FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 2003
Commission File Number 1-10312
SYNOVUS FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
Georgia 58-1134883
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
901 Front Avenue
P. O. Box 120
Columbus, Georgia 31902
(Address of principal executive offices)
(706) 649-2401
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES X NO
------- ---------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES X NO
------- ---------
At April 30, 2003, 303,611,182 shares of the Registrant's Common Stock,
$1.00 par value, were outstanding.
SYNOVUS FINANCIAL CORP.
INDEX
Page
Part I. Financial Information Number
------
Item 1. Financial Statements
Consolidated Balance Sheets (unaudited)
March 31, 2003 and December 31, 2002 3
Consolidated Statements of Income (unaudited)
Three Months Ended March 31, 2003 and 2002 4
Consolidated Statements of Cash Flows (unaudited)
Three Months Ended March 31, 2003 and 2002 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 30
Item 4. Controls and Procedures 31
Part II. Other Information 32
Item 6. (a) Exhibits 32
(b) Reports on Form 8-K 32
Signature Page 33
Certification of Chief Executive Officer 34
Certification of Chief Financial Officer 36
Exhibit Index 38
(11) Statement re Computation of Per Share Earnings
(99.1) Certification of Chief Executive Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
(99.2) Certification of Chief Financial Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
2
PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
SYNOVUS FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
(In thousands, except share and per share data) 2003 2002
---------- ----------
ASSETS
Cash and due from banks $ 745,517 741,092
Interest earning deposits with banks 4,457 5,055
Federal funds sold and securities purchased under resale agreements 189,661 92,709
Mortgage loans held for sale 378,900 245,858
Investment securities available for sale 2,307,736 2,237,725
Loans, net of unearned income 15,551,328 14,463,909
Allowance for loan losses (216,989) (199,841)
---------- ----------
Loans, net 15,334,339 14,264,068
---------- ----------
Premises and equipment, net 656,507 616,355
Contract acquisition costs and computer software, net 330,448 324,026
Goodwill and other intangible assets, net 115,237 118,506
Other assets 540,999 390,852
---------- ----------
Total assets $ 20,603,801 19,036,246
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing $ 2,514,136 2,303,375
Interest bearing 12,699,956 11,625,459
---------- ----------
Total deposits 15,214,092 13,928,834
Federal funds purchased and securities sold under repurchase agreements 966,683 1,275,084
Long-term debt 1,713,844 1,336,200
Billings in excess of costs on uncompleted contracts 29,722 --
Other liabilities 360,072 338,176
---------- ----------
Total liabilities 18,284,413 16,878,294
---------- ----------
Minority interest in consolidated subsidiaries 122,372 117,099
Company-obligated mandatory redeemable capital
securities of subsidiary trusts 16,750 --
Shareholders' equity:
Common stock - $1.00 par value; Authorized 600,000,000 shares;
issued 305,346,728 in 2003 and 300,573,027 in 2002; outstanding
305,171,464 in 2003 and 300,397,763 in 2002 305,347 300,573
Surplus 406,494 305,718
Treasury stock - 175,264 shares in 2003 and 2002 (1,285) (1,285)
Unamortized restricted stock (132) (146)
Accumulated other comprehensive income 40,413 46,113
Retained earnings 1,429,429 1,389,880
---------- ----------
Total shareholders' equity 2,180,266 2,040,853
---------- ----------
Total liabilities and shareholders' equity $ 20,603,801 19,036,246
========== ==========
See accompanying notes to consolidated financial statements.
3
SYNOVUS FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
------------------------
(In thousands, except per share data) 2003 2002
-------- -------
Interest income:
Loans, including fees $ 230,850 223,469
Investment securities:
U.S. Treasury and U.S. Government agencies 13,673 14,941
Mortgage-backed securities 7,827 10,949
State and municipal 2,912 2,890
Other investments 889 840
Mortgage loans held for sale 3,194 4,603
Federal funds sold and securities purchased
under resale agreements 404 367
Interest earning deposits with banks 8 14
---------- ----------
Total interest income 259,757 258,073
---------- ----------
Interest expense:
Deposits 57,732 66,094
Federal funds purchased and securities sold
under repurchase agreements 3,718 5,503
Long-term debt 16,724 13,859
---------- ----------
Total interest expense 78,174 85,456
---------- ----------
Net interest income 181,583 172,617
Provision for losses on loans 20,304 13,109
---------- ----------
Net interest income after provision
for losses on loans 161,279 159,508
---------- ----------
Non-interest income:
Electronic payment processing services 180,927 160,066
Service charges on deposit accounts 24,683 22,172
Fees for trust services 6,652 6,916
Brokerage revenue 4,937 4,644
Mortgage banking income 15,688 8,739
Credit card fees 5,710 4,796
Securities gains, net 60 929
Other fee income 5,725 4,746
Other operating income 22,399 19,115
---------- ----------
Non-interest income before reimbursable items 266,781 232,123
Reimbursable items 58,474 56,990
---------- ----------
Total non-interest income 325,255 289,113
---------- ----------
Non-interest expense:
Salaries and other personnel expense 158,641 142,071
Net occupancy and equipment expense 69,537 61,069
Other operating expenses 53,339 54,201
---------- ----------
Non-interest expense before reimbursable items 281,517 257,341
Reimbursable items 58,474 56,990
---------- ----------
Total non-interest expense 339,991 314,331
---------- ----------
Minority interest in subsidiaries' net income 6,144 5,088
Income before income taxes 140,399 129,202
Income tax expense 50,480 46,450
---------- ----------
Net income $ 89,919 82,752
========== ==========
Net income per share :
Basic $ 0.30 0.28
========== ==========
Diluted 0.30 0.28
========== ==========
Weighted average shares outstanding:
Basic 302,067 294,927
========== ==========
Diluted 304,002 300,158
========== ==========
See accompanying notes to consolidated financial statements.
4
SYNOVUS FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
-----------------------
(In thousands) 2003 2002
----------- ---------
Operating Activities
Net Income $ 89,919 82,752
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for losses on loans 20,304 13,109
Depreciation, amortization, and accretion, net 27,812 22,084
(Increase) decrease in interest receivable (2,923) 2,285
Increase (decrease) in interest payable 5,504 (4,102)
Minority interest in subsidiaries' net income 6,144 5,088
(Increase) decrease in mortgage loans held for (133,042) 175,338
Billings in excess of costs on uncompleted contracts 29,722 --
Other, net 1,714 33,129
--------- ---------
Net cash provided by operating activities 45,154 329,683
--------- ---------
Investing Activities
Net cash paid for acquisitions (39,355) --
Net decrease in interest earning deposits with banks 598 914
Net increase in federal funds sold
and securities purchased under resale agreements (64,717) (108,079)
Proceeds from maturities and principal collections of
investment securities available for sale 409,809 175,507
Proceeds from sales of investment securities available for sale 27,588 32,291
Purchases of investment securities available for sale (451,007) (211,589)
Net increase in loans (471,299) (289,950)
Purchases of premises and equipment (39,151) (38,855)
Proceeds from disposals of premises and equipment 730 4,301
Proceeds from sales of other real estate 1,687 2,626
Increase in contract acquisition costs (8,765) (9,177)
Additions to computer software (15,456) (15,690)
--------- ---------
Net cash used by investing activities (649,338) (457,701)
--------- ---------
Financing Activities
Net increase in demand and savings deposits 281,610 310,337
Net increase (decrease) in certificates of deposit 316,597 (5,527)
Net decrease in federal funds purchased
and securities sold under repurchase agreements (308,401) (357,614)
Principal repayments on long-term debt (5,286) (101)
Proceeds from issuance of long-term debt 371,930 61,900
Dividends paid to shareholders (50,372) (37,135)
Proceeds from issuance of common stock 2,531 5,765
--------- ---------
Net cash provided (used) by financing activities 608,609 (22,375)
--------- ---------
Increase (decrease) in cash and due from banks 4,425 (150,393)
Cash and due from banks at beginning of period 741,092 648,179
--------- ---------
Cash and due from banks at end of period $ 745,517 497,786
========= =========
See accompanying notes to consolidated financial statements.
5
SYNOVUS FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A - Basis of Presentation
- ------------------------------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and therefore do not include
all information and footnotes necessary for a fair presentation of financial
position, results of operations, and cash flows in conformity with generally
accepted accounting principles. All adjustments consisting of normally 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 2002 annual report previously filed on Form 10-K.
Note B - Supplemental Cash Flow Information
- -------------------------------------------
For the three months ended March 31, 2003 and 2002, Synovus paid income taxes
(net of refunds received) of $6.0 million and $1.7 million, respectively. For
the three months ended March 31, 2003 and 2002, Synovus paid interest of $83.7
million and $89.6 million, respectively.
Cash flows used by TSYS in additions to computer software for the three months
ended March 31, 2003 and 2002 are summarized as follows:
(In thousands) March 31, 2003 March 31, 2002
----------------------------- ----------------------------
Purchased programs $ 11,502 $ 5,780
Developed software 3,954 10,088
----------------------------- -----------------------------
Total $ 15,456 $ 15,868
============================= ============================
Cash flows used by TSYS in additions to contract acquisition costs for the three
months ended March 31, 2003 and 2002 are summarized as follows:
(In thousands) March 31, 2003 March 31, 2002
----------------------------- ----------------------------
Conversion costs $ 5,765 $ 2,677
Payments for processing rights 3,000 6,500
----------------------------- ----------------------------
Total $ 8,765 $ 9,177
============================= ============================
Noncash investing activities consisted of loans of approximately $5.3 million
and $3.2 million, which were foreclosed and transferred to other real estate
during the three months ended March 31, 2003 and 2002, respectively. The more
significant noncash items relating to the acquisitions of FNB Newton Bankshares,
Inc. and United Financial Holdings, Inc. consist of $623.4 million in loans,
$64.1 million in investment ecurities available for sale, and $687.1 million in
deposits.
6
Note C - Other Comprehensive Income (Loss)
- ------------------------------------------
Other comprehensive income (loss) consists of net unrealized gains (losses) on
securities available for sale, net unrealized gains (losses) on cash flow
hedges, and foreign currency translation adjustments. Comprehensive income
consists of net income plus other comprehensive income (loss). Comprehensive
income for the three months ended March 31, 2003 and 2002 was $84.2 million and
$71.2 million, respectively.
Note D - Stock-Based Compensation
- ---------------------------------
Synovus accounts for its fixed stock-based compensation in accordance with the
provisions set forth in Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations. In
accordance with APB Opinion No. 25, compensation expense is recorded on the
grant date only to the extent that the current market price of the underlying
stock exceeds the exercise price on the grant date.
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation", established accounting and disclosure requirements
using a fair value based method of accounting for stock-based compensation
plans. As allowed by SFAS No. 123, Synovus has elected to apply the accounting
method prescribed under APB Opinion No. 25, and has adopted the disclosure
requirements of SFAS No. 123, as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure".
If Synovus had determined compensation expense based on the fair value at the
grant date for its stock options granted during the years 1997 through 2003
under SFAS No. 123, net income and earnings per share for the quarters ended
March 31, 2003 and 2002 would have been reduced to the pro forma amounts
indicated in the following table.
(In thousands, except
per share data) 2003 2002
---- ----
Net income as reported $ 89,919 82,752
Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (2,152) (3,368)
------- -------
Net income - pro forma $ 87,767 79,384
======= =======
Earnings per share:
Basic - as reported $ 0.30 0.28
Basic - pro forma 0.29 0.27
Diluted - as reported 0.30 0.28
Diluted - pro forma 0.29 0.26
Note E - Business Combinations
- ------------------------------
On February 27, 2003, Synovus acquired all the issued and outstanding common
shares of FNB Newton Bankshares, Inc. (FNB), a $375 million asset bank holding
company with a net book value of approximately $34.0 million and the parent
company of First Nation Bank, headquartered in Covington, Georgia. The
acquisition was accounted for using the purchase method of accounting, and
accordingly, the results of FNB's operations have been included in the
consolidated financial statements beginning March 1, 2003.
7
The aggregate purchase price was $96.0 million, consisting of 2,253,627 shares
of Synovus common stock valued at $46.4 million, $46.4 million in cash, stock
options valued at $3.2 million, and $23 thousand in direct acquisition costs
(which consist primarily of external legal and accounting fees). The value of
the common stock issued was determined based on the average market price of
Synovus' common stock over the 2-day period before and after the terms of the
acquisition were agreed to and announced. The fair value of the stock options
was determined based on the Black-Scholes option pricing model.
On February 28, 2003 Synovus acquired all the issued and outstanding common
shares of United Financial Holdings, Inc. (United Financial). United Financial,
a $429 million asset bank holding company with a net book value of approximately
$23.5 million, is the parent company of United Bank, in St. Petersburg, Florida,
United Bank of the Gulf Coast, in Sarasota, Florida, United Trust Company, and
EPW Investment Management, Inc. The acquisition was accounted for using the
purchase method of accounting and accordingly, the results of United Financial's
operations have been included in the consolidated financial statements beginning
March 1, 2003.
The aggregate purchase price was $87.5 million, consisting of 2,388,087 shares
of Synovus common stock valued at $49.6 million, $34.0 million in cash, stock
options valued at $3.7 million, and $203 thousand in direct acquisition costs
(which consist primarily of external legal and accounting fees). The value of
the common stock issued was determined based on the average market price of
Synovus' common stock over the 2-day period before and after the terms of the
acquisition were agreed to and announced. The fair value of the stock options
was determined based on the Black-Scholes option pricing model.
Synovus has not yet completed the allocation of the purchase prices of the
aforementioned acquisitions to the respective assets acquired and liabilities
assumed. It is expected that such purchase price allocations will be completed
in the second quarter, and will result in the majority of the excess purchase
prices being recorded as goodwill.
Proforma information relating to the impact of these two 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.
Note F - Operating Segments
- ---------------------------
Synovus has two reportable segments: Financial Services and Transaction
Processing Services. The Financial Services segment is predominately involved in
commercial banking activities and also provides retail banking, financial
management, mortgage, and insurance services. The Transaction Processing
Services segment primarily provides electronic payment processing services to
card-issuing institutions in the United States, Mexico, Canada, Honduras,
Europe, and the Caribbean. The accounting policies of the segments are the same
as those described in the summary of significant accounting policies in the 2002
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 net income of the respective segments and are
eliminated to arrive at consolidated totals.
8
Segment information as of and for the three months ended March 31, 2003 and 2002
is presented in the following table:
Three months ended March 31, 2003 and 2002
Transaction
Financial Processing
(In thousands) Services Services (a) Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------------
Interest income 2003 $ 259,757 340 (340) (b) $ 259,757
2002 258,073 268 (268) (b) 258,073
- --------------------------------------------------------------------------------------------------------------------------
Interest expense 2003 78,502 12 (340) (b) 78,174
2002 85,711 13 (268) (b) 85,456
- --------------------------------------------------------------------------------------------------------------------------
Net interest income 2003 181,255 328 - 181,583
2002 172,362 255 - 172,617
- --------------------------------------------------------------------------------------------------------------------------
Provision for loan losses 2003 20,304 - - 20,304
2002 13,109 - - 13,109
- --------------------------------------------------------------------------------------------------------------------------
Net interest income after provision 2003 160,951 328 - 161,279
for loan losses 2002 159,253 255 - 159,508
- --------------------------------------------------------------------------------------------------------------------------
Total non-interest income 2003 74,028 255,225 (3,998) (c) 325,255
2002 59,444 232,320 (2,651) (c) 289,113
- --------------------------------------------------------------------------------------------------------------------------
Total non-interest expense 2003 135,804 208,185 (3,998) (c) 339,991
2002 124,910 192,072 (2,651) (c) 314,331
- --------------------------------------------------------------------------------------------------------------------------
Income before income taxes 2003 99,175 47,368 (6,144) (d) 140,399
2002 93,787 40,503 (5,088) (d) 129,202
- --------------------------------------------------------------------------------------------------------------------------
Income tax expense 2003 34,966 15,514 - 50,480
2002 33,193 13,257 - 46,450
- --------------------------------------------------------------------------------------------------------------------------
Net income 2003 64,209 31,854 (6,144) (d) 89,919
2002 60,594 27,246 (5,088) (d) 82,752
- --------------------------------------------------------------------------------------------------------------------------
Total assets 2003 19,890,450 824,328 (110,977) (e) 20,603,801
2002 16,101,865 693,401 (69,532) (e) 16,725,734
- --------------------------------------------------------------------------------------------------------------------------
(a) Includes equity in income of joint ventures, which is included in other
operating income.
(b) Interest on TSYS' cash deposits with the Financial Services segment.
(c) Principally, electronic payment processing services provided by TSYS to the
Financial Services segment.
(d) Minority interest in TSYS and GP Network Corporation (a TSYS subsidiary).
(e) Primarily, TSYS' cash deposits with the Financial Services segment.
Note G - Dividends Per Share
- ----------------------------
Dividends declared per share for the quarter ended March 31, 2003 were $.17, up
11.8% from $.15 for the first quarter of 2002.
9
Note H - Legal Proceedings
- --------------------------
Synovus and its subsidiaries are subject to various legal proceedings and claims
that arise in the ordinary course of its business. Any litigation is vigorously
defended by Synovus and in the opinion of management, based on consultation
with external legal counsel, any outcome of such litigation would not materially
affect the consolidated financial position or results of operations.
A lawsuit seeking class action treatment that was previously pending against one
of Synovus' Alabama banking subsidiaries that involved the receipt of
commissions by that subsidiary in connection with the sale of credit life
insurance to its consumer credit customers and the charging of an interest
surcharge and a processing fee in connection with consumer loans made by that
subsidiary was settled by Synovus through a $3,500 payment to the named
plaintiff. The lawsuit was dismissed, with prejudice to the named plaintiff, and
without prejudice to the class claims, on February 27, 2003.
Note I - Derivative Instruments
- -------------------------------
As part of its overall interest rate risk management activities, Synovus
utilizes derivative instruments to manage its exposure to various types of
interest rate risks. These derivative instruments consist of commitments to sell
fixed-rate mortgage loans and interest rate swaps. The interest rate lock
commitments made to prospective mortgage loan customers also represent
derivative instruments since it is intended that such loans will be sold.
Commitments to sell fixed-rate mortgage loans are entered into to reduce the
exposure to market risk arising from potential changes in interest rates, which
could affect the fair value of mortgage loans held for sale and outstanding
commitments to originate residential mortgage loans for resale. The commitments
to sell mortgage loans are at fixed prices and are scheduled to settle at
specified dates that generally do not exceed 90 days.
Synovus also enters into derivative financial instruments to meet the financing
and interest rate risk management needs of its customers. Upon entering into
these instruments to meet customer needs, Synovus will ordinarily enter into
offsetting positions in order to minimize the risk to Synovus. These derivative
financial instruments are reported at fair value with any resulting gain or loss
recorded in current period earnings.
Interest rate swap transactions generally involve the exchange of fixed-rate and
floating-rate interest payment obligations without the exchange of the
underlying principal amounts. Entering into interest rate contracts involves not
only interest rate risk, but also the risk of counterparties' failure to fulfill
their legal obligations. Notional principal amounts often are used to express
the volume of these transactions, but the amounts potentially subject to credit
risk are much smaller.
Note J - Recent Accounting Pronouncements
- -----------------------------------------
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
No. 143 (SFAS No. 143), "Accounting for Asset Retirement Obligations." SFAS No.
143 requires Synovus to record the fair value of an asset retirement obligation
as a liability in the period in which it incurs a legal obligation associated
with the retirement of tangible long-lived assets that result from the
acquisition, construction, development, and/or normal use of the assets. It also
requires that a corresponding asset be recorded which is depreciated over the
life of the asset. Subsequent to the initial measurement of the asset retirement
obligation, the obligation will be
10
adjusted at the end of each period to reflect the passage of time and changes in
the estimated future cash flows underlying the obligation. Synovus adopted SFAS
No. 143 on January 1, 2003. The adoption of SFAS No. 143 did not have a material
effect on Synovus' financial condition or results of operations.
In October 2001, the FASB issued Statement No. 144 (SFAS No. 144), "Accounting
for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions", for the disposal of a segment of a business (as previously
defined in that Opinion). This statement also amends Accounting Research
Bulletin No. 51, "Consolidated Financial Statements", to eliminate the exception
to consolidation for a subsidiary for which control is likely to be temporary.
SFAS No. 144 improves financial reporting by requiring that one accounting model
be used for long-lived assets to be disposed of by sale, whether previously held
and used or newly acquired, and by broadening the presentation of discontinued
operations to include more disposal transactions. Synovus adopted SFAS No. 144
on January 1, 2002. The adoption of SFAS No. 144 was not material to Synovus'
financial condition or results of operations.
In July 2002, the FASB issued Statement No. 146 (SFAS No. 146), "Accounting for
Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies EITF Issue No. 94-3 (EITF No. 94-3), "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." This statement
requires recognition of a liability for a cost associated with an exit or
disposal activity when the liability is incurred, as opposed to when the entity
commits to an exit plan under EITF No. 94-3. The statement is effective
prospectively for exit or disposal activities initiated after December 31, 2002.
Management does not anticipate that the adoption of SFAS No. 146 will have a
material impact on Synovus' financial condition or results of operations.
In October 2002, the FASB issued Statement No. 147 (SFAS No. 147), "Acquisitions
of Certain Financial Institutions". SFAS No. 147 amends SFAS No. 72, "Accounting
for Certain Acquisitions of Banking or Thrift Institutions", and SFAS No. 144.
SFAS No. 147 also amends FASB Interpretation No. 9, "Applying APB Opinions No.
16 and 17, When a Savings and Loan Association or a Similar Institution is
Acquired in a Business Combination Accounted for by the Purchase Method". SFAS
No. 147 applies to all financial institution acquisitions except those between
two or more mutual enterprises. The statement was effective on October 1, 2002.
The adoption of SFAS No. 147 did not have a material impact on Synovus'
financial condition or results of operations.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an interpretation of FASB Statements No. 5, 57, and 107
and a rescission of FASB Interpretation No. 34". This interpretation addresses
the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees issued. Interpretation No. 45
also clarifies that a guarantor is required to recognize, at inception of a
11
guarantee, a liability for the fair value of the obligation undertaken. The
initial recognition and measurement provisions of the interpretation are
applicable to guarantees issued or modified after December 31, 2002 and are not
expected to have a material effect on Synovus' financial condition or results of
operations.
At the November 21, 2002 meeting of the FASB's Emerging Issues Task Force
(EITF), the EITF ratified as a consensus the tentative conclusions it reached at
its October 25, 2002 meeting, regarding EITF Issue No. 00-21 (EITF No. 00-21),
"Accounting for Revenue Arrangements with Multiple Deliverables". EITF Issue No.
00-21 addresses certain aspects of the accounting by a vendor for arrangements
under which it will perform multiple revenue-generating activities. Those
activities may involve the delivery or performance of multiple products,
services, and/or rights to use assets, and performance may occur at different
points in time or over different periods of time. The arrangements are often
accompanied by initial installation, initiation, or activation services, and
generally involve either a fixed fee or a fixed fee coupled with a continuing
payment stream. The continuing payment stream generally corresponds to the
continuing performance, and may be fixed, variable based on future performance,
or composed of a combination of fixed and variable payments. EITF No. 00-21
addresses how to account for those arrangements, and is effective for revenue
arrangements entered into in fiscal periods beginning after June 15, 2003.
Entities may also elect to report the change in accounting as a cumulative
effect adjustment, in which case disclosure should be made, in periods
subsequent to the date of initial application, of the amount of recognized
revenue that was previously included in the cumulative effect adjustment.
Management has not yet determined the effect of EITF No. 00-21 on Synovus'
financial condition, results of operations, and cash flows.
In December 2002, the FASB issued Statement No. 148 (SFAS No. 148), "Accounting
for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB
Statement No. 123". SFAS No. 148 amends Statement No. 123 (SFAS No. 123),
"Accounting for Stock-Based Compensation", to provide alternative methods of
transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation. In addition, this statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements. Certain of the disclosure modifications
are required beginning with the first quarter of 2003 and are included in
Note D.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51". Interpretation No.
46 addresses the consolidation by business enterprises of variable interest
entities which have certain characteristics. This interpretation applies
immediately to variable interests in variable interest entities created or
obtained after January 31, 2003. For TSYS, which has a variable interest in a
variable interest entity created before February 1, 2003, the interpretation
applies in the interim period beginning after June 15, 2003. The interpretation
requires certain disclosures in financial statements issued after January 31,
2003 if it is reasonably possible that TSYS will consolidate or disclose
information about variable interest entities when the interpretation becomes
effective.
In 2002, TSYS renewed its operating lease agreement with a special purpose
entity (SPE) for its corporate campus. If the lease is not restructured,
Interpretation No. 46 will require Synovus to consolidate the SPE effective with
the reporting period beginning July 1, 2003. The estimated fair value of the
campus buildings and real property at January 1, 2003 was approximately $93.0
million. Consolidation would also require Synovus to consolidate the SPE's
results of operations, including depreciation and interest expense. TSYS can
withdraw from the lease agreement by providing a 60-day written notice.
12
On April 30, 2003, TSYS provided written notice that it intended to terminate
the lease agreement for its corporate campus. TSYS expects to purchase
the corporate campus by the end of the second quarter of 2003.
In April 2003, the FASB issued Statement No. 149 (SFAS No. 149), "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities". SFAS No. 149
amends and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." In particular this statement clarifies under what circumstances a
contract with an initial net investment meets the charachteristic of a
derivative and when a derivative contains a financing componet that warrants
special reporting in the statement of cash flows. This statement is generally
effective for contracts entered into or modified after June 30, 2003, and for
hedging relationships designated after June 30, 2003, and is not expected to
have a material impact on Synovus' financial statements.
Note K - Subsequent Event
- -------------------------
On April 28, 2003, TSYS announced the acquisition of Enhancement Services
Corporation (ESC) for $36.0 million in cash. TSYS is in the process
of completing the purchase price allocation and has preliminarily allocated
approximately $24.5 million to goodwill, approximately $8.2 million to
intangibles, and the remaining amount to the net assets acquired. ESC provides
targeted loyalty consulting and travel, as well as gift card and merchandise
reward programs to more than 40 national and regional financial institutions in
the United States. TSYS believes the acquisition of ESC enhances its processing
services by adding distinct value differentiation for TSYS and its clients.
Note L - Other
- --------------
Certain amounts in 2002 have been reclassified to conform to the presentation
adopted in 2003.
13
ITEM 2 - MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Summary
Net income for the three months ended March 31, 2003 was $89.9 million, up 8.7%
from the same period a year ago. Diluted net income per share was $0.30 for the
first quarter, up 7.3% over $0.28 for the same period in 2002. Return on average
assets was 1.89% and return on average equity was 17.26% for the three months
ended March 31, 2003. This compares to a return on average assets of 2.03% and a
return on average equity of 19.52% for the first quarter of 2002.
Critical Accounting Policies
The accounting and financial reporting policies of Synovus conform to accounting
principles generally accepted in the United States of America and to general
practices within the banking and electronic payment processing industries.
Following is a description of the accounting policies applied by Synovus which
are deemed "critical". In determining which accounting policies are critical in
nature, Synovus has identified the policies that require significant judgment or
involve complex estimates. The application of these policies has a significant
impact on Synovus' financial statements. Synovus' financial results could differ
significantly if different judgments or estimates are applied in the application
of these policies.
Allowance for Loan Losses:
The allowance for loan losses is established through provisions for loan losses
charged to operations. Loans are charged against the allowance for loan losses
when management believes that the collection of principal is unlikely.
Subsequent recoveries are added to the allowance. Management's evaluation of the
adequacy of the allowance for loan losses is based on a formal analysis which
assesses the risk within the loan portfolio. This analysis includes
consideration of historical performance, current economic conditions, level of
nonperforming loans, loan concentrations, and review of certain individual
loans.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance for loan losses may be necessary based on changes in
economic conditions. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the subsidiary banks'
allowances for loan losses. Such agencies may require the subsidiary banks to
recognize adjustments to the allowance for loan losses based on their judgments
about information available to them at the time of their examination.
Management, considering current information and events regarding a borrower's
ability to repay its obligations, considers a loan to be impaired when the
ultimate collectibility of all amounts due, according to the contractual terms
of the loan agreement, is in doubt. When a loan is considered to be impaired,
the amount of impairment is measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate. If the loan
is collateral-dependent, the fair value of the collateral is used to determine
the amount of impairment. Impairment losses are included in the allowance for
loan losses through a charge to the provision for losses on loans. Subsequent
recoveries are added to the allowance for loan losses. Cash
14
receipts for accruing loans are applied to principal and interest under the
contractual terms of the loan agreement. Cash receipts on impaired loans for
which the accrual of interest has been discontinued are applied first to
principal and then to interest income.
The accounting for impaired loans described above applies to all loans, except
for large pools of smaller-balance, homogeneous loans that are collectively
evaluated for impairment, loans that are measured at fair value or at the lower
of cost or fair value, and debt securities. The allowance for loan losses for
large pools of smaller-balance, homogeneous loans is established through
consideration of such factors as changes in the nature and volume of the
portfolio, overall portfolio quality, adequacy of the underlying collateral,
loan concentrations, historical charge-off trends, and economic conditions that
may affect the borrowers' ability to pay.
Certain economic and interest rate factors could have a material impact on the
determination of the allowance for loan losses and corresponding credit costs.
The depth, duration, and dispersion of any economic recession all have an impact
on the credit risk profile of the loan portfolio. Additionally, a rapidly rising
interest rate environment could as well have a material impact on certain
borrowers' ability to pay.
A significant portion of the loan portfolio is in the commercial real estate
sector. However, as further discussed in the section entitled "Loans," these
loans are diversified by geography, industry, and loan type.
Revenue Recognition:
TSYS' electronic payment processing revenues are derived from long-term
processing contracts with financial and nonfinancial institutions and are
recognized as the services are performed. Electronic payment processing revenues
are generated primarily from charges based on the number of accounts on file,
transactions and authorizations processed, statements mailed, and other
processing services for cardholder accounts on file. Most of these contracts
have prescribed annual revenue minimums. The terms of processing contracts
generally range from three to ten years in length.
On March 3, 2003, TSYS announced that Bank One selected TSYS to upgrade its
credit card processing. Under the long-term software licensing and services
agreement, TSYS will provide bankcard processing services to Bank One's credit
card accounts for at least two years starting in mid 2004 (excluding statement
and card production services), and then license a modified version of its TS2
consumer and commercial software to Bank One under a perpetual license with a
six year payment term. TSYS uses the percentage-of-completion accounting method
for its agreement with Bank One. TSYS began recognizing revenue in March 2003
and has recorded the amounts as revenues in electronic payment processing
services and as a reduction of liabilities in billings in excess of costs on
uncompleted contracts.
Contract Acquisition Costs:
TSYS capitalizes contract acquisition costs related to signing or renewing
long-term contracts. These costs, primarily consisting of cash payments for
rights to provide processing services and internal conversion and software
development costs, are amortized using the straight-line method over the
contract term beginning when the client's cardholder accounts are converted and
producing revenues. All costs incurred prior to a signed agreement are expensed
as incurred.
15
The amortization of contract acquisition costs associated with cash payments is
recorded net of revenues in the consolidated statements of income. The
amortization of contract acquisition costs associated with conversion activity
is recorded as other operating expenses in the consolidated statements of
income. TSYS evaluates the carrying value of contract acquisition costs for
impairment on the basis of whether these costs are fully recoverable from
expected undiscounted net operating cash flows of the related contract. The
determination of expected undiscounted net operating cash flows requires
management to make estimates.
These costs may become impaired with the loss of a contract, the financial
decline of a client, termination of conversion efforts after a contract is
signed, diminished prospects for current clients, or if TSYS' estimates of
future cash flows differ from actual results.
Software Development Costs:
TSYS develops software that is used in providing electronic payment processing
and other services to clients. Software development costs are capitalized once
technological feasibility of the software product has been established. Costs
incurred prior to establishing technological feasibility are expensed as
incurred. Technological feasibility is established when TSYS has completed a
detailed program design and has determined that a product can be produced to
meet its design specifications, including functions, features, and technical
performance requirements.
Capitalization of costs ceases when the product is available to clients for
general use. TSYS evaluates the unamortized capitalized costs of software
development as compared to the net realizable value of the software product
which is determined by future undiscounted net cash flows. The amount by which
the unamortized software development costs exceed the net realizable value is
written off in the period that such determination is made. Software development
costs are amortized using the greater of (1) the straight-line method over its
estimated useful life, which ranges from three to ten years or (2) the ratio of
current revenues to total anticipated revenue over its useful life.
TSYS also develops software that is used internally. Software development costs
that are modifications to existing internal-use software that result in
additional functionality are capitalized based upon Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." Internal-use software development costs are capitalized once (a)
preliminary project stage is completed, (b) management authorizes and commits to
funding a computer software project, and (c) it is probable that the project
will be completed and the software will be used to perform the function
intended. Costs incurred prior to meeting the qualifications are expensed as
incurred. Capitalization of costs ceases when the project is substantially
complete and ready for its intended use. Internal-use software development costs
are amortized using an estimated useful life of three to seven years. Software
development costs may become impaired in situations where development efforts
are abandoned due to the viability of the planned project becoming doubtful or
due to technological obsolescence of the planned software product.
Transaction Processing Provisions:
TSYS has recorded estimates to accrue for contract contingencies (performance
penalties) and processing errors. A significant number of TSYS' contracts with
large clients contain service level agreements which can result in TSYS
incurring performance penalties if contractually required service levels are not
met. When providing these accruals, TSYS takes into consideration such factors
as the prior history of performance penalties and processing errors
16
incurred, actual contractual penalties inherent in its contracts, progress
towards milestones, and known processing errors not covered by insurance.
These accruals are included in other current liabilities in the accompanying
consolidated balance sheets. Increases and decreases in transaction processing
provisions are charged to other operating expenses in the consolidated
statements of income, and payments or credits for performance penalties and
processing errors are charged against the accrual.
Business Combinations
Refer to Note E of the Notes to Consolidated Financial Statements for a
discussion of business combinations.
Balance Sheet
During the first three months of 2003, total assets increased $1.57 billion.
This growth includes approximately $874 million in assets from the FNB and
United Financial acquisitions. Loans increased by $1.09 billion, federal funds
sold and securities purchased under resale agreements increased by $97.0
million, and mortgage loans held for sale increased by $133.0 million. Providing
the necessary funding for the balance sheet growth during the first three months
of 2003, the deposit base grew $1.29 billion, long-term debt increased $377.6
million, and shareholders' equity increased $139.4 million. These increases were
partially offset by a $308.4 million decrease in federal funds purchased and
securities sold under repurchase agreements.
Loans
As expected, loan growth remained strong but it was lower than the levels
experienced in recent quarters. Excluding the impact of the acquisitions
completed in the first quarter of 2003, the sequential quarter annualized growth
was 12.5%. Compared to a year ago, loans grew by 22.5%. Excluding the impact of
acquisitions and divestitures, year-over-year loan growth was 14.5%.
The table on page 20 illustrates the composition of the loan portfolio
(classified by loan purpose) as of March 31, 2003. The commercial real estate
portfolio totals $8.2 billion, which represents 53.03% of the total loan
portfolio. Loans for the purpose of financing investment properties total $2.6
billion, which is only 17.04% of the total loan portfolio or one-third ofthe
total commercial real estate portfolio. Included in the investment properties
loan category is $379 million in loans in the Atlanta market. This amount
represents 2.4% of the total loan portfolio or 7.21% of the total commercial
real estate portfolio. The primary source of repayment on investment property
loans is the income from the underlying property (e.g., hotels, office
buildings, shopping centers, and apartment units' rental income), with the
collateral as the secondary source of repayment. Additionally, in almost all
cases, these loans are made on a recourse basis, which provides another source
of repayment. From an underwriting standpoint, these loans are evaluated by
determining the impact of higher interest rates as well as lower occupancy rates
on the borrower's ability to service its debt.
Commercial loans for the purpose of financing 1-4 family properties represent
$2.1 billion or 13.24% of the total loan portfolio and one-fourth of the total
commercial real estate portfolio. The 1-4 family properties category includes
$755 million in loans in the Atlanta market, which is 4.9% of the total loan
portfolio, or 36.6% of the 1-4 family properties category. While we are not
seeing signs of deterioration in the Atlanta real estate properties that are
part of our loan
17
portfolio, we remain very cautious regarding this market. Senior management has
recently completed a review of Synovus' credit relationships with builders in
the Atlanta sector. Credit reviews included liquidity tests to assess the
ability of our customers to carry inventory if sales were to slow down
significantly. This review indicated that market absorption in the 1-4 family
properties sector is still very strong. A significant portion of our 1-4 family
property loans are in the entry-level market sector and we continue to see
strong demand in this sector. The majority of our Atlanta area residential
builders continue to be very profitable and have strong liquidity.
Included in total commercial real estate loans are $3.0 billion in commercial
and industrial related real estate loans. These loans are categorized as
owner-occupied and other property loans on the table shown on page 20. These
loans represent 19.2% of the total loan portfolio or 36.2% of the total
commercial real estate portfolio. The primary source of repayment on these loans
is revenue generated from products or services (e.g., accounting, legal and
medical services; retailers; manufacturers and wholesalers). The secondary
source of repayment on these loans is the real estate.
Commercial and industrial loans represent $4.6 billion or 29.57% of the total
loan portfolio at March 31, 2003. These loans are diversified by geography,
industry, and loan type.
Asset Quality
We are confident about asset quality but continue to be very cautious on
the credit front. The nonperforming assets ratio was .72% at March 31, 2003, up
8 basis points from year-end 2002. The United Financial and FNB acquisitions
(both of which were completed during the first quarter of 2003) accounted for
4 basis points of the total increase in nonperforming assets. The quality of our
commercial real estate portfolio remains strong with a nonperforming loan ratio
of only .32% at March 31, 2003.
Past due levels continue to be very positive and near historically low levels.
Loans 90 days past due and still accruing at March 31, 2003 were $24.8 million,
or .16% of total loans, down from $30.2 million or .21% at year-end 2002. These
loans are in the process of collection, and management believes that sufficient
collateral value securing these loans exists to cover contractual interest and
principal payments on the loans. Management further believes the resolution of
these delinquencies will not cause a material increase in nonperforming assets.
The allowance for loan losses is $217.0 million, or 1.40% of net loans, at March
31, 2003 compared to $200.0 million, or 1.38% of net loans, at December 31,
2002. For the three months ended March 31, 2003, the provision for losses on
loans was $20.3 million, up 55% from $13.0 million for the three months ended
March 31, 2002. The increase in provision expense was primarily due to
acquisitions, good loan growth, and higher net charge-offs than the same period
a year ago. The net charge-off rate was .37% for the first quarter of 2003
compared to .29% for the first quarter of 2002. The provision to net charge-offs
coverage for the three months ended March 31, 2003 was 1.48 times compared to
1.44 times for the first quarter of 2002. We believe that the remaining quarters
of 2003 will reflect lower charge-offs and that the charge-off ratio for the
full year will be approximately the same as last year's charge-off ratio.
18
(In thousands) March 31, 2003 December 31, 2002
- -------------- ---------------- -----------------
Nonperforming loans $ 79,718 $ 66,736
Other real estate 31,991 26,517
---------------- ------------------
Nonperforming assets $ 111,709 $ 93,253
================ ==================
Loans 90 days past due and still accruing $ 24,771 $ 30,192
================ ==================
Allowance for loan losses $ 216,989 $ 199,841
================ ==================
Allowance for loan losses as a % of loans 1.40 % 1.38 %
================ ==================
As a % of loans and other real estate:
Nonperforming loans 0.51 % 0.46 %
Other real estate 0.21 0.18
----------------- ------------------
Nonperforming assets 0.72 % 0.64 %
================= ==================
Allowance to nonperforming loans 272.20 % 299.45 %
================= ==================
Management continuously monitors nonperforming and past due loans, to prevent
further deterioration regarding the condition of these loans. Management is not
aware of any material loans classified for regulatory purposes as loss,
doubtful, substandard, or special mention that have been excluded from
nonperforming assets. Management further believes nonperforming assets include
all material loans in which doubts exist as to the collectibility of amounts due
according to the contractual terms of the loan agreement.
19
The following table shows the composition of the loan portfolio and
nonperforming loans (classified by loan purpose) as of March 31, 2003.
Loans % of
as a Total Total
% of Non- Non-
Total Total Loans performing performing
Loan Type Loans Outstanding Loans Loans
- --------- ------------ ------------- ------------ -----------
Multi-Family $ 399,980 2.57 % - - %
Hotels 657,815 4.23 - -
Office Buildings 616,982 3.97 565 0.71
Shopping Centers 503,155 3.24 481 0.60
Commercial
Development 471,738 3.03 6,610 8.29
------------ ----------------- ---------------- ----------------
Investment
Properties 2,649,670 17.04 7,656 9.60
1-4 Family Construction 823,309 5.29 5,117 6.42
1-4 Family Perm
/Mini-Perm 601,945 3.87 3,813 4.78
Residential
Development 635,166 4.08 1,102 1.38
------------- ------------------ ---------------- ----------------
1-4 Family
Properties 2,060,420 13.24 10,032 12.59
Land Acquisition 553,043 3.56 471 0.59
------------- ------------------ ---------------- ----------------
Total Investment
Related Real Estate 5,263,133 33.84 18,159 22.78
------------- ------------------ ---------------- ----------------
Owner-Occupied 1,813,450 11.66 2,845 3.57
Other Property 1,170,510 7.53 5,119 6.42
------------- ------------------ ---------------- ----------------
Total Commercial
Real Estate 8,247,093 53.03 26,123 32.77
------------- ------------------ ---------------- ----------------
Commercial &
Industrial Loans 4,599,249 29.57 44,658 56.02
Consumer Loans 2,733,470 17.58 8,937 11.21
Unearned Income (28,484) (0.18)
------------- ------------------ ---------------- ----------------
Total Loans $ 15,551,328 100.00 % 79,718 100.00 %
============= ================== ================ ================
20
Capital Resources and Liquidity
Synovus has always placed great emphasis on maintaining a strong capital base
and continues to exceed regulatory capital requirements. Additionally, based on
internal calculations and previous regulatory exams, each of the subsidiary
banks is currently in compliance with regulatory capital guidelines. Total
risk-based capital was $2.531 billion at March 31, 2003, compared to $2.196
billion at December 31, 2002. The ratio of total risk-based capital to
risk-weighted assets was 13.43% at March 31, 2003 compared to 12.53% at December
31, 2002. The leverage ratio at the end of the first quarter of 2003 was 10.56%
compared to 10.86% at the end of 2002. The equity-to-assets ratio was 10.58% at
March 31, 2003 compared to 10.72% at year-end 2002. The equity-to-assets ratio,
exclusive of net unrealized gains (losses) on investment securities available
for sale, was 10.41% at March 31, 2003, compared to 10.51% at year-end 2002.
Synovus' management actively analyzes and manages the liquidity position in
coordination with the appropriate committees at subsidiary banks. Management
must ensure that adequate liquidity, at a reasonable cost, is available to meet
the cash flow needs of depositors, borrowers, and creditors. Management
constantly monitors and maintains appropriate levels of assets and liabilities
so as to provide adequate funding sources to meet estimated customer withdrawals
and future loan requests. Subsidiary banks have access to overnight federal
funds lines with various financial institutions, which total approximately $2.9
billion and can be drawn upon for short-term liquidity needs. Banking liquidity
and sources of funds have not changed significantly since December 31, 2002.
The Parent Company requires cash for various operating needs including dividends
to shareholders, business combinations, capital infusions into subsidiaries, the
servicing of debt, and the payment of general corporate expenses. The primary
source of liquidity for the Parent Company is dividends from the subsidiary
banks. As a short-term liquidity source, the Parent Company has access to a $25
million line of credit with an unaffiliated banking organization. The Parent
Company enjoys an excellent reputation and credit standing in the capital
markets and has the ability to raise substantial amounts of funds in the form of
either short-term or long-term borrowings. In February 2003, the Parent Company
issued $300 million of subordinated debt. This debt bears a coupon interest rate
of 4.875% and has a maturity of ten years.
The consolidated statements of cash flows detail cash flows from operating,
investing, and financing activities. Operating activities provided net cash of
$45.2 million during the first three months of 2003, while investing activities
used $649.3 million. Financing activities provided $608.6 million, resulting in
an increase in cash and due from banks of $745.5 million.
On March 3, 2002, TSYS announced that Bank One selected TSYS to upgrade its
credit card processing. As part of that agreement, TSYS received a $30 million
payment from Bank One, which is included in "billings in excess of costs on
uncompleted contracts" on the consolidated balance sheet. TSYS is recognizing
this payment in revenues in proportion to the costs incurred.
In 1997, TSYS entered into an operating lease agreement with a special purpose
entity (SPE) for its corporate campus. The business purpose of the SPE was to
provide a means of financing the corporate campus. The assets and liabilities of
the SPE consist solely of the cost of the building and the loans from a
consortium of banks. The cost of the building and the outstanding principal
balance of the debt included on the financial statements of the SPE both
approximate $93.0 million. The lease, which is guaranteed by Synovus, provides
for substantial residual value guarantees. The amount of the residual value
21
guarantee relative to the assets under this lease is approximately $81.4
million. In accordance with current accounting principles, no asset or
obligation is recorded on Synovus' consolidated balance sheets.
The terms of this lease financing arrangement require, among other things, that
TSYS maintain certain minimum financial ratios and provide certain information
to the lessor. TSYS is also subject to interest rate risk associated with the
lease on its campus facilities because of the short-term variable rate nature of
the SPE's debt. In the event that LIBOR rates increase, operating expenses could
increase proportionately.
In 2002, TSYS renewed its operating lease agreement with the SPE for its
corporate campus. If the lease is not restructured, FASB Interpretation No. 46
will require Synovus to consolidate the SPE effective with the reporting period
beginning July 1, 2003. The estimated fair value of the campus buildings and
real property at January 1, 2003 was approximately $93.0 million. Consolidation
would also require Synovus to consolidate the SPE's results of operations,
including depreciation and interest expense. TSYS can withdraw from the lease
agreement by providing a 60-day written notice.
On April 30, 2003, TSYS provided written notice that it intended to terminate
the lease agreement for its corporate campus. TSYS expects to purchase the
corporate campus by the end of the second quarter of 2003. As a result of
the purchase, net occupacy and equipment expense will increase approximately
$2.6 million annually for depreciation of the building and related equipment.
Earning Assets, Sources of Funds, and Net Interest Income
Average total assets for the first three months of 2003 were $19.3 billion, up
17.0% over the first three months of 2002. Excluding the impact of acquisitions
and divestitures in both years, average assets increased 12.7%. Average earning
assets were up 16.5% in the first three months of 2003 over the same period last
year, and represented 90.5% of average total assets. When compared to the same
period last year, average deposits increased $2.0 billion, average Federal funds
purchased and securities sold under repurchase agreements decreased $78.7
million, average long-term debt increased $423.0 million, and average
shareholders' equity increased $393.2 million. This growth provided the funding
for the $2.3 billion growth in average net loans.
Net interest income was $181.6 million for the three months ended March 31,
2003, up $9.0 million, or 5.2% over the $172.6 million reported for the three
months ended March 31, 2002. Net interest income, on a tax-equivalent basis, for
the first three months of 2003 increased $9.1 million, or 5.2%, over the same
period in 2002.
The first quarter 2003 net interest margin was 4.31%, down forty-six basis
points from the same period a year ago. This decrease resulted from a 96 basis
point decrease in the yield on earning assets, which was partially offset by a
50 basis point decrease in the effective cost of funds. The decreased yield on
earning assets was due to lower yields on loans and investments. This was
largely due to a 50 basis point decrease in the average Prime rate and lower
reinvestment yields on securities as compared to the prior year-to-date period.
Significant growth in floating-rate loans also contributed to the decline in
total loan yieds. The decreased effective cost of funds was due to lower average
rates paid on interest-bearing funding.
22
On a sequential quarter basis, the net interest margin was down 22 basis points
while net interest income was down $5.0 million. The decrease in the margin was
more severe than originally expected due to three primary factors. First, loan
growth remained strong in the first quarter; however, all of the loan growth was
in variable rate loans which have a short-term dilutive impact on the margin. We
also experienced some repricing in our existing loan portfolio from fixed-rate
to floating-rate, which caused further dilution in the margin. Second, the $300
million subordinated debt offering (completed in February 2003) diluted the
first quarter margin by 3 basis points due to the initial higher cost of
fixed-rate debt. Third, the yield on our bond portfolio was lower than expected
due to lower reinvestment rates and higher than anticipated prepayment levels.
This resulted in a margin dilution of approximately 6 basis points for the first
quarter.
We believe that the impact of the November 2002 Federal Reserve 50 basis point
rate cut has now settled, and that the aforementioned factors that impacted the
first quarter 2003 margin have been built into our expectation of limited
additional margin compression for the remainder of 2003.
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 table below. The taxable-equivalent adjustment is
based on a 35% Federal income tax rate.
Three Months Ended
March 31,
--------------------------------
(In thousands) 2003 2002
- -------------- ------------- --------------
Interest income $ 259,757 258,073
Taxable-equivalent adjustment 1,870 1,771
------------- --------------
Interest income, taxable-equivalent 261,627 259,844
Interest expense 78,174 85,456
------------- --------------
Net interest income, taxable-equivalent $ 183,453 174,388
============= ==============
Non-Interest Income
Total non-interest income during the first three months of 2003 increased $36.1
million, or 12.5%, over the same period in 2002. Total non-interest income
excluding reimbursable items for the first three months of 2003 increased $34.7
million, or 14.9%, over the same period in 2002.
Financial Services' non-interest income was up 24.5% as compared to the first
quarter last year, with increases in service charges on deposits of 11.3%,
mortgage banking income of 79.5% and credit card fees of 19.1% over the same
period last year. Financial Management Services and insurance revenues increased
10.5% over last year, with trust down 4%, brokerage up 6%, financial
planning/asset management (which consists of Creative Financial Group and
GLOBALT, acquired in 2001 and 2002, respectively) up 121%, and insurance down
11%.
Financial Services' non-interest income as a percentage of Financial Services'
revenues - excluding securities gains/losses - was 29% for the quarter.
23
TSYS' revenues are derived from providing electronic payment processing and
related services to financial and nonfinancial institutions, generally under
long-term processing contracts. TSYS' services are provided through its
cardholder systems, TS2 and TS1, to financial institutions and other
organizations throughout the United States, Mexico, Canada, Honduras, the
Caribbean, and Europe. TSYS currently offers merchant services to financial
institutions and other organizations in Japan through its majority owned
subsidiary, GP Net, and in the United States through its joint venture, Vital
Processing Services L.L.C. (Vital).
Electronic payment processing services revenues increased $20.9 million, or
13.0%, for the three months ended March 31, 2003, compared to the same period in
2002. Electronic payment processing revenues are generated primarily from
charges based on the number of accounts on file, transactions and authorizations
processed, statements mailed, credit bureau reports, cards embossed and mailed,
and other processing services for cardholder accounts on file. Cardholder
accounts on file include active and inactive consumer credit, retail, debit,
stored value, student loan, and commercial card accounts. Due to the number of
cardholder accounts processed by TSYS and the expanding use of cards, as well as
increases in the scope of services offered to clients, revenues relating to
electronic payment processing services have continued to grow.
Due to the seasonal nature of credit card transactions, 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 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, among others, 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.
Processing contracts with large clients, representing a significant portion of
TSYS' total revenues, generally provide for discounts on certain services based
on the size and activity of clients' portfolios. Therefore, electronic payment
processing revenues and the related margins are influenced by the client mix
relative to the size of client card portfolios, as well as the number and
activity of individual cardholder accounts processed for each client.
Consolidation among financial institutions has resulted in an increasingly
concentrated client base, which results in a changing client mix toward larger
clients. 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 condition, results of operations, and cash flows in the future.
TSYS provides services to its clients including processing consumer, retail, and
commercial cards, as well as student loan processing.
Average cardholder accounts on file for the three months ended March 31, 2003
were 252.2 million, an increase of approximately 12.4% over the average of 224.3
million for the same period in 2002. Cardholder accounts on file at March 31,
2003 were 254.2 million, a 10.9% increase compared to the 229.2 million accounts
on file at March 31, 2002. The change in cardholder accounts on file from March
2002 to March 2003 included the deconversion and purging of 9.3 million
accounts, the addition of approximately 20.4 million accounts attributable to
the internal growth of existing clients, and approximately 13.9 million accounts
for new clients.
24
TSYS expects to continue expanding its market share in the consumer, retail, and
commercial card arenas. TSYS' future growth is dependent upon new clients,
international expansion, and continued internal growth of clients' portfolios.
In March of 2003, Sears announced that it is evaluating strategic alternatives
for its private label and MasterCard portfolio. TSYS and Sears are parties to a
10-year agreement, which was renewed in January of 2000, under which TSYS
provides transaction processing for more than 75 million Sears accounts. If
Sears does sell its portfolio, TSYS has significant termination provisions
embedded within the processing agreement in the event of an early termination
without cause. Sears represents less than 10% of TSYS revenues.
On March 3, 2003, TSYS announced that Bank One selected TSYS to upgrade its
credit card processing. Under the long term software licensing and services
agreement, TSYS will provide electronic payment processing services to Bank
One's credit card accounts for at least two years starting in mid 2004
(excluding statement and card production services), and then license a modified
version of its TS2 consumer and commercial software to Bank One under a
perpetual license with a six year payment term. TSYS uses the percentage of
completion accounting method for its agreement with Bank One and recognizes
revenues in proportion to costs incurred. The impact upon TSYS' 2003 earnings
will be slightly positive. The contribution from the Bank One agreement to TSYS'
2004 earnings per share (EPS) is expected to range from $0.03 to $0.04.
Beginning in 2005 and continuing thereafter through the payment term of the
license, the contribution of the Bank One agreement to TSYS' EPS is expected to
exceed $0.04 on an annual basis.
A significant amount of TSYS's revenues is derived from long-term contracts with
large clients, including certain major customers. For the three months ended
March 31, 2003, TSYS had two major customers. The two major customers for the
quarter ended March 31, 2003 accounted for approximately 29.9%, or $75.3
million, of total revenues. For the three months ended March 31, 2002, TSYS had
two major customers that accounted for 34.0%, or $77.5 million, of total
revenues. The loss of one of its major customers, or other significant clients,
could have a material adverse effect on TSYS' financial position, results of
operations, and cash flows.
Non-Interest Expense
Total non-interest expense for the three months ended March 31, 2003 increased
$25.7 million, or 8.2%, over the same period in 2002. Total non-interest expense
excluding reimbursable items for the three months ended March 31, 2003 increased
$24.2 million, or 9.4% over the same period in 2002. Management analyzes
non-interest expense in two separate components: Financial Services and
Transaction Processing Services.
25
The following table summarizes non-interest expense for the three months
ended March 31, 2003 and 2002.
Three Months Ended Three Months Ended
March 31, 2003(*) March 31, 2002(*)
-------------------------------- ----------------------------------
Transaction Transaction
Financial Processing Financial Processing
(In thousands) Services Services Services Services
- -------------- ------------ --------------- ----------- ------------------
Salaries and other personnel expenses $ 81,096 76,096 72,144 68,732
Net occupancy and equipment expense 17,917 51,619 16,839 44,230
Other operating expenses 36,791 21,996 35,927 22,120
Reimbursable items -- 58,474 -- 56,990
------------- ---------------- --------------- ------------------
Total non-interest expense $ 135,804 208,185 124,910 192,072
============= ================ =============== ==================
(*) 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 for the first quarter of 2003 was
$135.8 million, up 8.7% compared to the first quarter of 2002. The efficiency
ratio for the first quarter of 2003 was 52.80% compared to 53.65% for the same
period a year ago.
Employment expenses, the single largest non-interest expense component,
increased $9.0 million or 12.4% compared to the first quarter of 2002. Normal
merit and promotional salary adjustments were the primary reason for the
increase. Additionally, an increase in the average number of full-time
equivalent (FTE) employees contributed to the increase in related expenses.
Average FTE employees for the first quarter of 2003 were 5,712 up 272 or 5.0%
from the same period a year ago. Almost one-half of the total increase in
average FTEs was the net change resulting from acquisitions and divestitures.
Other expenses increased by only 2.4% compared to the first quarter of 2002. The
year-over-year comparison is impacted by a $3.9 million non-recurring merchant
fraud loss that was recognized in the first quarter of 2002.
Transaction Processing Services
Total expenses increased 8.4% for the three months ended March 31, 2003,
compared to the same period in 2002. Excluding reimbursable items, total
expenses increased 10.8% for the three months ended March 31, 2003, compared to
the same period in 2002. The increase is attributable to changes in each of the
expense categories as described below.
Salaries and other personnel expenses increased $7.4 million, or 10.7%, for the
three months ended March 31, 2003, compared to the same period in 2002. The
change in employment expenses is associated with the growth in the number of
employees, normal salary increases, and related benefits.
26
Net occupancy and equipment expense increased $7.4 million, or 16.7%, for the
three months ended March 31, 2003 over the same period in 2002. Due to rapidly
changing technology in computer equipment, TSYS' equipment needs are achieved to
a large extent through operating leases. Computer equipment and software
rentals, which represent the largest component of net occupancy and equipment
expense, increased approximately $1.6 million in the first quarter of 2003,
compared to the same period of 2002. Depreciation and software amortization
increased $4.8 million during the three months ended March 31, 2003, compared to
the same period in 2002. The increase in depreciation and amortization is the
result of the amortization of additional software licenses acquired in 2002, as
well as the amortization of developed software placed in service after March 31,
2002.
Income Tax Expense
Income tax expense for the three months ended March 31, 2003 was $50.5 million
compared to $46.4 million for the same period a year ago. The effective tax rate
for the first three months of 2003 was 36.0% unchanged from the same period in
2002.
2003 Earnings Guidance
During the fourth quarter of 2002, we offered 2003 earnings guidance based upon
various assumptions about growth and margins, our own beliefs, and in the
context of the consensus economic forecasts. That guidance assumed an improving
economy with an increasing rate environment in the second half of the year. Our
balance sheet was positioned to benefit in that environment; however, currently
that same forward look implies a longer road to economic recovery and a higher
probability of flat rates. Also, contrary to our expectations, our customers
have favored variable rate loans at a time in the cycle where fixed rates would
normally prevail. Those factors, coupled with the higher levels of margin
compression in the first quarter of 2003 led us to revise our guidance. We now
believe that our EPS growth will be in the range of 4% - 8% growth over 2002.
We expect to be in the middle of that range (6%) assuming:
* Financial Services' net income growth of 3% to 7% over 2002.
* Flat rates for the remainder of 2003 (2003 net interest margin of
approximately 4.28%).
* Good credit quality with a 2003 net charge-off ratio which
approximates 2002 levels.
* TSYS earnings growth of 12-15% over 2002.
* Successful execution of at least one half of our share repurchase
plan by the end of the second quarter of 2003.
27
The highest end of the range would be supported by:
* Rising interest rates (a 25 basis point rate increase in August and
a 25 basis point rate increase in October would result in a net
interest margin for the year of aproximatley 4.33%).
* TSYS earnings growth at the higher end of its estimates.
* More rapid execution of the balance of the share repurchase plan.
The lower end of the range might be triggered by:
* Further rate reductions (a 50 basis point rate decrease by mid-year
would result in a net interest margin for the year of approximately
4.20%).
* Higher credit costs.
* Failure to execute the share repurchase plan.
Share Repurchase Plan
On April 14, 2003 the Synovus board of directors approved a $200 million share
repurchase plan which equates to approximately 10 million shares based upon
current market prices. The shares will be purchased from time to time over the
next two years at prices considered attractive to management. It is expected
that approximately 5 million of such shares will be repurchased by the end of
the second quarter of 2003. Through May 13, 2003 Synovus has acquired 3 million
shares at a weighted average price of $19.52 under this plan.
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 management's belief
concerning the expected impact on Synovus of recent accounting pronouncements;
management's belief with respect to the adequacy of the allowance for loan
losses, the impact of the resolution of certain loan delinquencies on
nonperforming assets, and the inclusion of all material loans in which doubt
exists as to collectibility in nonperforming assets; the expected financial
impact to TSYS of its contract with Bank One and Synovus' expected growth in
earnings per share for 2003 and the assumptions underlying such statements,
including, with respect to Synovus' expected increase in earnings per share for
2003; expected increase of 3-7% in Financial Services' net income, with a net
interest margin in the 4.20% to 4.33% range, good credit quality and a 2003 net
charge-off ratio which approximates 2002 levels; expected increase of 12-15% in
net income of TSYS; and expected repurchase of at least 5 million shares of
Synovus common stock by the end of the second quarter of 2003. In addition,
certain statements in future filings by Synovus with the Securities and Exchange
Commission, in press releases, and in oral and written statements made by or
with the approval of Synovus which are not statements of historical fact
constitute forward-looking statements within the meaning of the Act. Examples of
forward-looking statements include, but are not limited to: (i) projections of
revenues, income or loss, earnings or loss per share, the payment or non-payment
of dividends, capital structure, and other financial terms; (ii) statements of
plans and objectives of Synovus or its management or Board of Directors,
including those relating to products or services; (iii) statements of future
economic performance; and (iv) statements of assumptions underlying such
statements. Words such as "believes," "anticipates," "expects,"
28
"intends," "targeted," and similar expressions are intended to identify
forward-looking statements but are not the exclusive means of identifying such
statements.
Prospective investors are cautioned that any such forward-looking statements are
not guarantees of future performance and involve risks and uncertainties, and
that actual results may differ materially from those contemplated by such
forward-looking statements. A number of important factors could cause actual
results to differ materially from those contemplated by the forward-looking
statements. Many of these factors are beyond Synovus' ability to control or
predict. These factors include, but are not limited to, Synovus' inability to
achieve its net income goals for Financial Services; Synovus' inability to
increase its revenues derived from Financial Management Services and insurance;
Synovus' inability to control Financial Services' expenses; TSYS' inability to
achieve its net income goals for 2003; adverse developments with respect to TSYS
meeting its performance obligations under its contract with Bank One; Synovus'
inability to successfully implement its share repurchase plan; competitive
pressures arising from aggressive competition from other lenders; factors that
affect the delinquency rate on Synovus' loans and the rate at which Synovus'
loans are charged off; 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; changes in prevailing interest rates; the timely
development of competitive new products and services and the acceptance of such
by customers; Synovus' inability to control expenses; a deterioration in credit
quality or a reduced demand for credit; hostilities increase in the Middle East
or elsewhere; and the effects of changes in government policy and regulations,
including restrictions and/or limitations arising from banking laws, regulations
and examinations, the strength of the U.S. economy in general and the strength
of the local economies in which operations are conducted, including, but not
limited to, inflation, interest rate, market and monetary fluctuations; changes
in Synovus' organization, compensation and benefit plans; the occurrence of
catastrophic events that could impact Synovus or TSYS or its major clients'
operating facilities; and the success of Synovus at managing the risks involved
in the foregoing.
Such forward-looking statements speak only as of the date on which such
statements are made, and Synovus undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made to reflect the occurrence of unanticipated events.
29
ITEM 3 - QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
During the first three months of 2003, Synovus has experienced a shortening of
the expected average maturity and repricing frequency of its earning asset base.
This shortening is primarily due to all of its net loan growth in 2003 having
its interest rate tied to a short-term index, primarily the Prime rate;
additionally, net paydowns of fixed-rate loans have also contributed to a
shortening of the average maturity. Lower market rates have led to a higher
level of prepayment activity in Synovus' investment portfolio, therefore
shortening the expected average life of the portfolio. This shortening of
Synovus' earning asset base has been more significant than the concurrent
shortening of the funding supporting this earning asset base. These changes in
Synovus' asset liability mix have resulted in an increased level of net asset
sensitivity to changes in market interest rates.
Synovus measures its sensitivity to changes in market interest rates through the
use of a simulation model. Synovus uses this simulation model to determine a
baseline net interest income forecast and the sensitivity of this forecast to
changes in interest rates. These simulations include all of Synovus' earning
assets, liabilities, and derivative instruments. Forecasted balance sheet
changes, primarily reflecting loan and deposit growth forecasts, are included in
the periods modeled.
Synovus models its baseline net interest income forecast assuming an unchanged
or flat interest rate environment. Synovus has modeled the impact of a gradual
increase and decrease in short-term rates of 100 basis points to determine the
sensitivity of net interest income for the next twelve months. In the gradual
100 basis point decrease scenario, net interest income is expected to decrease
by approximately 2.2% 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 3.6%, 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.
30
ITEM 4 - CONTROLS AND PROCEDURES
As required by SEC rules, we have evaluated the effectiveness of the design and
operation of our disclosure controls and procedures within 90 days of the filing
date of this quarterly report. This evaluation was carried out under the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer. Based on this
evaluation, these officers have concluded that the design and operation of our
disclosure controls and procedures are effective. There were no significant
changes to our internal controls or in other factors that could significantly
affect internal controls subsequent to the date of their evaluation.
Disclosure controls and procedures are our controls and other procedures that
are designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized, and reported, within the time periods specified in the SEC's rules
and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by us in the reports that we file under the Exchange Act is
accumulated and communicated to our management, including our principal
executive officer and principal financial officer, as appropriate, to allow
timely decisions regarding required disclosure.
31
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(11) Statement re Computation of Per Share Earnings
(99.1) Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
(99.2) Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
The following report on Form 8-K was filed subsequent to the first
quarter of 2003.
The report filed on April 16, 2003, included the following event:
On April 16, 2003, Synovus issued a press release and held an investor
conference call and webcast with respect to its first quarter 2003 earnings.
32
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: May 14, 2003 BY: /s/ Thomas J. Prescott
-----------------------
Thomas J. Prescott
Executive Vice President and
Chief Financial Officer
33
Certification of Chief Executive Officer
I, James H. Blanchard, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Synovus Financial
Corp.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations, and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date");
and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize, and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
34
A signed original of the written statement required by Section 906 has been
provided to the registrant and will be retained by the registrant and furnished
to the Securities and Exchange Commission or its staff upon request.
Date: May 14, 2003 BY: /s/James H. Blanchard
------------ ----------------------------
James H. Blanchard
Chief Executive Officer
35
Certification of Chief Financial Officer
I, Thomas J. Prescott, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Synovus Financial
Corp.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations, and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date");
and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize, and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
36
A signed original of the written statement required by Section 906 has been
provided to the registrant and will be retained by the registrant and furnished
to the Securities and Exchange Commission or its staff upon request.
Date: May 14, 2003 /s/ Thomas J. Prescott
------------ --------------------------
Thomas J. Prescott
Chief Financial Officer
37
INDEX TO EXHIBITS
-----------------
Exhibit Number Description
- ------------- -----------
11 Statement re Computation of Per Share Earnings
99.1 Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
38