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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 June 30, 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 July 31, 2003, 301,439,960 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)
June 30, 2003 and December 31, 2002 3
Consolidated Statements of Income (unaudited)
Six and Three Months Ended June 30, 2003 and 2002 4
Consolidated Statements of Cash Flows (unaudited)
Six Months Ended June 30, 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 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 34
Item 4. Controls and Procedures 35
Part II. Other Information 36
Item 4. Submission of Matters to a Vote of Security Holders 36
Item 6. (a) Exhibits 37
(b) Reports on Form 8-K 37
Signature Page 38
Exhibit Index 39
(11) Statement re Computation of Per Share Earnings
(31.1) Certification of Chief Executive Officer
(31.2) Certification of Chief Financial Officer
(32) Certification of Periodic Report
2
PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
SYNOVUS FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
(In thousands, except share and per share data) 2003 2002
---------------- ---------------------
ASSETS
Cash and due from banks $ 804,899 741,092
Interest earning deposits with banks 4,529 5,055
Federal funds sold and securities purchased under resale agreements 139,543 92,709
Mortgage loans held for sale 362,799 245,858
Investment securities available for sale 2,327,296 2,237,725
Loans, net of unearned income 15,831,548 14,463,909
Allowance for loan losses (220,978) (199,841)
---------------- ---------------------
Loans, net 15,610,570 14,264,068
---------------- ---------------------
Premises and equipment, net 763,955 616,355
Contract acquisition costs and computer software, net 334,405 324,026
Goodwill, net 247,371 99,108
Other intangible assets, net 41,355 16,869
Other assets 427,765 393,381
---------------- ---------------------
Total assets $ 21,064,487 19,036,246
================ =====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing $ 2,735,416 2,303,375
Interest bearing 12,889,141 11,625,459
---------------- ---------------------
Total deposits 15,624,557 13,928,834
Federal funds purchased and securities sold under repurchase agreements 962,320 1,275,084
Long-term debt 1,776,362 1,336,200
Billings in excess of costs on uncompleted contracts 28,473 -
Other liabilities 389,441 338,176
---------------- ---------------------
Total liabilities 18,781,153 16,878,294
---------------- ---------------------
Minority interest in consolidated subsidiaries 125,873 117,099
Company-obligated mandatory redeemable capital
securities of subsidiary trusts 17,527 -
Shareholders' equity:
Common stock - $1.00 par value; Authorized 600,000,000 shares; issued
306,311,709 in 2003 and 300,573,027 in 2002; outstanding
301,148,745 in 2003 and 300,397,763 in 2002 306,312 300,573
Surplus 413,783 305,718
Treasury stock - 5,162,964 shares in 2003 and 175,264 shares in 2002 (102,083) (1,285)
Unearned compensation (364) (146)
Accumulated other comprehensive income 46,195 46,113
Retained earnings 1,476,091 1,389,880
---------------- ---------------------
Total shareholders' equity 2,139,934 2,040,853
---------------- ---------------------
Total liabilities and shareholders' equity $ 21,064,487 19,036,246
================ =====================
See accompanying notes to consolidated financial statements.
3
SYNOVUS FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Six Months Ended Three Months Ended
June 30, June 30,
------------------------------ --------------------------------
(In thousands, except per share data) 2003 2002 2003 2002
------------- ---------------- --------------- --------------
Interest income:
Loans, including fees $ 473,193 449,218 242,343 225,749
Investment securities:
U.S. Treasury and U.S. Government agencies 26,665 29,380 12,992 14,439
Mortgage-backed securities 14,956 21,954 7,129 11,005
State and municipal 5,742 5,740 2,830 2,850
Other investments 1,889 2,227 1,000 1,387
Mortgage loans held for sale 7,190 7,445 3,996 2,842
Federal funds sold and securities purchased
under resale agreements 849 759 445 392
Interest earning deposits with banks 15 27 7 13
------------- ---------------- --------------- --------------
Total interest income 530,499 516,750 270,742 258,677
------------- ---------------- --------------- --------------
Interest expense:
Deposits 115,804 130,781 58,072 64,687
Federal funds purchased and securities sold
under repurchase agreements 6,504 9,936 2,786 4,433
Long-term debt 35,671 28,075 18,947 14,216
------------- ---------------- --------------- --------------
Total interest expense 157,979 168,792 79,805 83,336
------------- ---------------- --------------- --------------
Net interest income 372,520 347,958 190,937 175,341
Provision for losses on loans 36,869 33,087 16,565 19,978
------------- ---------------- --------------- --------------
Net interest income after provision
for losses on loans 335,651 314,871 174,372 155,363
------------- ---------------- --------------- --------------
Non-interest income:
Electronic payment processing services 342,326 294,500 175,698 152,243
Other transaction processing services revenue 50,808 55,646 25,755 27,987
Service charges on deposit accounts 51,167 45,231 26,484 23,059
Fees for trust services 14,736 14,367 8,084 7,451
Brokerage revenue 9,770 9,233 4,833 4,589
Mortgage banking income 33,970 17,193 18,282 8,454
Credit card fees 12,007 10,599 6,297 5,803
Securities gains, net 581 1,889 521 960
Other fee income 11,296 9,538 5,571 4,792
Other non-interest income 26,781 21,872 15,136 12,605
------------- ---------------- --------------- --------------
Non-interest income before reimbursable items
and impairment loss on private equity investment 553,442 480,068 286,661 247,943
Reimbursable items 113,112 117,022 54,638 60,032
Impairment loss on private equity investment - (8,355) - (8,355)
------------- ---------------- --------------- --------------
Total non-interest income 666,554 588,735 341,299 299,620
------------- ---------------- --------------- --------------
Non-interest expense:
Salaries and other personnel expense 333,566 281,630 174,925 139,559
Net occupancy and equipment expense 138,583 119,506 69,046 58,437
Other non-interest expense 111,404 112,062 58,065 57,859
------------- ---------------- --------------- --------------
Non-interest expense before reimbursable items 583,553 513,198 302,036 255,855
Reimbursable items 113,112 117,022 54,638 60,032
------------- ---------------- --------------- --------------
Total non-interest expense 696,665 630,220 356,674 315,887
------------- ---------------- --------------- --------------
Minority interest in subsidiaries' net income 12,673 10,713 6,529 5,625
Income before income taxes 292,867 262,673 152,468 133,471
Income tax expense 106,581 94,026 56,101 47,576
------------- ---------------- --------------- --------------
Net income $ 186,286 168,647 96,367 85,895
============= ================ =============== ==============
Net income per share:
Basic $ 0.62 0.57 0.32 0.29
============= ================ =============== ==============
Diluted 0.61 0.56 0.32 0.29
============= ================ =============== ==============
Weighted average shares outstanding:
Basic 302,423 295,280 302,776 295,629
============= ================ =============== ==============
Diluted 306,529 300,033 305,015 300,282
============= ================ =============== ==============
Dividends declared per share $ 0.33 0.30 0.17 0.15
============= ================ =============== ==============
See accompanying notes to consolidated financial statements.
4
SYNOVUS FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
---------------------------------------------------
(In thousands) 2003 2002
------------------------- ----------------------
Operating Activities
Net Income $ 186,286 168,647
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for losses on loans 36,869 33,087
Depreciation, amortization, and accretion, net 57,072 45,432
Deferred income tax expense 8,178 4,973
(Increase) decrease in interest receivable (2,042) 1,044
Increase (decrease) in interest payable 1,559 (12,764)
Minority interest in subsidiaries' net income 12,673 10,713
(Increase) decrease in mortgage loans held for sale (116,941) 223,898
Billings in excess of costs on uncompleted contracts 28,473 -
Other, net (7,117) 8,743
--------------------- ----------------------
Net cash provided by operating activities 205,011 483,773
--------------------- ----------------------
Investing Activities
Net cash (paid) received at acquisition (66,419) 323
Net decrease (increase) in interest earning deposits with banks 526 (384)
Net increase in federal funds sold
and securities purchased under resale agreements (14,599) (84,972)
Proceeds from maturities and principal collections of
investment securities available for sale 822,869 311,007
Proceeds from sales of investment securities available for sale 84,014 84,093
Purchases of investment securities available for sale (939,818) (386,682)
Net increase in loans (763,278) (806,739)
Purchases of premises and equipment (169,422) (73,149)
Proceeds from disposals of premises and equipment 868 2,927
Proceeds from sales of other real estate 12,059 8,093
Increase in contract acquisition costs (13,379) (27,684)
Additions to computer software (29,033) (35,644)
--------------------- ----------------------
Net cash used by investing activities (1,075,612) (1,008,811)
--------------------- ----------------------
Financing Activities
Net increase in demand and savings deposits 796,959 657,960
Net increase in certificates of deposit 208,544 137,329
Net decrease in federal funds purchased
and securities sold under repurchase agreements (312,764) (366,733)
Principal repayments on long-term debt (36,338) (280)
Proceeds from issuance of long-term debt 462,450 112,900
Dividends paid to shareholders (94,691) (80,856)
Proceeds from issuance of common stock 11,046 8,862
Treasury stock purchased (100,798) -
--------------------- ----------------------
Net cash provided by financing activities 934,408 469,182
--------------------- ----------------------
Increase (decrease) in cash and due from banks 63,807 (55,856)
Cash and due from banks at beginning of period 741,092 648,179
--------------------- ----------------------
Cash and and due from banks at end of period $ 804,899 592,323
===================== ======================
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 six months ended June 30, 2003 and 2002, Synovus paid income taxes (net
of refunds received) of $85.4 million and $76.9 million, respectively. For the
six months ended June 30, 2003 and 2002, Synovus paid interest of $156.4 million
and $181.6 million, respectively.
Cash flows used by TSYS in additions to computer software for the six months
ended June 30, 2003 and 2002 are summarized as follows:
- --------------------------------------------------------------------------------------------------------------------
(In thousands) June 30, 2003 June 30, 2002
- --------------------------------------------------------------------------------------------------------------------
Purchased programs $ 20,000 19,750
Developed software 9,033 15,894
--------------------------------------------------------------
Total $ 29,033 35,644
==============================================================
Cash flows used by TSYS in additions to contract acquisition costs for the six
months ended June 30, 2003 and 2002 are summarized as follows:
- --------------------------------------------------------------------------------------------------------------------
(In thousands) June 30, 2003 June 30, 2002
- --------------------------------------------------------------------------------------------------------------------
Conversion costs $ 10,379 6,143
Payments for processing rights 3,000 21,541
--------------------------------------------------------------
Total $ 13,379 27,684
==============================================================
Noncash investing activities consisted of loans of approximately $10.6 million
and $10.4 million, which were foreclosed and transferred to other real estate
during the six months ended June 30, 2003 and 2002, respectively.
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 six months ended June 30, 2003
6
and 2002 was $186.4 million and
$178.8 million, respectively. For the three months ended June 30, 2003 and 2002,
comprehensive income was $102.1 million and $107.6 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 six months and
three months ended June 30, 2003 and 2002 would have been reduced to the pro
forma amounts indicated in the following tables.
For the six months ended June 30, 2003 and 2002:
(In thousands, except per share data) 2003 2002
- -------------------------------------------------------------------------------------------------------------------
Net income as reported $ 186,286 168,647
Total stock-based employee compensation expense determined under fair
value based method for all awards, net of related tax effects
(6,703) (6,942)
---------------- -----------------
Net income - pro forma $ 179,583 161,705
================ =================
Earnings per share:
Basic - as reported $ 0.62 0.57
Basic - pro forma 0.59 0.55
Diluted - as reported 0.61 0.56
Diluted - pro forma 0.59 0.54
7
For the three months ended June 30, 2003 and 2002:
(In thousands, except per share data) 2003 2002
- -------------------------------------------------------------------------------------------------------------------
Net income as reported $ 96,367 85,895
Total stock-based employee compensation expense determined under fair
value based method for all awards, net of related tax effects
(3,467) (3,574)
---------------- -----------------
Net income - pro forma $ 92,900 82,321
================ =================
Earnings per share:
Basic - as reported $ 0.32 0.29
Basic - pro forma 0.31 0.28
Diluted - as reported 0.32 0.29
Diluted - pro forma 0.30 0.27
Note E - Business Combinations
- ------------------------------
On February 27, 2003, Synovus acquired all the issued and outstanding common
shares of FNB Newton Bankshares, Inc. (FNB), the parent company of First Nation
Bank, headquartered in Covington, Georgia. The acquisition was accounted for
using the purchase method of accounting, and accordingly, the results of FNB's
operations have been included in the consolidated financial statements beginning
March 1, 2003.
The aggregate purchase price was $96.0 million, consisting of 2,253,627 shares
of Synovus common stock valued at $46.4 million, $46.4 million in cash, stock
options valued at $3.2 million, and $35 thousand in direct acquisition costs
(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 date the terms
of the acquisition were agreed upon. The fair value of the stock options was
determined based on the Black-Scholes option pricing model.
Of the $66.2 million of acquired intangible assets, $58.0 million was allocated
to goodwill. The goodwill will not be deductible for tax purposes. The
identifiable intangible assets consist of the core deposit premium, which has an
estimated fair value of $8.1 million and a weighted average useful life of 10
years.
8
Synovus is in the process of completing the purchase price allocation relating
to the FNB acquisition. The purchase price allocation has been preliminarily
determined as follows:
(In thousands) At February 28, 2003
-----------------------------------------------------------------------------------------
Cash and due from banks $ 16,238
Investments 30,011
Federal funds sold 25,200
Loans, net 292,325
Premises and equipment 10,141
Intangible assets 8,118
Goodwill 58,038
Other assets 4,460
-------------------------
Total assets acquired 444,531
--------------------------
Deposits 328,040
Notes payable 14,083
Other liabilities 6,443
---------------------------
Total liabilities assumed 348,566
---------------------------
Net assets acquired $ 95,965
===========================
On February 28, 2003 Synovus acquired all the issued and outstanding common
shares of United Financial Holdings, Inc. (United Financial), the parent company
of United Bank and Trust Company, in St. Petersburg, Florida and United Bank of
the Gulf Coast, in Sarasota, Florida. The acquisition was accounted for using
the purchase method of accounting and accordingly, the results from United
Financial's operations have been included in the consolidated financial
statements beginning March 1, 2003.
The aggregate purchase price was $85.3 million, consisting of 2,388,087 shares
of Synovus common stock valued at $47.6 million, $34.0 million in cash, stock
options valued at $3.5 million, and $215 thousand in direct acquisition costs
(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 date the terms
of the acquisition were agreed upon. The fair value of the stock options was
determined based on the Black-Scholes option pricing model.
Of the $67.1 million of acquired intangible assets, $59.9 million was allocated
to goodwill. The goodwill will not be deductible for tax purposes. The
identifiable intangible assets consist of the core deposit premium, which has an
estimated fair value of $7.4 million and a weighted average useful life of 10
years.
9
Synovus is in the process of completing the purchase price allocation relating
to the United Financial acquisition. The purchase price allocation has been
preliminarily determined as follows:
(In thousands) At February 28, 2003
-----------------------------------------------------------------------------------------
Cash and due from banks $ 29,559
Investments 34,288
Federal funds sold 7,035
Loans, net 327,768
Premises and equipment 16,806
Intangible assets 7,395
Goodwill 59,852
Other assets 7,482
---------------------------
Total assets acquired 490,185
---------------------------
Deposits 362,180
Other liabilities 25,003
---------------------------
Total liabilities assumed 387,183
---------------------------
Capital securities of subsidiary trust 17,744
---------------------------
Net assets acquired $ 85,258
===========================
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.
On April 28, 2003, TSYS completed 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 $26.0 million to goodwill and approximately $8.2 million to
intangible assets. 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. ESC operates as a separate subsidiary
of TSYS.
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.
10
Segment information as of and for the six months ended June 30, 2003 and 2002 is
presented in the following table:
Transaction
Financial Processing
(In thousands) Services Services (a) Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------------
Interest income 2003 $ 530,508 592 (601) (b) $ 530,499
2002 516,216 1,079 (545) (b) 516,750
- --------------------------------------------------------------------------------------------------------------------------
Interest expense 2003 158,550 30 (601) (b) 157,979
2002 169,317 20 (545) (b) 168,792
- --------------------------------------------------------------------------------------------------------------------------
Net interest income 2003 371,958 562 - 372,520
2002 346,899 1,059 - 347,958
- --------------------------------------------------------------------------------------------------------------------------
Provision for loan losses 2003 36,869 - - 36,869
2002 33,087 - - 33,087
- --------------------------------------------------------------------------------------------------------------------------
Net interest income after provision 2003 335,089 562 - 335,651
for loan losses 2002 313,812 1,059 - 314,871
- --------------------------------------------------------------------------------------------------------------------------
Non-interest income 2003 153,917 520,491 (7,854) (c) 666,554
2002 115,549 479,472 (6,286) (c) 588,735
- --------------------------------------------------------------------------------------------------------------------------
Non-interest expense 2003 283,391 421,128 (7,854) (c) 696,665
2002 240,658 395,848 (6,286) (c) 630,220
- --------------------------------------------------------------------------------------------------------------------------
Income before income taxes 2003 205,615 99,925 (12,673) (d) 292,867
2002 188,703 84,683 (10,713) (d) 262,673
- --------------------------------------------------------------------------------------------------------------------------
Income tax expense 2003 72,959 33,622 - 106,581
2002 66,615 27,411 - 94,026
- --------------------------------------------------------------------------------------------------------------------------
Net income 2003 132,656 66,303 (12,673) (d) 186,286
2002 122,088 57,272 (10,713) (d) 168,647
- --------------------------------------------------------------------------------------------------------------------------
Total assets 2003 20,212,311 882,819 (30,643) (e) 21,064,487
2002 16,671,052 714,947 (70,217) (e) 17,315,782
11
Segment information as of and for the three months ended June 30, 2003 and 2002
is presented in the following table:
Three months ended June 30, 2003 and 2002
- --------------------------------------------------------------------------------------------------------------------------
Transaction
Financial Processing
(In thousands) Services Services (a) Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------------
Interest income 2003 $ 270,751 252 (261) (b) $ 270,742
2002 258,143 811 (277) (b) 258,677
- --------------------------------------------------------------------------------------------------------------------------
Interest expense 2003 80,048 18 (261) (b) 79,805
2002 83,606 7 (277) (b) 83,336
- --------------------------------------------------------------------------------------------------------------------------
Net interest income 2003 190,703 234 - 190,937
2002 174,537 804 - 175,341
- --------------------------------------------------------------------------------------------------------------------------
Provision for loan losses 2003 16,565 - - 16,565
2002 19,978 - - 19,978
- --------------------------------------------------------------------------------------------------------------------------
Net interest income after provision 2003 174,138 234 - 174,372
for loan losses 2002 154,559 804 - 155,363
- --------------------------------------------------------------------------------------------------------------------------
Non-interest income 2003 79,889 265,266 (3,856) (c) 341,299
2002 56,103 247,152 (3,635) (c) 299,620
- --------------------------------------------------------------------------------------------------------------------------
Non-interest expense 2003 147,587 212,943 (3,856) (c) 356,674
2002 115,746 203,776 (3,635) (c) 315,887
- --------------------------------------------------------------------------------------------------------------------------
Income before income taxes 2003 106,440 52,557 (6,529) (d) 152,468
2002 94,916 44,180 (5,625) (d) 133,471
- --------------------------------------------------------------------------------------------------------------------------
Income tax expense 2003 37,993 18,108 - 56,101
2002 33,422 14,154 - 47,576
- --------------------------------------------------------------------------------------------------------------------------
Net income 2003 68,447 34,449 (6,529) (d) 96,367
2002 61,494 30,026 (5,625) (d) 85,895
- --------------------------------------------------------------------------------------------------------------------------
Total assets 2003 20,212,311 882,819 (30,643) (e) 21,064,487
2002 16,671,052 714,947 (70,217) (e) 17,315,782
(a) Includes equity in income of joint ventures, which is included in non-interest income.
(b) Interest on TSYS' cash deposits with the Financial Services segment.
(c) Principally, electronic payment processing services provided by TSYS to the Financial Services segment.
(d) Minority interest in TSYS and GP Network Corporation (a TSYS subsidiary).
(e) For 2003, balance consists primarily of a TSYS loan with a Synovus banking affiliate. For 2002, balance consists primarily of
TSYS' cash deposits with the Financial Services segment.
12
Segment information for the changes in the carrying amount of goodwill as of
June 30, 2003 is shown in the following table:
Transaction
Financial Processing
(In thousands) Services Services Total
- ----------------------------------------------------------------------------------------------------------------------
Balance as of January 1, 2003 $ 95,489 3,619 99,108
Goodwill acquired during period 122,271 25,992 148,263
Impairment losses - - -
------------------- ------------------- ----------------
Balance as of June 30, 2003 $ 217,760 29,611 247,371
=================== =================== ================
Other intangible assets (excluding goodwill) as of June 30, 2003 and December
31, 2002 held by the Financial Services segment are presented in the table
below.
(In thousands) June 30, 2003 December 31, 2002
- ----------------------------------------------------------------------------------------------------------------------
Purchased Trust Revenues $ 3,625 3,766
Core Deposit Premiums 22,592 8,946
Employment Contracts / Non-competition
Agreements 67 78
Acquired Customer Contracts 3,862 4,079
Intangibles Associated with the Acquisition of Minority
Interest in TSYS 3,320 -
------------------------ --------------------------
Total Carrying Value $ 33,466 16,869
======================== ==========================
Other intangible assets (excluding goodwill) held by the Transaction Processing
Services segment as of June 30, 2003 amounted to $7.9 million. These intangible
assets resulted from the ESC acquisition completed in April 2003, and they
consist primarily of customer-related and technology-based intangible assets.
There were no other intangible assets for this segment as of December 31, 2002.
Note G - Dividends per Share
- ----------------------------
Dividends declared per share for the quarter ended June 30, 2003 were $0.165, up
11.9% from $0.1475 for the second quarter of 2002. For the six months ended June
30, 2003, dividends declared per share were $0.330, up 11.9% from $0.295 for the
same period a year ago.
Note H - Derivative Instruments
- -------------------------------
Synovus accounts for its derivative financial instruments under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended. SFAS
No. 133 requires recognition of all derivatives as either assets or liabilities
in the balance sheet and requires measurement of those instruments at fair value
through adjustments to either accumulated other comprehensive income, current
earnings, or both, as appropriate. As part of its overall interest rate risk
management activities, Synovus utilizes derivative instruments to manage its
exposure to various types of interest rate risks. These derivative instruments
consist 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.
13
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.
A summary of interest rate swap contracts utilized for interest rate risk
management at June 30, 2003 is shown in the following table.
Weighted Average Unrealized
Maturity
Notional Receive Pay In Net Gains
(Dollars in thousands) Amount Rate Rate(*) Months Gains Losses (Losses)
- ----------------------------------------------------------------------------------------------------------------------
Receive fixed swaps:
Fair value hedges $ 120,000 3.68% 1.09% 75 1,623 (137) 1,486
Cash flow hedges 570,000 5.58% 4.00% 28 10,011 (343) 9,668
------------ ---------- ---------- -------------
Total $ 690,000 5.25% 3.50% 36 11,634 (480) 11,154
============ ========== ========== =============
(*) Variable pay rate based upon contract rates in effect at June 30, 2003.
At June 30, 2003, Synovus had commitments to fund fixed-rate mortgage loans to
customers in the amount of $367.4 million. The fair value of these commitments
was $780 thousand.
At June 30, 2003, outstanding commitments to sell fixed-rate mortgage loans
amounted to approximately $487.5 million. Such commitments are entered into to
reduce the exposure to market risk arising from potential changes in interest
rates, which could affect the fair value of mortgage loans held for sale and
outstanding commitments to originate residential mortgage loans for resale. The
commitments to sell mortgage loans are at fixed prices and are scheduled to
settle at specified dates that generally do not exceed 90 days. The fair value
of outstanding commitments to sell mortgage loans at June 30, 2003 was ($1.8)
million.
Synovus also enters into derivative financial instruments to meet the financing
and interest rate risk management needs of its customers. Upon entering into
these instruments to meet customer needs, Synovus will ordinarily enter into
offsetting positions in order to minimize the risk to Synovus. These derivative
financial instruments are reported at fair value with any resulting gain or loss
recorded in current period earnings. As of June 30, 2003, the notional amount of
customer related derivative financial instruments was $338 million.
Note I - 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 adjusted at the end of each period to reflect
the passage of time and changes in the estimated
14
future cash flows underlying the obligation. Synovus adopted SFAS No. 143 on
January 1, 2003. The adoption of SFAS No. 143 did not have a material effect
on Synovus' financial condition or results of operations.
In June 2002, the FASB issued Statement No. 146 (SFAS No. 146), "Accounting for
Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF)Issue No. 94-3 (EITF
No. 94-3), "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity." 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 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
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 EITF, the EITF ratified as a
consensus the tentative conclusions it reached at its October 25, 2002 meeting,
regarding EITF Issue No. 00-21 (EITF No. 00-21), "Accounting for Revenue
Arrangements with Multiple Deliverables". EITF No. 00-21 addresses certain
aspects of the accounting by a vendor for arrangements under which it will
perform multiple revenue-generating activities. Those activities may involve the
delivery or performance of multiple products, services, and/or rights to use
assets, and performance may occur at different points in time or over different
periods of time. The arrangements are often accompanied by initial installation,
initiation, or activation services, and generally involve either a fixed fee or
a fixed fee coupled with a continuing payment stream. The continuing payment
stream generally corresponds to the continuing performance, and may be fixed,
variable based on future performance, or composed of a combination of fixed and
variable payments. EITF No. 00-21 addresses how to account for those
arrangements, and is effective for revenue arrangements entered into in fiscal
periods beginning after June 15, 2003. Entities may also elect to report the
change in accounting as a cumulative effect adjustment, in which case disclosure
should be made, in periods subsequent to the date of initial application, of the
amount of recognized revenue that was previously included in the cumulative
effect adjustment. Management has determined that based on its evaluation, the
adoption of EITF No. 00-21 did not impact Synovus' or TSYS' financial condition
or results of operations.
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
15
annual and interim financial statements. Certain of the additional disclosures
were 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 had a variable interest in a
variable interest entity created before February 1, 2003, the interpretation
would have applied in the first interim period beginning after June 15, 2003. On
June 30, 2003, TSYS terminated the operating lease agreement and purchased the
corporate campus for $93.5 million through a combination of cash and long-term
debt financing from a Synovus banking affiliate. Accordingly, the interpretation
did not impact TSYS' or Synovus' financial statements.
In April 2003, the FASB issued Statement No. 149 (SFAS No. 149), "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities". SFAS No. 149
amends and clarifies 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 characteristic of a derivative
and when a derivative contains a financing component 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. The adoption of SFAS No. 149 is
not expected to have a material impact on Synovus' financial statements.
In May 2003, the FASB issued Statement No. 150 (SFAS No. 150), "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity". SFAS No. 150 improves the accounting for certain financial instruments
that, under previous guidance, issuers could account for as equity. The new
statement requires that those instruments be classified as liabilities in
statements of financial position. Accounting for three types of freestanding
financial instruments is affected: mandatorily redeemable shares, which the
issuing company is obligated to buy back in exchange for cash or other assets;
put options and forward purchase contracts involving instruments that do or may
require the issuer to buy back some of its shares in exchange for cash or other
assets; and obligations that can be settled with shares, for which the monetary
value is fixed, tied solely or predominantly to a variable such as a market
index, or varies inversely with the value of the issuers' shares. SFAS No. 150
also requires disclosures about alternative ways of settling the instruments and
the capital structure of entities, all of whose shares are mandatorily
redeemable. SFAS No. 150 is effective for all financial instruments entered into
or modified after May 31, 2003, and otherwise is effective at the beginning of
the first interim period beginning after June 15, 2003. Currently, the only
impact of adopting SFAS No. 150 is expected to be the requirement to reclassify
the $17.5 million in company-obligated mandatory redeemable capital securities
of subsidiary trusts as liabilities beginning with the third quarter of 2003.
Note J - Other
- --------------
Certain amounts in 2002 have been reclassified to conform to the presentation
adopted in 2003.
16
ITEM 2 - MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Summary
Net income for the six months ended June 30, 2003 was $186.3 million, up 10.5%
from the same period a year ago. Diluted net income per share was $0.61 for the
six months ended June 30, 2003, up 8.1% from the same period a year ago. Return
on average assets was 1.89% and return on average equity was 17.54% for the six
months ended June 30, 2003. This compares to a return on average assets of 2.04%
and a return on average equity of 19.46% for the same period a year ago.
For the three months ended June 30, 2003, net income was $96.4 million, up 12.2%
from the second quarter of 2002. Diluted net income per share was $0.32 for the
second quarter, up 10.5% over $0.29 for the same period in 2002. For the three
months ended June 30, 2003, return on average assets was 1.88% and return on
average equity was 17.81%, compared to a return on average assets of 2.05%, and
a return on average equity of 19.40% for the second 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, the 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
17
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 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 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 TSYS will license a
modified version of its TS2 consumer and commercial software to Bank One under a
perpetual license with a six year payment term. TSYS uses the
percentage-of-completion accounting method for its agreement with Bank One. TSYS
began recognizing revenue in March 2003.
18
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.
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 for each customer on the basis of whether these costs are fully
recoverable from expected undiscounted net operating cash flows of the related
contract. The determination of expected undiscounted net operating cash flows
requires management to make estimates.
These costs may become impaired with the loss of a contract, the financial
decline of a client, termination of conversion efforts after a contract is
signed, diminished prospects for current clients, or if TSYS' 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. These software development
costs 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.
19
Transaction Processing Provisions:
TSYS has recorded estimates to accrue for contract contingencies (performance
penalties) and processing errors. A significant number of TSYS' contracts with
large clients contain service level agreements, which can result in TSYS
incurring performance penalties if contractually required service levels are not
met. When providing these accruals, TSYS takes into consideration such factors
as the prior history of performance penalties and processing errors incurred,
actual contractual penalties inherent in its contracts, progress towards
milestones, and known processing errors not covered by insurance.
These accruals are included in other 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 six months of 2003, total assets increased $2.0 billion. This
growth includes approximately $935 million in assets from the FNB and United
Financial acquisitions. Loans increased by $1.3 billion, cash and due from banks
increased by $63.8 million, federal funds sold and securities purchased under
resale agreements increased by $46.8 million, mortgage loans held for sale
increased by $116.9 million, and investment securities increased by $89.6
million. Premises and equipment, net increased by $147.6 million, primarily as a
result of the purchase of the TSYS corporate campus and acquisitions. Providing
the necessary funding for the balance sheet growth during the first six months
of 2003, the deposit base grew $1.7 billion, long-term debt increased $440.2
million, and shareholders' equity increased $99.1 million. These increases were
partially offset by a $312.8 million decrease in federal funds purchased and
securities sold under repurchase agreements.
Loans
Compared to a year ago, loans grew by 19.9%. Excluding the impact of
acquisitions and divestitures, year-over-year loan growth was 12.5% and
year-to-date loan growth was 9.9%. The sequential quarter annualized growth was
7.2%.
The table on page 23 illustrates the composition of the loan portfolio
(classified by loan purpose) as of June 30, 2003. The commercial real estate
portfolio totals $8.5 billion, which represents 53.7% of the total loan
portfolio. Loans for the purpose of financing investment properties total $2.6
billion, which is only 16.6% of the total loan portfolio, or less than one-third
of the total commercial real estate portfolio. Included in the investment
properties loan category is $376.2 million in loans in the Atlanta market. This
amount represents 2.4% of the total loan portfolio, or 4.4% 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,
20
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 13.4% of the total loan portfolio, and one-fourth of the total
commercial real estate portfolio. The 1-4 family properties category includes
$808.4 million in loans in the Atlanta market, which is 5.1% of the total loan
portfolio, or 38.1% of the 1-4 family properties category.
Included in total commercial real estate loans are $3.1 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 23. These
loans represent 19.7% of the total loan portfolio, or 36.7% 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 29.2% of the total
loan portfolio at June 30, 2003. These loans are diversified by geography,
industry, and loan type.
Asset Quality
The nonperforming assets ratio was 0.73% at June 30, 2003, compared to 0.72% the
previous quarter and 0.64% at year-end 2002. The quality of our commercial real
estate portfolio remains strong with a nonperforming loan ratio of only .39% at
June 30, 2003. The charge-off ratio for the second quarter decreased to .32%
from .37% on a sequential quarter basis. For the year-to-date period, the
charge-off ratio was .34%, down from .37% for the same period a year ago. We
believe that the charge-off ratio for the full year will be approximately the
same as last year's charge-off ratio.
Past due levels remained very favorable, with total past dues at 0.92% of loans.
Loans 90 days past due and still accruing at June 30, 2003 were $31.7 million,
or 0.20% of total loans, down from 0.21% 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 $221.0 million, or 1.40% of net loans, at June
30, 2003 compared to $200.0 million, or 1.38% of net loans, at December 31,
2002. For the six months ended June 30, 2003, the provision for losses on loans
was $36.9 million, up 11.4% from $33.1 million for the same period a year ago.
The provision for losses on loans was $16.6 million for the three months ended
June 30, 2003, down 17.1% from $20.0 million for the second quarter of 2002. The
decrease is primarily due to lower charge-offs and slower loan growth.
21
(In thousands) June 30, 2003 December 31, 2002
- --------------------------------------------------------------------------------------------------------------------
Nonperforming loans $ 86,440 $ 66,736
Other real estate 29,709 26,517
--------------------- -------------------------
Nonperforming assets $ 116,149 $ 93,253
===================== =========================
Loans 90 days past due and still accruing $ 31,675 $ 30,192
Allowance for loan losses $ 220,978 $ 199,841
Allowance for loan losses as a % of loans 1.40 % 1.38 %
As a % of loans and other real estate:
Nonperforming loans 0.55 % 0.46 %
Other real estate 0.18 0.18
--------------------- -------------------------
Nonperforming assets 0.73 % 0.64 %
===================== =========================
Allowance to nonperforming loans 255.64 % 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 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.
22
The following table shows the composition of the loan portfolio and
nonperforming loans (classified by loan purpose) as of June 30, 2003.
Loans % of
as a Total Total
% of Non- Non-
Total Total Loans performing performing
Loan Type Loans Outstanding Loans Loans
- --------------------------------------------------------------------------------------------------------------------------
Multi-Family $ 431,632 2.7 % $ 4,277 5.0 %
Hotels 589,944 3.7 7,938 9.2
Office Buildings 649,333 4.1 397 0.5
Shopping Centers 483,227 3.1 464 0.5
Commercial
Development 478,659 3.0 6,824 7.9
--------------- ----------------
Investment
Properties 2,632,795 16.6 19,900 23.1
1-4 Family
Construction 817,852 5.2 2,101 2.4
1-4 Family Perm
/Mini-Perm 618,496 3.9 3,432 4.0
Residential
Development 684,188 4.3 946 1.1
--------------- ----------------
1-4 Family
Properties 2,120,536 13.4 6,479 7.5
Land Acquisition 630,077 4.0 233 0.3
--------------- ----------------
Total Investment-Related
Real Estate 5,383,408 34.0 26,612 30.9
Owner-Occupied 1,914,284 12.1 4,129 4.7
Other Property 1,205,746 7.6 2,155 2.5
--------------- ----------------
Total Commercial
Real Estate 8,503,438 53.7 32,896 38.1
Commercial &
Industrial Loans 4,616,115 29.2 44,861 51.9
Consumer Loans 2,740,455 17.3 8,683 10.0
Unearned Income (28,460) (0.2)
--------------- ----------------
Total Loans $ 15,831,548 100.00 % $ 86,440 100.00 %
=============== ================
23
Deposits
Total deposits at June 30, 2003 were $15.6 billion, compared to $13.9 billion at
year-end 2002. Excluding acquisitions and divestitures, core deposits increased
$734.8 million or 13.6% annualized compared to year-end 2002.
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 $2.473 billion at June 30, 2003, compared to $2.196
billion at December 31, 2002. The ratio of total risk-based capital to
risk-weighted assets was 12.74% at June 30, 2003 compared to 12.53% at December
31, 2002. The leverage ratio at the end of the first six months of 2003 was
9.67% compared to 10.86% for the year ended December 31, 2002. The decrease in
the leverage ratio was primarily due to higher balances in disallowed goodwill
and other intangible assets, which increased from $120.5 million at December 31,
2002 to $283.5 million at June 30, 2003. Disallowed goodwill and intangible
assets increased due to the acquisitions completed in the first half of 2003.
Other factors impacting the regulatory capital calculations consist of a
decrease in capital due to the repurchase of $100 million in treasury stock
during the second quarter of 2003. Additionally, the $300 million subordinated
debt issued in February 2003 increased Tier II capital by the same amount.
The equity-to-assets ratio was 10.16% at June 30, 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 9.95% at June 30,
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, acquisitions, capital infusions into subsidiaries, the
servicing of debt, and the payment of general corporate expenses. The primary
source of liquidity for the Parent Company is dividends from the subsidiary
banks. As a short-term liquidity source, the Parent Company has access to a $25
million line of credit with an unaffiliated banking organization. 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
$205.0 million during the first six months of 2003. On March 3, 2003, 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
24
Bank One, which is included in "billings in excess of costs on uncompleted
contracts" on the balance sheet, and is recognizing this payment in accordance
with the percentage-of-completion method of accounting. Investing activities
used $1.1 billion, and financing activities provided $934.4 million, resulting
in an increase in cash and due from banks of $63.8 million.
On June 30, 2003, TSYS terminated the operating lease agreement for its
corporate campus and purchased the property for $93.5 million through a
combination of cash and long-term debt financing from a Synovus banking
affiliate.
Earning Assets, Sources of Funds, and Net Interest Income
Average total assets for the first six months of 2003 were $19.9 billion, up
19.5% over the first six months of 2002. Excluding the impact of acquisitions
and divestitures in both years, average assets increased 13.3%. Average earning
assets were up 18.5% in the first six months of 2003 over the same period last
year, and represented 89.9% of average total assets. When compared to the same
period last year, average deposits increased $2.3 billion, average investments
increased $192.1 million, average Federal funds purchased and securities sold
under repurchase agreements decreased $57.5 million, average Federal funds sold
and securities purchased under resale agreements increased $50.5 million,
average long-term debt increased $520.6 million, and average shareholders'
equity increased $394.0 million. This growth provided the funding for the $2.5
billion growth in average net loans.
For the six months ended June 30, 2003, net interest income was $372.5 million,
up $24.6 million, or 7.1%, over the $348.0 million for the same period a year
ago. Net interest income was $190.9 million for the three months ended June 30,
2003, up $15.6 million, or 8.9%, over the $175.3 million reported
for the three months ended June 30, 2002. For the six months ended June 30,
2003, net interest income, on a tax-equivalent basis, increased $24.7 million,
or 7.0%, over the same period in 2002. Net interest income, on a tax-equivalent
basis, for the second quarter of 2003 increased $15.7 million, or 8.9%, over the
second quarter of 2002.
The net interest margin was 4.28% for the six months ended June 30, 2003, down
46 basis points from the six months ended June 30, 2002. This decrease resulted
from a 94 basis point decrease in the yield on earning assets, which was
partially offset by a 48 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 yields. The decreased effective cost of funds was
due to lower average rates paid on interest-bearing funding. The second quarter
2003 net interest margin was 4.25%, down 46 basis points from the same period a
year ago. This decrease resulted from a 92 basis point decrease in the yield on
earning assets, which was partially offset by a 46 basis point decrease in the
effective cost of funds.
On a sequential quarter basis, the net interest margin was down only 6 basis
points while net interest income was up $9.4 million. Corporate initiatives
underway to improve both loan and deposit pricing have helped limit margin
compression. Solid core deposit growth has also had a beneficial effect on our
margin.
The tax-equivalent adjustment that is required in making yields on tax-exempt
loans and investment securities comparable to taxable loans and investment
securities is shown in the following table. The taxable-equivalent adjustment is
based on a 35% Federal income tax rate.
25
Six Months Ended Three Months Ended
June 30, June 30,
(In thousands) 2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------
Interest income $ 530,499 516,750 270,742 258,677
Taxable-equivalent adjustment 3,723 3,542 1,853 1,771
---------------- ---------------- ---------------- -------------
Interest income,
taxable-equivalent 534,222 520,292 272,595 260,448
Interest expense 157,979 168,792 79,805 83,336
---------------- ---------------- ---------------- -------------
Net interest income,
taxable-equivalent $ 376,243 351,500 192,790 177,112
================ ================ ================ =============
Non-Interest Income
Total non-interest income during the first six months of 2003 increased $77.8
million, or 13.2%, over the same period a year ago. Total non-interest income
during the second quarter of 2003 increased $41.7 million, or 13.9%, over the
same period in 2002. For the first six months of 2003, total non-interest income
excluding reimbursable items and the impairment loss on a private equity
investment increased $73.3 million, or 15.3%, over the first six months of 2002.
Total non-interest income excluding reimbursable items and an impairment loss on
a private equity investment for the second quarter of 2003 increased $38.7
million, or 15.6%, over the same period in 2002.
Financial Services:
Financial Services' non-interest income for the three and six months ended June
30, 2003 was up 42.4% and 33.2%, respectively, as compared to the same periods
last year. Acquisitions, divestitures, and the impairment loss recorded in the
prior year have significantly impacted the year-over-year comparisons. Excluding
these items and securities gains, non-interest income for the three and six
months ended June 30, 2003 was up 18.7% and 20.2%, respectively, from the same
periods last year. The key drivers are mortgage revenues, up 116.2% compared to
the second quarter of 2002 and 97.6% for the year-to-date period, and service
charges on deposits, up 8.4% for the quarter and 8.0% for the year-to-date
period.
Financial Management Services revenues for the six months ended June 30, 2003
increased 9.5% compared to the same period a year ago. Excluding acquisitions,
these revenues are the same as last year. Declining market values of equity
securities have impacted the fee income base of Financial Management Services.
However, most of this impact was offset by the addition of new assets under
management, which are approximately $13 billion as of June 30, 2003.
Transaction Processing Services:
TSYS' revenues are derived from providing electronic payment processing and
related services to financial and nonfinancial institutions, generally under
long-term processing contracts. TSYS' services are provided through 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).
26
Electronic payment processing services revenues increased $47.8 million, or
16.2%, for the six months ended June 30, 2003, compared to the same period in
2002. For the second quarter of 2003, electronic payment processing services
revenues increased $23.5 million, or 15.4%, compared to the second quarter of
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 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,
commercial, debit and stored-value cards, as well as student loan processing.
Average cardholder accounts on file for the three months ended June 30, 2003
were 260.7 million, an increase of approximately 13.8% over the average of 229.1
million for the same period in 2002. Average cardholder accounts on file for the
six months ended June 30, 2003 were 256.4 million, an increase of approximately
10.5% over the average of 232.1 million for the same period in 2002. Cardholder
accounts on file at June 30, 2003 were 262.5 million, a 15.8% increase compared
to the 226.7 million accounts on file at June 30, 2002. The change in cardholder
accounts on file from June 2002 to June 2003 included the deconversion and
purging of 9.5 million accounts, the addition of approximately 23.8 million
accounts attributable to the internal growth of existing clients, and
approximately 21.5 million accounts for new clients.
TSYS expects to continue expanding its market share in the consumer, debit,
retail, and commercial card arenas. TSYS' future growth is dependent upon new
clients, international expansion, and continued internal growth of clients'
portfolios.
27
In March of 2003, Sears announced that it is evaluating strategic alternatives
for its private label and MasterCard portfolio. In July 2003, Sears and Citicorp
announced an agreement for the proposed sale by Sears to Citicorp of its credit
card and financial services businesses by the end of 2003. Sears and Citicorp
are both current customers of TSYS, and TSYS considers its relationships with
both companies to be very positive.
TSYS and Sears are parties to a 10-year agreement, which was renewed in January
of 2000, under which TSYS provides transaction processing for more than 78
million Sears accounts. The TSYS/Sears processing agreement as it relates to the
Sears retail and MasterCard portfolios expires on April 30, 2010. During the six
month period ending June 30, 2003, TSYS' revenues from the TSYS/Sears agreement
represented 6.5% of its consolidated revenues. The agreement includes provisions
for termination for convenience prior to its expiration upon the payment of a
termination fee. This termination fee is not fixed, but is reduced annually the
closer the termination date is to the expiration date of the agreement. The
TSYS/Sears agreement also grants to Sears the one-time right to market test
TSYS' pricing and functionality after May 1, 2004. Potential results of such
market test, in which TSYS will be a participant, include continuation of the
processing agreement under its existing terms, continuation of the processing
agreement under mutually agreed modified terms, or termination of the processing
agreement after May 1, 2006 without a termination fee.
At this point in time, TSYS has not had any formal discussions with Citicorp
about its future plans for the Sears portfolios. TSYS believes that many aspects
of the TSYS/Sears processing agreement are unique to its relationship with
Sears, and intends to address those issues in future conversations and
negotiations with Citicorp. The impact of the proposed transaction between Sears
and Citicorp on the financial condition and results of operations for Synovus
and TSYS cannot be determined at this time.
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 TSYS will license a
modified version of its TS2 consumer and commercial software to Bank One under a
perpetual license with a six year payment term. TSYS uses the
percentage-of-completion accounting method for its agreement with Bank One and
recognizes revenues in proportion to costs incurred. 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' revenues is derived from long-term contracts with
large clients, including certain major customers. For the three months ended
June 30, 2003, TSYS had two major customers, which accounted for approximately
30.2%, or $77.7 million, of total revenues. For the three months ended June 30,
2002, TSYS had two major customers that accounted for 35.0%, or $82.0 million,
of total revenues.
TSYS had two major customers for the six months ended June 30, 2003, which
accounted for approximately 30.1%, or $153.0 million, of total revenues. For the
six months ended June 30, 2002, TSYS had two major customers which accounted for
approximately 33.9%, or $159.5
28
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
For the six months ended June 30, 2003, total non-interest expense increased
$66.4 million, or 10.5%. Total non-interest expense for the three months ended
June 30, 2003 increased $40.8 million, or 12.9%, over the same period in 2002.
Total non-interest expense excluding reimbursable items for the six months ended
June 30, 2003 increased $70.4 million, or 13.7%, over the same period in 2002.
For the three months ended June 30, 2003, total non-interest expense excluding
reimbursable items increased $46.2 million, or 18.0% over the second quarter of
2002. Management analyzes non-interest expense in two separate components:
Financial Services and Transaction Processing Services.
The following table summarizes non-interest expense for the six months ended
June 30, 2003 and 2002.
Six Months Ended Six Months Ended
(In thousands) June 30, 2003(*) June 30, 2002(*)
- --------------------------------------------------------------------------------------------------------------------
Transaction Transaction
Financial Processing Financial Processing
Services Services Services Services
------------- ---------------- ------------- ----------------
Salaries and other personnel expenses $ 170,979 162,890 137,494 144,406
Net occupancy and equipment expenses 36,556 102,027 33,555 85,950
Other operating expenses 75,856 43,099 69,609 48,470
Reimbursable items -- 113,112 -- 117,022
------------- ---------------- ------------- ----------------
Total non-interest expense $ 283,391 421,128 240,658 395,848
============= ================ ============= ================
The following table summarizes non-interest expense for the three months ended
June 30, 2003 and 2002.
Three Months Ended Three Months Ended
(In thousands) June 30, 2003(*) June 30, 2002(*)
- --------------------------------------------------------------------------------------------------------------------
Transaction Transaction
Financial Processing Financial Processing
Services Services Services Services
--------------- -------------------------------- ---------------
Salaries and other personnel expenses $ 89,883 85,118 65,350 74,350
Net occupancy and equipment expenses 18,640 50,407 16,717 41,720
Other operating expenses 39,064 22,780 33,679 27,674
Reimbursable items -- 54,638 -- 60,032
--------------- ---------------- --------------- ---------------
Total non-interest expense $ 147,587 212,943 115,746 203,776
=============== ================ =============== ===============
(*) The added totals are greater than the consolidated totals due to
inter-segment balances which are eliminated in consolidation.
29
Financial Services:
Financial Services' non-interest expense for the first six months of 2003 was
$283.4 million, up 17.8% compared to the same period a year ago. For the second
quarter of 2003, Financial Services' non-interest expense was $147.6 million, up
27.5% compared to the second quarter of 2002. The efficiency ratio for the six
months ended June 30, 2003 was 53.55% compared to 51.82% for the same period a
year ago. Significant items which impacted the growth in non-interest expense
since last year include acquisitions, divestitures, mortgage banking unit
expenses, timing differences in incentive pay expenses, and the merchant fraud
loss recorded in 2002. Excluding these items, non-interest expense for the six
months ended June 30, 2003 increased approximately 6.8% compared to the same
period a year ago. The core infrastructure expenses within our support companies
have an increase of approximately 4% over last year-to-date results. The
remainder of the growth is predominately in the sales and production areas of
the highest growth banking markets.
Average FTE employees for the six months ended June 30, 2003 were 5,871, up 388
or 7.1% from the same period a year ago. More than one-half of the total
increase in average FTEs was the net change resulting from acquisitions and
divestitures.
Transaction Processing Services:
Total expenses increased 6.4% for the six months ended June 30, 2003, compared
to the same period in 2002. Excluding reimbursable items, total expenses
increased 10.5% for the six months ended June 30, 2003, compared to the same
period in 2002. Total expenses increased 4.5% for the second quarter of 2003,
compared to the second quarter of 2002. Excluding reimbursable items, total
expenses increased 10.1% for the second quarter of 2003, compared to the same
period in 2002. The increases are due to changes in each of the expense
categories as described below.
Salaries and other personnel expenses increased $18.5 million, or 12.8%, for the
six months ended June 30, 2003, compared to the same period in 2002. For the
second quarter of 2003, salaries and other personnel expenses increased $10.8
million, or 14.5%, compared to the second quarter of 2002. The change in
employment expenses is associated with the growth in the number of employees,
normal salary increases, and related benefits, as well as lower levels of
employment costs categorized as software development and contract acquisition
costs. The average number of employees in the second quarter of 2003 increased
to 5,421, which increased 2.1% compared to 5,311 in the same period in 2002. The
average number of employees for the first six months of 2003 increased to 5,304,
which approximates the 5,298 in the same period in 2002. During the second
quarter, TSYS added approximately 220 employees associated with the ESC
acquisition and the creation of a wholly-owned subsidiary named TSYS Technology
Center, Inc. (TCC) in Boise, Idaho. Initially employing 77 team members, the TTC
team members will support technology efforts throughout TSYS, including
government services, customer care, programming, and systems development.
For the six months ended June 30, 2003, net occupancy and equipment expense
increased $16.1 million, or 18.7%, over the same period in 2002. Net occupancy
and equipment expense increased $8.7 million, or 20.8%, for the three months
ended June 30, 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 $4.6 million and $6.2 million for the first three and
six months ended
30
June 30, 2003, respectively, compared to the same periods of
2002. Depreciation and software amortization increased $4.0 million and $8.8
million during the three and six months ended June 30, 2003, respectively,
compared to the same periods in 2002. The increase in depreciation and
amortization is the result of the amortization of additional software acquired
in 2002, as well as the amortization of developed software placed in service
after June 30, 2002.
On June 30, 2003, TSYS terminated the lease arrangement and purchased its
corporate campus through a combination of cash and long-term debt financing
through a banking affiliate of Synovus. As a result of the purchase, net
occupancy and equipment expense is not expected to increase because the increase
of approximately $2.6 million annually for depreciation of the building and
related equipment will be offset by the decrease in annual rent expense related
to the lease. However, the campus purchase will result in a reduction of net
interest income.
Income Tax Expense
Income tax expense for the six months ended June 30, 2003 was $106.6 million
compared to $94.0 million for the same period a year ago. For the second quarter
of 2003, income tax expense was $56.1 million compared to $47.6 million for the
second quarter of 2002. The effective tax rate for the first six months of 2003
was 36.4%, compared to 35.8% for the same period in 2002. For the second quarter
of 2003, the effective tax rate was 36.8%, compared to 35.6% for the second
quarter of 2002.
2003 Earnings Guidance
Synovus expects to achieve earnings per share growth for 2003 in the range of 4
- - 8% over 2002, based in part upon the following assumptions:
* Financial Services' net income growth of 3 - 7% over 2002.
* 2003 net interest margin of approximately 4.20% to 4.33%.
* Good credit quality with a 2003 net charge-off ratio which approximates
2002 levels.
* TSYS earnings growth of 12 - 15% over 2002.
Share Repurchase Plan
On April 14, 2003 the Synovus board of directors approved a $200 million share
repurchase plan. Through August 13, 2003, 5.0 million shares have been purchased
under this plan at a total cost of $100.8 million. This was consistent with
Synovus' expectation to repurchase one half of the total authorization in the
first 90 days after the plan was approved. The pace of future repurchases under
this two year plan will depend on various factors including price, market
conditions, acquisitions, and the general financial position of Synovus.
Forward-Looking Statements
Certain statements contained in this 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; management's belief with respect to the charge-off ratio for the full
year; management's belief with respect to 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
31
nonperforming assets; TSYS' belief with respect to expanding its market share,
the uniqueness of the TSYS/Sears processing relationship and 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; an expected increase of 3-7% in Financial Services' net
income; expected net interest margin of approximately 4.20% to 4.33%;
expectation of good credit quality with a 2003 net charge-off ratio which
approximates 2002 levels; and an expected increase of 12-15% in net income of
TSYS (based upon TSYS' assumptions that revenues (excluding reimbursable items)
will increase 9 - 10%, that the internal growth rate of existing clients will be
approximately 11%, and that there will be a continued focus on expense
management). In addition, certain statements in future filings by Synovus with
the Securities and Exchange Commission, in press releases, and in oral and
written statements made by or with the approval of Synovus which are not
statements of historical fact constitute forward-looking statements within the
meaning of the Act. Examples of forward-looking statements include, but are not
limited to: (i) projections of revenues, income or loss, earnings or loss per
share, the payment or non-payment of dividends, capital structure, and other
financial terms; (ii) statements of plans and objectives of Synovus or its
management or Board of Directors, including those relating to products or
services; (iii) statements of future economic performance; and (iv) statements
of assumptions underlying such statements. Words such as "believes,"
"anticipates," "expects," "intends," "targeted," and similar expressions are
intended to identify forward-looking statements but are not the exclusive means
of identifying such statements.
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: (i) Synovus' inability
to achieve its net income goals for Financial Services; (ii) TSYS' inability to
achieve its net income goals for 2003 (whether arising out of TSYS' inability to
successfully bring new products and services to market, adverse developments
with respect to TSYS' sub-prime or retail clients, adverse developments with
respect to signing new clients, adverse developments with respect to controlling
expenses, or otherwise); (iii) adverse developments with respect to TSYS meeting
its performance obligations under its contract with Bank One; (iv) the strength
of the U.S. economy in general and the strength of the local economies in which
operations are conducted; (v) the effects of and changes in trade, monetary and
fiscal policies, and laws, including interest rate policies of the Federal
Reserve Board; (vi) inflation, interest rate, market and monetary fluctuations;
(vii) the timely development of and acceptance of new products and services by
users; (viii) changes in consumer spending, borrowing, and saving habits; (ix)
technological changes are more difficult or expensive than anticipated; (x)
acquisitions; (xi) the ability to increase market share and control expenses;
(xii) the effect of changes in laws and regulations (including laws and
regulations concerning taxes, banking, securities, and insurance) with which
Synovus and its subsidiaries must comply; (xiii) the effect of changes in
accounting policies and practices, as may be adopted by the regulatory agencies,
the Financial Accounting Standards Board, or other authoritative bodies; (xiv)
changes in Synovus' organization, compensation, and benefit plans; (xv) the
costs and effects of litigation and of unexpected or adverse outcomes in such
litigation; (xvi) a deterioration in credit quality or a reduced demand for
credit; (xvii) Synovus' inability to successfully manage any impact from slowing
economic conditions or consumer spending; (xviii) the occurrence of catastrophic
events that could impact Synovus or TSYS or its major customers' operating
facilities, communication systems and technology or that have a material
negative impact on current economic conditions or levels of consumer
32
spending; (xix) successfully managing the potential both for patent protection
and patent liability in the context of rapidly developing legal framework for
expansive software patent protection; (xx) hostilities increase in the Middle
East or elsewhere; and (xxi) 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.
33
ITEM 3 - QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
During the second quarter of 2003, Synovus experienced a moderate 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 the second
quarter having its interest rate tied to a short-term index, primarily the Prime
rate. Through its asset liability management practices, Synovus has sought to
limit any further significant increases in its asset sensitivity. These
activities have largely offset the shortening of its loan portfolio, resulting
in limited changes in Synovus' interest rate sensitivity.
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 2.5%, 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 2.8%, 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.
34
ITEM 4 - CONTROLS AND PROCEDURES
We have evaluated the effectiveness of the design and operation of our
disclosure controls and procedures as of the end of the period covered by this
quarterly report as required by Rule 13a-15 of the Securities Exchange Act of
1934, as amended. This evaluation was carried out under the supervision and with
the participation of our management, including our 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 have been no changes in Synovus' internal
control over financial reporting which could materially affect, or are
reasonably likely to materially affect, internal control over financial
reporting.
35
PART II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual shareholders' meeting was held on April 24, 2003. Following is a
summary of the proposal that was submitted to the shareholders for approval.
The proposal was to elect three nominees for Class III directors of Synovus to
serve until the 2006 Annual Meeting of Shareholders. The three nominees for
election as Class III directors named below were elected by the number of
affirmative votes set forth opposite their names below, with the number of votes
withholding authority to vote for such nominees also being shown. As the
election of each of the nominees for Class III directors was approved by a
plurality of the total votes entitled to be cast by the holders of shares
represented at the meeting, each of the nominees for Class III directors were
elected.
Nominee Votes For Withheld Authority to Vote
- ---------------------------------------- -------------------------------------- --------------------------------------
Richard Y. Bradley 1,600,665,688 285,473,523
- ---------------------------------------- -------------------------------------- --------------------------------------
John P. Illges, III 1,839,612,131 46,527,080
- ---------------------------------------- -------------------------------------- --------------------------------------
William B. Turner 1,770,307,279 115,831,932
- ---------------------------------------- -------------------------------------- --------------------------------------
36
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(11) Statement re Computation of Per Share Earnings
(31.1) Certification of Chief Executive Officer
(31.2) Certification of Chief Financial Officer
(32) Certification of Periodic Report
(b) Reports on Form 8-K
The following report on Form 8-K was filed subsequent to the second
quarter of 2003.
The report filed on July 16, 2003, included the following event:
On July 16, 2003, Synovus issued a press release and held an investor
conference call and webcast with respect to its second quarter 2003 earnings.
37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SYNOVUS FINANCIAL CORP.
Date: August 14, 2003 BY: /s/ Thomas J. Prescott
---------------------------- ----------------------
Thomas J. Prescott
Executive Vice President and
Chief Financial Officer
38
INDEX TO EXHIBITS
Exhibit Number Description
- -------------- ------------
11 Statement re Computation of Per Share Earnings
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32 Certification of Periodic Report
39