FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 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
(Registrants' telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES X NO
---------- -----------
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 October 31, 2003, 301,760,697 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. Unaudited Financial Statements
Consolidated Balance Sheets
September 30, 2003 and December 31, 2002 3
Consolidated Statements of Income
Nine and Three Months Ended September 30, 2003 and 2002 4
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2003 and 2002 5
Notes to Consolidated Financial Statements 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 35
Item 4. Controls and Procedures 36
Part II. Other Information
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)
September 30, December 31,
(In thousands, except share and per share data) 2003 2002
--------------------- --------------------
ASSETS
Cash and due from banks $ 706,029 741,092
Interest earning deposits with banks 4,426 5,055
Federal funds sold and securities purchased under resale agreements 138,448 92,709
Mortgage loans held for sale 238,986 245,858
Investment securities available for sale 2,431,951 2,237,725
Loans, net of unearned income 15,918,573 14,463,909
Allowance for loan losses (223,461) (199,841)
--------------------- --------------------
Loans, net 15,695,112 14,264,068
--------------------- --------------------
Premises and equipment, net 776,848 616,355
Contract acquisition costs and computer software, net 340,078 324,026
Goodwill, net 248,869 99,108
Other intangible assets, net 38,993 16,869
Other assets 403,654 393,381
--------------------- --------------------
Total assets $ 21,023,394 19,036,246
===================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing $ 2,800,637 2,303,375
Interest bearing 12,723,450 11,625,459
--------------------- --------------------
Total deposits 15,524,087 13,928,834
Federal funds purchased and securities sold under repurchase agreements 1,115,984 1,275,084
Long-term debt 1,684,798 1,336,200
Billings in excess of costs on uncompleted contracts 24,074 -
Other liabilities 365,213 338,176
--------------------- --------------------
Total liabilities 18,714,156 16,878,294
--------------------- --------------------
Minority interest in consolidated subsidiaries 133,432 117,099
Shareholders' equity:
Common stock - $1.00 par value; Authorized 600,000,000 shares;
issued 307,054,609 in 2003 and 300,573,027 in 2002; outstanding
301,441,645 in 2003 and 300,397,763 in 2002 307,055 300,573
Surplus 422,615 305,718
Treasury stock - 5,612,964 shares in 2003 and 175,264 shares in 2002 (112,738) (1,285)
Unearned compensation (306) (146)
Accumulated other comprehensive income 32,873 46,113
Retained earnings 1,526,307 1,389,880
--------------------- --------------------
Total shareholders' equity 2,175,806 2,040,853
--------------------- --------------------
Total liabilities and shareholders' equity $ 21,023,394 19,036,246
===================== ====================
See accompanying notes to consolidated financial statements.
3
SYNOVUS FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Nine Months Ended Three Months Ended
September 30, September 30,
--------------------------- ----------------------
(In thousands, except per share data) 2003 2002 2003 2002
--------------- ---------- ------- -----------
Interest income:
Loans, including fees $ 712,542 685,797 239,349 236,579
Investment securities 71,455 88,131 22,203 28,830
Mortgage loans held for sale 11,514 10,796 4,324 3,351
Federal funds sold and securities purchased
under resale agreements 1,216 1,130 367 371
Interest earning deposits with banks 20 40 5 13
--------------- ---------- ----------- -----------
Total interest income 796,747 785,894 266,248 269,144
--------------- ---------- ----------- -----------
Interest expense:
Deposits 168,337 197,625 52,533 66,844
Federal funds purchased and securities sold
under repurchase agreements 9,007 14,317 2,503 4,381
Long-term debt 53,770 43,055 18,099 14,980
--------------- ---------- ----------- -----------
Total interest expense 231,114 254,997 73,135 86,205
--------------- ---------- ----------- -----------
Net interest income 565,633 530,897 193,113 182,939
Provision for losses on loans 51,977 49,497 15,108 16,410
--------------- ---------- ----------- -----------
Net interest income after provision
for losses on loans 513,656 481,400 178,005 166,529
--------------- ---------- ----------- -----------
Non-interest income:
Electronic payment processing services 519,906 450,970 177,580 156,470
Other transaction processing services revenue 81,735 81,097 30,927 25,451
Service charges on deposit accounts 77,877 69,512 26,710 24,281
Fees for trust services 21,925 21,295 7,189 6,928
Brokerage revenue 15,108 13,605 5,338 4,372
Mortgage banking income 51,991 27,986 18,021 10,793
Credit card fees 19,117 16,609 7,110 6,010
Securities gains, net 1,336 2,606 755 717
Other fee income 17,335 14,792 6,039 5,254
Other non-interest income 38,557 36,668 11,776 14,796
--------------- ---------- ----------- -----------
Non-interest income before reimbursable items
and impairment loss on private equity investment 844,887 735,140 291,445 255,072
Reimbursable items 168,852 173,495 55,740 56,473
Impairment loss on private equity investment - (8,355) - -
--------------- ---------- ----------- -----------
Total non-interest income 1,013,739 900,280 347,185 311,545
--------------- ---------- ----------- -----------
Non-interest expense:
Salaries and other personnel expense 505,091 443,839 171,525 162,209
Net occupancy and equipment expense 208,872 181,833 70,289 62,327
Other non-interest expense 174,538 159,018 63,134 46,956
--------------- ---------- ----------- -----------
Non-interest expense before reimbursable items 888,501 784,690 304,948 271,492
Reimbursable items 168,852 173,495 55,740 56,473
--------------- ---------- ----------- -----------
Total non-interest expense 1,057,353 958,185 360,688 327,965
--------------- ---------- ----------- -----------
Minority interest in subsidiaries' net income 19,453 16,967 6,780 6,254
Income before income taxes 450,589 406,528 157,722 143,855
Income tax expense 164,303 145,609 57,722 51,583
--------------- ---------- ----------- -----------
Net income $ 286,286 260,919 100,000 92,272
=============== ========== =========== ===========
Net income per share:
Basic $ 0.95 0.88 0.33 0.31
=============== ========== =========== ===========
Diluted 0.94 0.87 0.33 0.31
=============== ========== =========== ===========
Weighted average shares outstanding:
Basic 302,067 296,387 301,366 298,564
=============== ========== =========== ===========
Diluted 304,574 300,816 304,514 301,986
=============== ========== =========== ===========
Dividends declared per share $ 0.50 0.44 0.17 0.15
=============== ========== =========== ===========
See accompanying notes to consolidated financial statements.
4
SYNOVUS FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
----------------------------------------------------
(In thousands) 2003 2002
--------------------- ---------------------
Operating Activities
Net Income $ 286,286 260,919
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for losses on loans 51,977 49,497
Depreciation, amortization, and accretion, net 90,383 69,638
Deferred income tax expense 21,248 2,332
Decrease in interest receivable 6,278 4,727
Decrease in interest payable (4,854) (11,031)
Minority interest in subsidiaries' net income 19,453 16,967
Decrease in mortgage loans held for sale 6,872 160,832
Billings in excess of costs on uncompleted contracts 24,074 -
Other, net (54,165) (14,290)
--------------------- ---------------------
Net cash provided by operating activities 447,552 539,591
--------------------- ---------------------
Investing Activities
Net cash (paid) received in acquisitions (66,155) 14,722
Net decrease (increase) in interest earning deposits with banks 629 (87)
Net increase in federal funds sold
and securities purchased under resale agreements (13,504) (58,003)
Proceeds from maturities and principal collections of
investment securities available for sale 1,147,308 496,185
Proceeds from sales of investment securities available for sale 130,753 104,427
Purchases of investment securities available for sale (1,437,466) (557,983)
Net increase in loans (862,928) (1,301,457)
Purchases of premises and equipment (160,127) (97,868)
Proceeds from disposals of premises and equipment 2,152 2,316
Proceeds from sales of other real estate 15,961 13,170
Increase in contract acquisition costs (17,904) (34,317)
Additions to purchased computer software (35,682) (20,686)
Additions to internally developed computer software (13,945) (21,573)
--------------------- ---------------------
Net cash used by investing activities (1,310,908) (1,461,154)
--------------------- ---------------------
Financing Activities
Net increase in demand and savings deposits 895,730 828,318
Net increase in certificates of deposit 9,303 297,946
Net decrease in federal funds purchased
and securities sold under repurchase agreements (159,100) (231,317)
Principal repayments on long-term debt (101,908) (54,406)
Proceeds from issuance of long-term debt 419,400 197,684
Dividends paid to shareholders (144,397) (125,091)
Proceeds from issuance of common stock 20,718 12,102
Treasury stock purchased (111,453) -
--------------------- ---------------------
Net cash provided by financing activities 828,293 925,236
--------------------- ---------------------
(Decrease) increase in cash and due from banks (35,063) 3,673
Cash and due from banks at beginning of period 741,092 648,179
--------------------- ---------------------
Cash and due from banks at end of period $ 706,029 651,852
===================== =====================
See accompanying notes to consolidated financial statements.
5
SYNOVUS FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
- ------------------------------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and therefore do not include
all information and footnotes necessary for a fair presentation of financial
position, results of operations, and cash flows in conformity with generally
accepted accounting principles. All adjustments consisting of normally recurring
accruals that, in the opinion of management, are necessary for a fair
presentation of the financial position and results of operations for the periods
covered by this report have been included. The accompanying unaudited
consolidated financial statements should be read in conjunction with the Synovus
Financial Corp. (Synovus) consolidated financial statements and related notes
appearing in the 2002 annual report previously filed on Form 10-K.
Note 2 - Supplemental Cash Flow Information
- -------------------------------------------
For the nine months ended September 30, 2003 and 2002, Synovus paid income taxes
(net of refunds received) of $139.4 million and $112.6 million, respectively.
For the nine months ended September 30, 2003 and 2002, Synovus paid interest of
$236.0 million and $266.0 million, respectively.
Cash used by TSYS for contract acquisition costs for the nine months ended
September 30, 2003 and 2002 are summarized as follows:
- --------------------------------------------------------------------------------------------------------------
(In thousands) September 30, 2003 September 30, 2002
- --------------------------------------------------------------------------------------------------------------
Conversion costs $ 13,404 22,941
Payments for processing rights 4,500 11,376
--------------------------------------------------------
Total $ 17,904 34,317
========================================================
Noncash investing activities consisted of loans of approximately $14.1 million
and $10.6 million, which were foreclosed and transferred to other real estate
during the nine months ended September 30, 2003 and 2002, respectively.
Note 3 - 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 nine months ended September 30, 2003 and 2002 was $273.0 million
and $277.9 million, respectively. For the three months ended September 30, 2003
and 2002, comprehensive income was $86.7 million and $99.1 million,
respectively.
Note 4 - 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
6
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 nine months and
three months ended September 30, 2003 and 2002 would have been reduced to the
pro forma amounts indicated in the following tables.
For the nine months ended September 30, 2003 and 2002:
(In thousands, except per share data) 2003 2002
- -------------------------------------------------------------------------------------------------------------------
Net income as reported $ 286,286 260,919
Total stock-based employee compensation expense determined under fair
value based method for all awards, net of related tax effects (10,110) (10,929)
---------------- -----------------
Net income - pro forma $ 276,176 249,990
================ =================
Earnings per share:
Basic - as reported $ 0.95 0.88
Basic - pro forma 0.91 0.84
Diluted - as reported 0.94 0.87
Diluted - pro forma 0.91 0.83
- -------------------------------------------------------------------------------------------------------------------
7
For the three months ended September 30, 2003 and 2002:
(In thousands, except per share data) 2003 2002
- -------------------------------------------------------------------------------------------------------------------
Net income as reported $ 100,000 92,272
Total stock-based employee compensation expense determined under fair
value based method for all awards, net of related tax effects (3,407) (3,987)
---------------- -----------------
Net income - pro forma $ 96,593 88,285
================ =================
Earnings per share:
Basic - as reported $ 0.33 0.31
Basic - pro forma 0.32 0.30
Diluted - as reported 0.33 0.31
Diluted - pro forma 0.32 0.29
- -------------------------------------------------------------------------------------------------------------------
Note 5 - 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 $66.1 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 57,959
Other assets 4,539
---------------------------
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 $67.2 million of acquired intangible assets, $59.8 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 34,255
Federal funds sold 7,035
Loans, net 327,768
Premises and equipment 16,806
Intangible assets 7,395
Goodwill 59,836
Other assets 7,482
---------------------------
Total assets acquired 490,136
---------------------------
Deposits 362,180
Capital securities of subsidiary trust 17,744
Other liabilities 24,954
---------------------------
Total liabilities assumed 404,878
---------------------------
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 has allocated approximately
$26.0 million to goodwill, approximately $8.2 million to intangibles and the
remaining amount to the net assets acquired. ESC provides targeted loyalty
consulting and travel, as well as gift card and merchandise reward programs to
more than 40 national and regional financial institutions in the United States.
ESC operates as a separate subsidiary of TSYS.
On October 7, 2003, Synovus announced an agreement to acquire the $249.9 million
asset Peoples Florida Banking Corporation (Peoples) in Palm Harbor, Florida in a
cash and stock transaction. Peoples is the parent company of Peoples Bank, a
state-chartered, commercial bank which provides a comprehensive range of
financial services to individuals, corporations, professional associations,
nonprofit organizations, and local governments in the Tampa Bay, Florida area.
Peoples Bank will retain its separate bank charter and name immediately
following the merger, which is subject to approval by the shareholders of
Peoples and regulatory agencies. The acquisition is expected to be completed
during the first quarter of 2004.
10
Note 6 - Operating Segments
- ---------------------------
Synovus has two reportable segments: Financial Services and Transaction
Processing Services. The Financial Services segment primarily provides
commercial banking services 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.
Segment information as of and for the nine months ended September 30, 2003 and
2002 is presented in the following table:
Nine months ended September 30, 2003 and 2002
- --------------------------------------------------------------------------------------------------------------------------
Transaction
Financial Processing
(In thousands) Services Services (a) Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------------
Interest income 2003 $ 796,776 649 (678) (b) $ 796,747
2002 785,194 1,598 (898) (b) 785,894
- --------------------------------------------------------------------------------------------------------------------------
Interest expense 2003 231,726 66 (678) (b) 231,114
2002 169,317 27 (898) (b) 254,997
- --------------------------------------------------------------------------------------------------------------------------
Net interest income 2003 565,050 583 - 565,633
2002 529,326 1,571 - 530,897
- --------------------------------------------------------------------------------------------------------------------------
Provision for loan losses 2003 51,977 - - 51,977
2002 49,497 - - 49,497
- --------------------------------------------------------------------------------------------------------------------------
Net interest income after provision 2003 513,073 583 - 513,656
for loan losses 2002 479,829 1,571 - 481,400
- --------------------------------------------------------------------------------------------------------------------------
Non-interest income 2003 234,978 790,707 (11,946) (c) 1,013,739
2002 183,863 726,882 (10,465) (c) 900,280
- --------------------------------------------------------------------------------------------------------------------------
Non-interest expense 2003 430,955 638,344 (11,946) (c) 1,057,353
2002 373,666 594,984 (10,465) (c) 958,185
- --------------------------------------------------------------------------------------------------------------------------
Income before income taxes 2003 317,096 152,946 (19,453) (d) 450,589
2002 290,026 133,469 (16,967) (d) 406,528
- --------------------------------------------------------------------------------------------------------------------------
Income tax expense 2003 113,173 51,130 - 164,303
2002 102,314 43,295 - 145,609
- --------------------------------------------------------------------------------------------------------------------------
Net income 2003 203,923 101,816 (19,453) (d) 286,286
2002 187,712 90,174 (16,967) (d) 260,919
- --------------------------------------------------------------------------------------------------------------------------
Total assets 2003 20,149,986 893,753 (20,345) (e) 21,023,394
2002 17,847,534 756,920 (94,239) (e) 18,510,215
- --------------------------------------------------------------------------------------------------------------------------
11
Segment information as of and for the three months ended September 30, 2003 and
2002 is presented in the following table:
Three months ended September 30, 2003 and 2002
- --------------------------------------------------------------------------------------------------------------------------
Transaction
Financial Processing
(In thousands) Services Services (a) Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------------
Interest income 2003 $ 266,268 57 (77) (b) $ 266,248
2002 268,978 519 (353) (b) 269,144
- --------------------------------------------------------------------------------------------------------------------------
Interest expense 2003 73,176 36 (77) (b) 73,135
2002 86,551 7 (353) (b) 86,205
- --------------------------------------------------------------------------------------------------------------------------
Net interest income 2003 193,092 21 - 193,113
2002 182,427 512 - 182,939
- --------------------------------------------------------------------------------------------------------------------------
Provision for loan losses 2003 15,108 - - 15,108
2002 16,410 - - 16,410
- --------------------------------------------------------------------------------------------------------------------------
Net interest income after provision 2003 177,984 21 - 178,005
for loan losses 2002 166,017 512 - 166,529
- --------------------------------------------------------------------------------------------------------------------------
Non-interest income 2003 81,061 270,216 (4,092) (c) 347,185
2002 68,314 247,410 (4,179) (c) 311,545
- --------------------------------------------------------------------------------------------------------------------------
Non-interest expense 2003 147,564 217,216 (4,092) (c) 360,688
2002 133,008 199,136 (4,179) (c) 327,965
- --------------------------------------------------------------------------------------------------------------------------
Income before income taxes 2003 111,481 53,021 (6,780) (d) 157,722
2002 101,323 48,787 (6,255) (d) 143,855
- --------------------------------------------------------------------------------------------------------------------------
Income tax expense 2003 40,214 17,508 - 57,722
2002 35,699 15,884 - 51,583
- --------------------------------------------------------------------------------------------------------------------------
Net income 2003 71,267 35,513 (6,780) (d) 100,000
2002 65,624 32,903 (6,255) (d) 92,272
- --------------------------------------------------------------------------------------------------------------------------
Total assets 2003 20,149,986 893,753 (20,345) (e) 21,023,394
2002 17,847,534 756,920 (94,239) (e) 18,510,215
- --------------------------------------------------------------------------------------------------------------------------
(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 and on
TSYS' line of credit with a Synovus banking affiliate.
(c) Principally, electronic payment processing services provided by TSYS to the
Financial Services segment.
(d) Minority interest in TSYS and GP Network Corporation (a TSYS subsidiary).
(e) Primarily TSYS' cash deposits with the Financial Services segment.
12
Segment information for the changes in the carrying amount of goodwill for the
nine months ended September 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 117,794 31,959 149,753
Impairment losses - - -
Other (*) - 8 8
------------------- ------------------- ----------------
Balance as of September 30, 2003 $ 213,283 35,586 248,869
=================== =================== ================
(*) Consists of foreign currency translation adjustments for GP Network
Corporation.
Other intangible assets (excluding goodwill) as of September 30, 2003 and
December 31, 2002 are presented in the table below.
(In thousands) September 30, 2003 December 31, 2002
- ----------------------------------------------------------------------------------------------------------------------
Purchased Trust Revenues $ 3,555 3,766
Core Deposit Premiums 21,473 8,946
Employment Contracts / Non-competition
Agreements 419 78
Acquired Customer Contracts 6,800 4,079
Trademark Name 627 -
Current Technology 3,392 -
Intangibles Associated with the Acquisition of
Minority Interest in TSYS 2,727 -
---------------------------- -------------------------
Total Carrying Value $ 38,993 16,869
============================ =========================
Note 7 - Dividends per Share
- ----------------------------
Dividends declared per share for the quarter ended September 30, 2003 were
$0.165, up 11.9% from $0.1475 for the third quarter of 2002. For the nine months
ended September 30, 2003, dividends declared per share were $0.495, up 11.9%
from $0.4425 for the same period a year ago.
Note 8 - 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 September 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 $ 190,000 3.95% 1.03% 88 1,477 (1,492) (15)
Cash flow hedges 545,000 5.42% 4.00% 26 6,997 (806) 6,191
------------ ---------- ---------- -------------
Total $ 735,000 5.04% 3.23% 42 8,474 (2,298) 6,176
============ ========== ========== =============
(*) Variable pay rate based upon contract rates in effect at September 30, 2003.
At September 30, 2003, Synovus had commitments to fund fixed-rate mortgage loans
to customers in the amount of $146.5 million. The fair value of these
commitments was $2.4 million.
At September 30, 2003, outstanding commitments to sell fixed-rate mortgage loans
amounted to approximately $290.6 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 September 30, 2003 was
($2.6) 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 September 30, 2003, the notional
amount of customer related derivative financial instruments was $356.5 million.
Note 9 - 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." The provisions of this statement are effective
for exit or disposal activities that are initiated after December 31, 2002, with
early application encouraged. The adoption of SFAS No. 146 on January 1, 2003
did not have a material impact on Synovus' financial condition or results of
operations.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and 107
and a rescission of FASB Interpretation No. 34". This interpretation elaborates
on 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 the
disclosure requirements are effective for financial statements of interim or
annual periods ending after December 15, 2002. The adoption of Interpretation
No. 45 did not 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. The adoption of EITF No. 00-21 did not significantly impact
Synovus' 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 disclosure modifications
are required beginning with the fiscal year ending after December 15, 2002 and
are included in Note 4.
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 as defined in the interpretation. The 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 reporting period after December 15, 2003. On
June 30, 2003, TSYS terminated the operating lease agreement and purchased the
corporate campus for $93.5 million with a combination of $73.3 million in cash
and funds from a long-term line of credit with a Synovus banking affiliate.
Accordingly, the interpretation did not directly impact 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 financial accounting and reporting 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". SFAS No. 149 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 did not 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 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires than an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. SFAS No. 150 is
effective for 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, except for mandatorily redeemable financial
instruments of nonpublic entities. Currently, the only impact of adopting SFAS
No. 150 has been 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 10 - 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 nine months ended September 30, 2003 was $286.3 million, up
9.7% from the same period a year ago. Diluted net income per share was $0.94 for
the nine months ended September 30, 2003, up 8.4% from the same period a year
ago. Return on average assets was 1.89% and return on average equity was 17.80%
for the nine months ended September 30, 2003. This compares to a return on
average assets of 2.05% and a return on average equity of 19.34% for the same
period a year ago.
For the three months ended September 30, 2003, net income was $100.0 million, up
8.4% from the third quarter of 2002. Diluted net income per share was $0.33 for
the third quarter, up 7.5% over $0.31 for the same period in 2002. For the three
months ended September 30, 2003, return on average assets was 1.91% and return
on average equity was 18.32%, compared to a return on average assets of 2.06%,
and a return on average equity of 19.12% for the third 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 due, according to the contractual terms
of the loan agreement, is in doubt. When a loan is
17
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.
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 costs, are
amortized using the straight-line method over the contract term beginning when
the client's cardholder accounts are converted and producing revenues. All costs
incurred prior to a signed agreement are expensed as incurred.
The amortization of contract acquisition costs associated with cash payments is
recorded as a reduction of revenues in the consolidated statements of income.
The amortization of contract acquisition costs associated with conversion
activity is recorded as other non-interest expense 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 liabilities in the accompanying
consolidated balance sheets. Increases and decreases in transaction processing
provisions are charged to other non-interest expense 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 5 of the Notes to Consolidated Financial Statements for a
discussion of business combinations.
Balance Sheet
During the first nine 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, net of unearned income, increased by $1.5
billion, federal funds sold and securities purchased under resale agreements
increased by $45.7 million, and investment securities available for sale
increased by $194.2 million. Premises and equipment, net increased by $160.5
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 nine months of 2003, the deposit base grew $1.6 billion,
long-term debt increased $348.6 million, and shareholders' equity increased
$135.0 million. These increases were partially offset by a $159.1 million
decrease in federal funds purchased and securities sold under repurchase
agreements.
Loans
Compared to September 30, 2002, loans grew by 13.2%. Excluding the impact of
acquisitions and divestitures, year-over-year loan growth was 9.3% and
year-to-date annualized loan growth was 7.4%. On a sequential quarter basis,
annualized loan growth was $87 million or 2.2%. We expect that the
sequential quarter annalized loan growth for the fourth quarter of 2003
will be in the 7-8% range.
The table on page 23 illustrates the composition of the loan portfolio
(classified by loan purpose) as of September 30, 2003. The commercial real
estate portfolio totals $8.6 billion, which represents 54.1% of the total loan
portfolio. Loans for the purpose of financing investment properties total $2.7
billion, which is only 17.0% 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 $350.0 million in loans in the Atlanta market. This
amount represents 2.2% of the total loan portfolio, or 4.1% of the total
commercial real estate portfolio. The primary source of repayment on investment
property loans is the income from the underlying property (e.g., hotels, office
buildings, shopping centers, and apartment units' rental income), with the
collateral as the secondary source of repayment. Additionally, in almost all
cases, these loans are made on a
20
recourse basis, which provides another source of repayment. From an underwriting
standpoint, these loans are evaluated by determining the impact of higher
interest rates, as well as lower occupancy rates, on the borrower's ability to
service its debt.
Commercial loans for the purpose of financing 1-4 family properties represent
$2.2 billion or 13.6% of the total loan portfolio, and one-fourth of the total
commercial real estate portfolio. The 1-4 family properties category includes
$813.4 million in loans in the Atlanta market, which is 5.1% of the total loan
portfolio, or 37.3% 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 19.4% of the total loan portfolio, or 35.9% 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 28.8% of the total
loan portfolio at September 30, 2003. These loans are diversified by geography,
industry, and loan type.
Asset Quality
The nonperforming assets ratio was 0.73% at September 30, 2003, unchanged from
the previous quarter and compared to 0.64% at year-end 2002. The quality of our
commercial real estate portfolio remains strong with a nonperforming loan ratio
of only 0.49% at September 30, 2003. The charge-off ratio for the third quarter
was 0.32%, unchanged from the previous quarter. For the year-to-date period, the
charge-off ratio was 0.34%, down from 0.35% 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 0.70% of loans.
Loans 90 days past due and still accruing at September 30, 2003 were $23.3
million, or 0.15% 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 $223.5 million, or 1.40% of net loans, at
September 30, 2003 compared to $200.0 million, or 1.38% of net loans, at
December 31, 2002. For the nine months ended September 30, 2003, the provision
for losses on loans was $52.0 million, up 5.0% from $49.5 million for the same
period a year ago. The provision for losses on loans was $15.1 million for the
three months ended September 30, 2003, down 7.9% from $16.4 million for the
third quarter of 2002. The decrease is primarily due to stable credit quality
and slower loan growth.
21
(Dollars in thousands) September 30, 2003 December 31, 2002
- --------------------------------------------------------------------------------------------------------------------
Nonperforming loans $ 93,633 $ 66,736
Other real estate 22,842 26,517
------------------------- ------------------------
Nonperforming assets $ 116,475 $ 93,253
========================= ========================
Loans 90 days past due and still accruing $ 23,254 $ 30,192
Allowance for loan losses $ 223,461 $ 199,841
Allowance for loan losses as a % of loans 1.40 % 1.38 %
As a % of loans and other real estate:
Nonperforming loans 0.59 % 0.46 %
Other real estate 0.14 0.18
------------------------- ------------------------
Nonperforming assets 0.73 % 0.64 %
========================= ========================
Allowance to nonperforming loans 238.66 % 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 September 30, 2003.
(Dollars in thousands) Loans % of
as a Total Total
% of Non- Non-
Total Loans Total Loans performing performing
Loan Type Outstanding Loans Loans
- --------------------------------------------------------------------------------------------------------------------------
Multi-Family $ 439,684 2.8 % $ 4,348 4.6 %
Hotels 655,904 4.1 7,938 8.5
Office Buildings 654,849 4.1 1,545 1.7
Shopping Centers 511,322 3.2 850 0.9
Commercial Development
441,494 2.8 11,674 12.5
--------------- ----------------
Investment Properties
2,703,253 17.0 26,355 28.1
1-4 Family Construction
784,272 4.8 2,242 2.4
1-4 Family Perm
/Mini-Perm 650,246 4.1 3,117 3.3
Residential Development
747,094 4.7 1,742 1.9
--------------- ----------------
1-4 Family Properties
2,181,612 13.6 7,101 7.6
Land Acquisition 629,931 4.0 209 0.2
--------------- ----------------
Total Investment-Related Real
Estate
5,514,796 34.6 33,665 35.9
Owner-Occupied 1,856,783 11.7 4,960 5.3
Other Property 1,235,365 7.8 3,724 4.0
--------------- ----------------
Total Commercial
Real Estate 8,606,944 54.1 42,349 45.2
Commercial &
Industrial Loans 4,582,781 28.8 43,776 46.8
Consumer Loans 2,758,284 17.3 7,508 8.0
Unearned Income (29,436) (0.2)
--------------- ----------------
Total Loans $ 15,918,573 100.00 % $ 93,633 100.00 %
=============== ================
23
Deposits
Total deposits at September 30, 2003 were $15.5 billion, compared to $13.9
billion at year-end 2002. Excluding acquisitions and divestitures, core deposits
increased $732.9 million or 9.1% 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 $2.535 billion at September 30, 2003, compared to $2.196
billion at December 31, 2002. The ratio of total risk-based capital to
risk-weighted assets was 12.98% at September 30, 2003 compared to 12.53% at
December 31, 2002. The leverage ratio at September 30, 2003 was 9.84% compared
to 10.86% at December 31, 2002. The regulatory capital calculations are impacted
by the decrease in capital due to the repurchase of $111.5 million in treasury
stock during the first nine months 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 10.35% at September 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 10.21% at September
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 $3.0
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.
24
The consolidated statements of cash flows detail cash flows from operating,
investing, and financing activities. Operating activities provided net cash of
$447.6 million during the first nine 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 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 $1.3
billion, and financing activities provided $828.3 million, resulting in a
decrease in cash and due from banks of $35.1 million.
Earning Assets, Sources of Funds, and Net Interest Income
Average total assets for the first nine months of 2003 were $20.2 billion, up
18.6% over the first nine months of 2002. Excluding the impact of acquisitions
and divestitures in both years, average assets increased 12.7%. Average earning
assets were up 17.6% in the first nine months of 2003 over the same period last
year, and represented 89.6% of average total assets. When compared to the same
period last year, average deposits increased $2.3 billion, average investments
increased $204.5 million, average Federal funds purchased and securities sold
under repurchase agreements decreased $45.1 million, average Federal funds sold
and securities purchased under resale agreements increased $46.1 million,
average long-term debt increased $496.3 million, and average shareholders'
equity increased $345.7 million. This growth provided the funding for the $2.3
billion growth in average net loans.
For the nine months ended September 30, 2003, net interest income was $565.6
million, up $34.7 million, or 6.5%, over the $530.9 million for the same period
a year ago. Net interest income was $193.1 million for the three months ended
September 30, 2003, up $10.2 million, or 5.6%, over the $182.9 million reported
for the three months ended September 30, 2002. For the nine months ended
September 30, 2003, net interest income, on a tax-equivalent basis, increased
$34.9 million, or 6.5%, over the same period in 2002. Net interest income, on a
tax-equivalent basis, for the third quarter of 2003 increased $10.2 million, or
5.5%, over the third quarter of 2002.
The net interest margin was 4.26% for the nine months ended September 30, 2003,
down 44 basis points from the nine months ended September 30, 2002. This
decrease resulted from a 95 basis point decrease in the yield on earning assets,
which was partially offset by a 51 basis point decrease in the effective cost of
funds. The decreased yield on earning assets was largely due to a 59 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 third quarter 2003 net interest margin was 4.22%,
down 42 basis points from the same period a year ago. This decrease resulted
from a 100 basis point decrease in the yield on earning assets, which was
partially offset by a 58 basis point decrease in the effective cost of funds.
On a sequential quarter basis, the net interest margin was down 3 basis points
while the average Prime rate declined 25 basis points. The margin stability was
primarily due to strong pricing discipline on both deposits and loans.
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
Nine Months Ended Three Months Ended
September 30, September 30,
(In thousands) 2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------
Interest income $ 796,747 785,894 266,248 269,144
Taxable-equivalent adjustment 5,554 5,395 1,831 1,853
---------------- ---------------- ---------------- -------------
Interest income,
taxable-equivalent 802,301 791,289 268,079 270,997
Interest expense 231,114 254,997 73,135 86,205
---------------- ---------------- ---------------- -------------
Net interest income,
taxable-equivalent $ 571,187 536,292 194,944 184,792
================ ================ ================ =============
Non-Interest Income
Total non-interest income during the first nine months of 2003 increased $113.5
million, or 12.6%, over the same period a year ago. Total non-interest income
during the third quarter of 2003 increased $35.6 million, or 11.4%, over the
same period in 2002. For the first nine months of 2003, total non-interest
income excluding reimbursable items and the impairment loss on a private equity
investment increased $109.7 million, or 14.9%, over the first nine months of
2002. For the third quarter of 2003, total non-interest income excluding
reimbursable items increased $36.4 million, or 14.3%, over the same period in
2002.
Financial Services:
Financial Services' non-interest income for the three and nine months ended
September 30, 2003 was up 18.7% and 27.8%, respectively, as compared to the same
periods last year. Acquisitions, divestitures, and the impairment loss recorded
in the prior year have an impact on the year-over-year comparisons. Excluding
these items and securities gains, non-interest income for the three and nine
months ended September 30, 2003 was up 14.8% and 18.8%, respectively, from the
same periods last year. The key driver was mortgage revenues, up 67.0% compared
to the third quarter of 2002 and up 85.8% for the year-to-date period.
Financial Management Services revenues for the nine months ended September 30,
2003 increased 8.0% compared to the same period a year ago. Excluding
acquisitions, the increase is 2.1% compared to the same period a year ago.
Financial Management Services fee income has been impacted by lower market
values of equity securities for the year-to-date period compared to a year ago.
Most of the impact of the lower market values of managed assets has been offset
by the addition of new assets under management during the first nine months of
2003. The recent increase in market indices has begun to provide some benefit in
the third quarter and is expected to provide additional benefits in the fourth
quarter.
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.
26
Electronic payment processing services revenues increased $68.9 million, or
15.3%, for the nine months ended September 30, 2003, compared to the same period
in 2002. For the third quarter of 2003, electronic payment processing services
revenues increased $21.1 million, or 13.5%, compared to the third 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 or a decline 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 account
processing. Average cardholder accounts on file for the three months ended
September 30, 2003 were 265.9 million, an increase of approximately 14.7% over
the average of 231.8 million for the same period in 2002. Average cardholder
accounts on file for the nine months ended September 30, 2003 were 259.6
million, an increase of approximately 13.7% over the average of 228.4 million
for the same period in 2002. Cardholder accounts on file at September 30, 2003
were 267.9 million, a 13.6% increase compared to the 235.8 million accounts on
file at September 30, 2002. The change in cardholder accounts on file from
September 2002 to September 2003 included the deconversion and purging of 12.7
million accounts, the addition of approximately 25.1 million accounts
attributable to the internal growth of existing clients, and approximately 19.7
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 was evaluating strategic alternatives
for its private label and MasterCard portfolio. In July 2003, Sears and
Citigroup announced an agreement for the proposed sale by Sears to Citigroup of
its credit card and financial services businesses by the end of 2003. Sears and
Citigroup 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 79.9
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
nine month period ended September 30, 2003, TSYS' revenues from the TSYS/Sears
agreement represented 6.3% 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 is discussing with Citigroup Citigroup's 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
Citigroup. The impact of the proposed transaction between Sears and Citigroup 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
September 30, 2003, TSYS had one major customer, which accounted for
approximately 17.5%, or $46.5 million, of total revenues. For the three months
ended September 30, 2002, TSYS had two major customers that accounted for 30.7%,
or $74.2 million, of total revenues.
TSYS had two major customers for the nine months ended September 30, 2003, which
accounted for approximately 29.1%, or $225.8 million, of total revenues. For the
nine months ended September 30, 2002, TSYS had two major customers which
accounted for approximately 32.9%, or $233.7 million, of total revenues. The
loss of one of its major customers, or other significant
28
clients, could have a material adverse effect on TSYS' financial position,
results of operations, and cash flows.
For the three months and nine months ended September 30, 2003, TSYS' revenues
for other services included $4.1 million and $7.2 million, respectively, related
to ESC's revenues.
TSYS' share of income from its equity in joint ventures was $3.9 million and
$5.3 million for the three months ended September 30, 2003 and 2002,
respectively. For the first nine months of 2003 and 2002, TSYS' share of income
from its equity in joint ventures was $12.9 million and $14.6 million,
respectively. The decrease for the third quarter is attributable to the decrease
in Vital's operating results as a result of pricing compression, nonrecurring
charges associated with an executive's retirement, and termination of Vital's
stock-based compensation plans.
For the three months ended September 30, 2003 and 2002, TSYS' gain/(loss) on net
foreign currency translation was ($246.0) thousand and $2.1 million,
respectively. For the nine months ended September 30, 2003 and 2002, TSYS'
gain/(loss) on net foreign currency translation was $916.0 thousand and $2.1
million, respectively.
Non-Interest Expense
For the nine months ended September 30, 2003, total non-interest expense
increased $99.2 million, or 10.3%. Total non-interest expense for the three
months ended September 30, 2003 increased $32.7 million, or 10.0%, over the same
period in 2002. Total non-interest expense excluding reimbursable items for the
nine months ended September 30, 2003 increased $103.8 million, or 13.2%, over
the same period in 2002. For the three months ended September 30, 2003, total
non-interest expense excluding reimbursable items increased $33.5 million, or
12.3% over the third 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 nine months ended
September 30, 2003 and 2002.
Nine Months Ended Nine Months Ended
(In thousands) September 30, 2003(*) September 30, 2002(*)
- --------------------------------------------------------------------------------------------------------------------
Transaction Transaction
Financial Processing Financial Processing
Services Services Services Services
------------- ---------------- ------------- ----------------
Salaries and other personnel expenses $ 259,873 245,661 219,932 224,310
Net occupancy and equipment expenses 55,800 153,070 51,210 130,623
Other non-interest expense 115,282 70,761 102,524 66,556
Reimbursable items -- 168,852 -- 173,495
------------- ---------------- ------------- ----------------
Total non-interest expense $ 430,955 638,344 373,666 594,984
============= ================ ============= ================
29
The following table summarizes non-interest expense for the three months ended
September 30, 2003 and 2002.
Three Months Ended Three Months Ended
(In thousands) September 30, 2003(*) September 30, 2002(*)
- -------------------------------------------------------------------------------------- -----------------------------
Transaction Transaction
Financial Processing Financial Processing
Services Services Services Services
------------- ----------------------------- ----------------
Salaries and other personnel expenses $ 88,894 82,771 82,438 79,904
Net occupancy and equipment expenses 19,244 51,043 17,655 44,673
Other non-interest expense 39,426 27,662 32,915 18,086
Reimbursable items -- 55,740 -- 56,473
------------- ---------------- ------------ ----------------
Total non-interest expense $ 147,564 217,216 133,008 199,136
============= ================ ============ ================
(*) The added totals are greater than the consolidated totals due to
inter-segment balances which are eliminated in consolidation.
Financial Services:
Total non-interest expense for the Financial Services segment during the first
nine months of 2003 was $431.0 million, up 15.3% compared to the same period a
year ago. For the third quarter of 2003, total non-interest expense was $147.6
million, up 10.9% compared to the third quarter of 2002. 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. The
core infrastructure expenses within our support companies have an increase of
approximately 4% over the prior year-to-date results. The remainder of the
growth is primarily in the sales and production areas of the highest growth
banking markets.
Average full time equivalent (FTE) employees for the nine months ended September
30, 2003 were 5,918, up 385 or 7.0% 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.
The efficiency ratio for the nine months ended September 30, 2003 was 53.56%
compared to 52.15% for the same period a year ago. The net interest margin
compression was the primary contributor to the movement in the efficiency ratio.
The net overhead ratio improved to 1.36 % for the first nine months of 2003
compared to 1.57% for the same period a year ago.
Transaction Processing Services:
Total non-interest expense increased 7.3% for the nine months ended September
30, 2003, compared to the same period in 2002. Excluding reimbursable items,
total non-interest expense increased 11.4% for the nine months ended September
30, 2003, compared to the same period in 2002. Total non-interest expense
increased 9.1% for the third quarter of 2003, compared to the third quarter of
2002. Excluding reimbursable items, total non-interest expense increased 13.2%
for the third 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.
30
Salaries and other personnel expenses increased $21.4 million, or 8.7%, for the
nine months ended September 30, 2003, compared to the same period in 2002. For
the third quarter of 2003, salaries and other personnel expenses increased $2.9
million, or 3.6%, compared to the third 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. These increases were offset during the quarter with a reduction in the
accrual for performance-based incentive benefits. The average number of
employees in the third quarter of 2003 increased to 5,607, which increased 4.8%
compared to 5,349 in the same period in 2002. The average number of employees
for the first nine months of 2003 increased to 5,348, which decreased 1.1%
compared to 5,405 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 nine months ended September 30, 2003, net occupancy and equipment
expense increased $22.4 million, or 17.2%, over the same period in 2002. Net
occupancy and equipment expense increased $6.4 million, or 14.3%, for the three
months ended September 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 $1.9 million and $8.1 million for the three and
nine months ended September 30, 2003, respectively, compared to the same periods
of 2002. Depreciation and software amortization increased $5.0 million and $13.7
million during the three and nine months ended September 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 September 30, 2002.
In 1997, TSYS entered into an operating lease agreement with a special purpose
entity (SPE) for its corporate campus. On June 30, 2003, TSYS terminated the
lease arrangement and purchased the corporate campus for $93.5 million with a
combination of $73.3 million in cash and funds from a long-term line of credit
with a Synovus banking affiliate. 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.
Other non-interest expense for the three and nine months ended September 30,
2003 increased $9.6 million, or 52.9%, and $4.2 million, or 6.3%, respectively,
as compared to the same periods in 2002. Other non-interest expense includes,
among other things, amortization of conversion costs, professional advisory
fees, and court costs associated with TSYS' debt collection business. TSYS'
amortization of conversion costs increased $1.3 million and $2.5 million,
respectively, for the three and nine month periods ended September 30, 2003, as
compared to the same periods last year. During the third quarter of 2003, TSYS
also incurred $1.3 million of expense for a third-party professional advisory
firm to assist in strategic planning. As a result of a new debt-collection
agreement with an existing client signed in the third quarter of 2003, TSYS
incurred $3.7 million of attorney court costs and commissions in other
non-interest expense which TSYS expects to recover in future periods.
31
Other non-interest expense also includes charges for processing errors,
contractual commitments, and bad debt expense. TSYS' evaluation of the adequacy
of its transaction processing provisions is based on a formal analysis which
assesses the probability of losses related to contractual contingencies,
processing errors, and uncollectible accounts. Increases and decreases in
transaction processing provisions are reflected in other non-interest expense.
For the three months and nine months ended September 30, 2003, TSYS' transaction
processing expenses increased $2.2 million and decreased $2.6 million,
respectively, compared to the same period in 2002.
Income Tax Expense
Income tax expense for the nine months ended September 30, 2003 was $164.3
million compared to $145.6 million for the same period a year ago. For the third
quarter of 2003, income tax expense was $57.7 million compared to $51.6 million
for the third quarter of 2002. The effective tax rate for the first nine months
of 2003 was 36.5%, compared to 35.8% for the same period in 2002. For the third
quarter of 2003, the effective tax rate was 36.6%, compared to 35.9% for the
third 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 4.23% to 4.30%.
* 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 September 30, 2003, 5.4 million shares have been
purchased under this plan at a total cost of $111.5 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 with
respect to the adequacy of the allowance for loan losses; management's
expectation with respect to loan growth for the fourth quarter of 2003;
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 nonperforming assets; management's
expectation with respect to increases in Financial Management Services fee
income in the fourth quarter of 2003; TSYS' belief with respect to expanding its
market share, the uniqueness of the TSYS/Sears processing relationship and the
expected financial
32
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 4.23% to 4.30%; 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 spending;
(xix) successfully managing the potential both for patent protection and patent
liability
33
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.
34
ITEM 3 - QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
During the third quarter of 2003, Synovus experienced a moderate shortening of
the expected average maturity and repricing frequency of its earning asset base,
consisting primarily of commercial and consumer loans. This shortening is
primarily due to the continuation of all of its net loan growth 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 3.1%, 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.
35
ITEM 4 - CONTROLS AND PROCEDURES
We have evaluated the effectiveness of the design and operation of our
disclosure controls and procedures as of the end of the period covered by this
quarterly report as required by Rule 13a-15 of the Securities Exchange Act of
1934, as amended. This evaluation was carried out under the supervision and with
the participation of our management, including our chief executive officer and
chief financial officer. Based on this evaluation, these officers have concluded
that the design and operation of our disclosure controls and procedures are
effective in timely alerting them to material information relating to Synovus
(including its consolidated subsidiaries) required to be included in our
periodic SEC filings. 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.
36
PART II - OTHER INFORMATION
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 third
quarter of 2003.
The report filed on October 15, 2003, included the following
event:
On October 15, 2003, Synovus issued a press release and held an
investor conference call and webcast with respect to its third 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: November 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