SYNOVUS FINANCIAL CORPORATION
Table of Contents

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2006
Commission File Number 1-10312
(LOGO)
SYNOVUS FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
     
GEORGIA   58-1134883
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer Identification No.)
1111 Bay Avenue, Suite # 500
P.O. Box 120
Columbus, Georgia 31902

(Address of principal executive offices)
(706) 649-2401
(Registrants’ telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12B-2 of the Exchange Act.
Large Accelerated Filer þ   Accelerated Filer o   Non-Accelerated Filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12B-2 of the Exchange Act).
Yes o   No þ
Indicate the number of shares outstanding of each of the issuer’s class of common stock, as of the latest practicable date.
     
Class   July 31, 2006
     
Common Stock, $1.00 Par Value   324,030,639 shares
 
 

 


 

SYNOVUS FINANCIAL CORP.
INDEX
             
  Financial Information:        
 
           
  Unaudited Financial Statements        
 
           
 
  Consolidated Balance Sheets June 30, 2006 and December 31, 2005     3  
 
           
 
  Consolidated Statements of Income Six and Three Months Ended June 30, 2006 and 2005     4  
 
           
 
  Consolidated Statements of Cash Flows Six Months Ended June 30, 2006 and 2005     5  
 
           
 
  Notes to Consolidated Financial Statements     6  
 
           
  Management’s Discussion and Analysis of Financial Condition and Results of Operations     21  
 
           
  Quantitative and Qualitative Disclosures About Market Risk     44  
 
           
  Controls and Procedures     45  
 
           
  Other Information:        
 
           
  Risk Factors     46  
 
           
  Unregistered Sales of Equity Securities and Use of Proceeds     46  
 
           
  Submission of Matters to a Vote of Security Holders     47  
 
           
  Exhibits     49  
 
           
Signature Page     50  
 
           
Exhibit Index     51  
 EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
 EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
 EX-32 SECTION 906 CERTIFICATION OF THE CEO & CFO

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PART I. FINANCIAL INFORMATION
ITEM 1 – FINANCIAL STATEMENTS
SYNOVUS FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
(unaudited)
                 
    June 30,     December 31,  
(In thousands, except share data)   2006     2005  
ASSETS
               
Cash and due from banks
  $ 887,154       880,886  
Interest earning deposits with banks
    11,885       2,980  
Federal funds sold and securities purchased under resale agreements
    203,631       68,922  
Trading account assets
    46,939       27,322  
Mortgage loans held for sale
    170,650       143,144  
Investment securities available for sale
    3,137,486       2,958,320  
 
               
Loans, net of unearned income
    23,661,964       21,392,347  
Allowance for loan losses
    (313,694 )     (289,612 )
 
           
Loans, net
    23,348,270       21,102,735  
 
           
 
               
Premises and equipment, net
    707,988       669,425  
Contract acquisition costs and computer software, net
    406,793       431,849  
Goodwill, net
    607,501       458,382  
Other intangible assets, net
    52,894       44,867  
Other assets
    945,897       831,840  
 
           
Total assets
  $ 30,527,088       27,620,672  
 
           
 
               
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Liabilities:
               
Deposits:
               
Non-interest bearing retail and commercial deposits
  $ 3,806,277       3,700,750  
Interest bearing retail and commercial deposits
    16,124,042       14,798,845  
 
           
Total retail and commercial deposits
    19,930,319       18,499,595  
Brokered time deposits
    3,123,380       2,284,770  
 
           
Total deposits
    23,053,699       20,784,365  
Federal funds purchased and securities sold under repurchase agreements
    1,974,272       1,158,669  
Long-term debt
    1,421,578       1,933,638  
Other liabilities
    488,559       597,698  
 
           
Total liabilities
    26,938,108       24,474,370  
 
           
 
               
Minority interest in consolidated subsidiaries
    215,521       196,973  
 
               
Shareholders’ equity:
               
Common stock — $1.00 par value. Authorized 600,000,000 shares; issued 329,097,369 in 2006 and 318,301,275 in 2005; outstanding 323,435,831 in 2006 and 312,639,737 in 2005
    329,097       318,301  
Surplus
    960,054       686,447  
Treasury stock – 5,661,538 shares in 2006 and 2005
    (113,944 )     (113,944 )
Unearned compensation
          (3,126 )
Accumulated other comprehensive loss
    (54,783 )     (29,536 )
Retained earnings
    2,253,035       2,091,187  
 
           
Total shareholders’ equity
    3,373,459       2,949,329  
 
           
Total liabilities and shareholders’ equity
  $ 30,527,088       27,620,672  
 
           
See accompanying Notes to Consolidated Financial Statements.

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SYNOVUS FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
                                 
    Six Months Ended     Three Months Ended  
    June 30,     June 30,  
(In thousands, except per share data)   2006     2005     2006     2005  
Interest income:
                               
Loans, including fees
  $ 863,961       632,900       459,111       329,785  
Investment securities
    64,520       52,735       33,809       26,615  
Trading account assets
    1,384             685        
Mortgage loans held for sale
    4,274       3,092       2,340       1,745  
Federal funds sold and securities purchased under resale agreements
    2,946       1,699       1,705       993  
Interest earning deposits with banks
    121       55       63       37  
 
                       
Total interest income
    937,206       690,481       497,713       359,175  
 
                       
Interest expense:
                               
Deposits
    312,171       170,917       171,757       93,397  
Federal funds purchased and securities sold under repurchase agreements
    37,162       17,504       21,010       8,606  
Long-term debt
    38,234       38,133       17,743       20,107  
 
                       
Total interest expense
    387,567       226,554       210,510       122,110  
 
                       
Net interest income
    549,639       463,927       287,203       237,065  
Provision for losses on loans
    38,083       42,106       18,534       22,823  
 
                       
Net interest income after provision for losses on loans
    511,556       421,821       268,669       214,242  
 
                       
Non-interest income:
                               
Electronic payment processing services
    454,990       420,947       234,518       215,784  
Merchant services
    129,769       95,801       65,820       68,696  
Other transaction processing services revenue
    91,588       93,838       46,463       45,324  
Service charges on deposit accounts
    56,123       54,994       29,410       28,004  
Fiduciary and asset management fees
    23,222       22,175       11,509       11,138  
Brokerage and investment banking revenue
    13,506       12,070       6,559       5,807  
Mortgage banking income
    13,978       13,328       8,105       7,430  
Bankcard fees
    21,527       17,691       10,992       9,462  
Securities gains (losses), net
    (1,136 )     598       (1,062 )     327  
Other fee income
    18,988       15,319       10,038       7,834  
Other operating income
    18,435       16,311       9,263       7,325  
 
                       
Non-interest income before reimbursable items
    840,990       763,072       431,615       407,131  
Reimbursable items
    168,638       148,330       86,138       79,161  
 
                       
Total non-interest income
    1,009,628       911,402       517,753       486,292  
 
                       
Non-interest expense:
                               
Salaries and other personnel expense
    461,605       398,425       233,847       208,596  
Net occupancy and equipment expense
    197,195       175,473       99,495       88,839  
Other operating expenses
    218,770       202,623       112,934       110,015  
 
                       
Non-interest expense before reimbursable items
    877,570       776,521       446,276       407,450  
Reimbursable items
    168,638       148,330       86,138       79,161  
 
                       
Total non-interest expense
    1,046,208       924,851       532,414       486,611  
 
                       
 
                               
Minority interest in subsidiaries’ net income
    20,905       18,504       11,165       9,672  
 
                               
Income before income taxes
    454,071       389,868       242,843       204,251  
Income tax expense
    166,767       144,674       90,046       75,791  
 
                       
Net income
  $ 287,304       245,194       152,797       128,460  
 
                       
 
                               
Net income per share:
                               
Basic
  $ 0.90       0.79       0.47       0.41  
 
                       
Diluted
    0.90       0.78       0.47       0.41  
 
                       
 
                               
Weighted average shares outstanding:
                               
Basic
    318,236       310,890       322,783       311,154  
 
                       
Diluted
    320,840       314,297       325,421       314,691  
 
                       
 
                               
Dividends declared per share
  $ 0.39       0.37       0.20       0.18  
 
                       
See accompanying Notes to Consolidated Financial Statements.

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SYNOVUS FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
                 
    Six months Ended  
    June 30,  
(In thousands)   2006     2005  
Cash flows from operating activities:
               
Net income
  $ 287,304       245,194  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provision for losses on loans
    38,083       42,106  
Depreciation, amortization and accretion, net
    97,970       92,258  
Increase in interest receivable
    (63,054 )     (16,977 )
Increase in interest payable
    25,311       7,729  
Equity in income of joint ventures
    (1,871 )     (4,340 )
Minority interest in subsidiaries’ net income
    20,905       18,504  
Increase in trading account assets
    (19,617 )      
Originations of mortgage loans held for sale
    (736,200 )     (696,752 )
Proceeds from sales of mortgage loans held for sale
    708,415       661,709  
Increase in prepaid and other assets
    (10,614 )     (106,614 )
Decrease in other liabilities
    (8,614 )     (37,774 )
Impairment of developed software
          3,137  
Share-based compensation
    13,259       1,114  
Decrease in accrued salaries and employee benefits
    (63,362 )     (29,568 )
Other, net
    913       (38,455 )
 
           
Net cash provided by operating activities
    288,828       141,271  
 
           
 
               
Cash flows from investing activities:
               
Net cash received from (paid for) acquisitions
    14,800       (56,983 )
Net increase in interest earning deposits with banks
    (8,905 )     (10,117 )
Net increase in federal funds sold and securities purchased under resale agreements
    (129,927 )     (209,487 )
Proceeds from maturities and principal collections of investment securities available for sale
    235,293       458,081  
Proceeds from sales of investment securities available for sale
    111,593       33,744  
Purchases of investment securities available for sale
    (444,720 )     (562,517 )
Net increase in loans
    (1,491,044 )     (999,438 )
Purchases of premises and equipment
    (64,361 )     (52,085 )
Proceeds from disposal of premises and equipment
    348       1,799  
Increase in contract acquisition costs
    (22,339 )     (10,981 )
Additions to licensed computer software from vendors
    (4,437 )     (12,020 )
Additions to internally developed computer software
    (8,999 )     (9,015 )
 
           
Net cash used by investing activities
    (1,812,698 )     (1,429,019 )
 
           
 
               
Cash flows from financing activities:
               
Net increase in demand and savings deposits
    449,389       768,655  
Net increase in certificates of deposit
    1,006,439       760,355  
Net increase (decrease) in federal funds purchased and securities sold under repurchase agreements
    762,864       (483,635 )
Principal repayments on long-term debt
    (570,679 )     (159,280 )
Proceeds from issuance of long-term debt
    23,500       614,841  
Excess tax benefit from share-based payment arrangements
    4,853        
Dividends paid to shareholders
    (181,317 )     (110,460 )
Proceeds from issuance of common stock
    33,294       28,018  
 
           
Net cash provided by financing activities
    1,528,343       1,418,494  
 
           
 
               
 
           
Effect of exchange rate changes on cash and cash equivalent balances held in foreign currencies
    1,795       (2,000 )
 
           
 
               
Increase in cash and due from banks
    6,268       128,746  
Cash and due from banks at beginning of period
    880,886       683,035  
 
           
Cash and due from banks at end of period
  $ 887,154       811,781  
 
           
See accompanying Notes to Consolidated Financial Statements.

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SYNOVUS FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 — Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with generally accepted accounting principles. All adjustments consisting of normally recurring accruals that, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the periods covered by this report have been included. The accompanying unaudited consolidated financial statements should be read in conjunction with the Synovus Financial Corp. (Synovus) consolidated financial statements and related notes appearing in the 2005 annual report previously filed on Form 10-K.
In preparing the consolidated financial statements, 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 respective balance sheets and the reported amounts of revenues and expenses for the periods presented. Actual results could differ significantly from those estimates.
Note 2 — Supplemental Cash Flow Information
For the six months ended June 30, 2006 and 2005, Synovus paid income taxes (net of refunds received) of $190.4 million and $143.6 million, respectively. For the six months ended June 30, 2006 and 2005, Synovus paid interest of $360.4 million and $216.1 million, respectively.
Non-cash investing activities consisted of loans of approximately $19.9 million and $11.2 million, which were foreclosed and transferred to other real estate during the six months ended June 30, 2006 and 2005, respectively.
Significant non-cash items for the six months ended June 30, 2006 related to the acquisition of Riverside Bancshares, Inc. and Banking Corporation of Florida consist of $812.5 million in net loans, $121.3 million in investment securities available for sale, $155.0 million in goodwill, and $813.5 million in deposits.
Note 3 — Comprehensive Income
Other comprehensive income (loss) consists of change in net unrealized gains (losses) on cash flow hedges, change in net unrealized gains (losses) on investment securities available for sale, and gains (losses) on foreign currency translation. Comprehensive income consists of net income plus other comprehensive income (loss). Comprehensive income for the six and three months ended June 30, 2006 and 2005 is presented below:
                                 
    Six Months Ended June 30,     Three Months Ended June 30,  
(in thousands)   2006     2005     2006     2005  
Comprehensive income:
                               
Net income
  $ 287,304       245,194       152,797       128,460  
Other comprehensive income (loss), net of tax:
                               
Change in net unrealized gains (losses) on cash flow hedges
    (1,054 )     869       48       (1,532 )
Change in net unrealized gains/losses on investment securities available for sale, net of reclassification adjustment
    (28,000 )     (5,940 )     (15,113 )     14,986  
Gains (losses) on foreign currency translation
    3,807       (4,348 )     3,472       (2,384 )
 
                       
Other comprehensive income (loss)
    (25,247 )     (9,419 )     (11,593 )     11,070  
 
                       
Comprehensive income
  $ 262,057       235,775       141,204       139,530  
 
                       
Note 4 — Derivative Instruments
Synovus accounts for its derivative financial instruments under Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended. SFAS No. 133 requires recognition of all derivatives as either assets or

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liabilities on the balance sheet and requires measurement of those instruments at fair value through adjustments to either the hedged items, accumulated other comprehensive income, or current earnings, as appropriate. As part of its overall interest rate risk management activities, Synovus utilizes derivative instruments to manage its exposure to various types of interest rate risks. These derivative instruments consist primarily of interest rate swaps and commitments to sell mortgage loans. The interest rate lock commitments made to prospective mortgage loan customers also represent derivative instruments since it is intended that such loans will be sold.
Interest rate swap transactions generally involve the exchange of fixed-rate and floating-rate interest payment obligations without the exchange of the underlying notional amounts. Entering into interest rate contracts involves not only interest rate risk, but also the risk of counterparties’ failure to fulfill their legal obligations. Notional amounts often are used to express the volume of these transactions, but the amounts potentially subject to credit risk are much smaller.
A summary of interest rate swap contracts utilized for interest rate risk management at June 30, 2006 is shown in the following table.
                                                         
            Weighted-Average                        
                            Maturity                     Net  
    Notional     Receive     Pay     In     Unrealized     Unrealized  
(Dollars in   Amount     Rate     Rate(*)     Months     Gains     Losses     Gains  
thousands)                                                   (Losses)  
Receive fixed swaps:
                                                       
Fair value hedges
  $ 1,762,500       4.76 %     4.80 %     40       5,872       (33,038 )     (27,166 )
Cash flow hedges
    750,000       7.74 %     8.25 %     41       27       (10,000 )     (9,973 )
                                   
Total
  $ 2,512,500       5.65 %     5.83 %     40       5,899       (43,038 )     (37,139 )
                                   
 
(*)   Variable pay rate based upon contract rates in effect at June 30, 2006.
At June 30, 2006, outstanding commitments to sell mortgage loans amounted to approximately $217.4 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 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 June 30, 2006 was an unrealized gain of $1.0 million.
At June 30, 2006, Synovus had commitments to fund fixed-rate mortgage loans to customers in the amount of $143.7 million. The fair value of these commitments at June 30, 2006 was an unrealized loss of $690,000.
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 recorded at fair value with any resulting gain or loss recorded in current period earnings. As of June 30, 2006, the notional amount of customer related derivative financial instruments was $1.53 billion.

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Note 5 – Share-Based Compensation
General Description of Share-Based Compensation Plans
Synovus has various long-term incentive plans under which the Compensation Committee of the Board of Directors has the authority to grant share-based compensation to Synovus employees. At June 30, 2006, Synovus had a total of 3,982,444 shares of its authorized but unissued common stock reserved for future grants under three long-term incentive plans. The general terms of each of these plans are substantially the same, permitting the grant of share-based compensation including stock options, non-vested shares, and stock appreciation rights. These plans include vesting periods ranging from two to three years and contractual terms ranging from five to ten years. Stock 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 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 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 Payment,” on January 1, 2006, share-based compensation expense was recognized 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.
Accounting Policy
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123R, which 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.
SFAS No. 123R is effective for all awards granted on or after January 1, 2006 and for awards modified, repurchased, or cancelled after that date. SFAS No. 123R requires that compensation cost be recognized on or after the effective date for the unvested portion of outstanding awards, as of the effective date, based on the grant-date fair value of those awards calculated under SFAS No. 123, “Accounting for Stock-Based Compensation.” Share-based compensation expenses include the impact of expensing the fair value of stock options as well as expenses associated

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with non-vested share awards. Synovus adopted the provisions of SFAS No. 123R effective January 1, 2006, using the modified prospective transition method.
Prior to 2006, Synovus applied the intrinsic-value based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, including FASB Interpretation (FIN) No. 44, “Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB Opinion No. 25.” Under this methodology, Synovus adopted the disclosure requirements of SFAS No. 123, and recognized compensation expense only if, on the date of grant, the market price of the underlying stock exceeded the exercise price.
The following table illustrates the effect on net income and earnings per share for the six and three months ended June 30, 2005 as if Synovus had applied the fair value recognition provisions of SFAS No. 123 to share-based employee compensation granted to purchase shares of Synovus stock.
                 
    Six Months Ended     Three Months  
    June 30,     Ended June 30,  
(In thousands, except per share data)   2005     2005  
Net income as reported
  $ 245,194     $ 128,460  
Add: Share-based employee compensation expense recognized, net of tax
    615       195  
Deduct: Total share-based employee compensation expense determined under fair value based method for all awards, net of related tax effects
    (7,115 )     (3,342 )
 
           
Net income – pro forma
  $ 238,694     $ 125,313  
 
           
 
               
Earnings per share:
               
Basic – as reported
  $ 0.79     $ 0.41  
Basic – pro forma
    0.77       0.40  
Diluted – as reported
    0.78       0.41  
Diluted – pro forma
    0.76       0.40  
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 data based on historical experience to determine separate forfeiture rates for the different award grants. Currently, Synovus estimates a forfeiture rate in the range of 0% to 7.5%.

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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. Share-based compensation expense recognized in income is presented below:
                                 
(in thousands)   Six Months Ended June 30,     Three Months Ended June 30,  
    2006     2005     2006     2005  
Share-based compensation expense:
                               
Stock options
  $ 11,348     $     $ 4,773     $  
Non-vested shares
    1,911       1,114       1,073       321  
 
                       
Total share-based compensation expense
  $ 13,259     $ 1,114     $ 5,846     $ 321  
 
                       
Aggregate compensation expense recognized in the six and three months ended June 30, 2006 with respect to the foregoing Synovus stock options included $4.6 million and $2.2 million, respectively, that would have been recognized in previous periods had the policy under SFAS No. 123R with respect to retirement eligibility been applied to awards granted prior to January 1, 2006. At June 30, 2006, there was total unrecognized compensation cost of approximately $33.1 million related to the unvested portion of share-based compensation arrangements involving shares of Synovus stock, and approximately $4.4 million related to the unvested portion of share-based compensation arrangements involving shares of TSYS stock.
As stock options for purchase of Synovus common stock are exercised and non-vested shares vest, Synovus recognizes a tax benefit which is recorded as a component of surplus within shareholders’ equity. Synovus recognized a tax benefit in the amount of $5.3 million and $6.3 million for the six months ended June 30, 2006 and 2005, respectively, and recognized a tax benefit in the amount of $2.8 million and $2.0 million for the three months ended June 30, 2006 and 2005, respectively.
Stock Option Awards
The weighted-average grant-date fair value of stock options granted to key Synovus employees during the six months ended June 30, 2006 and 2005 was $6.40 and $7.06, respectively, and during the three months ended June 30, 2006 and 2005 was $6.52 and $6.95, respectively. The fair value of the option grants was determined using the Black-Scholes-Merton option-pricing model with the following weighted-average assumptions:
                                 
    Six Months Ended June 30,     Three Months Ended June 30  
    2006     2005     2006     2005  
Risk-free interest rate
    4.47 %     4.14 %     4.82 %     4.07 %
Expected stock price volatility
    24.87       21.37       24.61       20.40  
Dividend Yield
    2.80       2.44       2.80       2.40  
Expected life of options
  5.8 years   8.6 years   6.0 years   8.5 years
 
                       

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The expected volatility for stock option awards in 2006 was determined with equal weighting of implied volatility and historical volatility. For awards prior to 2006, it was determined using implied volatility. The expected life for stock options granted during the six months ended June 30, 2006 was determined using the “simplified” method, as prescribed by the Securities and Exchange Commission’s (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.
A summary of stock options outstanding (including performance-accelerated stock options as described below) as of June 30, 2006 and changes during the six months then ended is presented below:
                                 
                    Weighted-        
                    Average        
            Weighted-     Remaining     Aggregate  
            Average     Contractual     Intrinsic  
Stock Options   Shares     Exercise Price     Term     Value  
Outstanding at January 1, 2006
    25,546,776     $ 22.66                  
Granted
    866,466       27.66                  
Assumed in connection with acquisitions
    877,915       8.93                  
Exercised
    (1,790,022 )     18.47                  
Forfeited or expired
    (161,412 )     27.51                  
 
                       
Outstanding at June 30, 2006
    25,339,723     $ 22.60     4.94 Years   $ 105,904,781  
 
                       
Exercisable at June 30, 2006
    13,878,879     $ 21.11     3.88 Years   $ 78,674,354  
 
                       
During the first six months of 2006, a total of 2,477,793 stock options vested with a weighted-average grant-date fair value of $5.38. The intrinsic value of stock options exercised during the six months ended June 30, 2006 was $16.0 million. At June 30, 2006, there was approximately $27.4 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 1.39 years.
During the six months ended June 30, 2005, Synovus granted 2,571,053 stock options to key Synovus officers. The exercise price for these grants was equal to the market price on the date of grant. Accordingly, no compensation expense was recorded for stock options granted during the six months ended June 30, 2005 under the intrinsic-value based method as described above. The intrinsic value of stock options exercised during the six months ended June 30, 2005 was $15.7 million.
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. 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 results of operations.

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Summary information regarding these performance-accelerated stock options is presented below. There were no performance-accelerated stock options granted during the six months ended June 30, 2006 or 2005.
                         
                    Options  
Year Options   Number of     Exercise Price     Outstanding at  
Granted   Stock Options     Per Share     June 30, 2006  
2000
    4,100,000     $ 17.69 – 18.06       4,100,000  
2001
    2,600,000       28.99       2,600,000  
 
                 
Non-Vested Shares
In addition to the stock options described above, non-transferable, non-vested shares of Synovus common stock have been awarded to certain key executives and non-employee directors of Synovus. Except for the grant of 63,386 performance-vesting shares described 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.
A summary of non-vested shares outstanding (excluding the 63,386 performance-vesting shares as described below) as of June 30, 2006 is presented below:
                 
            Weighted-  
            Average  
            Grant-Date  
Non-Vested Shares   Shares     Fair Value  
Outstanding at January 1, 2006
    82,583     $ 27.28  
Granted
    167,169       27.59  
Vested
    (5,220 )     26.82  
Forfeited or cancelled
    (1,500 )     27.54  
 
           
Outstanding at June 30, 2006
    243,032     $ 27.50  
 
           
At June 30, 2006, there was approximately $5.5 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 1.9 years.
During the six months ended June 30, 2005, Synovus issued 66,083 non-vested shares to key Synovus executives and non-management members of its board of directors, with a weighted-average grant-date fair value of $26.87 per share.
Synovus granted 63,386 non-vested shares to a key executive with a performance-vesting schedule (performance-vesting shares) during the three months ended March 31, 2005. There were no performance-vesting shares granted in 2006 or during the three months ended June 30, 2005. 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 traunch 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.

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The following is a summary of performance-vesting shares outstanding at June 30, 2006:
                 
            Grant-Date  
Performance-Vesting Shares   Shares     Fair Value  
Outstanding at January 1, 2006
    12,677     $ 26.82  
Granted
    12,677       27.72  
Vested
    (12,677 )     26.82  
Forfeited or cancelled
           
 
           
Outstanding at June 30, 2006
    12,677     $ 27.72  
 
           
At June 30, 2006, there was approximately $176,000 of total unrecognized compensation cost related to performance-vesting shares based on the quoted market price of Synovus’ stock at June 30, 2006. This cost is expected to be recognized over the remainder of 2006.
TSYS Share-Based Compensation
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.
TSYS did not grant any TSYS stock options during the six months ended June 30, 2006 or 2005. At June 30, 2006, there were 1,370,000 TSYS stock options outstanding with a weighted-average exercise price of $15.15, weighted-average remaining contractual life of 2.5 years, and an aggregate intrinsic value of $13.5 million. Of these 1,370,000 stock options, 1,347,000 were exercisable at June 30, 2006 with a weighted-average exercise price of $14.94, a weighted-average remaining contractual life of 2.4 years, and an aggregate intrinsic value of $13.0 million. At June 30, 2006, there was approximately $102,000 of total unrecognized compensation cost related to TSYS stock options that is expected to be recognized over a weighted-average period of 0.7 years.
During the six months ended June 30, 2006 and 2005, TSYS issued 150,775 and 95,815 TSYS non-vested shares with a grant-date fair value of $3.0 million and $2.2 million, respectively, to certain key executives and non-employee directors of TSYS. There were no non-vested TSYS shares issued during the three months ended June 30, 2006 and 2005. At June 30, 2006, there was approximately $4.0 million of total unrecognized compensation cost related to TSYS’ non-vested share based compensation arrangements. This cost is expected to be recognized over a weighted-average period of 2.7 years.
Additionally, during the three months ended March 31, 2005, TSYS granted 126,087 TSYS non-vested shares to two key executives with a performance-vesting schedule (TSYS performance-vesting shares). There were no performance-vesting shares granted in 2006 or during the three months ended June 30, 2005. These performance-vesting shares have seven one-year performance periods (2005-2011) during each of which the 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 performance-vesting shares will vest. Compensation expense for each traunch of this grant is measured based on the quoted market value of TSYS’ 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. At June 30, 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 June 30, 2006, there was approximately $252,000 of total unrecognized compensation cost related to

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TSYS performance-vesting shares. This cost is expected to be recognized over the remainder of 2006.
Note 6 – Business Combinations
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 $83.2 million, consisting of 2,938,791 shares of Synovus common stock valued at $78.5 million, stock options valued at $4.7 million and $9,200 in direct acquisition costs. Synovus has not yet completed the allocation of the purchase price of this acquisition to the respective assets acquired, including identifiable intangible assets, and liabilities assumed.
The preliminary purchase price allocation is presented below:
         
(In thousands)   At April 1, 2006  
Cash and due from banks
  $ 2,614  
Federal funds sold
    4,782  
Investments
    5,655  
Loans, net
    342,509  
Premises and equipment
    2,317  
Goodwill
    43,532  
Core deposits premium
    906  
Other assets
    3,655  
 
     
Total assets acquired
    405,970  
 
     
Deposits(A)
    321,767  
Other liabilities
    1,046  
 
     
Total liabilities assumed
    322,813  
 
     
Net assets acquired
  $ 83,157  
 
     
(a)  Includes time deposits in the amount of $232.4 million.
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 $171.3 million, consisting of 5,883,427 shares of Synovus common stock valued at $159.7 million, stock options valued at $11.4 million, and $100,500 in

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direct acquisition costs. Synovus has not yet completed the allocation of the purchase price of this acquisition to the respective assets acquired, including identifiable intangible assets, and liabilities assumed.
The preliminary purchase price allocation is presented below:
         
     
(In thousands)   At March 25, 2006  
Cash and due from banks
  $ 12,186  
Investments
    115,665  
Loans, net
    469,983  
Premises and equipment
    11,973  
Goodwill
    111,464  
Core deposits premium
    11,688  
Other assets
    16,815  
 
     
Total assets acquired
    749,774  
 
     
 
       
Deposits(A)
    491,739  
Federal funds purchased
    2,069  
Securities sold under repurchase agreements
    50,670  
FHLB advances
    27,318  
Other liabilities
    6,649  
 
     
Total liabilities assumed
    578,445  
 
     
Net assets acquired
  $ 171,329  
 
     
(a)  Includes time deposits in the amount of $175.7 million.
On March 1, 2005, TSYS completed the acquisition of Vital Processing Services, L.L.C. (Vital), by purchasing the 50-percent equity stake formerly held by Visa U.S.A. for $95.8 million, including $794,000 of direct acquisition costs. In April, 2006, Vital was renamed 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 finalized the purchase price allocation during the first quarter of 2006 and has allocated $30.2 million to goodwill, $12.0 million to intangible assets and the remaining amount to the assets and liabilities acquired. TSYS Acquiring’s results of operations have been included in the consolidated financial results beginning March 1, 2005.

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The final purchase price allocation is presented below:
         
     
(In thousands)   At March 1, 2005  
Cash and cash equivalents
  $ 19,399  
Contract acquisition costs and computer software, net
    31,656  
Intangible assets
    12,000  
Goodwill
    30,210  
Other assets
    34,407  
 
     
Total assets acquired
    127,672  
Total liabilities assumed
    31,829  
Minority interest
    49  
 
     
Net assets acquired
  $ 95,794  
 
     
Pro forma information related to the impact of these acquisitions on Synovus’ consolidated financial statements, assuming such acquisitions had occurred at the beginning of the periods reported, is not presented as such impact is not significant.
On July 11, 2006, TSYS completed the acquisition of Card Tech, Ltd., a privately owned London-based payments firm, and related companies. TSYS paid aggregate consideration of approximately $58.0 million.
Note 7 – Operating Segments
Synovus has two reportable segments: Financial Services and Transaction Processing Services, which is comprised of TSYS. The Financial Services segment provides financial services including banking, financial management, insurance, mortgage and leasing services through 40 subsidiary banks and other Synovus offices in Georgia, Alabama, South Carolina, Florida, and Tennessee. TSYS provides electronic payment processing and other related services to card-issuing institutions in the United States, Mexico, Canada, Honduras, Puerto Rico and Europe. The significant accounting policies of the segments are described in the summary of significant accounting policies in the 2005 annual report previously filed on Form 10-K. All inter-segment services provided are charged at the same rates as those charged to unaffiliated customers. Such services are included in the results of operations of the respective segments and are eliminated to arrive at consolidated totals.

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Segment information as of and for the six months ended June 30, 2006 and 2005, respectively, is presented in the following table:
                                         
            Financial                    
(In thousands)           Services     TSYS (a)     Eliminations     Consolidated  
Interest income
    2006     $ 937,206       3,554       (3,554 ) (b)   $ 937,206  
 
    2005       690,518       1,487       (1,524 ) (b)     690,481  
Interest expense
    2006       391,043       78       (3,554 ) (b)     387,567  
 
    2005       227,956       122       (1,524 ) (b)     226,554  
Net interest income
    2006       546,163       3,476             549,639  
 
    2005       462,562       1,365             463,927  
Provision for losses on loans
    2006       38,083                   38,083  
 
    2005       42,106                   42,106  
Net interest income after provision
    2006       508,080       3,476             511,556  
for losses on loans
    2005       420,456       1,365             421,821  
Total non-interest income
    2006       172,517       845,618       (8,507 ) (c)     1,009,628  
 
    2005       155,215       766,079       (9,892 ) (c)     911,402  
Total non-interest expense
    2006       369,796       684,919       (8,507 ) (c)     1,046,208  
 
    2005       315,586       619,157       (9,892 ) (c)     924,851  
Income before income taxes
    2006       310,801       164,175       (20,905 ) (d)     454,071  
 
    2005       260,085       148,287       (18,504 ) (d)     389,868  
Income tax expense
    2006       110,656       56,111             166,767  
 
    2005       93,263       51,411             144,674  
Net income
    2006       200,145       108,064       (20,905 ) (d)     287,304  
 
    2005       166,822       96,876       (18,504 ) (d)     245,194  
Total assets
    2006       29,311,947       1,426,850       (211,710 ) (e)     30,527,088  
 
    2005       25,483,657       1,316,910       (87,273 ) (e)     26,713,294  
 
(a)   Includes equity in income of joint ventures which is included in non-interest income.
 
(b)   Interest on TSYS’ cash deposits with the Financial Services segment.
 
(c)   Principally, electronic payment processing and other services provided by TSYS to the Financial Services segment.
 
(d)   Minority interest in TSYS and GP Network Corporation (a TSYS subsidiary).
 
(e)   Primarily TSYS’ cash deposits with the Financial Services segment.

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Segment information as of and for the three months ended June 30, 2006 and 2005, respectively, is presented in the following table:
                                         
            Financial                    
(In thousands)           Services     TSYS (a)     Eliminations     Consolidated  
Interest income
    2006     $ 497,713       2,034       (2,034 ) (b)   $ 497,713  
 
    2005       359,204       700       (729 ) (b)     359,175  
Interest expense
    2006       212,499       45       (2,034 ) (b)     210,510  
 
    2005       122,768       71       (729 ) (b)     122,110  
Net interest income
    2006       285,214       1,989             287,203  
 
    2005       236,436       629             237,065  
Provision for losses on loans
    2006       18,534                   18,534  
 
    2005       22,823                   22,823  
Net interest income after provision
    2006       266,680       1,989             268,669  
for losses on loans
    2005       213,613       629             214,242  
Total non-interest income
    2006       89,453       431,212       (2,912 ) (c)     517,753  
 
    2005       80,646       410,717       (5,071 ) (c)     486,292  
Total non-interest expense
    2006       190,850       344,476       (2,912 ) (c)     532,414  
 
    2005       157,752       333,930       (5,071 ) (c)     486,611  
Income before income taxes
    2006       165,283       88,725       (11,165 ) (d)     242,843  
 
    2005       136,507       77,416       (9,672 ) (d)     204,251  
Income tax expense
    2006       58,899       31,147             90,046  
 
    2005       49,060       26,731             75,791  
Net income
    2006       106,384       57,578       (11,165 ) (d)     152,797  
 
    2005       87,447       50,685       (9,672 ) (d)     128,460  
Total assets
    2006       29,311,947       1,426,850       (211,710 ) (e)     30,527,088  
 
    2005       25,483,657       1,316,910       (87,273 ) (e)     26,713,294  
 
(a)   Includes equity in income of joint ventures which is included in non-interest income.
 
(b)   Interest on TSYS’ cash deposits with the Financial Services segment.
 
(c)   Principally, electronic payment processing and other services provided by TSYS to the Financial Services segment.
 
(d)   Minority interest in TSYS and GP Network Corporation (a TSYS subsidiary).
 
(e)   Primarily TSYS’ cash deposits with the Financial Services segment.

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Segment information for the changes in the carrying amount of goodwill for the six months ended June 30, 2006 is shown in the following table:
                         
    Financial              
(In thousands)   Services     TSYS     Total  
Balance as of December 31, 2005
  $ 345,517       112,865       458,382  
Goodwill acquired during period
    155,594 (1)(2)     23       155,617  
Impairment losses
                 
Other
          (6,498 )(3)     (6,498 )
 
                 
Balance as of June 30, 2006
  $ 501,111       106,390       607,501  
 
                 
 
(1)   Synovus acquired all of the issued and outstanding shares of GLOBALT, Inc. on May 31, 2002. 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 (EBTDA), for each of the three years ending December 31, 2004, 2005 and 2006. The contingent consideration is payable by February 15th of each year subsequent to the respective calendar year for which the EBTDA calculation is made. The fair value of the contingent consideration is recorded as an addition to goodwill. On February 15, 2005, Synovus recorded additional contingent consideration of $226,000, which was based on 4% of a multiple of GLOBALT’s EBTDA for the year ended December 31, 2004. On February 15, 2006, Synovus recorded additional contingent consideration of $585,000, which was based on 7% of a multiple of GLOBALT’s EBTDA for the year ended December 31, 2005.
 
(2)   Goodwill acquired during the six months ended June 30, 2006 included $111.5 million resulting from the Riverside acquisition on March 25, 2006 and $43.5 million resulting from the First Florida acquisition on April 1, 2006. See Note 6 for additional information regarding these acquisitions.
 
(3)   On March 1, 2005, TSYS completed the acquisition of TSYS Acquiring. During the first quarter of 2006, TSYS recorded a final adjustment to the purchase price allocation, which resulted in a $6.5 million decrease in goodwill (see Note 6 for additional information regarding this acquisition).

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Intangible assets (excluding goodwill) net of accumulated amortization as of June 30, 2006 and December 31, 2005, respectively, are presented in the table below.
                 
           
(In thousands)   June 30, 2006     December 31, 2005  
Purchased trust revenues
  $ 2,783       2,924  
Core deposit premiums
    33,800       23,550  
Employment contracts / non-competition agreements
    300       460  
Acquired customer contracts
    3,271       3,913  
Intangibles associated with the acquisition of minority interest in TSYS
    1,944       2,087  
Customer relationships
    10,650       11,700  
Other
    146       233  
 
           
Total carrying value
  $ 52,894       44,867  
 
           
Note 8 – Dividends per Share
Dividends declared per share for the quarter ended June 30, 2006 were $0.1950, up 6.8% from $0.1825 for the second quarter of 2005. For the six months ended June 30, 2006, dividends declared per share were $0.390, an increase of 6.8% from $0.365 for the same period in 2005.
Note 9 – Guarantees and Indemnifications
TSYS has entered into processing and licensing agreements with clients that include intellectual property indemnification clauses. TSYS generally agrees to indemnify its clients, subject to certain exceptions, against legal claims that TSYS’ services or systems infringes on certain third party patents, copyrights or other proprietary rights. In the event of such a claim, TSYS is generally obligated to hold the client harmless and pay for related losses, liabilities, costs and expenses, including, without limitation, court costs and reasonable attorney’s fees. TSYS has not made any indemnification payments in relation to these indemnification clauses.
Synovus has not recorded a liability for guarantees or indemnities in the accompanying consolidated balance sheets since the maximum amount of potential future payments under such guarantees and indemnities is not determinable.
Note 10 – Other
Certain amounts in 2005 have been reclassified to conform to the presentation adopted in 2006.

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ITEM 2 — MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Executive Summary
The following financial review provides a discussion of Synovus’ financial condition, changes in financial condition, and results of operations.
About Our Business
Synovus is a diversified financial services holding company, based in Columbus, Georgia, with more than $30 billion in assets. Synovus operates two business segments: the Financial Services and the Transaction Processing Services segments. The Financial Services segment provides integrated financial services including banking, financial management, insurance, mortgage and leasing services through 40 subsidiary banks and other Synovus offices in five southeastern states. At June 30, 2006, our subsidiary banks ranged in size from $59.6 million to $5.8 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 business mix; for the first six months of 2006, 54% of our consolidated revenues and 30% of our net income came from TSYS.
Our Key Financial Performance Indicators
In terms of how we measure success in our business, the following are our key financial performance indicators:
             
Financial Services        
 
 
  Loan Growth   Credit Quality    
 
 
  Deposit Growth   Fee Income Growth    
 
 
  Net Interest Margin   Expense Management    
 
           
TSYS        
 
  Revenue Growth   Expense Management    
2006 Financial Performance Highlights
Consolidated
    Net income of $152.8 million, up 18.9%, and $287.3 million, up 17.2% for the three and six months ended June 30, 2006 as compared to the same periods in 2005.
 
    Diluted earnings per share of $0.47 for the three months ended June 30, 2006 and $0.90 for the six months ended June 30, 2006, up 15.0% and 14.8%, respectively, over the same periods a year ago.
 
    The 2006 financial results include the impact of incremental (as compared to 2005) share-based compensation related to expensing the fair value of stock options and non-vested shares. This incremental expense resulted from the adoption of Statement of Financial Accounting Standards No. 123R “Share-Based Payment,” effective January 1, 2006 as well as an increased utilization of non-vested shares as an alternative to stock options. The incremental share-based

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      compensation expense represented 2.3 cents per diluted share for the six months ended June 30, 2006.
 
    Effective April 1, 2006, Synovus completed the acquisition of Banking Corporation of Florida (First Florida). The acquisition resulted in the addition of $342.5 million in net loans and $321.8 million in total deposits.
 
    Effective March 25, 2006, Synovus completed the acquisition of Riverside Bancshares, Inc. (Riverside). The acquisition resulted in the addition of $470.0 million in net loans and $491.7 million in total deposits.
 
    The first quarter of 2006 results include a reduction of income tax expense of $3.7 million in connection with the completion of a tax examination for the tax years 2000 through 2003.
Financial Services
    Net income growth: 21.7% and 20.0 % for the three and six months ended June 30, 2006, respectively, over the corresponding periods in the prior year.
 
    Net interest margin: 4.39% and 4.36 % for the three and six months ended June 30, 2006, respectively, as compared to 4.15% and 4.13% for the same periods in 2005.
 
    Loan growth: 15.5% increase from June 30, 2005 (11.5% excluding the impact of the First Florida and the Riverside acquisitions).
 
    Credit quality measures remained strong:
    Non-performing assets ratio of 0.48%, compared to 0.46% at December 31, 2005 and 0.51% at June 30, 2005.
 
    Past dues over 90 days and still accruing interest as a percentage of total loans of 0.08%, compared to 0.07% at December 31, 2005 and 0.08 % at June 30, 2005.
 
    Total past dues and still accruing interest as a percentage of total loans of 0.47% compared to 0.44% at December 31, 2005 and 0.59% at June 30, 2005.
 
    Net charge-off ratio of 0.17% for the second quarter of 2006 compared to 0.27% for the first quarter of 2006, and 0.37% for the second quarter of 2005, and 0.21% compared to 0.30% for the first six months of 2006 and 2005, respectively.
    Deposit growth: 14.7% increase from a year ago (14.3% growth excluding brokered time deposits and 9.9% growth excluding brokered time deposits and the impact of the First Florida and the Riverside acquisitions)
 
    Fee income: up 10.9% for the quarter and 11.1% for first six months of 2006 compared to the corresponding periods in the prior year.
 
    Non-Interest expenses up by 21.0% for the quarter and 17.2% for the first six months of 2006 over the corresponding periods in the prior year (15.5% and 12.8% increases excluding the impact of share-based compensation and the Riverside and First Florida acquisitions).

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TSYS
    Revenue growth before reimbursable items: 3.5% and 10.0% for the three and six months ended June 30, 2006 over the corresponding periods in the prior year.
 
    Expense growth before reimbursable items: 1.3% and 10.0% for the three and six months ended June 30, 2006 over the corresponding periods in the prior year.
 
    Net income growth: 13.4% and 11.4% for the three months and six months ended June 30, 2006, respectively, over the corresponding periods in the prior year.
Other highlights at TSYS include:
    TSYS expanded its global footprint with the acquisition of London-based Card Tech, Ltd. in July of 2006.
 
    TSYS reached a long-term agreement with Wachovia Corporation, the No. 4 bank-holding company in the U.S., to provide core processing and other related services in support of their re-entry into the consumer credit card line of business.
 
    TSYS announced that its Board of Directors approved a share repurchase plan to purchase up to 2 million shares of TSYS common stock over the next 2 years.
 
    TSYS entered the healthcare payments market by signing a long-term agreement with Exante Bank, a wholly-owned subsidiary of UnitedHealth Group, Inc., to provide a broad range of payment processing and related services.
2006 Earnings Outlook
Synovus expects its earnings per share growth for 2006 to be at the upper end of the 12% to 14% range, based in part upon the following assumptions:
    The Federal Reserve is at or near the end of its interest rate increase cycle.
 
    A favorable credit environment.
 
    TSYS’ earnings growth in the 21% to 23% range.
 
    Incremental (as compared to 2005) share-based compensation expense of approximately 5 cents per diluted share.
Critical Accounting Policies
The accounting and financial reporting policies of Synovus conform to accounting principles generally accepted in the United States of America and to general practices within the banking and electronic payment processing industries. Synovus has identified certain of its accounting policies as “critical accounting policies.” In determining which accounting policies are critical in nature, Synovus has identified the policies that require significant judgment or involve complex estimates. The application of these policies has a significant impact on Synovus’ financial statements. Synovus’ financial results could differ significantly if different judgments or estimates are applied in the application of these policies.
Synovus’ critical accounting policies are described in the “Financial Review” section of Synovus’ 2005 annual report on Form 10-K. There have been no material changes to Synovus’ critical accounting policies, estimates, and assumptions, or the judgments affecting the application of these estimates and assumptions in 2006.

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Business Combinations
Refer to Note 6 of the Notes to Unaudited Consolidated Financial Statements for a discussion of business combinations.
Balance Sheet
Effective on April 1, 2006 Synovus completed the acquisition of Banking Corporation of Florida, the parent company of First Florida Bank, (First Florida) headquartered in Naples, Florida. Effective on March 25, 2006, Synovus completed the acquisition of Riverside Bancshares, Inc., the parent company of Riverside Bank (Riverside), headquartered in Marietta, Georgia. The comparison of Synovus’ consolidated balance sheet at June 30, 2006 to December 31, 2005 is impacted by the First Florida and the Riverside acquisitions. The more significant of the changes were the net loans addition of $812.5 million, the investment securities addition of $121.3 million, the goodwill addition of $155.0 million, and the deposits addition of $813.5 million.
During the first six months of 2006, total assets increased $2.91 billion, and excluding the impact of the aforementioned acquisitions, total assets increased $1.75 billion. The more significant increases consisted of loans, net of unearned income, up $2.27 billion, federal funds sold and securities purchased under resale agreements up $134.7 million, investment securities available for sale up $179.2 million, and goodwill up $149.2 million.
Providing the necessary funding for the balance sheet growth during the first six months of 2006, the core deposit base (excluding brokered time deposits) grew $1.43 billion, brokered time deposits grew $838,600, federal funds purchased and securities sold under repurchase agreements increased $815.6 million, and shareholders’ equity increased $424.1 million. These increases were partially offset by a $512.1 million decrease in long-term debt.
Loans
Compared to June 30, 2005, total loans grew by 15.5%, and excluding the impact of acquisitions, total loans grew by $2.3 billion, or 11.5%. On a sequential quarter basis, total loans outstanding grew by $1.24 billion or 11.2% annualized. Excluding the impact of the First Florida acquisition, total loans grew by $907.4 million or 16.6% annualized.
The tables on pages 27 and 28 illustrate the composition of the loan portfolio (classified by loan purpose) as of June 30, 2006. The commercial real estate portfolio totals $14.6 billion, which represents 61.9% of the total loan portfolio. Loans for the purpose of financing investment properties total $4.1 billion, which is only 17.3% of the total loan portfolio, or less than one-third of the total commercial real estate portfolio. The investment properties loan category includes $746.9 million in loans in the Atlanta market. This amount represents 3.2% of the total loan portfolio, or 5.1% of the total commercial real estate portfolio. The primary source of repayment on investment property loans is the income from the underlying property (e.g., hotels, office buildings, shopping centers, and apartment units’ rental income), with the collateral as the secondary source of repayment. Additionally, in almost all cases, these loans are made on a recourse basis, which provides another source of repayment. Among other factors, the underwriting of these loans is evaluated by determining the impact of higher interest rates, as well as lower occupancy rates, on the borrower’s ability to service debt.
Commercial loans for the purpose of financing 1-4 family properties represent $5.2 billion or 21.9% of the total loan portfolio, and 35.4% of the total commercial real estate portfolio. The

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1-4 family properties category includes $1.5 billion in loans in the Atlanta market, which is 6.3% of the total loan portfolio, or 28.9% of the 1-4 family properties category.
Included in total commercial real estate loans are $4.2 billion in commercial and industrial related real estate loans. These loans are categorized as owner-occupied and other property loans in the tables shown on pages 27 and 28. These loans represent 17.6% of the total loan portfolio, or 28.4% of the total commercial real estate portfolio. The primary source of repayment on these loans is revenue generated from products or services offered by the business or organization (e.g., accounting; legal and medical services; retailers; manufacturers and wholesalers). These loans typically carry the personal guarantees of the principals of the business.
Commercial and industrial (C&I) loans represent $5.5 billion or 23.4% of the total loan portfolio at June 30, 2006. The primary source of repayment on these loans is revenue generated from products or services offered by the business or organization (e.g., accounting; legal and medical services; retailers; manufacturers and wholesalers). These loans typically carry the personal guarantees of the principals of the business. These loans are diversified by geography, industry, and loan type. While Synovus has not experienced strong growth in C&I loans in recent years, Synovus is implementing a C&I growth strategy that is beginning to be reflected in the second quarter results as well as the commercial loan pipeline.
Consumer loans at June 30, 2006 total $3.5 billion, representing 14.9% of the total loan portfolio. Overall, consumer loans have experienced moderate growth on both sequential quarter and year over year basis, led principally by growth in consumer mortgages and home equity lines. Credit card balances are up slightly over the prior year following the normal seasonal decline in the first quarter of 2006.
Credit Quality
Credit quality measures remained strong. The non-performing assets ratio was 0.48% at June 30, 2006 compared to 0.46% at December 31, 2005 and 0.51% at June 30, 2005. Total non-performing assets were $114.4 million at June 30, 2006, up $15.8 million from December 31, 2005. This increase included a commercial and industrial loan of approximately $7.6 million that was placed on non-accrual status during the second quarter of 2006 as well as approximately $4.1 million in non-performing assets that were added as a result of 2006 acquisitions. The quality of our commercial real estate portfolio remains strong with a non-performing loan ratio of only 0.25% of total commercial real estate loans at June 30, 2006. This compares to an overall non-performing loan ratio for the total loan portfolio of 0.38%. The year-to-date net charge-off ratio for the first six months of 2006 was 0.17% compared to 0.37% for the same period of 2005. We expect that the net charge-off ratio for the year will be under 0.30%.
Past due levels remained very favorable, with total loans past due (and still accruing interest) at 0.47% of loans. Loans 90 days past due and still accruing interest at June 30, 2006 were $19.3 million, or 0.08% of total loans, compared to 0.07% at December 31, 2005 and 0.08% at June 30, 2005. These loans are in the process of collection, and management believes that sufficient collateral value securing these loans exists to cover contractual interest and principal payments on the loans. Management further believes the resolution of these delinquencies will not cause a material increase in non-performing assets.
The allowance for loan losses is $313.7 million, or 1.33% of net loans, at June 30, 2006 compared to $289.6 million, or 1.35% of net loans, at December 31, 2005. The allowance to non-performing loans coverage was 353% at June 30, 2006, compared to 352% at

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December 31, 2005.
The provision for losses on loans was $18.5 million for the second quarter of 2006 compared to $19.5 million for the first quarter of 2006 and $22.8 million for the second quarter of 2005. For the first six months of 2006, the provision for loan losses was $38.1 million compared to $42.1 million for the same period in 2005. For the first six months of 2006, total provision expense covered net charge-offs by 1.59 times compared to 1.39 times for the same period a year ago.
                 
(Dollars in thousands)   June 30, 2006     December 31, 2005  
Non-performing loans
  $ 88,805     $ 82,175  
Other real estate
    25,634       16,500  
 
           
Non-performing assets
  $ 114,439     $ 98,675  
 
           
 
               
Loans 90 days past due and still accruing
  $ 19,340     $ 16,023  
 
           
As a % of loans
    0.08 %     0.07 %
 
           
 
               
Allowance for loan losses
  $ 313,694     $ 289,612  
 
           
Allowance for loan losses as a % of loans
    1.33 %     1.35 %
 
           
As a % of loans and other real estate:
               
Non-performing loans
    0.38 %     0.38 %
Other real estate
    0.10       0.08  
 
           
Non-performing assets
    0.48 %     0.46 %
 
           
 
               
Allowance to non-performing loans
    353.24 %     352.43 %
 
           
Management continuously monitors non-performing 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, or substandard that have been excluded from the determination of non-performing assets or impaired loans. Management further believes non-performing assets and impaired loans include all material loans in which doubts exist as to the collectibility of amounts due according to the contractual terms of the loan agreement.

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     The following table shows the composition of the loan portfolio and non-performing loans (classified by loan purpose) as of June 30, 2006.
                                 
(Dollars in thousands)                           % of  
                    Total     Total  
            % of     Non-     Non-  
            Total Loans     performing     performing  
Loan Type   Total Loans     Outstanding     Loans     Loans  
Commercial Real Estate
                               
 
                               
Multi-Family
  $ 528,278       2.2 %   $ 214       0.2 %
Hotels
    674,971       2.9       1,485       1.7  
Office Buildings
    850,826       3.6       3,928       4.4  
Shopping Centers
    692,452       2.9              
Commercial Development
    942,220       4.0       1,795       2.0  
 
                               
Other Investment Property
    409,371       1.7       74       0.1  
 
                       
Total Investment Properties
    4,098,118       17.3       7,496       8.4  
 
                       
 
                               
1-4 Family Construction
    2,120,870       9.0       2,349       2.6  
1-4 Family Perm /Mini-Perm.
    1,180,088       5.0       5,438       6.1  
Residential Development
    1,882,508       8.0       1,293       1.5  
 
                       
Total 1-4 Family Properties
    5,183,466       21.9       9,080       10.2  
 
                       
 
                               
Land Acquisition
    1,205,548       5.1       4,934       5.6  
 
                       
 
                               
Total Investment-Related Real Estate
    10,487,132       44.3       21,510       24.2  
 
                       
 
                               
Owner-Occupied
    2,940,952       12.4       10,047       11.3  
Other Property
    1,221,842       5.2       5,053       5.7  
 
                       
Total Commercial Real Estate
    14,649,926       61.9       36,610       41.2  
 
                               
Commercial & Industrial
    5,547,533       23.4       43,291       48.8  
 
                               
Home Equity Lines
    1,245,895       5.3       1,519       1.7  
Consumer Mortgages
    1,493,278       6.3       4,479       5.0  
Credit Cards
    266,233       1.1              
Other Consumer Loans
    511,398       2.2       2,906       3.3  
 
                       
Total Consumer
    3,516,804       14.9       8,904       10.0  
 
                               
Unearned Income
    (52,299 )     (0.2 )            
 
                       
 
                               
Total
  $ 23,661,964       100.0 %   $ 88,805       100.0 %
 
                       

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     The following table compares the composition of the loan portfolio at June 30, 2006, December 31, 2005 and June 30, 2005.
                                         
(Dollars in thousands)   Total Loans             Total Loans      
                    2Q06             2Q06  
                    vs             vs  
                    4Q05             2Q05  
    June 30,     Dec. 31,     % change     June 30,     % change  
Loan Type   2006     2005     (1)(2)     2005     (2)  
Commercial Real Estate
                                       
 
                                       
Multi-Family
  $ 528,278     $ 527,710       0.2 %   $ 526,820       0.3 %
Hotels
    674,971       680,301       (1.6 )     804,316       (16.1 )
Office Buildings
    850,826       747,493       27.9       786,262       8.2  
Shopping Centers
    692,452       656,949       10.9       628,701       10.1  
Commercial Development
    942,220       867,217       17.4       803,494       17.3  
Other Investment Property
    409,371       372,911       19.7       330,992       23.7  
 
                             
Total Investment Properties
    4,098,118       3,852,581       12.9       3,880,585       5.6  
 
                             
 
                                       
1-4 Family Construction
    2,120,870       1,552,338       73.9       1,372,556       54.5  
1-4 Family Perm /Mini-Perm.
    1,180,088       1,095,155       15.6       1,087,763       8.5  
Residential Development
    1,882,508       1,496,436       52.0       1,219,186       54.4  
 
                             
Total 1-4 Family Properties
    5,183,466       4,143,929       50.6       3,679,505       40.9  
 
                                       
Land Acquisition
    1,205,548       1,049,041       30.1       913,488       32.0  
 
                                       
Total Investment- Related Real Estate
    10,487,132       9,045,551       32.1       8,473,578       23.8  
 
                             
 
                                       
Owner-Occupied
    2,940,952       2,699,431       18.0       2,335,195       25.9  
Other Property
    1,221,842       1,115,094       19.3       1,202,920       1.6  
 
                             
Total Commercial Real Estate
    14,649,926       12,860,076       28.1       12,011,693       22.0  
 
                                       
Commercial & Industrial
    5,547,533       5,231,150       12.2       5,235,982       6.0  
 
                                       
Home Equity Lines
    1,245,895       1,187,205       10.0       1,131,195       10.1  
Consumer Mortgages
    1,493,278       1,372,134       17.8       1,338,095       11.6  
Credit Cards
    266,233       268,348       (1.6 )     257,427       (3.4 )
Other Consumer Loans
    511,398       521,521       (3.9 )     549,207       (6.9 )
 
                             
Total Consumer
    3,516,804       3,349,208       10.1       3,275,924       7.4  
 
                             
Unearned Income
    (52,299 )     (48,087 )     17.7       (43,765 )     19.5  
 
                             
 
                                       
Total
  $ 23,661,964     $ 21,392,347       21.4 %   $ 20,479,834       15.5 %
 
                             
 
(1)   Percentage changes are annualized.
 
(2)   The percentage change comparison to prior periods is impacted by the First Florida and Riverside acquisitions, which were completed on April 1, 2006 and March 25, 2006, respectively. First Florida and Riverside contributed approximately $346 million and $482 million, respectively, in total loans. Excluding the impact of these two acquisitions, the year-to-date annualized growth is 13.6%, while the year-over-year growth is 11.5%.

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Deposits
Total deposits at June 30, 2006 were $23.1 billion, a $2.27 billion increase from December 31, 2005. Total deposits excluding brokered time deposits increased by $1.43 billion from December 31, 2005. The June 30, 2006 balance sheet includes $321.8 million in deposits added as a result of the First Florida acquisition and $491.7 million in deposits added as a result of the Riverside acquisition completed on April 1, 2006 and March 24, 2006, respectively. Excluding the impact of the First Florida and Riverside acquisitions plus brokered time deposits, total deposits increased by $617.2 million, or 6.71% annualized from December 31, 2005. This growth was driven by strong growth in money market accounts and time deposits. The growth in money market and time deposit balances reflects a continued shift in customer preference towards this type of deposits. Customers have become more interest rate sensitive as the overall level of market rates has increased.
Compared to a year ago, total deposits grew by 14.7%. Excluding the impact of the First Florida and Riverside acquisitions, and brokered time deposits, total deposits grew by 9.9% over the prior year. This growth was led by increases in both time deposits and money market accounts, with increases excluding the impact of acquisitions of 20.0% and 15.8%, respectively.
On a sequential quarter basis, average core deposits (excluding brokered time deposits) grew at an annualized rate of 23.4%. Excluding the impact of acquisitions, average core deposits grew at an annualized rate of 7.3%. The primary contributors to this growth were money market accounts and time deposits, which grew at an annualized rate of 27.4% and 38.3%, respectively, and excluding acquisitions, grew at an annualized rate of 14.2% and 12.7%, respectively.
Capital Resources and Liquidity
Synovus has always placed great emphasis on maintaining a strong capital base and continues to exceed regulatory capital requirements. Additionally, based on internal calculations and previous regulatory exams, each of the subsidiary banks is currently in compliance with regulatory capital guidelines. Total risk-based capital was $4.06 billion at June 30, 2006, compared to $3.70 billion at December 31, 2005. The ratio of total risk-based capital to risk-weighted assets was 14.10% at June 30, 2006 compared to 14.23% at December 31, 2005. The leverage ratio was 10.39% at June 30, 2006 compared to 9.99% at December 31, 2005. The equity-to-assets ratio was 11.05% at June 30, 2006 compared to 10.68% at year-end 2005.
Synovus’ management, 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. Management must ensure that adequate liquidity, at a reasonable cost, is available to meet the cash flow needs of depositors, borrowers, and creditors. Management constantly monitors and maintains appropriate levels of assets and liabilities so as to provide adequate funding sources to meet estimated customer withdrawals and future loan requests. Subsidiary banks have access to overnight federal funds lines with various financial institutions, which total approximately $3.7 billion and can be drawn upon for short-term liquidity needs. Banking liquidity and sources of funds have not changed significantly since December 31, 2005.
The Parent Company requires cash for various operating needs including dividends to shareholders, acquisitions, capital infusions into subsidiaries, the servicing of debt, and the payment of general corporate expenses. The primary source of liquidity for the Parent Company is dividends from the subsidiary banks. As a short-term liquidity source, the Parent Company has access to a $25 million line of credit with an unaffiliated banking organization. Synovus had

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no borrowings outstanding on this line of credit at June 30, 2006.
The consolidated statements of cash flows detail cash flows from operating, investing, and financing activities. For the six months ended June 30, 2006, operating activities provided net cash of $288.8 million, investing activities used $1.81 billion, and financing
activities provided $1.53 billion, resulting in an increase in cash and due from banks of $6.3 million.
Earning Assets, Sources of Funds, and Net Interest Income
Average total assets for the first six months of 2006 were $28.7 billion, up 11.4% over the first six months of 2005, or 9.4% excluding acquisitions. Average earning assets were up 12.3% in the first six months of 2006 over the same period last year, or 10.1% excluding acquisitions, and represented 89.1% of average total assets, or 89.0% excluding acquisitions. When compared to the same period last year, average deposits increased $2.41 billion, average federal funds purchased and securities sold under repurchase agreements increased $255.7 million, average long-term debt decreased $249.3 million, and average shareholders’ equity increased $478.6 million. Excluding acquisitions, average deposits increased $1.97 billion, average federal funds purchased and securities sold under repurchase agreements increased $228.2 million, average long-term debt decreased $264.2 million, and average shareholders’ equity increased $344.1 million. This growth provided the funding for $2.38 billion growth in average net loans and $383.7 million growth in average investments, or $1.95 billion and $316.6 million, respectively excluding the impact of acquisitions.
Net interest income for the six months ended June 30, 2006 was $549.6 million up $85.7 million, or 18.5%, over $463.9 million for the six months ended June 30, 2005. Net interest income for the three months ended June 30, 2006 was $287.2 million, an increase of $50.1 million, or 21.2%, over $237.1 million for the three months ended June 30, 2005.
The net interest margin was 4.36% for the six months ended June 30, 2006, up 23 basis points from the six months ended June 30, 2005. The increase was driven by a 141 basis point increase in loan yields. A significant increase in variable rate loan yields, primarily due to a 199 basis point increase in the average prime rate, was the main contributor to the increased loan yields. Earning asset yields increased by 127 basis points, which was partially offset by a 104 basis point increase in the effective cost of funds. The increase in the effective cost of funds was primarily due to an increase in the cost of variable rate deposits and short-term wholesale funding, the most significant of which were a 168 basis point increase in money market rates and a 200 basis point increase in the rate on federal funds purchased and securities sold under repurchase agreements.
On a sequential quarter basis, net interest income increased by $24.8 million (approximately $13.3 million increase excluding the impact of current year acquisitions), while the net interest margin increased 7 basis points to 4.39%. The yield on earning assets increased by 35 basis points, which was due to a 39 basis point increase in loan yields resulting from a 47 basis point increase in the average prime rate for the quarter. The effective cost of funds increased 28 basis points for the quarter. This increase was primarily driven by higher rates on money market accounts and short-term wholesale funding plus an upward repricing of certificates of deposit.
For the remainder of 2006, Synovus anticipates that its net interest margin will remain near the level of the second quarter. This assumption anticipates that interest rates will be relatively stable for the remainder of the year.

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Quarterly yields earned on average interest-earning assets and rates paid on average interest-bearing liabilities for the five most recent quarters are presented below:
                                         
    2006     2005  
    Second     First     Fourth     Third     Second  
(dollars in thousands)   Quarter     Quarter     Quarter     Quarter     Quarter  
         
Interest Earning Assets
                                       
Taxable Investment Securities
  $ 3,008,122       2,823,306       2,713,238       2,611,048       2,556,964  
Yield
    4.21 %     4.08       3.87       3.75       3.78  
Tax-Exempt Investment Securities
  $ 202,676       201,432       208,265       215,096       220,109  
Yield
    6.73 %     6.86       6.90       7.08       6.87  
Trading Account Assets
  $ 47,398       37,659       26,006       19,143        
Yield
    5.72 %     7.42       6.97       3.84        
Commercial Loans
  $ 19,746,392       18,377,498       17,881,828       17,342,794       17,090,893  
Yield
    7.98 %     7.58       7.25       6.83       6.47  
Consumer Loans
  $ 875,171       835,520       845,251       840,746       833,071  
Yield
    8.09 %     7.89       7.87       7.83       7.37  
Mortgage Loans
  $ 1,071,477       1,039,741       1,036,041       1,015,396       1,022,169  
Yield
    6.82 %     6.67       6.44       6.31       6.47  
Credit Card Loans
  $ 260,010       260,251       257,691       253,985       249,491  
Yield
    10.81 %     10.81       10.19       10.07       10.03  
Home Equity Loans
  $ 1,231,592       1,188,153       1,167,361       1,149,255       1,100,010  
Yield
    7.69 %     7.30       6.85       6.32       5.92  
Allowance for Loan Losses
  $ (307,674 )     (294,817 )     (286,846 )     (281,505 )     (278,734 )
         
Loans, Net
  $ 22,876,968       21,406,345       20,901,326       20,320,671       20,016,900  
Yield
    8.06 %     7.67       7.35       6.95       6.61  
Mortgage Loans Held for Sale
  $ 132,605       117,085       121,665       137,116       108,929  
Yield
    7.08 %     6.61       6.48       6.54       6.41  
Federal Funds Sold and Time Deposits with Banks
  $ 139,924       118,772       119,606       135,735       133,399  
Yield
    5.07 %     4.42       4.26       3.55       3.10  
         
Total Interest Earning Assets
  $ 26,407,692       24,704,601       24,090,106       23,438,809       23,036,301  
Yield
    7.58 %     7.23       6.94       6.58       6.28  
         
 
                                       
Interest Bearing Liabilities
                                       
Interest Bearing Demand Deposits
  $ 3,040,292       3,004,244       2,989,754       2,939,524       2,990,725  
Rate
    1.81 %     1.63       1.39       1.25       1.12  
Money Market Accounts
  $ 6,196,865       5,800,154       5,619,551       5,421,961       4,968,113  
Rate
    4.00 %     3.55       3.13       2.75       2.31  
Savings Deposits
  $ 573,776       535,475       534,533       561,550       568,279  
Rate
    0.69 %     0.47       0.40       0.38       0.38  
Time Deposits under $100,000
  $ 2,738,528       2,501,504       2,408,591       2,318,085       2,249,590  
Rate
    3.92 %     3.55       3.28       2.99       2.71  
Time Deposits over $100,000 (less brokered time deposits)
  $ 3,362,304       3,067,094       2,864,382       2,700,297       2,534,846  
Rate
    4.44 %     4.01       3.67       3.35       3.04  
         
Total Interest Bearing Core Deposits
  $ 15,911,765       14,908,471       14,416,811       13,941,417       13,311,553  
Rate
    3.54 %     3.15       2.80       2.50       2.16  
Brokered Time Deposits
  $ 2,740,674       2,364,383       2,443,105       2,611,091       2,689,079  
Rate
    4.57 %     4.24       3.89       3.52       3.21  
         
Total Interest Bearing Deposits
  $ 18,652,438       17,272,854       16,859,916       16,552,508       16,000,632  
Rate
    3.69 %     3.30       2.96       2.66       2.34  
Federal Funds Purchased and Other Short-Term Borrowings
  $ 1,772,113       1,530,099       939,008       687,055       1,255,755  
Rate
    4.76 %     4.28       3.72       3.03       2.75  
Long-Term Debt
  $ 1,586,586       1,774,804       2,184,538       2,302,328       1,981,235  
Rate
    4.42 %     4.62       4.44       4.34       4.01  
         
Total Interest Bearing Liabilities
  $ 22,011,138       20,577,757       19,983,462       19,541,891       19,237,622  
Rate
    3.83 %     3.48       3.16       2.87       2.54  
         
Net Interest Margin
    4.39 %     4.32       4.32       4.18       4.15  
     

 


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Quarterly yields earned on average interest-earning assets and rates paid on average interest-bearing liabilities for the six months ended June 30, 2006 and 2005 are presented below:
                 
    Six Months Ended June 30,  
(dollars in thousands)   2006     2005  
     
Interest Earning Assets
               
Taxable Investment Securities
  $ 2,916,216       2,555,203  
Yield
    4.15 %     3.76  
Tax-Exempt Investment Securities
  $ 202,057       221,950  
Yield
    6.79 %     6.90  
Trading Account Assets
  $ 42,565        
Yield
    6.47 %      
Commercial Loans
  $ 19,065,726       16,856,133  
Yield
    7.79 %     6.31  
Consumer Loans
  $ 855,455       839,869  
Yield
    8.00 %     7.39  
Mortgage Loans
  $ 1,055,696       1,024,329  
Yield
    6.75 %     6.28  
Credit Card Loans
  $ 260,130       248,015  
Yield
    10.82 %     10.21  
Home Equity Loans
  $ 1,209,992       1,068,786  
Yield
    7.50 %     5.74  
Allowance for Loan Losses
  $ (301,281 )     (274,815 )
     
Loans, Net
  $ 22,145,719       19,762,317  
Yield
    7.87 %     6.46  
Mortgage Loans Held for Sale
  $ 124,888       98,292  
Yield
    6.86 %     6.30  
Federal Funds Sold and Time Deposits with Banks
  $ 129,407       126,664  
Yield
    4.78 %     2.72  
     
Total Interest Earning Assets
  $ 25,560,852       22,764,427  
Yield
    7.41 %     6.13  
     
 
               
Interest Bearing Liabilities
               
Interest Bearing Demand Deposits
  $ 3,022,367       2,985,564  
Rate
    1.72 %     1.04  
Money Market Accounts
  $ 5,999,605       4,861,713  
Rate
    3.79 %     2.11  
Savings Deposits
  $ 554,732       562,487  
Rate
    0.58 %     0.31  
Time Deposits under $100,000
  $ 2,620,394       2,223,832  
Rate
    3.75 %     2.59  
Time Deposits over $100,000 (less brokered time deposits)
  $ 3,215,792       2,464,293  
Rate
    4.23 %     2.91  
     
Total Interest Bearing Core Deposits
  $ 15,412,890       13,097,890  
Rate
    3.35 %     2.02  
Brokered Time Deposits
  $ 2,553,568       2,588,728  
Rate
    4.42 %     3.08  
     
Total Interest Bearing Deposits
  $ 17,966,458       15,686,617  
Rate
    3.50 %     2.19  
Federal Funds Purchased and Other Short-Term Borrowings
  $ 1,651,774       1,397,787  
Rate
    4.54 %     2.53  
Long-Term Debt
  $ 1,680,175       1,929,484  
Rate
    4.53 %     3.93  
     
Total Interest Bearing Liabilities
  $ 21,298,407       19,013,888  
Rate
    3.66 %     2.40  
     
   
Net Interest Margin
    4.36 %     4.13  
     

 


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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.
The following table summarizes interest income for the six and three months ended June 30, 2006 and 2005.
                                 
    Six Months Ended     Three Months Ended  
    June 30,     June 30,  
(In thousands)   2006     2005     2006     2005  
Interest income
  $ 937,206       690,481       497,713       359,175  
Taxable-equivalent adjustment
    2,962       3,211       1,478       1,588  
 
                       
Interest income, Taxable-equivalent
    940,168       693,692       499,191       360,763  
Interest expense
    387,567       226,554       210,510       122,110  
 
                       
Net interest income, Taxable-equivalent
  $ 552,601       467,138       288,681       238,653  
 
                       
Non-Interest Income
Total non-interest income during the six and three months ended June 30, 2006 increased $98.2 million, or 10.8%, and $31.5 million, or 6.5%, over the same periods a year ago, respectively. For the six and three months ended June 30, 2006 compared, excluding reimbursable items, the increase in non-interest income was 10.2% and 6.0%, over the same periods in 2005, respectively.
Financial Services:
Total non-interest income for the Financial Services segment for the six and three months ended June 30, 2006 was $172.5 million and $89.5 million, up 11.1% and 10.9% from the same periods in 2005, respectively.
Service charges on deposit accounts, the single largest component of Financial Services fee income, were $56.1 million and $29.4 million for the six and three months ended June 30, 2006, up 2.1% and 5.0% from the same periods in 2005, respectively. Service charges on deposit accounts consist of non-sufficient funds (NSF) fees (which represent 67.2% and 66.1% of the total for the six and three months ended June 30, 2006), account analysis fees, and all other service charges. Declines in account analysis fees and all other service charges of 9.5% and 8.2% for the six months ended June 30, 2006, and 3.3% and 9.4% for the three months ended June 30, 2006, respectively, were offset by an increase in NSF fees.
NSF fees for the six months ended June 30, 2006 were $37.1 million, an increase of $2.9 million, or 8.6%, over the same period in 2005. NSF fees of $19.7 million for the second quarter of 2006 increased by $2.4 million, or 14.0%, compared to the first quarter of 2006, and increased by $2.1 million, or 12.2% compared to the second quarter of 2005. Account analysis fees decreased by $751,200, or 9.5% to $7.2 million for the six months ended June 30, 2006. Account analysis fees were $3.7 million for the quarter, a decrease of $126,000, or 3.3%, from the second quarter

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of 2005. The decrease in account analysis fees, as compared to 2005, 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 saving accounts, were $11.9 million for first six months of 2006, down 8.2% from the first six months of 2005, and were $5.9 million for the second quarter of 2006, down 9.4% from the second quarter of 2005. The decrease is largely due to continued growth in the number of checking accounts with no monthly service charge.
Bankcard fees increased 21.7% to $21.5 million for the first six months of 2006, and increased 16.2% to $11.0 million for the second quarter of 2006, as compared to the same periods in 2005, respectively. Financial management services revenues (which primarily consists of fiduciary and asset management fees, brokerage and investment banking revenue and customer interest rate swap revenue which is included in other fee income) increased 15.4% to $40.4 million for the six months ended June 30, 2006, and increased 15.1% to $20.3 million, as compared to the same periods in 2005. Growth in financial management services revenues was led by customer interest rate swap revenues from the new capital markets unit, which is included in other fee income, as well as increases in fiduciary and asset management fees and brokerage and investment banking revenue. Mortgage banking income grew by 4.9% and 9.1% for the three and six months ended June 30, 2006 over the same periods in 2005.
During the second quarter of 2006, Synovus recognized a pre-tax gain of approximately $2.5 million resulting from the redemption of shares of MasterCard International (MasterCard) held by Synovus. The redemption related to MasterCard’s initial public offering which was completed on May 25, 2006. These shares were initially received in connection with MasterCard’s conversion from a membership association to a private share corporation, which occurred in 2002.
Transaction Processing Services:
TSYS’ revenues are derived from providing electronic payment processing and related services to financial and non-financial institutions, generally under long-term processing contracts. TSYS’ services are provided primarily through its cardholder systems, TS2 and TS1, to financial institutions and other organizations throughout the United States, Mexico, Canada, Honduras, Puerto Rico, and Europe. TSYS currently offers merchant services to financial institutions and other organizations through its wholly owned subsidiary, TSYS Acquiring Solutions, L.L.C. (TSYS Acquiring), and its majority owned subsidiary, GP Network Corporation (GP Net).
Due to the somewhat seasonal nature of the credit card industry, TSYS’ revenues and results of operations have generally increased in the fourth quarter of each year because of increased transaction and authorization volumes during the traditional holiday shopping season. Furthermore, growth or declines in card portfolios of existing clients, the conversion of cardholder accounts of new clients to TSYS’ processing platforms, and the loss of cardholder accounts impact the results of operations from period to period. Another factor which may affect TSYS’ revenues and results of operations from time to time, is the sale by a client of its business, its card portfolio or a segment of its accounts to a party which processes cardholder accounts internally or uses another third-party processor. Consolidation in either the financial services or retail industries, a change in the economic environment in the retail sector, or a change in the mix of payments between cash and cards could favorably or unfavorably impact TSYS’ financial position, results of operations and cash flows in the future.
Processing contracts with large clients, representing a significant portion of TSYS’ total

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revenues, generally provide for discounts on certain services based on the size and activity of clients’ portfolios. Therefore, electronic payment processing revenues and the related margins are influenced by the client mix relative to the size of client card portfolios, as well as the number and activity of individual cardholder accounts processed for each client. Consolidation among financial institutions has resulted in an increasingly concentrated client base, which results in a changing client mix toward larger clients and increasing pressure on TSYS’ operating profit margins.
Accounts on File
TSYS provides services to its clients including processing consumer, retail, commercial, government services, stored-value and debit cards. Average accounts on file for the six months ended June 30, 2006 were 427.5 million, an increase of 15.0% over the average of 371.8 million for the same period in 2005. Total accounts on file at June 30, 2006 were 366.5 million, a 5.7% decrease compared to the 388.6 million accounts on file at June 30, 2005. The change in accounts on file from June 2005 to June 2006 included the deconversion of approximately 86.3 million accounts, the purging/sales of 12.3 million accounts, the addition of approximately 36.5 million accounts attributable to the internal growth of existing clients, and approximately 40.0 million accounts from new clients.
Major Customers
A significant amount of TSYS’ revenues is derived from long-term contracts with large clients, including its major customers, one of which is Bank of America. TSYS derives revenues from providing various processing and other services to this customer, including processing of consumer and commercial accounts, as well as revenues for reimbursable items. With the consolidation of TSYS Acquiring beginning March 1, 2005, TSYS’ revenues also include revenues derived from providing merchant processing services to Bank of America. Refer to Note 6 in the Notes to the Unaudited Consolidated Financial Statements for more information on TSYS Acquiring.
During the second quarter of 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. TSYS expects to continue providing commercial and small business card processing for Bank of America and MBNA, as well as merchant processing for Bank of America, according to the terms of existing agreements for those services.
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 on 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 is accelerating the amortization of approximately $6 million in contract acquisition costs. The loss of Bank of America, or any significant client, could have a material adverse effect on TSYS and Synovus’ 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 the 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

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the deconversion and the acceleration of amortization of contract acquisition costs, will have a positive effect on TSYS’ financial position, results of operations and cash flows for the year ending December 31, 2006.
For the six months ended June 30, 2006, revenues from Bank of America were $198.1 million, which represented approximately 23.5% and 12.7% of TSYS and Synovus’ total revenues, respectively. For the three months ended June 30, 2006, revenues from Bank of America were $101.8 million, which represented approximately 23.7% and 12.6% of TSYS and Synovus’ total revenues, respectively. These amounts consist of processing revenues for consumer, commercial and merchant services as well as reimbursable items. Of the $198.1 million and $101.8 million for the six and three months ended June 30, 2006, approximately $72.1 million, or 36.4%, and $36.6 million, or 35.9% was derived from Bank of America for reimbursable items, respectively. For the six months ended June 30, 2006, Bank of America accounted for approximately $126.0 million, or 18.7% of TSYS’, and 9.1% of Synovus’ revenues before reimbursable items. For the three months ended June 30, 2006, Bank of America accounted for approximately $65.2 million, or 19.0% of TSYS’, and 9.1% of Synovus’ revenues before reimbursable items. The majority of the increase in revenues derived from Bank of America for 2006, as compared to 2005, is the result of including TSYS Acquiring’s revenues for merchant services from Bank of America.
For the six and three months ended June 30, 2006, TSYS had another major customer that accounted for approximately 10.5%, or $88.0 million, and approximately 10.1%, or $43.3 million, respectively, of TSYS’ total revenues. For the six and three months ended June 30, 2005, this client accounted for 8.5%, or $64.5 million, and approximately 7.3%, or $29.8 million, respectively, of TSYS’ total revenues. The loss of this client, or any significant client, could have a material adverse effect on TSYS or Synovus’ financial position, results of operations and cash flows.
Electronic Payment Processing Services
Revenues from electronic payment processing services increased $34.0 million, or 8.1%, and $18.7 million, or 8.7%, for the six and three months ended June 30, 2006, respectively, compared to the same periods in 2005. Electronic payment processing 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. Cardholder accounts on file include active and inactive consumer credit, retail, debit, stored value, government services and commercial card accounts. Due to the number of cardholder accounts processed by TSYS and the expanding use of cards as well as increases in the scope of services offered to clients, revenues relating to electronic payment processing services have continued to grow.
On October 13, 2004, TSYS finalized a definitive agreement with JPMorgan Chase & Co. (Chase) to service the combined card portfolios of Chase Card Services and to upgrade Chase’s 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 2007.

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In August 2005, TSYS finalized a five year definitive agreement with Capital One Financial Corporation (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-house processing system to TS2 in phases, beginning in July 2006 and ending in early 2007. 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.
Current 2006 earnings estimates assume that TSYS will recognize revenues and costs associated with converting, processing and servicing the Capital One portfolio beginning in the fourth quarter of 2006.
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. For the three months ended June, 2006, 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 would move the Sears consumer MasterCard and private-label accounts from TSYS in a deconversion that occurred in June 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 those portfolios. TSYS’ management believes that the loss of revenues from the Sears portfolio for the months of 2006 subsequent to the deconversion, combined with decreased expenses from the reduction in hardware and software and the redeployment of personnel, will not have a material adverse effect on TSYS’ financial position, results of operations or cash flows for the year ending December 31, 2006.
Merchant Services
Merchant services revenues are derived from providing electronic transaction processing services primarily to large financial institutions and other merchant acquirers. Revenues from merchant services include processing all payment forms including credit, debit, electronic benefit transfer and check truncation for merchants of all sizes across a wide array of retail market segments. Merchant services’ products and services 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 service.
On March 1, 2005, TSYS acquired the remaining 50% of TSYS Acquiring from Visa for $95.8 million in cash, including direct acquisition costs of $794,000. TSYS Acquiring is now a separate, wholly owned subsidiary of TSYS. As a result of the acquisition of control of TSYS Acquiring, TSYS changed from the equity method of accounting for the investment in TSYS Acquiring and began consolidating TSYS Acquiring’s balance sheet and results of operations. Refer to Note 6 in the Notes to Unaudited Consolidated Financial Statements for more information on the acquisition of TSYS Acquiring.
Revenues from merchant services consist of revenues generated by TSYS’ wholly owned subsidiary, TSYS Acquiring, and its majority owned subsidiary, GP Net. Merchant services revenue for the three and six months ended June 30, 2006 was $65.8 million and $129.8 million, respectively, compared to $68.7 million and $95.8 million for the same periods last year. The

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increase for the six months ended June 30, 2006 is attributable to the consolidation of TSYS Acquiring’s results effective March 1, 2005. Prior to the acquisition of TSYS Acquiring, TSYS’ revenues included fees TSYS charged to TSYS Acquiring for back-end processing support.
Revenues from merchant services are down for the three months ended June 30, 2006, as compared to the same period in 2005, as the result of closing a sales office for point of sale systems and services during the first quarter of 2006. TSYS Acquiring is also experiencing a reduction of revenues in certain products and services.
TSYS Acquiring’s results are driven by the transactions processed at the point-of-sale and the number of outgoing transactions. TSYS Acquiring’s primary point-of-sale service deals with authorizations and data capture transactions primarily through dial-up or the Internet.
Other Transaction Processing Services Revenues
Revenues from TSYS’ other transaction processing services consist primarily of revenues generated by TSYS’ wholly owned subsidiaries not included in electronic payment processing services or merchant services, as well as TSYS’ business process management services. Revenues from other services increased $1.1 million, or 2.5%, for the three months ended June 30, 2006, as compared to the same period in 2005. Revenues from other services decreased $2.3 million, or 2.4%, for the six months ended June 30, 2006, as compared to the same period last year. Other services revenue for the second quarter of 2006 decreased as a result of lower volume for attorney services and bankruptcy, which was offset by greater growth in redemption services from Enhancement Services Corporation (ESC). Other services revenues for the six months ended June 30, 2006 decreased primarily due to the loss of call center revenue.
Equity in Income of Equity Investments
TSYS’ share of income from its equity in equity investments was $1.0 million and $590,000 for the three months ended June 30, 2006 and 2005, respectively. TSYS’ share of income from its equity in equity investments was $1.9 million and $4.3 million for the three and six months ended June 30, 2006 and 2005, respectively. The decrease for first six months of 2006 is primarily attributable to the purchase of the remaining 50% interest in TSYS Acquiring on March 1, 2005 and the consideration of TSYS Acquiring’s operating results in TSYS’ statement of income. Refer to Note 6 in the Notes to Unaudited Consolidated Financial Statements for more information on the acquisition of TSYS Acquiring. These amounts are reflected as a component of other operating income in the Consolidated Statements of Income.
Non-Interest Expense
For the six and three months ended June 30, 2006, total non-interest expense increased $121.4 million, or 13.1%, and $45.8 million, or 9.4%, over the same periods in 2005, respectively. Excluding reimbursable items, the increase was 13.0% and 9.5% over the same periods in the prior year, respectively. Management analyzes non-interest expense in two separate segments: Financial Services and Transaction Processing Services.

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The following table summarizes non-interest expense for the six months ended June 30, 2006 and 2005, respectively.
                                 
    Six months ended     Six months ended  
(In thousands)   June 30, 2006(*)     June 30, 2005(*)  
            Transaction             Transaction  
    Financial     Processing     Financial     Processing  
    Services     Services     Services     Services  
Salaries and other personnel expense
  $ 221,400       240,613       181,467       217,219  
Net occupancy and equipment expense
    48,333       148,865       43,259       132,217  
Other operating expenses
    100,063       126,329       90,860       120,938  
Reimbursable items
          169,112             148,783  
 
                       
Total non-interest expense
  $ 369,796       684,919       315,586       619,157  
 
                       
The following table summarizes non-interest expense for the three months ended June 30, 2006 and 2005, respectively.
                                 
    Three months ended     Three months ended  
(In thousands)   June 30, 2006(*)     June 30, 2005(*)  
            Transaction             Transaction  
    Financial     Processing     Financial     Processing  
    Services     Services     Services     Services  
Salaries and other personnel expense
  $ 113,951       120,032       90,720       118,104  
Net occupancy and equipment expense
    24,835       74,663       21,712       67,127  
Other operating expenses
    52,064       63,407       45,320       69,524  
Reimbursable items
          86,374             79,175  
 
                       
Total non-interest expense
  $ 190,850       344,476       157,752       333,930  
 
                       
 
(*)   The added totals are greater than the consolidated totals due to inter-segment balances which are eliminated in consolidation.
Financial Services:
Financial Services’ non-interest expense increased by 17.2% and 21.0% for the six and three months ended June 30, 2006 compared to the same periods in the previous year, respectively. The 2006 results include the impact of expensing stock options beginning January 1, 2006, which resulted in an expense of $7.9 million and $3.1 million for the six and three months ended June 30, 2006, respectively. Additionally, the 2006 financial results reflect a higher level of expenses related to non-vested stock awards, as these have now become the primary form of stock-based compensation. Excluding the impact of stock options, the incremental impact (as compared to 2005 levels) of non-vested stock expense and acquisitions competed in 2006, total non-interest expense increased by 12.8% and 15.5% for the six and three months ended June 30, 2006, respectively. Key drivers of the increase in non-interest expense also include increased employment expenses associated with additional employees, annual compensation adjustments, and higher levels of incentive compensation. Additionally, investments in additional branch locations (approximately 12 branches in the past 18 months) and incremental expenses associated with our retail strategy contributed to the increase.

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Total headcount for the Financial Services segment at June 30, 2006 was 7,066 compared to 6,639 at December 31, 2005 and 6,564 at June 30, 2005. Total headcount at June 30, 2006 included the addition of 87 team members as a result of the Riverside acquisition on March 24, 2006, and 63 team members as a result of the First Florida acquisition on April 1, 2006.
Transaction Processing Services:
Total non-interest expense increased 10.6% and 3.2% for the six and three months ended June 30, 2006, compared to the same periods in 2005. The increase in expense includes a decrease of $4.0 million and $3.0 million for the six and three months ended June 30, 2006, respectively, related to the effects of currency translation of TSYS’ foreign-based subsidiaries and branches. Excluding reimbursable items, total non-interest expense increased 10.0% and 1.3% for the six and three months ended June 30, 2006, respectively, compared to the same periods in 2005. The increases are due to changes in each of the expense categories as described below.
Salaries and other personnel expenses increased $23.4 million, or 10.8%, and $1.9 million, or 1.6%, for the six and three months ended June 30, 2006 compared to the same periods in 2005, respectively. The 2006 results include the impact of expensing stock options beginning January 1, 2006, which resulted in an expense of $3.5 million for the six months ended June 30, 2006 and $1.7 million for the second quarter of 2006. Of the $23.4 million increase for the first six months of 2006, $11.8 million is the result of employee related expenses of TSYS Acquiring. In addition, the change in employment expenses is associated with normal salary increases and related benefits, offset in part by the level of employment costs capitalized as software development and contract acquisition costs. The growth in employment expenses included a decrease in the accrual for performance-based incentive benefits. Such accrual for performance-based incentive benefits decreased by $8.0 million and $7.3 million for the six and three months ended June 30, 2006.
At June 30, 2006, TSYS had 6,549 employees compared to 6,698 at December 31, 2006 and 6,475 at June 30, 2005.
Net occupancy and equipment expense increased $16.6 million, or 12.6%, and $7.5 million, or 11.2%, for the six and three months ended June 30, 2006 over the same periods in 2005, respectively. Of the $16.6 million increase for the six months ended June 30, 2006, $5.7 million is the result of occupancy and equipment related expenses of TSYS Acquiring.
Depreciation and amortization increased for the six and three months ended June 30, 2006, as compared to the same periods in 2005, as a result of the depreciation and amortization associated with TSYS Acquiring, as well as the acceleration of amortization of software licenses that are under processing capacity agreements, commonly referred to as millions of instructions per second (MIPS) agreements. These licenses are amortized using a units-of-production basis. As a result of deconversions scheduled later this year and next year, TSYS’ total future MIPS are expected to decline, resulting in an increase in software amortization for the periods prior to the deconversion dates. Additionally, TSYS recognized impairment losses on developed software of $3.1 million in the first quarter of 2005.
Other operating expenses for the six months ended June 30, 2006 increased $5.4 million, or 4.5%, as compared to the same period in 2005, and declined by $6.1 million for the second quarter of 2006 as compared to the second quarter of 2005. The net increase of $5.4 million for the first six months of 2006 includes $8.0 million of other operating related expenses of TSYS Acquiring.

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Other operating expenses include, among other things, amortization of conversion costs, costs associated with delivering merchant services, professional advisory fees and court costs associated with TSYS’ debt collection business.
Other operating expenses also include 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.
Income Tax Expense
For the second quarter of 2006, income tax expense was $90.0 million, compared to $75.8 million for the second quarter of 2005. For the six months ended June 30, 2006, income tax expense was $166.8 million compared to $144.7 million for the same period in 2005. The effective tax rate for the second quarter of both 2006 and 2005 was 37.1%. The effective tax rate for the six months ended June 30, 2006 was 36.7% compared to 37.1% for the same period in 2005 and 37.3% for the year ended December 31, 2005.
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 the three months ended March 31, 2006, Synovus received notices of adjustment relating to taxes due for the years 2000 through 2003. As a result, Synovus recorded a reduction in previously recorded income tax liabilities of $3.7 million, which reduced income tax expense (net of minority interest) for the three months ended March 31, 2006.
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. Based on our current estimates, we believe that Synovus’ effective income tax rate for the remainder of 2006 will be approximately 37% to 38%.
Legal Proceedings
Synovus and its subsidiaries are subject to various legal proceedings and claims that arise in the ordinary course of its business. In the opinion of management, based in part upon the advice of legal counsel, all matters are believed to be adequately covered by insurance, or if not covered, are believed to be without merit or are of such kind or involve such amounts that would not have a material adverse effect on the financial position, results of operations or cash flows of Synovus if disposed of unfavorably. Synovus establishes reserves for expected future litigation exposures that Synovus determines to be both probable and reasonably estimable.
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

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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. While the amount of restitution cannot be precisely determined at this time, it is expected that the total aggregate restitution will be approximately $11 million in the form of account credits by CompuCredit which will be netted against the cardholder’s current account indebtedness and which is expected to result in a cash payment of no more than $2.0 million.
Synovus and CB&T will not incur any financial loss in connection with the Agreement as CompuCredit has 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, it is possible that the investigation could result in material changes to CB&T’s policies, practices and procedures in connection with the credit card programs offered pursuant to the Affinity Agreement. 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.
Recently Issued Accounting Standards
In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments.” SFAS No. 155 amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS No. 155 resolves issues addressed in Statement 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets.” The provisions of this statement are effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. Synovus does not expect the impact of SFAS No. 155 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 Financial Assets, an Amendment of FASB Statement No. 140.” SFAS No. 156 amends SFAS No. 140 with respect to the accounting for separately recognized servicing assets and servicing liabilities. SFAS No. 156 (a) specifies when, under certain situations, an entity must recognize a servicing asset or servicing liability, (b) requires all separately recognized servicing assets and liabilities to be initially measured at fair value, if practicable, (c) permits an entity to choose between subsequent measurement methods, (d) permits, at initial adoption, a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights, and (e)

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requires separate presentation of servicing assets and servicing liabilities. The provisions of this statement are effective as of the beginning of an entity’s first fiscal year beginning 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 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109.” FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” 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 be 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 is currently evaluating the impact of adopting FIN 48 on its financial position, results of operations and cash flows, but has yet to complete its assessment.
Forward-Looking Statements
Certain statements contained in this filing which are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act (the “Act”). These forward-looking statements include, among others, statements regarding: (i) the expected financial impact of recent accounting pronouncements, including the expected after-tax expense for both option and restricted stock awards in 2006; (ii) the estimated periods for recognizing expenses associated with stock based compensation; (iii) management’s belief with respect to legal proceedings and other claims, including management’s expectation that the ultimate resolution of the FDIC’s investigation of the policies, practices and procedures used by CB&T in connection with the credit card programs offered pursuant to its Affinity Agreement with CompuCredit will not have a material adverse effect on its consolidated financial condition, results of operation or cash flows as a result of the expected performance by CompuCredit of its indemnification obligations under the Affinity Agreement; (iv) TSYS’ expectation that it will deconvert Bank of America’s consumer accounts in October of 2006; (v) TSYS’ expectation that it will continue to process commercial card accounts for Citibank, as well as Citibank’s Banamex USA consumer accounts; (vi) TSYS’ expectation that it will maintain the card-processing functions of Chase for at least two years and that Chase will discontinue its processing agreement according to the original schedule and license TSYS’ processing software in 2007; (vii) TSYS’ expectation that it will continue providing commercial and small business card processing for Bank of America and MBNA, as well as merchant processing for Bank of America; (viii) the estimated termination fee to be paid by Bank of America in connection with termination of its processing agreement; (ix) Synovus and TSYS’ belief that the loss of revenues from the Bank of America consumer card portfolio for 2006 should not have a material adverse effect 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; (x) TSYS’ expectation that it will convert Capital One’s portfolio in phases beginning in July 2006 and ending in early 2007; (xi) TSYS’ expectation that it will maintain card processing functions of Capital One for at least

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five years; (xii) TSYS’ belief that the loss of revenue from the Sears portfolio for 2006 should not have a material adverse effect on TSYS for 2006; (xiii) management’s expectation that the net charge-off ratio for the year will be under 0.30%; (xiv) management’s belief with respect to the existence of 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; (xv) management’s expectation that the net interest margin for the remainder of 2006 will be approximately the level of the second quarter; (xvi) management’s belief that Synovus is beginning to achieve a more neutral position with respect to rate sensitivity and its expectation that measured asset sensitivity will be reduced; (xvii) Synovus’ expected growth in earnings per share for 2006 and the assumptions underlying such statements, including, with respect to Synovus’ expected increase in earnings per share for 2006, the Federal Reserve is at or near the end of its interest rate increase cycle; the credit environment will remain favorable; TSYS’ earnings growth will be in the 21% — 23% range; and the incremental (as compared to 2005) share-based compensation expense will be approximately 5 cents per diluted share. 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; (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 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, or the interpretation or application thereof, including restrictions, limitations and/or penalties arising from banking, securities and insurance laws, regulations and 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

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in Synovus’ organization, compensation, and benefit plans; (xvi) the costs and effects of litigation, regulatory 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 does not intend 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.

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ITEM 3 — QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
During the first six months of 2006, Synovus maintained an asset sensitive interest rate risk position. This position was maintained in anticipation of further moderate increases in short term interest rates. In anticipation of the end of the Federal Reserve interest rate increase cycle, Synovus has been gradually reducing this asset sensitive positioning. Synovus, while continuing to maintain a modest measured asset sensitive position, believes it is beginning to achieve a more neutral position with respect to rate sensitivity. Synovus expects to continue to opportunistically reduce its measured asset sensitivity, primarily through the use of receive fixed interest rate swaps.
Synovus measures its sensitivity to changes in market interest rates through the use of a simulation model. Synovus uses this simulation model to determine a baseline net interest income forecast and the sensitivity of this forecast to changes in interest rates. These simulations include all of Synovus’ earning assets, liabilities, and derivative instruments. Forecasted balance sheet changes, primarily reflecting loan and deposit growth forecasts prepared by each banking affiliate, are included in the periods modeled.
Synovus models its baseline net interest income forecast assuming an unchanged or flat interest rate environment. Synovus has modeled the impact of a gradual increase and decrease in short-term rates of 100 basis points to determine the sensitivity of net interest income for the next twelve months. In the gradual 100 basis point decrease scenario, net interest income is expected to decrease by approximately 1.0%, as compared to an unchanged interest rate environment. In the gradual 100 basis point increase scenario, net interest income is expected to increase by approximately 1.2%, as compared to an unchanged interest rate environment. While these estimates are reflective of the general interest rate sensitivity of Synovus, local market conditions and their impact on loan and deposit pricing would be expected to have a significant impact on the realized level of net interest income. Actual realized balance sheet growth and mix would also impact the realized level of net interest income.

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ITEM 4 – CONTROLS AND PROCEDURES
We have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this quarterly report as required by Rule 13a-15 of the Securities Exchange Act of 1934, as amended. This evaluation was carried out under the supervision and with the participation of our management, including our chief executive officer and chief financial officer. Based on this evaluation, these officers have concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to Synovus (including its consolidated subsidiaries) required to be included in our periodic SEC filings. No change in Synovus’ internal control over financial reporting occurred during the period covered by this report that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION
ITEM 1A – RISK FACTORS
     In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2005, which could materially affect our financial position, results of operations or cash flows. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our financial position, results of operations or cash flows.
ITEM 2 – UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS
Synovus acquired GLOBALT, Inc. (GLOBALT) on May 31, 2002. The purchase agreement contained an earn-out provision pursuant to which we may issue additional shares of Synovus common stock contingent upon GLOBALT’s financial performance. On February 15, 2006, Synovus issued 21,132 shares of Synovus common stock to the former shareholders of GLOBALT as a result of GLOBALT attaining its financial performance goals. The shares of stock issued to the former shareholders of GLOBALT were issued pursuant to the exemption from registration set forth in Section 4(2) of the Securities Act of 1933.
The following table sets forth information regarding Synovus’ purchases of its common stock on a monthly basis during the three months ended June 30, 2006:
                                 
                            Maximum  
                    Total Number of     Number of Shares  
                    Shares Purchased     That May Yet Be  
                    as Part of     Purchased Under  
    Total Number of     Average Price Paid     Announced Plans     the Plans or  
Period   Shares Purchased     per Share     or Programs     Programs  
April 2006
    225 (1)   $ 27.38              
May 2006
    238 (1)     27.64              
June 2006
    371 (1)     26.60              
 
                       
Total
    834 (1)   $ 27.11              
 
                       
 
(1)   Consists of delivery of previously owned shares to Synovus in payment of the exercise price of stock options.

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ITEM 4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual shareholders’ meeting was held on April 27, 2006. Following is a summary of the proposals that were submitted to the shareholders for approval and a tabulation of the votes with respect to each proposal.
Proposal I
The proposal was to elect seven directors as Class III directors of Synovus to serve until the 2009 Annual Meeting of Shareholders (As Proposal I was approved, the following directors listed in the chart below will serve until the 2007 Annual Meeting of Shareholders). Daniel P. Amos, Richard E. Anthony, James H. Blanchard, C. Edward Floyd, Gardiner W. Garrard, Jr., V. Nathaniel Hansford, Alfred W. Jones III, Mason H. Lampton, Elizabeth C. Ogie, H. Lynn Page, Melvin T. Stith and James D. Yancey also continued to serve as directors following the annual meeting.
                 
Nominee   Votes For   Withheld Authority to Vote
Richard Y. Bradley
    2,088,402,171       469,369,779  
Frank W. Brumley
    2,447,324,879       110,447,071  
Elizabeth W. Camp
    2,513,246,166       44,525,784  
T. Michael Goodrich
    2,513,642,858       44,129,092  
John P. Illges, III
    2,512,622,942       45,149,008  
J. Neal Purcell
    2,513,744,752       44,027,198  
William B. Turner, Jr.
    1,914,627,141       643,144,809  
Proposal II
The proposal was to amend Synovus’ Articles of Incorporation and Bylaws to declassify the Board of Directors so that each member of the Board of Directors will be elected at the annual meeting of shareholders for a term of one year.
                         
    For     Against     Abstain  
Votes
    2,510,165,528       23,272,202       24,337,214  
 
                 
Proposal III
The proposal was to approve the Synovus Financial Corp. Executive Cash Bonus Plan.
                         
    For     Against     Abstain  
Votes
    2,463,122,868       66,057,365       28,594,692  
 
                 

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Proposal IV
The proposal was to ratify the appointment of KPMG LLP as the independent auditor to audit the consolidated financial statements of Synovus and its subsidiaries for the fiscal year ended December 31, 2006.
                         
    For     Against     Abstain  
Votes
    2,494,649,795       42,763,237       20,361,933  
 
                 
Proposal V
The proposal was to approve a shareholder proposal that director nominees be elected to the Board of Directors by a majority of votes cast at an annual meeting of shareholders.
                                 
                            Broker  
    For     Against     Abstain     Non-Vote  
Votes
    552,009,741       1,306,648,640       36,373,734       662,742,861  
 
                       

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ITEM 6 — EXHIBITS
     
(a) Exhibits   Description
31.1
  Certification of Chief Executive Officer
 
   
31.2
  Certification of Chief Financial Officer
 
   
32
  Certification of Periodic Report

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
                 
    SYNOVUS FINANCIAL CORP.    
 
               
Date: August 9, 2006
      BY:   /s/ Thomas J. Prescott
 
Thomas J. Prescott
   
 
          Executive Vice President and    
 
          Chief Financial Officer    

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INDEX TO EXHIBITS
     
Exhibit Number   Description
31.1
  Certification of Chief Executive Officer
 
   
31.2
  Certification of Chief Financial Officer
 
   
32
  Certification of Periodic Report

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