10-Q 1 main.txt SYNOVUS 3RD QUARTER REPORT 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