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SNV > SEC Filings for SNV > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for SYNOVUS FINANCIAL CORP

Form 10-Q for SYNOVUS FINANCIAL CORP


9-Nov-2012

Quarterly Report


ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In this Report, the words "Synovus," "the Company," "we," "us," and "our" refer to Synovus Financial Corp. together with Synovus Bank and Synovus' other wholly-owned subsidiaries, except where the context requires otherwise.
FORWARD-LOOKING STATEMENTS
Certain statements made or incorporated by reference in this Report which are not statements of historical fact, including those under "Management's Discussion and Analysis of Financial Condition and Results of Operations," and elsewhere in this Report, constitute forward-looking statements within the meaning of, and subject to the protections of, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. Forward-looking statements include statements with respect to Synovus' beliefs, plans, objectives, goals, targets, expectations, anticipations, assumptions, estimates, intentions and future performance and involve known and unknown risks, many of which are beyond Synovus' control and which may cause Synovus' actual results, performance or achievements or the commercial banking industry or economy generally, to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. All statements other than statements of historical fact are forward-looking statements. You can identify these forward-looking statements through Synovus' use of words such as "believes," "anticipates," "expects," "may," "will," "assumes," "should," "predicts," "could," "should," "would," "intends," "targets," "estimates," "projects," "plans," "potential" and other similar words and expressions of the future or otherwise regarding the outlook for Synovus' future business and financial performance and/or the performance of the commercial banking industry and economy in general. Forward-looking statements are based on the current beliefs and expectations of Synovus' management and are subject to significant risks and uncertainties. Actual results may differ materially from those contemplated by such forward-looking statements. A number of factors could cause actual results to differ materially from those contemplated by the forward-looking statements in this document. Many of these factors are beyond Synovus' ability to control or predict. These factors include, but are not limited to:
(1) further deterioration in credit quality may result in increased non-performing assets and credit losses, which could adversely impact our capital, financial condition, and results of operations;

(2) further declines in the values of residential and commercial real estate may result in further write-downs of assets and realized losses on disposition of non-performing assets, which may increase credit losses and negatively affect our financial results;

(3) continuing weakness in the residential and commercial real estate environment, which may negatively impact our ability to dispose of distressed assets, and may result in continued elevated levels of non-performing assets and potential problem loans;

(4) the impact on our borrowing costs, capital costs and our liquidity due to further adverse changes in our credit ratings;

(5) the risk that our allowance for loan losses may prove to be inadequate or may be negatively affected by credit risk exposures;

(6) the concentration of our non-performing assets by loan type, in certain geographic regions and with affiliated borrowing groups;

(7) changes in the interest rate environment and competition in our primary market area may result in increased funding costs or reduced earning assets yields, thus reducing margins and net interest income;

(8) restrictions or limitations on access to funds from historical and alternative sources of liquidity could adversely affect our overall liquidity, which could restrict our ability to make payments on our obligations or dividend payments on our Common Stock and Series A Preferred Stock and our ability to support asset growth and sustain our operations and the operations of Synovus Bank;

(9) future availability and cost of additional capital and liquidity on favorable terms, if at all;

(10) the risks that we may be required to undertake additional strategic initiatives or seek or deploy additional capital to satisfy applicable and proposed regulatory capital standards and pressures in light of expected increases in capital requirements or as a result of supervisory actions or directives;

(11) changes in the cost and availability of funding due to changes in the deposit market and credit market, including any loss of deposits as a result of the scheduled expiration of the unlimited FDIC insurance coverage on demand deposits, or the way in which we are perceived in such markets, including a further reduction in our credit ratings;

(12) risks related to the timing of the reversal of our deferred tax asset valuation allowance, which is subject to considerable judgment, and the risk that even after the recovery of our deferred tax asset balance under GAAP, there will remain limitations on the ability to include our deferred tax assets for regulatory capital purposes;


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(13) the risk that we could have an "ownership change" under Section 382 of the IRC, which could impair our ability to timely and fully utilize our net operating losses and built-in losses that may exist when such "ownership change" occurs;

(14) the impact of our continued participation in TARP and the CPP, including the impact on compensation and other restrictions imposed under TARP which affect our ability to attract, retain, and compensate talented executives and other employees and the impact of actions that we may be required to take to exit from the CPP and repay the outstanding Series A Preferred Stock issued under the CPP;

(15) the impact of the Dodd-Frank 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, increased capital requirements, limitations and/or penalties arising from banking, securities and insurance laws, enhanced regulations and examinations and restrictions on compensation;

(16) the impact on our financial results, reputation, and business if we are unable to comply with all applicable federal and state regulations and applicable memoranda of understanding, other supervisory actions or directives and any necessary capital initiatives;

(17) the risk that our enterprise risk management framework may not identify or address risks adequately, which may result in unexpected losses;

(18) the continuing impact of the execution of our strategic plan and efficiency and growth initiatives announced in late 2010 and January 2011, including the risk that we may not sustain the annual levels of expense savings realized to date under the plan or achieve the additional expense savings, revenue growth and other benefits from such initiatives;

(19) the costs and effects of litigation, investigations, inquiries or similar matters, or adverse facts and developments related thereto;

(20) risks related to a failure in or breach of our operational or security systems of our infrastructure, or those of our third party vendors and other service providers, including as a result of cyber attacks, which could disrupt our businesses, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs or cause losses;

(21) the costs of services and products provided to us by third parties, whether as a result of our financial condition, credit ratings, the way we are perceived by such parties, the economy or otherwise;

(22) the effects of any damages to Synovus' reputation resulting from developments related to any of the items identified above; and

(23) other factors and other information contained in this Report and in other reports and filings that we make with the SEC under the Exchange Act, including, without limitation, those found in "Part I - Item 1A.- Risk Factors" of Synovus' 2011 Form 10-K.

For a discussion of these and other risks that may cause actual results to differ from expectations, refer to "Risk Factors" and other information contained in Synovus' 2011 Form 10-K and other periodic filings, including this Report and other quarterly reports on Form 10-Q and current reports on Form 8-K, that Synovus files with the SEC. All written or oral forward-looking statements that are made by or are attributable to Synovus are expressly qualified by this cautionary notice. Undue reliance on any forward-looking statements should not be placed given that 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 or to reflect the occurrence of new information or unanticipated events, except as may otherwise be required by law.

INTRODUCTION AND CORPORATE PROFILE
Synovus Financial Corp. is a diversified financial services company and a registered financial holding company headquartered in Columbus, Georgia. Synovus provides integrated financial services including commercial and retail banking, financial management, insurance, and mortgage services to its customers through 30 locally-branded banking divisions of its wholly-owned subsidiary bank, Synovus Bank, and other offices in Georgia, Alabama, South Carolina, Florida, and Tennessee.
The following financial review summarizes the significant trends affecting Synovus' results of operations and financial condition for the nine and three months ended September 30, 2012. This discussion supplements, and should be read in conjunction with, the unaudited consolidated financial statements and notes thereto contained elsewhere in this Report and the consolidated financial statements of Synovus, the notes thereto, and management's discussion and analysis contained in Synovus' 2011 Form 10-K.


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The discussion is divided into key segments:
Executive and Economic Overview-Provides a business overview, including our thoughts on the impact of the economy, legislative and regulatory initiatives, and recent industry developments.

Discussion of Results of Operations-Reviews Synovus' financial performance, as well as selected balance sheet items, items from the statement of operations, and certain key ratios that illustrate Synovus' performance.

Credit Quality, Capital Resources and Liquidity-Discusses credit quality, market risk, and liquidity, as well as performance trends. It also includes a discussion of liquidity policies, how Synovus obtains funding, and related performance.

Additional Disclosures-Provides comments on additional important matters including other contingencies, critical accounting policies and Non-GAAP financial measures used within the Report.

A reading of each section is important to understand fully the nature of our financial performance.

EXECUTIVE AND ECONOMIC OVERVIEW
Economic Overview
For the nine and three months ended September 30, 2012, economic growth has continued at a very modest pace with limited job growth and above average unemployment levels.
Business investment and hiring has been very sluggish in recent months, which has generally been attributed to the current high level of political and fiscal policy uncertainty.
The Conference Board Consumer Confidence Index, which continues to reflect volatility from the uncertainties in the national and global economies, improved to 70.3%, in September 2012, up from 62.0% at June 2012, as compared to 69.5% for March 2012, and 64.8% for December 2011. Consumer spending could be negatively impacted by economic and political uncertainty.
The banking industry continues to be negatively affected by the national economic recession and real estate valuation declines, which has resulted in a significant number of bank closings, particularly in Georgia and Florida, where nearly one third of all bank seizures since the start of 2010 have occurred. A total of 457 banks have failed from January 2008 through September 30, 2012, with 84 of those banks based in Georgia and 63 in Florida. During the nine months ended September 30, 2012, bank failures included 9 in Georgia and 5 in Florida, an improvement from the same period a year ago when bank failures included 19 in Georgia and 11 in Florida.
Global markets also show signs of slow growth, with noted contraction on the global manufacturing sector. Since 2008, the consensus has continued to grow among many that the use of the common currency in Europe, the Euro, has caused an increased number of European countries to experience a recession. This situation could threaten the entire European Union structure, and the events and actions in these markets could impact the United States economy. Synovus does not have a direct exposure to the European markets; however, Synovus will continue to monitor the impact of international developments on domestic economic activity and determine the most appropriate strategies to pursue given the current economic uncertainties.


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Consolidated Financial Highlights
A summary of Synovus' financial performance for the nine and three months ended
September 30, 2012 and 2011 is set forth in the table below.
                                 Nine Months Ended September 30,            Three Months Ended September 30,
(dollars in thousands,            2012             2011        Change         2012         2011        Change
except per share data)
Net interest income        $    646,661          696,998        (7.2 )%      212,345     228,603        (7.1 )%
Provision for loan losses       173,843          364,230       (52.3 )        63,572     102,325       (37.9 )
Non-interest income             233,849          265,405       (11.9 )        73,233     133,392       (45.1 )
Non-interest expense            602,890          684,683       (11.9 )       191,492     222,552       (14.0 )
Core expenses (1)               520,886          541,629        (3.8 )       167,421     179,754        (6.9 )
Income (loss) before
income taxes                    103,777          (86,510 )        nm          30,514      37,118       (17.8 )
Pre-tax, pre-credit costs
income (1)                      328,715          356,104        (7.7 )       111,501     119,368        (6.6 )
Net income (loss)
available to controlling
interest                        106,170          (87,980 )        nm          30,725      30,208         1.7
Net income (loss)
available to common
shareholders                     62,202         (131,490 )        nm          16,030      15,667         2.3
Earnings per common share:
Net income (loss)
available to common
shareholders, basic                0.08            (0.17 )        nm            0.02        0.02           -
Net income (loss)
available to common
shareholders, diluted      $       0.07            (0.17 )        nm            0.02        0.02           -




(dollars in thousands,                                                   Sequential                            Year Over Year
except per share data)         September 30, 2012     June 30, 2012    Quarter Change    September 30, 2011        Change
Loans, net of deferred fees
and costs                    $         19,731,865       19,680,127          0.3  %              20,102,086         (1.8 )%
Total deposits                         20,846,830       21,565,065         (3.3 )               23,109,427         (9.8 )
Core deposits (1)                      19,926,871       20,416,173         (2.4 )               20,951,796         (4.9 )
Core deposits excluding time
deposits (1)                           16,155,754       16,318,339         (1.0 )               15,999,652          1.0

Net interest margin                          3.51             3.48 %    3 b.p.s                       3.47      4 b.p.s
Non-performing assets ratio                  4.51             4.83         (32)                       5.71         (120 )
Past dues over 90 days                       0.05             0.03            2                       0.13           (8 )
Net charge-off ratio                         1.97             1.99           (2 )                     2.72          (75 )

Tier 1 capital               $          2,835,950        2,822,487          0.5  %               2,770,971          2.3  %
Tier 1 common equity                    1,872,003        1,861,135          0.6                  1,817,168          3.0
Total risk-based capital                3,465,950        3,449,214          0.5                  3,533,600         (1.9 )
Tier 1 capital ratio                        13.23            13.35     12 b.p.s                      12.97     26 b.p.s
Tier 1 common equity ratio                   8.73             8.80          (7)                       8.50           23
Total risk-based capital
ratio                                       16.16            16.31         (14)                      16.53         (36)
Total shareholders' equity
to total assets ratio (2)                   11.16            10.85           31                      10.01          115
Tangible common equity to
tangible assets ratio(1)                     7.35             7.12           23                       6.56           79
Tangible common equity to
risk-weighted assets
ratio (1)                                    8.82             8.84          (2)                       8.66           16
Tangible book value per
common share (1)(3) (4)      $               2.07             2.05          1.0  %                    2.03          2.0  %

(1) See reconciliation of "Non-GAAP Financial Measures" in this Report.

(2) Total shareholders' equity divided by total assets.

(3) Excludes the carrying value of goodwill and other intangible assets from common equity and total assets.

(4) Equity and common shares exclude impact of unexercised tangible equity units (tMEDS).

nm = not meaningful


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DISCUSSION OF RESULTS OF OPERATIONS
Results for the Nine and Three Months Ended September 30, 2012 For the nine months ended September 30, 2012, net income available to common shareholders was $62.2 million, or $0.07 per diluted common share, compared to a net loss available to common shareholders of $131.5 million, or $0.17 per common share, for the nine months ended September 30, 2011. For the three months ended September 30, 2012, net income available to common shareholders was $16.0 million, or $0.02 per diluted common share, as compared to a net income available to common shareholders of $15.7 million, or $0.02 per diluted common share, for the same period last year. For the nine and three months ended September 30, 2012 as compared to the same periods in the prior year, the improvements are primarily due to $230.7 million and $56.9 million declines in total credit costs, respectively, partially offset by $33.8 million and $56.2 million decreases in net investment securities gains, respectively. See reconciliation of "Non-GAAP Financial Measures" in this Report. Although credit costs, charge-offs, and non-performing asset levels remain elevated, overall credit metrics continued to improve during the third quarter of 2012. For the three months ended September 30, 2012, total credit costs were $85.6 million, a 21.7% increase from the three months ended June 30, 2012. Provision for loan losses, the largest component of total credit costs, was $63.6 million for the third quarter of 2012, a 43.8% increase from $44.2 million in the second quarter of 2012, and a 37.9% decrease from $102.3 million in the third quarter of 2011. The sequential quarter increase in provision for loans losses was primarily due to an impairment charge on an existing non-performing loan (collateral fair value update), a lower benefit from the update to the loan loss reserve factors, and to a lesser extent, an increase in retail charge-offs, and the overall growth in loans. Net charge-offs of $96.5 million for the third quarter of 2012 decreased $2.2 million compared to the second quarter of 2012 and decreased by $41.9 million, or 30.3% from the third quarter of 2011. NPL inflows declined for the sixth consecutive quarter to $114.8 million for the third quarter of 2012 compared to $124.3 million for the second quarter of 2012 and $222.0 million for the third quarter of 2011. Total non-performing assets declined $62.0 million from $961.4 million at June 30, 2012 to $899.4 million at September 30, 2012, and declined $265.0 million or 22.8% from $1.16 billion at September 30, 2011. As a percentage of total loans outstanding, past due loans remained at favorable levels with total past due loans and still accruing interest of 0.55% at September 30, 2012 compared to 0.47% and 0.99% at June 30, 2012 and September 30, 2011, respectively, and loans 90 days past due and still accruing interest of 0.05% at September 30, 2012 compared to 0.03% and 0.13% at June 30, 2012 and September 30, 2011, respectively.
For the nine and three months ended September 30, 2012 and 2011, the majority of both the provision for loan losses and net charge-offs related to commercial real estate credits. Provision for loan losses attributable to the commercial real estate portfolio (excluding the unallocated allowance for loan losses component) was $104.5 million, or 60.1% of the total provision for loan losses, for the first nine months of 2012, while net charge-offs attributable to this portfolio were $153.0 million, or 52.8% of total net charge-offs for the nine months ended September 30, 2012. Provision for loan losses attributable to the commercial real estate portfolio was $269.6 million, or 74.0% of the total provision for loan losses, for the first nine months of 2011, while net charge-offs attributable to this portfolio were $306.5 million, or 64.9% of total net charge-offs for the nine months ended September 30, 2011. Provision for loan losses attributable to the commercial and industrial portfolio was $57.4 million, or 33.0%, of the total provision for loan losses (excluding the unallocated allowance for loan losses component) for the first nine months of 2012, while net charge-offs attributable to this portfolio were $102.4 million, or 35.3% of total net charge-offs for the nine months ended September 30, 2012. Provision for loan losses attributable to the commercial and industrial portfolio was $76.0 million, or 20.9%, of total provision for loan losses, during the first nine months of 2011, while net charge-offs attributable to this portfolio were $111.5 million, or 23.6%, of total net charge-offs for the nine months ended September 30, 2011.
Pre-tax, pre-credit costs income (which excludes provision for loan losses, other credit costs, restructuring charges, Visa indemnification charges, and investment securities gains, net) exceeded credit costs for the fourth consecutive quarter and was $111.5 million for the third quarter of 2012, representing a increase of $4.9 million, or 4.6%, from the second quarter of 2012 and a decrease of $7.9 million, or 6.6%, from the third quarter of 2011. As compared to the second quarter of 2012, the increase in pre-tax, pre-credit costs income was driven by an $11.6 million decrease in core expenses, partially offset by a $1.0 million decrease in net interest income and a $5.7 million decrease in non-interest income, excluding investment securities gains, net. The decline from the third quarter of 2011 was driven by a $16.3 million decrease in net interest income and a $3.9 million decrease in non-interest income, excluding investment securities gains, net, partially offset by a $12.3 million decrease in core expenses. See reconciliation of "Non-GAAP Financial Measures" in this Report.
The net interest margin increased 3 b.p.s to 3.51% in the third quarter of 2012 compared to 3.48% for the second quarter of 2012 and increased 4 b.p.s from 3.47% in the third quarter of 2011. The sequential quarter increase was driven by an 8 b.p.s decline in the effective cost of funds. The effective cost of funds was positively impacted by the downward repricing of core certificates of deposit and core money market accounts, each of which declined by 12 b.p.s and 9
b.p.s, respectively on a sequential quarter basis. Earning asset yields during the third quarter of 2012 decreased 19 b.p.s compared to the third quarter of 2011, and the effective cost of funds decreased 23 b.p.s as economic uncertainty has resulted in a sustained period of low interest rates.


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Total loans were $19.73 billion at September 30, 2012, an increase of $51.7 million from June 30, 2012. The increase in loans was primarily driven by growth within the corporate banking group. The net sequential quarter loan growth, excluding the impact of transfers to loans held-for-sale, charge-offs, and foreclosures, was approximately $240 million for the third quarter of 2012, compared to an increase of approximately $29 million during the second quarter of 2012, and a decrease of approximately $132 million during the third quarter of 2011. See reconciliation of "Non-GAAP Financial Measures" in this Report. Total deposits decreased by $718.2 million from the second quarter of 2012. The decline in total deposits was driven primarily by the continued planned reduction of brokered deposits and time deposits, as well as a planned strategic reduction in a large demand deposit clearing account. Core deposits excluding time deposits were $16.16 billion at September 30, 2012, down $162.6 million compared to June 30, 2012. Compared to September 30, 2011, core deposits excluding time deposits increased $156.1 million or 1.0%. See reconciliation of "Non-GAAP Financial Measures" in this Report.
Total shareholder's equity was $2.88 billion at September 30, 2012 compared to $2.83 billion at December 31, 2011. Synovus continues to actively monitor evolving industry capital standards and changes in regulatory standards and requirements. As part of its ongoing management of capital, Synovus will continue to monitor its capital position and identify, consider, and pursue additional strategies to bolster its capital position as deemed necessary.

Changes in Financial Condition
During the nine months ended September 30, 2012, total assets decreased by $1.40 billion, or 5.1%, from December 31, 2011 to $25.76 billion. The principal components of this decrease were a decrease of $751.9 million in interest bearing funds at the Federal Reserve Bank, a $460.7 million decrease in investment securities available for sale, and a $231.9 million decrease in loans, net of deferred fees and costs and the allowance for loan losses. These decreases were partially offset by an increase in mortgage loans held for sale of $84.7 million or 52.5% due to increased mortgage loan production. The decrease in interest bearing funds with the Federal Reserve Bank is primarily due to decreases in deposits. The decrease in investment securities is due to sales and the decision to utilize a portion of security maturities to reduce wholesale funding, including brokered deposits. The decrease in net loans is primarily due to charge-offs, sales of distressed loans, and principal reductions/pay offs.

Other Loans Held for Sale
During the nine months ended September 30, 2012, Synovus transferred loans with a carrying value immediately preceding the transfer totaling $353.1 million to . . .

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