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SNV > SEC Filings for SNV > Form 10-Q on 7-Aug-2013All Recent SEC Filings

Show all filings for SYNOVUS FINANCIAL CORP

Form 10-Q for SYNOVUS FINANCIAL CORP


7-Aug-2013

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, 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," "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) the risk that we may not realize the expected benefits from our efficiency and growth initiatives, which will negatively affect our future profitability;

(2) the risks that if economic conditions worsen or regulatory capital rules are modified, or the results of mandated "stress testing" do not satisfy certain criteria, we may be required to undertake additional strategic initiatives to improve our capital position;

(3) 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;

(4) changes in the cost and availability of funding due to changes in the deposit market and credit market, or the way in which we are perceived in such markets, including any reduction in our credit ratings;

(5) 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;

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

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

(8) the impact on our borrowing costs, capital costs and our liquidity due to our status as a non-investment grade issuer and any reduction in our credit ratings;

(9) 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 preferred stock and our ability to support asset growth and sustain our operations and the operations of Synovus Bank;

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

(11) the risk that for deferred tax assets, we may be required to increase the valuation allowance in future periods, or we may not be able to realize the deferred tax assets in the future;


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(12) the risk that we could have an "ownership change" under Section 382 of the Internal Revenue Code, 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;

(13) the impact on our financial results, reputation, and business if we are unable to comply with all applicable federal and state regulations, board resolutions adopted at the request of our regulators, or other supervisory actions or directives and any necessary capital initiatives;

(14) the impact of The Dodd-Frank Wall Street Reform and Consumer Protection 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;

(15) the risk that we may be unable to pay dividends on our common stock and preferred stock;

(16) the risk that we may be required to make substantial expenditures to keep pace with the rapid technological changes in the financial services market;

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

(18) 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;

(19) risks related to our reliance on third parties to provide key components of our business infrastructure, including the costs of services and products provided to us by third parties, and risks related to disruptions in service or financial difficulties of a third party vendor;

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

(21) risks related to the loss of customers to alternatives to bank deposits, which could affect our income and force us to rely on relatively more expensive sources of funding;

(22) risks related to recent and proposed changes in the mortgage banking industry, including the impact of the "ability to pay" and "qualified mortgage" rules on our loan origination process and foreclosure proceedings;

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

(24) the volatility of our stock price; and

(25) other factors and other information contained in this Report, 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' 2012 Form 10-K.

For a discussion of these and other risks that may cause actual results to differ from expectations, refer to "Part I-Item 1A. Risk Factors" and other information contained in Synovus' 2012 Form 10-K and our other periodic filings, including quarterly reports on Form 10-Q and current reports on Form 8-K, that we file from time to time 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. 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 information and statements, whether written or oral, 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. All forward-looking statements attributable to Synovus are expressly qualified by these cautionary statements.
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


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management, insurance, and mortgage services to its customers through 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 six and three months ended June 30, 2013 and 2012, respectively. This discussion supplements, and should be read in conjunction with, the unaudited interim 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' 2012 Form 10-K. Management's Discussion and Analysis of Financial Condition and Results of Operations are divided into key segments:
Economic Overview-Provides an 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 statements of income, 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 this Report.

A reading of each section is important to understand fully the nature of our financial performance.
ECONOMIC OVERVIEW
Economic metrics for the second quarter of 2013 point towards continued modest improvement in the national economy despite somewhat conflicting indicators. Employment has continued to grow overall as gains in non-manufacturing and small business employment have mitigated losses in the manufacturing and government sectors. While unemployment rates increased in 28 states month over month in June of 2013, the national average remained stable throughout the quarter, ending with a rate of 7.6%. The Conference Board Consumer Confidence Index, while continuing to reflect volatility from the uncertainties in the national and global economies, improved to 81.4% in June 2013, which is the index's highest level since January of 2008. Motor vehicle sales, retail sales, and consumer credit totals increased throughout the quarter, indicating a willingness to spend by the American public. Despite healthy consumption metrics and generally improving employment conditions, GDP for the second quarter was 1.7%, slightly less than market expectations but better than the revised first quarter rate of 1.1%. Reduced government spending and economic softness in global markets continue to weigh down United States GDP growth.
Housing metrics surged in the first half of the second quarter as price indexes hit post-recession highs and mortgage rates continued to trade at historical lows. However, indications by the Federal Reserve that the cessation of quantitative easing could be accomplished by June of 2014 sent a shockwave through the market; rapidly escalating bond yields, which drove mortgage rates up as high as 125 bps, caused annualized housing sales and starts to reverse course and trend downward by the end of the quarter. Subsequent indications from the Federal Reserve that the quantitative easing (QE) termination program may take longer than one year calmed markets and brought rates down, but the quarterly increase in mortgage rates still averaged approximately 75 bps. Commercial real estate continued its recovery as asset values pushed higher, particularly in the multifamily and industrial/warehouse sectors where cap rates are at or near historical lows. Premium pricing for major metro market properties has pushed investors seeking adequate yields towards secondary markets and major transportation hubs.
European countries are currently experiencing weak economic conditions, and ambivalence over appropriate austerity measures and central bank policies do not bode well for imminent improvement. China is hampered by lower European and American consumption and has fallen short of internal growth expectations. Although Synovus does not have direct exposure to global markets, Synovus will continue to monitor the impact of international developments on domestic economic activity and will determine the most appropriate strategies to pursue.


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DISCUSSION OF RESULTS OF OPERATIONS
Consolidated Financial Highlights
A summary of Synovus' financial performance for the six months ended June 30,
2013 and 2012 is set forth in the table below.
                                   Six Months Ended June 30,             Three Months Ended June 30,
(dollars in thousands,
except per share data)          2013         2012        Change        2013        2012        Change
Net interest income          $ 401,891     434,316       (7.5)%      202,077     213,356       (5.3)%
Provision for loan losses       48,773     110,271         (55.8 )    13,077      44,222         (70.4 )
Non-interest income            129,813     160,616         (19.2 )    65,092      76,477         (14.9 )
Non-interest expense           363,472     411,399         (11.6 )   181,186     208,264         (13.0 )
Adjusted non-interest
expense(1)                     331,582     353,466          (6.2 )   167,777     179,018          (6.3 )
Income before income taxes     119,459      73,262          63.1      72,906      37,347          95.2
Pre-tax, pre-credit costs
income(1)                      198,674     217,213          (8.5 )    97,989     106,645          (8.1 )
Net income available to
common shareholders             45,515      46,172          (1.4 )    30,717      24,803          23.8
Net income per common share,
basic                             0.06        0.06          (5.4 )      0.04        0.03          14.5
Net income per common share,
diluted                      $    0.05        0.05          (1.6 )      0.03        0.03          23.7
Net interest margin               3.41 %      3.52      (11) bps        3.39 %      3.48       (9) bps
Net charge-off ratio              0.90        1.94     (104) bps        0.61        1.99     (138) bps




                                                                   Sequential
(dollars in thousands,                                               Quarter                         Year Over
except per share data)        June 30, 2013     March 31, 2013       Change        June 30, 2012    Year Change
Loans, net of deferred fees
and costs                    $  19,608,283         19,367,887       240,396       $  19,680,127        (71,844 )
Total deposits                  20,710,703         20,561,193       149,510          21,565,065       (854,362 )
Core deposits(1)                19,372,640         19,228,561       144,079          20,416,173     (1,043,533 )
Core deposits excluding time
deposits(1)                     15,995,424         15,746,365       249,059          16,318,339       (322,915 )

Non-performing assets ratio           3.21 %             3.47      (26) bps                4.83 %    (162) bps
Past dues over 90 days                0.02               0.03        (1) bp                0.03         (1) bp

Tier 1 capital(1)            $   2,904,985          2,866,490        38,495       $   2,822,487         82,498
Tier 1 common equity(1)          1,932,260          1,896,485        35,775           1,860,394         71,866
Total risk-based capital         3,445,161          3,493,091       (47,930 )         3,449,214         (4,053 )
Tier 1 capital ratio(1)              13.49 %            13.50        (1) bp               13.35 %       14 bps
Tier 1 common equity
ratio(1)                              8.97               8.93         4 bps                8.80         17 bps
Total risk-based capital
ratio                                15.99              16.45      (46) bps               16.31       (32) bps
Total shareholders' equity
to total assets ratio(1)             13.43              13.65      (22) bps               10.85        258 bps
Tangible common equity to
tangible assets ratio(1)              9.71               9.89      (18) bps                7.12        259 bps

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

Results for the Six and Three Months Ended June 30, 2013 For the six months ended June 30, 2013, net income available to common shareholders was $45.5 million, or $0.05 per diluted common share, compared to net income available to common shareholders of $46.2 million, or $0.05 per diluted common share for the six months ended June 30, 2012. For the three months ended June 30, 2013, net income available to common shareholders was $30.7 million, or $0.03 per diluted common share, compared to $24.8 million and $0.03 per diluted common share for the same period a year earlier. Net income available to common shareholders for the six months ended June 30, 2013 includes $44.4 million in income tax expense, while net income available to common shareholders for the same period one year earlier includes an income tax benefit of $2.2 million. Income before taxes for the six months ended June 30, 2013 was $119.5 million, a $46.2 million, or 63.1%, increase over the six months ended June 30, 2012.


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Overall improvement for the six months ended June 30, 2013 is due to an $88.0 million decrease in total credit costs and a $21.9 million decrease in adjusted non- interest expense, partially offset by a $32.4 million decrease in net-interest income and a $30.2 million decrease in non-interest income. All key credit quality metrics continued to improve during the second quarter of 2013. Credit costs continued to decline and totaled $24.0 million for the second quarter of 2013, compared to $49.3 million for the first quarter of 2013 and $70.3 million for the second quarter of 2012. Net charge-offs for the second quarter of 2013 totaled $30.0 million or 0.61% of average loans, annualized, down from $57.3 million or 1.18% of average loans, annualized, for the first quarter of 2013. The year-to-date net charge-off ratio is 0.90%, the lowest level since the first quarter of 2008. NPL inflows were $66.9 million for the second quarter of 2013, down from $83.9 million in the first quarter of 2013, and down 46.2% from the second quarter of 2012. Total non-performing assets declined $42.4 million from $677.6 million at March 31, 2013 to $635.2 million at June 30, 2013, and declined $326.2 million or 33.9% from June 30, 2012. As a percentage of total loans outstanding, past due loans remained at favorable levels with total past due loans and still accruing interest of 0.41% at June 30, 2013 compared to 0.46% and 0.47% at March 31, 2013 and June 30, 2012, respectively, and loans 90 days past due and still accruing interest were 0.02% at June 30, 2013, compared to 0.03% at March 31, 2013 and 0.03% at June 30, 2012.
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) was $198.7 million for the six months ended June 30, 2013, and $98.0 million for second quarter of 2013, a $2.7 million, or 2.8%, decrease from the first quarter of 2013. As compared to the first quarter of 2013, the second quarter 2013 decrease in pre-tax, pre-credit costs income was primarily driven by a $1.0 million decrease in non-interest income and a $4.0 million increase in adjusted non-interest expense (primarily due to higher professional fees), and partially offset by a $2.3 million increase in net interest income, due primarily to loan growth and one extra calendar day in the quarter. The $8.7 million decline from the second quarter of 2012 was driven by an $11.3 million decrease in net interest income and an $8.0 million decrease in non-interest income, partially offset by a $10.6 million decrease in adjusted non-interest expense. See reconciliation of "Non-GAAP Financial Measures" in this Report.
The net interest margin declined 4 bps to 3.39% in the second quarter of 2013 compared to 3.43% for the first quarter of 2013, and declined 9 bps from 3.48% in the second quarter of 2012. The sequential quarter decline was primarily due to higher levels of liquidity. Earning asset yields decreased by 26 bps compared to the six months ended June 30, 2012 while the effective cost of funds decreased by 15 bps. The primary factors negatively impacting earning asset yields were a 44 bps decrease in the yield on taxable investment securities and a 33 bps decline in loan yields. The investment yield decrease was due to significantly lower yields available for the reinvestment of maturing higher yielding securities. Loan yield decreases were primarily driven by downward pricing of maturing and prepaid loans. Earning asset yields were positively impacted by the reduction in low yielding funds held at the Federal Reserve Bank. The effective cost of funds was positively impacted by the downward repricing of maturing certificates of deposit and a decrease in the effective cost of core money market deposits. As compared to the six months ended June 30, 2012, core certificates of deposit declined by 37 bps and core money market deposits declined by 12 bps. See reconciliation of core deposits in the "Non-GAAP Financial Measures" in this Report.
At June 30, 2013, total loans outstanding were $19.61 billion, a sequential quarter increase of $240.4 million or 5.0% annualized from the first quarter of 2013. Commercial and industrial loans grew by $184.6 million from the first quarter of 2013, or 8.2% annualized. Additionally, retail loans grew by $78.5 million from the first quarter of 2013, or 7.9% annualized.
Total deposits increased by $149.5 million to $20.71 billion from the first quarter of 2013. The increase in total deposits was driven by increases in non-interest bearing demand deposits and NOW account balances. June 30, 2013 balances include $36.1 million in deposits assumed from Sunrise Bank. Core deposits ended the quarter at $19.37 billion, up $144.1 million compared to first quarter of 2013. Core deposits, excluding time deposits, were $16.00 billion at June 30, 2013, down $385.6 million compared to December 31, 2012. Compared to June 30, 2012, core deposits excluding time deposits decreased $322.9 million or 2.0%. See reconciliation of "Non-GAAP Financial Measures" in this Report.
Total shareholders' equity was $3.57 billion at June 30, 2013, unchanged from December 31, 2012.
Recent Developments
As previously disclosed, in 2009, Synovus entered into the Synovus MOU with the Atlanta Fed and the GA DBF. The Atlanta Fed and the GA DBF terminated the Synovus MOU effective as of April 22, 2013. The Synovus MOU has been replaced with a resolution adopted by Synovus' Board of Directors relating to, among other things, continued emphasis on improving asset quality and maintaining strong levels of capital and liquidity. The Bank's Supervisory Authorities have also terminated the Synovus Bank MOU effective as of May 29, 2013. The Synovus Bank MOU was also replaced with a resolution adopted by Synovus Bank's Board of Directors relating to, among other things, continued emphasis on improving asset quality and maintaining strong levels of capital and liquidity. Common Stock and Preferred Stock Offerings On July 24, 2013, Synovus completed a public offering of 59,870,550 shares of its Common Stock at $3.09 per share. The offering generated net proceeds of approximately $175 million.


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On July 25, 2013, Synovus completed a public offering of $130 million of Series C Preferred Stock (5.2 million shares, no par value, with a liquidation preference of $25 per share). The offering generated net proceeds of approximately $125 million. From the date of issuance to, but excluding, August 1, 2018, the rate for declared dividends is 7.875% per annum. From and including August 1, 2018, the dividend rate will change to a floating rate equal to three-month LIBOR plus a spread of 6.39% per annum. Redemption of TARP Preferred Stock
On July 26, 2013, Synovus redeemed all 967,870 shares of its Series A Preferred Stock issued to the U.S. Treasury under the CPP established under TARP. Over two-thirds of the TARP redemption was funded by internally available funds. The balance of the redemption was funded by net proceeds from the equity offerings completed in July 2013, described above.
In connection with the redemption of the Series A Preferred Stock, Synovus accelerated the accretion of the remaining issuance discount on the Series A Preferred Stock, which will result in a $5.1 million reduction in net income available to common shareholders for the three months ending September 30, 2013. The current cost of the Series A Preferred Stock (including dividends paid to the Treasury on a quarterly basis, and related accretion) was approximately $59 million per year. The elimination of this cost, net of the costs of the transactions described above to assist in facilitating the redemption of the Series A Preferred Stock is expected to result in a net annualized increase to diluted EPS of $0.04 (based on annualized second quarter 2013 actual results). The U.S. Treasury continues to hold Warrants, which expire on December 19, 2018. Synovus will evaluate the potential repurchase of these Warrants directly from the U.S. Treasury or through participation in a subsequent auction process, which may or may not be successful.
Changes in Financial Condition
During the six months ended June 30, 2013, total assets decreased by $196.8 million, or 1%, to $26.56 billion as compared to December 31, 2012. The principal components of this decrease were a decrease of $186.1 million in cash and cash equivalents, a decrease of $99.9 million in mortgage loans held for sale, at fair value and a $39.1 million decrease in interest bearing funds with the Federal Reserve Bank. These decreases were partially offset by a $96.6 million increase in investment securities available for sale and a $66.6 million increase in loans, net of deferred fees and costs.

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