Add
SNV to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| SNV > SEC Filings for SNV > Form 10-Q/A on 12-Nov-2008 | All Recent SEC Filings |
12-Nov-2008
Quarterly Report
may be different than expected; (13) the effects of and changes in trade,
monetary and fiscal policies, and laws, including interest rate policies of the
Federal Reserve Board; (14) inflation, interest rate, market and monetary
fluctuations; (15) restrictions or limitations on access to funds from
subsidiaries, thereby restricting our ability to make payments on our
obligations or dividend payments; (16) the availability and cost of capital and
liquidity; (17) the effect of the Emergency Economic Stabilization Act and other
recent and proposed changes in governmental policy, laws and regulations,
including proposed and recently enacted changes in the regulation of banks and
financial institutions, or the interpretation or application thereof, including
restrictions, limitations and/or penalties arising from banking, securities and
insurance laws, regulations and examinations; (18) if the Treasury does not
approve Synovus' application to participate in the Capital Purchase Program,
Synovus' access to capital markets could be adversely impacted and could become
more costly; (19) the costs and effects of litigation, investigations or similar
matters, or adverse facts and developments related thereto, including, without
limitation, the pending litigation with CompuCredit Corporation relating to
CB&T's Affinity Agreement with CompuCredit; (20) the volatility of our stock
price; and (21) the actual results achieved by our implementation of Project
Optimus, and the risk that we may not achieve the anticipated cost savings and
revenue increases from this initiative; (22) other factors and other information
contained in this document and in other reports and filings that Synovus makes
with the SEC under the Exchange Act.
All written or oral forward-looking statements that are made by or are
attributable to Synovus are expressly qualified by this cautionary notice. You
should not place undue reliance on any forward-looking statements, since those
statements speak only as of the date on which the statements are made. Synovus
undertakes no obligation to update any forward-looking statement to reflect
events or circumstances after the date on which the statement is made to reflect
the occurrence of new information or unanticipated events, except as may
otherwise be required by law.
Executive Summary
The following financial review provides a discussion of Synovus' financial
condition, changes in financial condition, and results of operations.
Industry Overview
The first nine months of 2008 have been marked by challenging financial and
credit markets, building on issues that began in the sub-prime mortgage market
in the second half of 2007 and which led to declines in real estate and home
values. Consumer confidence declined as rising costs fueled by unprecedented
prices for crude oil have paralleled the downturns in housing and mortgage
related financial services. The supply of housing has surged as new and existing
home sales declined sharply and foreclosures reached record levels. These events
have manifested in significant volatility in equity and capital markets over the
past few months.
The Federal Reserve Bank (Federal Reserve) responded, lowering the federal funds
rate by 200 basis points in the first quarter, 25 basis points in the second
quarter and another 100 basis points in October 2008.
In addition, various agencies of the United States government proposed a number
of initiatives to stabilize the global economy and financial markets. On
October 3, 2008, President Bush signed into law the Emergency Economic
Stabilization Act of 2008 (EESA). The legislation was the result of a proposal
by the U.S. Department of Treasury (Treasury) in response to the financial
crises affecting the banking system and financial markets and threats to
investment banks and other financial institutions. Pursuant to the EESA, the
Treasury will have the authority to, among other things, purchase up to
$700 billion of mortgages, mortgage-backed securities and certain other
financial instruments from financial institutions for the purpose of stabilizing
and providing liquidity to the U.S. financial markets. On October 14, 2008, the
Treasury announced a program under the EESA pursuant to which it would make
senior preferred stock investments in participating financial institutions (TARP
Capital Purchase Program). On October 14, 2008, the Federal Deposit Insurance
Corporation announced the development of a guarantee program under the systemic
risk exception to the Federal Deposit Act pursuant to which the FDIC would offer
a guarantee of certain financial institution indebtedness in exchange for an
insurance premium to be paid to the FDIC by issuing financial institutions.
There can be no assurance as to the actual impact of the EESA, the FDIC programs
or any other governmental program will have on the financial markets.
The economic environment for the financial services industry as a whole has been
affected in a variety of ways, as evidenced by heightened levels of credit
losses, declining value of real property as collateral for loans, record levels
of non-performing assets, charge-offs and foreclosures. These factors have
negatively influenced earning asset yields, while the market for deposits has
become intensely competitive. As a result, financial institutions have
experienced pressure on credit costs, loan yields, deposit and other borrowing
costs, liquidity, and capital.
About Our Business
Synovus is a financial services holding company, based in Columbus, Georgia,
with approximately $34 billion in assets. Synovus provides integrated financial
services including
banking, financial management, insurance, mortgage, and leasing services through
32 wholly-owned subsidiary banks and other Synovus offices in Georgia, Alabama,
South Carolina, Tennessee, and Florida. At September 30, 2008, our banks ranged
in size from $211.1 million to $5.32 billion in total assets.
Subsequent Events Impacting Results of Operations
On October 23, 2008, Synovus reported results of operations for the three and
nine months ended September 30, 2008. In the press release announcing these
financial results, Synovus also disclosed two matters still under evaluation
which could have an impact on the results of operations for the periods
presented - completion of the Step 2 testing for Synovus' annual goodwill
impairment evaluation and the impact on Synovus of Visa Inc.'s announced
settlement of its litigation with Discover. Subsequent to the issuance of the
press release, Synovus completed its evaluation of these matters and determined
that the results of operations previously reported should be revised.
Accordingly, Synovus recognized an additional $9.9 million (pre-tax and
after-tax) non-cash charge for impairment of goodwill during the three months
ended September 30, 2008. Synovus also increased the accrued liability for its
membership proportion of the Discover settlement by $6.3 million. These
adjustments resulted in a decrease in net income for the nine months ended
September 30, 2008 and an increase in the net loss for the three months ended
September 30, 2008 of $13.2 million, and resulted in a change in earnings per
share of $0.04 for the nine and three months ended September 30, 2008, as
compared to the results originally reported on October 23, 2008. These items are
discussed in detail below and in Notes 14 and 16 to the unaudited consolidated
financial statements in this report.
Our Key Financial Performance Indicators
In terms of how we measure success in our business, the following are our key
financial performance indicators:
• Loan Growth
• Core Deposit Growth
• Net Interest Margin
• Credit Quality
• Fee Income Growth
• Expense Management
• Capital Strength
• Liquidity
Financial Performance Summary
• Net income (loss): ($40.1) million, down 148.0%, and $53.0 million, down
81.7%, for the three and nine months ended September 30, 2008,
respectively, as compared to income from continuing operations for the
prior year periods.
• Goodwill impairment: $36.9 million, or $0.11 per diluted share, for the nine months ended September 30, 2008. Goodwill impairment is a non-cash charge and has no impact on Synovus' tangible capital levels, regulatory capital ratios or on liquidity since goodwill is already excluded from these measures.
• Earnings (loss) per share: ($0.12) for the three months ended September 30, 2008 and diluted earnings per share (EPS) of $0.16 for the nine months ended September 30, 2008, down 129.8% and 88.1%, respectively, from EPS from continuing operations for the same periods a year ago.
• Net interest margin: 3.42% and 3.57% for the three and nine months ended September 30, 2008, respectively, as compared to 3.97% and 4.01%, respectively, for the same periods in 2007.
• Loan growth: 7.3% increase from September 30, 2007, 5.8% annualized increase from December 31, 2007, and 2.9% annualized sequential quarter growth.
• Credit quality:
• Non-performing assets ratio of 3.58%, compared to 3.00% at June 30, 2008 and 1.67% at December 31, 2007 (11 basis points of the sequential quarter increase was related to the Atlanta market).
• Provision expense of $151.4 million and $336.0 million for the three and nine months ended September 30, 2008, respectively, as compared to $58.8 million and $99.6 million for the same periods in 2007. (Provision expense for the three and nine months ended September 30, 2008 includes $40.0 million resulting from a reassessment of Synovus' largest lending relationships, representing approximately 14% of the total loan portfolio).
• Past dues over 90 days and still accruing interest as a percentage of total loans of 0.18%, compared to 0.14% at June 30, 2008 and 0.13% at December 31, 2007.
• Total past dues over 30 days and still accruing interest as a percentage of total loans of 1.46% compared to 1.33% at June 30, 2008 and 1.02% at December 31, 2007.
• Net charge-off ratio of 1.53% and 1.18% for the three and nine months ended September 30, 2008, respectively, compared to 0.51% and 0.30% for the same periods in the prior year.
• Core deposits (total deposits less brokered deposits): up 1.7% compared to September 30, 2007, and 4.3% annualized sequential quarter growth.
• Non-interest income: down 6.8% for the three months ended September 30, 2008 and up 19.5% for the nine months ended September 30, 2008 compared to the corresponding periods in the prior year (up 0.6% for the nine months ended September 30, 2008 excluding the gain from redemption of Visa shares and sale of MasterCard shares).
• Non-interest expense: up 29.5% for the three months ended September 30, 2008 and 22.7% for the nine months ended September 30, 2008 compared to the corresponding periods in the prior year (up 18.6% for the nine months ended September 30, 2008 excluding the goodwill impairment charge, restructuring charges and Visa litigation expense (recovery), net).
• Shareholders' equity: $3.38 billion at September 30, 2008, or 9.84% of assets. The Tier I Capital Ratio was 8.81%, the Total Risk-Based Capital Ratio was 12.20%, and the Tangible Common Equity to Tangible Assets Ratio was 8.49%.
• Synovus recognized restructuring charges of $9.0 million and $13.3 million for the three and nine months ended September 30, 2008 in connection with its implementation of Project Optimus.
• During the three months ended September 30, 2008, Synovus recognized an additional $6.3 million litigation expense in conjunction with Visa's settlement of litigation with Discover.
Critical Accounting Policies
The accounting and financial reporting policies of Synovus conform to U.S.
generally accepted accounting principles and to general practices within the
banking industry. Synovus has identified certain of its accounting policies as
"critical accounting policies." In determining which accounting policies are
critical in nature, Synovus has identified the policies that require significant
judgment or involve complex estimates. The application of these policies has a
significant impact on Synovus' financial statements. Synovus' financial results
could differ significantly if different judgments or estimates are applied in
the application of these policies.
Allowance for Loan Losses
Notes 1 and 6 to the consolidated financial statements in Synovus' 2007 annual
report contain a discussion of the allowance for loan losses. The allowance for
loan losses at September 30, 2008 was $463.8 million.
The allowance for loan losses is determined based on an analysis which assesses
the probable loss within the loan portfolio. The allowance for loan losses
consists of two components: the allocated and unallocated allowances. Both
components of the allowance are available to cover inherent losses in the
portfolio. Significant judgments or estimates made in the determination of the
allowance for loan losses consist of the risk ratings for loans in the
commercial loan portfolio, the valuation of the collateral for loans that are
classified as collateral-dependent impaired loans, and the loss factors.
Commercial Loans - Risk Ratings and Expected Loss Factors
Commercial loans are assigned a risk rating on a nine point scale. For
commercial loans that are not considered impaired, the allocated allowance for
loan losses is determined based upon the expected loss percentage factors that
correspond to each risk rating.
The risk ratings are based on the borrowers' credit risk profile, considering
factors such as debt service history and capacity, inherent risk in the credit
(e.g., based on industry type and source of repayment), and collateral position.
Ratings 6 through 9 are modeled after the bank regulatory classifications of
special mention, substandard, doubtful, and loss. Expected loss percentage
factors are based on the probable loss including qualitative factors. The
probable loss considers the probability of default, the loss given default, and
certain qualitative factors as determined by loan category and risk rating. The
probability of default and loss given default are based on industry data.
Industry data will continue to be used until sufficient internal data becomes
available. The qualitative factors consider credit concentrations, recent levels
and trends in delinquencies and nonaccrual loans, and growth in the loan
portfolio. The occurrence of certain events could result in changes to the
expected loss factors. Accordingly, these expected loss factors are reviewed
periodically and modified as necessary.
Each loan is assigned a risk rating during the approval process. This process
begins with a rating recommendation from the loan officer responsible for
originating the loan. The rating recommendation is subject to approvals from
other members of management and/or loan committees depending on the size and
type of credit. Ratings are re-evaluated on a quarterly basis. Additionally, an
independent holding company credit review function evaluates each bank's risk
rating process at least every twelve to eighteen months.
Impaired Loans
Management considers a loan to be impaired when the ultimate collectibility of
all amounts due according to the contractual terms of the loan agreement are in
doubt. A majority of our impaired loans are collateral-dependent. The net
carrying amount of collateral-dependent impaired loans is equal to the lower of
the loans' principal balance or the fair value of the collateral (less estimated
costs to sell) not only at the date at which impairment is initially recognized,
but also at each subsequent reporting period. Accordingly, our policy requires
that we update the fair value of the collateral securing collateral-dependent
impaired loans each calendar quarter. Impaired loans, not including impaired
loans held for sale, had a net carrying value of $617.2 million at September 30,
2008. Most of these loans are secured by real estate, with the majority
classified as collateral-dependent loans. The fair value of the real estate
securing these loans is generally determined based upon appraisals performed by
a certified or licensed appraiser. Management also considers other factors or
recent developments which could result in adjustments to the collateral value
estimates indicated in the appraisals.
Estimated losses on collateral-dependent impaired loans are typically
charged-off. At September 30, 2008, $540.7 million, or 70.2%, of non-performing
loans consisted of collateral-dependent impaired loans for which there is no
allowance for loan losses as the estimated losses have been charged-off. These
loans are recorded at the lower of cost or estimated fair value of the
underlying collateral net of selling costs. However, if a collateral-dependent
loan is placed on impaired status at or near the end of a calendar quarter,
management records an allowance for loan losses based on the loan's risk rating
while an updated appraisal is being obtained. At September 30, 2008, Synovus had
$76.6 million in collateral-dependent impaired loans with a recorded allocated
allowance for loan losses of $13.3 million, or 17.4% of the principal balance.
The estimated losses on these loans will be recorded as a charge-off during the
fourth quarter of 2008 after the receipt of a current appraisal or fair value
estimate based on current market conditions, including absorption rates.
Management does not expect a material difference between the current allocated
allowance on these loans and the actual charge-off.
Retail Loans - Expected Loss Factors
The allocated allowance for loan losses for retail loans is generally determined
by segregating the retail loan portfolio into pools of homogeneous loan
categories. Expected loss factors applied to these pools are based on the
probable loss including qualitative factors. The probable loss considers the
probability of default, the loss given default, and certain qualitative factors
as determined by loan category and risk rating. Through December 31, 2007, the
probability of default loss factors were based on industry data. Beginning
January 1, 2008, the probability of default loss factors are based on internal
default experience because this was the first reporting period when sufficient
internal default data became available. Synovus believes that this data provides
a more accurate estimate of probability of default considering the lower
inherent risk of the retail portfolio and lower than expected charge-offs. This
change resulted in a reduction in the allocated allowance for loan losses for
the retail portfolio of approximately $19 million during the three months ended
March 31, 2008. The loss given default factors continue to be based on industry
data because sufficient internal data is not yet available. The qualitative
factors consider credit concentrations, recent levels and trends in
delinquencies and nonaccrual loans, and growth in the loan portfolio. The
occurrence of certain events could result in changes to the loss factors.
Accordingly, these loss factors are reviewed periodically and modified as
necessary.
Unallocated Component
The unallocated component of the allowance for loan losses is considered
necessary to provide for certain environmental and economic factors that affect
the probable loss inherent in the entire loan portfolio. Unallocated loss
factors included in the determination of the unallocated allowance are economic
factors, changes in the experience, ability, and depth of lending management and
staff, and changes in lending policies and procedures, including underwriting
standards. Certain macro- economic factors and changes in business conditions
and developments could have a material impact on the collectibility of the
overall portfolio. As an example, a rapidly rising interest rate environment
could have a material impact on certain borrowers' ability to pay. The
unallocated component is meant to cover such risks.
Income Taxes
Note 17 to the consolidated financial statements in Synovus' 2007 Annual Report
contains a discussion of income taxes. The calculation of Synovus' income tax
provision is complex and requires the use of estimates and judgments in its
determination. As part of Synovus' overall business strategy, management must
consider tax laws and regulations that apply to the specific facts and
circumstances under consideration. This analysis includes the amount and timing
of the realization of income tax liabilities or benefits. Management closely
monitors tax developments on both the state and federal level in order to
evaluate the effect they may have on Synovus' overall tax position. Synovus had
a net accrual of $5.7 million for unrecognized tax benefits. At September 30,
2008, Synovus concluded that it did not need a valuation allowance for its
deferred income tax assets.
Asset Impairment
Goodwill
Under SFAS No. 142, "Goodwill and Other Intangible Assets," (SFAS No. 142)
goodwill is required to be tested for impairment annually, or more frequently if
events or circumstances indicate that there may be impairment. The combination
of the income approach utilizing the discounted cash flow (DCF) method, the
public company comparables approach, utilizing multiples of tangible book value,
and the transaction approach, utilizing readily available market valuation
multiples for closed transactions, is used to estimate the fair value of a
reporting unit.
Impairment is tested at the reporting unit (sub-segment) level involving two
steps. Step 1 compares the fair value of the reporting unit to its carrying
value. If the fair value is greater than carrying value, there is no indication
of impairment. Step 2 is performed when the fair value determined in Step 1 is
less than the carrying value. Step 2 involves a process similar to business
combination accounting where fair values are assigned to all assets,
liabilities, and intangibles. The result of Step 2 is the implied fair value of
goodwill. If the Step 2 implied fair value of goodwill is less than the recorded
goodwill, an impairment charge is recorded for the difference. The total of all
reporting unit fair values is compared for reasonableness to Synovus' market
capitalization plus a control premium.
Goodwill at September 30, 2008 and December 31, 2007 was $482.3 million and
$519.1 million, respectively. During the three months ended June 30, 2008,
Synovus conducted its annual goodwill impairment evaluation. As a result of this
evaluation, Synovus recognized a preliminary non-cash charge for impairment of
goodwill on one of its reporting units of $27.0 million (pre-tax and after-tax)
during the three months ended June 30, 2008 and recognized an
additional $9.9 million (pre-tax and after-tax) non-cash charge for impairment of goodwill during the three months ended September 30, 2008 upon finalization of the Step 2 calculation. The impairment charge was primarily related to a decrease in valuation based on market trading and transaction multiples of tangible book value. . . .
|
|