------------------
Net cash provided by financing
activities 51,804 241,447
- --------------------------------------------------------------------------------
Decrease in cash and cash equivalents (68,397) (68,887)
Cash and cash equivalents at beginning of period 388,134 404,952
- --------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 319,737 336,065
================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
SYNOVUS FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note A - Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and therefore do not include
all information and footnotes necessary for a fair presentation of financial
position, results of operations, and cash flows in conformity with generally
accepted accounting principles. All adjustments consisting of normally occurring
accruals which, in the opinion of management, are necessary for a fair
presentation of the financial position and results of operations for the periods
covered by this report have been included.
On April 23, 1998, Synovus declared a three-for-two stock split which was
effected on May 21, 1998 in the form of a 50% stock dividend. All share,
per share, and shareholders' equity amounts for all periods presented
in the accompanying consolidated financial statements have been restated to
reflect the stock split.
Note B - Supplemental Cash Flow Information
For the nine months ended September 30, 1998 and 1997, Synovus Financial
Corp. (Synovus) paid income taxes of $68.6 million and $73.3 million, and
interest of $238.4 million and $225.3 million, respectively.
Noncash investing activities consisted of loans of approximately $5.6 million
and $3.8 million, which were foreclosed and transferred to other real estate
during the nine months ended September 30, 1998 and 1997, respectively.
As of the close of business on August 31, 1998, Synovus completed the
acquisition of the $348 million asset Community Bank Capital Corporation (CBCC).
The acquisition was accounted for as a pooling of interests, except that the
financial statements for periods prior to the acquisition were not restated
since the effect was not material. This transaction resulted in the following
noncash activity for the nine months ended September 30, 1998: investment
securities of $35.5 million, net loans of $281.5 million, and other assets of
$17.8 million, all of which were obtained in the stock-for-stock acquisition.
Depreciation, amortization, and accretion, net, for the nine months ended
September 30, 1998 and 1997 included amortization of internally developed
computer software of $2.5 million, for both periods. Internally developed
computer software had a net carrying value of $22.5 million and $25.8 million at
September 30, 1998 and 1997, respectively.
Note C - Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income". This statement establishes standards for reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. SFAS No. 130 requires all items that are required
to be recognized under accounting standards as components of comprehensive
income be reported in an annual financial statement that is displayed in equal
prominence with the other annual financial statements. For interim period
financial statements, enterprises are required to disclose a total for
comprehensive income in those financial statements. The term "comprehensive
income" is used in SFAS No. 130 to describe the total of all components of
comprehensive income including net income. "Other comprehensive income" refers
to revenues, expenses, gains, and losses that are included in comprehensive
income but excluded from earnings under current accounting standards. Currently,
"other comprehensive income" for Synovus consists solely of items previously
recorded as a component of shareholders' equity under SFAS No. 52, "Foreign
Currency Translation", and SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities". Synovus has adopted the interim-period disclosure
requirements of SFAS No. 130 effective March 31, 1998 and will adopt
the annual financial statement reporting and disclosure requirements of
SFAS No. 130 effective December 31, 1998.
Comprehensive income for the three months ended September 30, 1998 was
$56,681,000 compared to $46,834,000 for the three months ended September 30,
1997. Comprehensive income for the nine months ended September 30, 1998 was
$143,782,000 compared to $122,735,000 for the nine months ended September 30,
1997.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". SFAS No. 131 supercedes SFAS No. 14,
"Financial Reporting in Segments of a Business Enterprise", and establishes new
standards for the disclosures made by public business enterprises to report
information about operating segments in annual financial statements and requires
those enterprises to report selected financial information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. SFAS No. 131 is effective for financial
statements for periods beginning after December 15, 1997. SFAS No. 131 need not
be applied to interim financial statements in the initial year of its
application, but comparative information for interim periods in the initial year
of application shall be reported in financial statements for interim periods in
the second year of application. Synovus does not expect that SFAS No. 131 will
require significant revision of prior disclosures.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. The accounting for
changes in fair value of a derivative depends on the intended use of the
derivative and the resulting designation. SFAS No. 133 is effective for the
first quarter of 2000 and is to be applied prospectively. Synovus has not made
an assessment of the expected impact that SFAS No. 133 will have on its
financial statements.
Note D - Other
Certain amounts in 1997 have been reclassified to conform with the presentation
adopted in 1998.
ITEM 2 - MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Summary
Net income for the nine months ended September 30, 1998, was $132.9
million, up $14.6 million, or 12.4%, from the same period a year ago. Diluted
net income per share increased to $.50 for the first nine months of 1998 as
compared to $.45 for the same period in 1997. This performance resulted in a
return on average assets of 1.90% and a return on average equity of 18.73% for
the nine months ended September 30, 1998. This compares to a return on average
assets of 1.81% and a return on average equity of 19.29% for the first nine
months of 1997.
Net income for the three months ended September 30, 1998 was $47.4 million,
up $4.3 million, or 10.1%, from the same period a year ago. Diluted net income
per share increased to $.18 in the third quarter of 1998 as compared to $.16 for
the third quarter of 1997. This performance resulted in a return on average
assets of 1.99% and a return on average equity of 19.07% for the three months
ended September 30, 1998. This compares to a return on average assets of 1.92%
and a return on average equity of 20.03% for the third quarter of 1997.
On April 23, 1998, Synovus declared a three-for-two stock split which was
effected on May 21, 1998 in the form of a 50% stock dividend. All share, per
share, and shareholders' equity amounts for all periods presented have been
restated to reflect the stock split.
Acquisitions
As of the close of business on August 31, 1998, Synovus completed the
acquisition of Community Bank Capital Corporation (CBCC), the parent company of
the $348 million asset, Bank of North Georgia which operates 6 full service
offices in counties north of Atlanta, as well as a full-service mortgage
division. Synovus issued 3,774,531 shares of common stock for all the issued and
outstanding shares of CBCC. This transaction has been accounted for as a pooling
of interests, except that the financial statements for periods prior to the
acquisition have not been restated since the effect was not material.
On September 15, 1998, Synovus signed a definitive agreement to acquire, for
stock, the $161 million asset Georgia Bank & Trust. Headquartered in Calhoun,
Georgia, Georgia Bank & Trust operates 3 full service offices in Calhoun and
Gordon Counties.
On April 22, 1998, Synovus signed a definitive agreement to acquire, for
stock, the $55 million asset Bank of Georgia which is located in Oconee County,
Georgia. Bank of Georgia will be merged into Athens First Bank & Trust Company,
an existing affiliate of Synovus.
The two above mentioned acquisitions are expected to be completed by the end of
1998 and will be accounted for under the pooling of interests method.
Balance Sheet
During the first nine months of 1998, total assets increased $580.4
million, resulting from net loan growth of $574.5 million of which $293.7
million was attributable to the acquisition of CBCC. Providing the necessary
funding for the balance sheet growth during the first nine months of 1998,
Synovus' deposit base grew $318.7 million, federal funds purchased and
securities sold under agreement to repurchase grew $111.5 million and
shareholders' equity increased $112.3 million.
Asset Quality
Synovus continues to underwrite loans that provide diversification while
emphasizing customer relationships in small and middle market businesses.
Commercial credits are routinely monitored for cash flows, liquidity, financial
condition, and collateral adequacy. Management continues to focus on maintaining
a high quality loan portfolio by knowing the markets served, as well as the
individual borrowers, and continuing emphasis on loan officer training. As
measured by general asset quality indicators, Synovus' asset quality remains
strong. During the first nine months of 1998, nonperforming assets, consisting
of nonaccrual loans, restructured loans, and other real estate, increased $2.9
million, while net loans increased $574.5 million. Synovus' nonperforming assets
ratio was .44% as of September 30, 1998, which remained unchanged from December
31, 1997. Net charge-offs to average loans for the nine months ended September
30, 1998, were .33% compared to .34% during the first nine months of 1997. Net
charge-offs to average loans for the quarter ended September 30, 1998, were .34%
compared to .41% during the third quarter of 1997.
Loans 90 days past due and still accruing were $23.9 million, or .32% of
total loans, compared to $20.9 million, or .33% of total loans, at September 30,
1998 and December 31, 1997, respectively. Management believes that the value of
the underlying collateral securing commercial and consumer loans is generally
sufficient to cover the principal and interest on these loans and management
does not expect a material increase in nonperforming assets in future periods as
a result of the resolution of these delinquencies.
The reserve for loan losses is maintained at an appropriate level based on
management's analysis of the risk inherent within the loan portfolio. When
determining the amount of loan loss provision, several relevant factors are
considered. These factors include the level of loan growth, nonperforming loans,
impaired loan balances, historical charge-offs, the net charge-offs recorded in
the given period, the current and anticipated economic conditions, and the loan
portfolio composition. Synovus' reserve for loan losses was $110.5 million, or
1.54% of net loans, at September 30, 1998, compared to $103.1 million, or 1.56%
of net loans, at December 31, 1997.
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
(In thousands)
Nonperforming loans $ 22,332 18,472
Other real estate 9,366 10,335
- --------------------------------------------------------------------------------
Nonperforming assets $ 31,698 28,807
================================================================================
Loans 90 days past due and still accruing $ 23,938 20,881
================================================================================
Reserve for loan losses $ 110,458 103,050
================================================================================
Reserve for loan losses as a % of loans 1.54% 1.56
================================================================================
As a % of loans and other real estate:
Nonperforming loans 0.31% 0.28
Other real estate 0.13 0.16
- --------------------------------------------------------------------------------
Nonperforming assets 0.44% 0.44
================================================================================
Reserve to nonperforming loans 494.61% 557.87
================================================================================
</TABLE>
Capital Resources and Liquidity
Synovus continues to maintain its capital at levels that exceed the minimum
regulatory guidelines. Additionally, based on internal calculations and previous
regulatory exams, each of Synovus' subsidiary banks is currently in compliance
with regulatory capital guidelines. Synovus' total risk-based capital was $1.134
billion at September 30, 1998, compared to $997.1 million at December 31, 1997.
The ratio of total risk-based capital to risk-weighted assets was 14.11% at
September 30, 1998 compared to 13.62% at December 31, 1997. Synovus' leverage
ratio at the end of the third quarter of 1998 was 10.94% compared to 10.02% at
the end of 1997. Synovus' equity-to-assets ratio increased fifty-six basis
points to 10.32% at September 30, 1998, when compared to year-end 1997.
Internal capital generation continues to support asset growth, as reflected in
the third quarter 1998 equity-to-asset ratio exclusive of net unrealized gains
on investment securities available for sale of 10.17%, compared to 9.70% at
year-end 1997.
Synovus' liquidity position and sources of funds have not changed
significantly since December 31,1997. Synovus' liquidity ratio at September 30,
1998 was 33.87% compared to 35.42% at December 31, 1997. Additionally, the
maturity mix of investment securities and loans has not changed significantly
during the first nine months of 1998.
Synovus' management monitors liquidity in coordination with the appropriate
committees at each subsidiary bank. Management must ensure that adequate
liquidity, at a reasonable cost, is available to meet the cash flow needs of
depositors, borrowers, and creditors. Management constantly monitors and
maintains appropriate levels of assets and liabilities so as to provide adequate
funding sources to meet estimated customer withdrawals and future loan requests.
Additionally, Synovus subsidiary banks have access to overnight federal funds
lines with various financial institutions, which total approximately $1.5
billion, that can be drawn upon for short-term liquidity needs. Synovus also
holds a $20 million line of credit.
In 1997, Total System Services, Inc. (TSYS), Synovus' 80.7% owned
subsidiary, began construction on a campus-type facility which will serve as
TSYS' corporate headquarters. TSYS entered into an operating lease agreement
relating to the new corporate campus. Under the agreement, the lessor has
purchased the land, is paying for construction and development costs, and has
leased the property to TSYS commencing upon its completion, which is expected to
be in 1999. The lease provides for a substantial residual value guarantee, up to
$87 million, and includes purchase options at the original cost of the property.
Real estate taxes, insurance, maintenance, and operating expenses applicable to
the leased property are obligations of TSYS. TSYS expects net occupancy and
equipment expense to increase in 1999 as a result of the lease.
In addition, TSYS began a $5 million expansion of its operations center in
north Columbus during 1997. This expansion includes space for the card
production services now located in downtown Columbus. TSYS will begin relocating
the card production services in the fourth quarter of 1998. This expansion will
further include additional space for the mailing support functions. TSYS has
also purchased 18 acres of land containing a 104,000 square-foot speculative
building in east Columbus at a cost of $1.9 million. The building has been
prepared for an additional state-of-the-art data center at a cost of
approximately $15.0 million and will be placed in service in phases over the
remainder of the fourth quarter of 1998. Permanent financing for these projects
will be through industrial revenue bonds.
The consolidated statements of cash flows detail Synovus' cash flows from
operating, investing, and financing activities. Operating activities provided
net cash of $181.7 million during the first nine months of 1998, while $51.8
million was provided by financing activities. Investing activities utilized
$301.9 million of this amount, resulting in a decrease in cash and cash
equivalents of $68.4 million.
Earning Assets, Sources of Funds, and Net Interest Income
Average total assets for the first nine months of 1998 were $9.3 billion,
up 7.0% over the first nine months average of 1997, which was $8.7 billion.
Average earning assets were up 6.8% in the first nine months of 1998 over the
same period a year ago and represented 90.8% of average total assets. When
compared to the same period last year, average deposits increased $544.3 million
and average shareholders' equity increased $128.8 million. These increases were
partially offset by a $102.5 million decrease in average federal funds purchased
and securities sold under agreement to repurchase. This growth provided the
funding for the $468.1 million growth in average net loans, the $19.5 million
increase in average investment securities, and the $45.0 million increase in
average federal funds sold.
Net interest income was $325.0 million for the nine months ended September 30,
1998, up $19.4 million, or 6.4%, over the $305.6 million reported in the nine
months ended September 30, 1997. Net interest income, on a tax-equivalent basis,
for the first nine months of 1998 increased $19.6 million, or 6.4%, over the
same period in 1997.
Net interest income was $111.0 million for the third quarter of 1998, up $6.2
million, or 5.9%, over the $104.8 million reported for the third quarter of
1997. Net interest income, on a tax-equivalent basis, for the third quarter of
1998 increased $6.3 million, or 5.9%, over the third quarter of 1997.
The year-to-date net interest margin was 5.24%, down one basis point from the
same period last year. This decrease resulted from a six basis point decrease in
the yield on earning assets, which was offset by a five basis point decrease in
the effective cost of funds. The decreased yield on earning assets was due to
lower yields on investment securities and loans. The decreased cost of funds was
due to a higher level of non-interest bearing balances.
The tax-equivalent adjustment that is required in making yields on tax-exempt
loans and investment securities comparable to taxable loans and investment
securities is shown in the following table. The taxable-equivalent adjustment is
based on a 35% federal income tax rate.
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
- ----------------------------------------------------------------------------------------------------------
(In thousands) 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $569,681 537,870 193,659 185,047
Taxable-equivalent adjustment 3,747 3,543 1,295 1,193
- -----------------------------------------------------------------------------------------------------------
Interest income, taxable-equivalent 573,428 541,413 194,954 186,240
Interest expense 244,640 232,264 82,620 80,204
- -----------------------------------------------------------------------------------------------------------
Net interest income, taxable-equivalent $328,788 309,149 112,334 106,036
===========================================================================================================
</TABLE>
Non-Interest Income
Total non-interest income during the first nine months of 1998 increased $45.3
million, or 12.7%, over the same period in 1997. This increase in non-interest
income resulted primarily from higher data processing revenues, which increased
$19.9 million, or 7.9%, during the nine months ended September 30, 1998, over
the same period in 1997. Additionally, as a part of its New Bank Initiatives,
Synovus continually sharpens its focus on utilizing its 35 subsidiary banks as
distribution channels for offering targeted products to customers throughout its
market areas. Fees for trust services increased $1.7 million, or 17.8% during
the nine months ended September 30, 1998, over the same period in 1997. The
increase in other operating income was primarily due to increases in brokerage
revenues (up 49%), credit card servicing fees (up 71%), mortgage related income
(up 93%), and income from TSYS joint ventures (up 29%).
Total non-interest income during the quarter ended September 30, 1998,
increased $16.7 million, or 13.4%, over the third quarter of 1997. The increase
in non-interest income resulted primarily from data processing revenues, which
increased $6.4 million, or 7.3%, and other operating income, which increased
$6.9 million, or 42.1%, during the quarter ended September 30, 1998, over the
same period in 1997. The increase in other operating income was due to the same
factors as noted above.
Data processing services revenue is derived principally from the servicing of
individual bankcard accounts for the card-issuing customers of TSYS. TSYS'
revenues from bankcard data processing services increased $6.2 million, or 7.6%,
in the three months ended September 30, 1998, compared to the same period in
1997. During the nine months ended September 30, 1998, TSYS revenues from
bankcard data processing services increased $16.6 million, or 7.0%, compared to
the same period in 1997. Increased revenues from bankcard data processing
services are primarily attributable to the growth in the card portfolios of
existing customers. Increases in the volumes of authorizations and transactions
associated with the additional cardholder accounts also contributed to the
increased revenues. Processing contracts with large customers, representing a
significant portion of TSYS' total revenues, generally provide for discounts on
certain services based on increases in the level of cardholder accounts
processed. As a result, bankcard data processing revenues and the related
margins are influenced by the customer mix relative to the size of customer
bankcard portfolios, as well as the number of individual cardholder accounts
processed for each customer.
A significant amount of TSYS' revenues is derived from long-term contracts
with large customers, including certain major customers. Two of TSYS' customers,
NationsBank and Bank of America, announced completion of their merger effective
September 30, 1998. As a result, the percentage of revenues derived from major
customers has increased. For the three and nine months ended September 30, 1998,
two major customers accounted for approximately 36% and 35% of TSYS' total
revenues, respectively, compared to 34% for the three and nine months ended
September 30, 1997. The loss of either one of TSYS' major customers, or
other significant customers, could have a material adverse effect on TSYS'
financial condition and results of operations.
Near the end of the first quarter of 1998, AT&T, a major customer of TSYS,
completed the sale of its Universal Card Services (UCS) to Citibank, now a part
of Citigroup after Citibank's merger with the Travelers Group, Inc. TSYS and UCS
(now Citibank) have a processing contract with a term until August 2000, and, at
the customer's instruction, TSYS converted all UCS accounts to TS2 , completing
the conversion in October 1998. The long-term effect of the sale of AT&T's
credit card business on TSYS' financial condition and results of operations
cannot be determined at this time.
As discussed above, NationsBank and Bank of America merged effective
September 30, 1998. TSYS has long-term processing contracts with each of these
customers and is in the process of assessing implications of the merger on the
existing contracts with each customer.
During the second quarter of 1998, TSYS announced the signing of a
long-term processing agreement with Sears, Roebuck and Co. to convert and
process its 60 million private label credit card accounts. TSYS successfully
converted the first 7.2 million of these accounts to TS2 in October 1998. The
conversion of the remainder of these accounts is anticipated to be completed by
the end of the second quarter of 1999. Additional revenue will be realized
as these accounts are added over the first half of 1999.
Non-Interest Expense
Total non-interest expense for the nine months ended September 30, 1998,
increased $45.9 million, or 10.1%, over the same period in 1997. Total
non-interest expense for the third quarter of 1998 increased $17.7 million, or
11.5%, over the third quarter of 1997. Management analyzes non-interest expense
in two separate components: banking operations and TSYS. The following table
summarizes this data for the first nine months of 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------------------------------------------------------------
(In thousands) Banking TSYS Banking TSYS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Salaries and other personnel expenses $157,068 120,297 141,264 111,278
Net occupancy and equipment expense 33,500 76,860 31,234 72,070
Other operating expenses 54,674 45,575 51,407 41,243
M&I conversion expenses 5,385 --- --- ---
Minority interest in subsidiary's net income 7,139 --- 6,099 ---
- ---------------------------------------------------------------------------------------------------------------------
Total non-interest expense $257,766 242,732 230,004 224,591
=====================================================================================================================
</TABLE>
In the first nine months of 1998, non-interest expense for Synovus' banking
operations increased $27.8 million, or 12.1 %. During the third quarter of 1998,
non-interest expense increased $12.0 million, or 15.1%, compared to the third
quarter of 1997. The primary reasons for this increase relate to M&I data
processing conversion expenses and additional employees. The number of employees
related to Synovus' banking operations as of September 30, 1998 increased to
5,051 compared to 4,564 as of September 30, 1997.
Non-interest expense related to TSYS increased 8.1% and 7.6% for the nine
and three months ended September 30, 1998, respectively, compared to the same
periods in 1997. TSYS' increase in non-interest expense is also attributable to
the addition of personnel. As of September 30, 1998, the number of employees was
3,378, up 11.2% from 3,039 employees as of September 30, 1997. The growth in
other operating expenses at TSYS during 1998 is primarily due to increased
travel, legal, telecommunications and other business development costs
associated with developing new business opportunities.
During the first quarter of 1998, Synovus began the conversion of its bank
data processing to the Marshall & Illsley (M&I) Data Services' system. This
conversion, which is expected to be substantially completed in 1998, will
greatly enhance Synovus' team members' capabilities to market the "New Bank's"
products and services, by providing more customer data at the point of service.
In the first nine months of 1998, approximately $5.4 million pre-tax of
non-recurring conversion related costs were expensed. Total non-recurring
expenses for this conversion are expected to be approximately $12 million in
1998.
Through separate task forces, Synovus is continuing its ongoing projects to
assure its processing systems are Year 2000 compliant for its banking activities
and at TSYS. The task forces are composed of dedicated resources as well as
members from other areas within the banks and TSYS. Each Board of Directors has
reviewed the overall project plans for the banks and TSYS with progress toward
completion monitored regularly. The primary components of the plans include:
awareness - assuring a common understanding of the issue throughout Synovus;
assessment - identification of non-compliant hardware, equipment, and software
as well as suppliers and vendors; renovation - renovation, replacement or
retirement of programs; validation - testing modifications of programs including
coordination of testing with third parties and vendors; and implementation -
moving validated code to production. Both companies are progressing according to
their plans and system renovation is expected to be completed in 1998.
Validation is underway and will be completed by mid-1999. The costs to bring
Synovus' systems into Year 2000 compliance are being expensed as incurred and
are not expected to have a material effect on Synovus' financial condition or
results of operations for 1998 or 1999. For the banks, the conversion of the
core processing systems to M&I will provide for Year 2000 compliance for those
applications which include loans, deposits, and sales platforms. M&I has
completed the Year 2000 renovation for its banking systems and is currently
utilizing this renovated code for all processing. During the first quarter of
1999, M&I will be completing the testing phase in partnership with Synovus. The
remaining personal computer hardware platforms and software programs as well as
other ancillary systems such as ATM's, fax machines, copiers, and phone systems
are being reviewed and no significant applications or infrastructure which need
to be modified have been identified.
At TSYS, the core system of TS2 was designed to be Year 2000 compliant, and
TSYS is continuing its ongoing project to ensure that all of TSYS' processing
systems are Year 2000 compliant. TSYS' Year 2000 plans called for all mission
critical systems to be renovated by the end of the second quarter of 1998 which
has been accomplished. Testing of clients and other third parties was begun in
the third quarter of 1998. Completion of all third party interface testing is
dependent upon those third parties completing their own internal remediation.
TSYS has made an assessment of non-compliant suppliers and vendors and will
schedule and coordinate testing of incoming and outgoing interfaces with
third-party vendors. TSYS could be adversely affected to the extent third
parties with which it interfaces have not properly addressed their Year 2000
issues.
For its banking operations, Synovus has addressed the Year 2000 contingency plan
requirements in accordance with the Federal Financial Institutions Examination
Council guidelines published May 13, 1998. One area of contingency planning
relates to remediation efforts. As discussed above, Synovus' Year 2000
remediation plans are progressing on schedule. The conversion of all Synovus
bank processing to M&I is on schedule and the Year 2000 renovation of M&I
systems has been completed. Testing of these systems has begun and will be
completed during the first quarter of 1999. Therefore, in accordance with
regulatory guidelines, Synovus has focused its attention on Year 2000 testing,
validation and business resumption issues. The latter issues address the ability
of the Synovus companies to operate in the unlikely event of a critical systems
failure on or about January 1, 2000. This phase of contingency planning has
begun and will continue throughout 1999.
TSYS has developed its remediation contingency plan and is currently
developing its Year 2000 business continuity contingency plan which will be
finalized by the end of the fourth quarter of 1998.
The majority of Synovus' costs in becoming Year 2000 compliant are related
to TSYS. TSYS is primarily utilizing existing internal resources to complete the
Year 2000 project. TSYS incurred $1.7 million of direct costs related to the
Year 2000 remediation project during the third quarter of 1998, bringing the
total direct costs for 1998 to $4.6 million. TSYS expects to incur an additional
$3.4 million of direct costs during the remainder of 1998 and approximately $6.0
million in 1999. Based upon progress to date, TSYS does not expect the cost of
the Year 2000 project to significantly impact its financial condition or results
of operations. The failure of Synovus and TSYS to be Year 2000 compliant would
have a material adverse effect on each company's financial condition and results
of operations.
The costs of the project and the dates on which Synovus and TSYS believe they
will complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions about future
events, including the continued availability of necessary technical resources
and the cooperation of customers and vendors. However, there are no guarantees
that these estimates will be achieved and actual results could differ materially
from those anticipated.
Income Tax Expense
Income tax expense for the nine months ended September 30, 1998, was $74.2
million compared to $67.4 million for the same period a year ago. Income tax
expense for the third quarter of 1998 was $26.8 million compared to $24.0
million in the third quarter of 1997. The effective tax rate for the first nine
months of 1998 and 1997 was 35.8% and 36.3%, respectively.
Legal Proceedings
Synovus is subject to various legal proceedings and claims which arise in
the ordinary course of its business. Any litigation is vigorously defended by
Synovus and, in the opinion of management, based on consultation with external
legal counsel, any outcome of such litigation would not materially affect
Synovus' consolidated financial position or results of operations.
Currently, multiple lawsuits seeking class action treatment, are pending against
one of Synovus' Alabama banking subsidiaries that involve: (1) payment of
service fees or interest rebates to automobile dealers in connection with the
assignment of automobile credit sales contracts to that Synovus subsidiary; (2)
the forced placement of insurance to protect that Synovus subsidiary's interest
in collateral for which consumer credit customers have failed to obtain or
maintain insurance; and (3) the receipt of commissions by that Synovus
subsidiary in connection with the sale of credit life insurance to its consumer
credit customers and the charging of an interest surcharge and a processing fee
in connection with consumer loans made by that subsidiary. These lawsuits seek
unspecified damages, including punitive damages. Synovus intends to vigorously
contest these lawsuits and all other litigation to which Synovus and its
subsidiaries are parties. Based upon information presently available, and in
light of legal, equitable, and factual defenses available to Synovus and its
subsidiaries, contingent liabilities arising from the threatened and pending
litigation are not considered material. It should be noted; however, that large
punitive damage awards, bearing little relation to the actual damages sustained
by plaintiffs, have been awarded in Alabama.
Forward-Looking Statements
Certain statements contained in this filing which are not statements of
historical fact constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act (the "Act"). 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 and other financial terms; (ii) statements of
plans and objectives of Synovus or its management or Board of Directors,
including those relating to products or services; (iii) statements of future
economic performance; and (iv) statements of assumptions underlying such
statements. Words such as "believes," "anticipates," "expects," "intends,"
"targeted," and similar expressions are intended to identify forward-looking
statements but are not the exclusive means of identifying such statements.
Forward-looking statements involve risks and uncertainties, which may cause
actual results to differ materially from those in such statements. Factors that
could cause actual results to differ from those discussed in the forward-looking
statements include, but are not limited to: (i) the strength of the U.S. economy
in general and the strength of the local economies in which operations are
conducted; (ii) the effects of and changes in trade, monetary and fiscal
policies, and laws, including interest rate policies of the Federal Reserve
Board; (iii) inflation, interest rate, market and monetary fluctuations; (iv)
the timely development of and acceptance of new products and services and
perceived overall value of these products and services by users; (v) changes in
consumer spending, borrowing, and saving habits; (vi) technological changes
(including "Year 2000" data systems compliance issues) are more difficult or
expensive than anticipated; (vii) acquisitions; (viii) the ability to increase
market share and control expenses; (ix) the effect of changes in laws and
regulations (including laws and regulations concerning taxes, banking,
securities, and insurance) with which Synovus and its subsidiaries must comply;
(x) the effect of changes in accounting policies and practices, as may be
adopted by the regulatory agencies, the Financial Accounting Standards Board, or
other authoritative bodies; (xi) changes in Synovus' organization, compensation,
and benefit plans; (xii) the costs and effects of litigation and of unexpected
or adverse outcomes in such litigation; and (xiii) the success of Synovus at
managing the risks involved in the foregoing.
Such forward-looking statements speak only as of the date on which such
statements are made, and Synovus undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made to reflect the occurrence of unanticipated events.
ITEM 3 - QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Quantitative and qualitative disclosures about market risk were included in
the annual report which was incorporated by reference in Synovus' 1997 10-K.
There have been no significant changes in the contractual balances and the
estimated fair value of Synovus' on-balance sheet financial instruments, the
notional amount and estimated fair value of the company's off-balance sheet
derivative financial instruments, or weighted-average interest rates.
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(11) Statement re Computation of Per Share Earnings
(27) Financial Data Schedule (for SEC purposes only, not enclosed
herewith)
(b) Report on Form 8-K
The following report on Form 8-K was filed during or subsequent to the
third quarter of 1998.
(1) The report filed on September 1, 1998, included the following event:
On September 1, 1998, Synovus Financial Corp. (Registrant) announced the
completion of its acquisition of the $348 million asset Community Bank
Capital Corporation located in Alpharetta, Georgia.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SYNOVUS FINANCIAL CORP.
Date: November 13, 1998 BY: /s/ Thomas J. Prescott
-----------------------
Thomas J. Prescott
Executive Vice President and
Chief Financial Officer
INDEX TO EXHIBITS
Sequentially
Exhibit Number Description Numbered Page
11 Statement re Computation of 23
Per Share Earnings
27 Financial Data Schedule
(for SEC purposes only, not
enclosed herewith)
EXHIBIT 11
SYNOVUS FINANCIAL CORP.
COMPUTATION OF NET INCOME
PER COMMON SHARE
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, 1998 Three Months Ended September 30, 1997
- ----------------------------------------------------------------------------------------------------------------
Net Average Net Income Net Average Net Income
Income Shares Per Share Income Shares Per Share
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $ 47,438 264,646 $ 0.18 $ 43,101 262,395 $ 0.16
Effect of dilutive options --- 4,216 --- 3,531
- -------------------------------------------------------- ---------------------
EPS - assuming dilution $ 47,438 268,862 $ 0.18 $ 43,101 265,926 $ 0.16
================================================================================================================
Nine Months Ended September 30, 1998 Nine Months Ended September 30, 1997
- ----------------------------------------------------------------------------------------------------------------
Net Average Net Income Net Average Net Income
Income Shares Per Share Income Shares Per Share
- ----------------------------------------------------------------------------------------------------------------
Basic EPS $ 132,863 263,554 $ 0.50 $ 118,230 262,081 $ 0.45
Effect of dilutive options --- 3,984 --- 3,448
- -------------------------------------------------------- ---------------------
EPS - assuming dilution $ 132,863 267,538 $ 0.50 $ 118,230 265,529 $ 0.45
================================================================================================================
</TABLE>
All information presented in Exhibit 11 reflects the three-for-two stock split
declared by the Synovus Board of Directors on April 23, 1998, effective May 21,
1998, to shareholders of record on May 7, 1998.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SYNOVUS FINANCIAL CORP. FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 319,737
<INT-BEARING-DEPOSITS> 675
<FED-FUNDS-SOLD> 42,728
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,372,847
<INVESTMENTS-CARRYING> 310,187
<INVESTMENTS-MARKET> 319,048
<LOANS> 7,191,812
<ALLOWANCE> 110,458
<TOTAL-ASSETS> 9,840,766
<DEPOSITS> 8,026,590
<SHORT-TERM> 417,361
<LIABILITIES-OTHER> 182,975
<LONG-TERM> 129,502
0
0
<COMMON> 267,437
<OTHER-SE> 768,064
<TOTAL-LIABILITIES-AND-EQUITY> 9,840,766
<INTEREST-LOAN> 488,139
<INTEREST-INVEST> 78,643
<INTEREST-OTHER> 2,899
<INTEREST-TOTAL> 569,681
<INTEREST-DEPOSIT> 228,886
<INTEREST-EXPENSE> 244,640
<INTEREST-INCOME-NET> 325,041
<LOAN-LOSSES> 20,329
<SECURITIES-GAINS> 750
<EXPENSE-OTHER> 500,498
<INCOME-PRETAX> 207,014
<INCOME-PRE-EXTRAORDINARY> 132,863
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 132,863
<EPS-PRIMARY> .50
<EPS-DILUTED> .50 <F1>
<YIELD-ACTUAL> 5.24
<LOANS-NON> 22,332
<LOANS-PAST> 23,938
<LOANS-TROUBLED> 22,332
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 103,050
<CHARGE-OFFS> 22,074
<RECOVERIES> 5,279
<ALLOWANCE-CLOSE> 110,458
<ALLOWANCE-DOMESTIC> 110,458
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 21,910
<FN>
<F1> On April 23, 1998, Synovus announced a three-for-two
stock split to be issued on May 21, 1998, to shareholders
of record as of May 7, 1998. Financial data schedules
have not been restated for prior periods for this recapitalization.
</FN>
</TABLE>
