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SNV > SEC Filings for SNV > Form 10-Q on 6-Nov-2013All Recent SEC Filings

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Form 10-Q for SYNOVUS FINANCIAL CORP


6-Nov-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;


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(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;

(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;


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(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 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 nine and three months ended September 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
The nation's economy began the third quarter acclimating to the June announcement by the Federal Reserve that its Quantitative Easing program could be tapered downwards towards eventual termination by mid-2014. The widely held expectation that initial tapering would be implemented at the September 18th Federal Reserve meeting was proved incorrect as action was deferred due


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to a fragile economic recovery, the potential risks of a government shutdown, and partisan debate over the national debt ceiling issues and the Affordable Care Act, each of which poses significant risk for a recovery that has yet to find sustained, vigorous growth. The Federal Reserve has stated that the commencement of the tapering process would be preceded by clear evidence of a sustained recovery. Given the market events that were imminent at the end of the third quarter of 2013 (such as the government shutdown, which ran through the first half of October), statistics used by the Federal Reserve to make such a judgment are expected to be distorted, skewed, or unavailable in the fourth quarter of 2013. Due to this condition, consensus has developed that the Federal Reserve will defer the implementation of tapering until 2014.
Unemployment continued to decline, dropping to 7.3% at the end of the third quarter from 7.6% at the end of the second quarter; concerns that the downward movement may be due more to a decline in the labor force than actual organic job growth have muted the impact of the quarter's progress. Within the Synovus footprint, most Metropolitan Statistical Areas (MSAs) showed declining unemployment, some mainly due to organic job growth (e.g., Tampa-St. Petersburg-Clearwater, Florida MSA) and others due to labor force reductions (e.g., Columbus, Georgia MSA). Within the Synovus footprint MSAs, the lowest unemployment rate for the third quarter of 2013 was 5.1% in the Crestview-Fort Walton-Destin, Florida MSA, while the highest MSA unemployment rate was 12.9% in the Dalton, Georgia MSA.
The Conference Board Consumer Confidence Index third quarter peak was 81.8 in August, before declining to 79.7 at quarter-end due to the then-imminent government shutdown and concern over the lack of resolution of the national debt ceiling issue. Consumer spending also peaked in August, as measured by several polls, and then dropped at higher-than-seasonal rates in September. This trend held in automobile sales (5.1% decline from August to September), National Federation of Independent Businesses Small Business Optimism Index (94.1 in August vs. 93.9 in September), and various other measures of economic health. Due to the United States government shutdown, some datasets for September remained unreleased at quarter-end, although consensus opinion points towards the same trend. It is likely that in Synovus markets where U.S. government employment is indicative of regional economic conditions, early fourth quarter consumption reductions could occur, with a minor recovery in losses as affected U.S. government employees are given back-pay.
After the late surge in mortgage rates at the end of the second quarter, homebuyers and refinancing home owners found some relief with the postponement of tapering in mid-September as rates dropped accordingly; the average 30-year mortgage rate at the end of the quarter was 4.62%, historically very low, yet roughly 100 bps over 2013 troughs. The pace of permitting in residential construction (including multi-family) slowed dramatically in the third quarter as evidenced by declines in permit volume in many MSAs within the Synovus footprint. Median home sale prices within the Synovus footprint generally increased year-over-year during the quarter, where Atlanta, for example, led the Synovus MSAs with a 39% year-over-year increase. Only two markets logged year-over-year median home sale price declines; these are Huntsville, Alabama and Columbus, Georgia, both with a 5% decrease. It should be noted, however, that during the most recent economic recession, both the Huntsville and Columbus markets saw only minimal housing market declines, when compared to those declines experienced in other Synovus footprint areas (e.g., in Atlanta, Georgia).
Commercial real estate continued its recovery as asset values pushed higher, particularly in the multi-family and industrial/warehouse sectors where capitalization rates are at or near historical lows and rents have generally exceeded pre-recession levels. Premium pricing for major metro market properties has pushed investors seeking adequate yields towards secondary markets and major inland transportation hubs. There is some general concern in the office sector, specifically the medical subsector where the impact of the Affordable Care Act is unclear. Expense control by hospitals and the consolidation of independent physician practices could result in an oversupply of vacant medical office space.
European nations continue to experience weak economic conditions, and as a result the Central Bank has kept key interest rates low in hopes of positively impacting below-normal lending levels. After experiencing lower first and second quarter international consumption rates, China had increased factory production and retail sales during the third quarter. Additionally, during the third quarter, the prospect of military intervention in Syria over chemical weapon attacks created uncertainties; however, a non-aggressive settlement was achieved and oil prices subsided. At this time, Synovus does not have direct exposure to global markets, but it 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 nine months ended September
30, 2013 and 2012 is set forth in the table below.
                                 Nine Months Ended September 30,            Three Months Ended September 30,
(dollars in thousands,
except per share data)            2013          2012        Change          2013           2012         Change
Net interest income          $   605,861      646,661       (6.3)%        203,970         212,345       (3.9)%
Provision for loan losses         55,534      173,843         (68.1 )       6,761          63,572         (89.4 )
Non-interest income              193,390      233,849         (17.3 )      63,578          73,233         (13.2 )
Non-interest expense             550,799      602,890          (8.6 )     187,328         191,492          (2.2 )
Adjusted non-interest
expense(1)                       502,618      520,886          (3.5 )     171,038         167,421           2.2
Income before income taxes       192,918      103,777          85.9        73,459          30,514         140.7
Pre-tax, pre-credit costs
income(1)                        294,062      328,715         (10.5 )      95,386         111,501         (14.5 )
Net income available to
common shareholders               82,704       62,202          33.0        37,188          16,030         132.0
Net income per common share,
basic                               0.10         0.08          19.4          0.04            0.02          90.7
Net income per common share,
diluted                      $      0.09         0.07          27.4          0.04            0.02         120.1
Net interest margin                 3.41 %       3.51      (10) bps          3.40 %          3.51      (11) bps
Net charge-off ratio                0.75         1.95     (120) bps          0.47            1.97     (150) bps




                                                                       Sequential
(dollars in thousands,                                                   Quarter                              Year Over
except per share data)        September 30, 2013     June 30, 2013       Change        September 30, 2012    Year Change
Loans, net of deferred fees
and costs                    $       19,711,610        19,608,283       103,327       $       19,731,865      (20,255 )
Total deposits                       20,973,856        20,710,703       263,153               20,846,830      127,026
Core deposits(1)                     19,698,656        19,372,640       326,016               19,926,871     (228,215 )
Core deposits excluding time
deposits(1)                          16,128,904        15,995,424       133,480               16,155,754      (26,850 )

                                                                                                                (155)
Non-performing assets ratio                2.96 %            3.21      (25) bps                     4.51 %        bps
Past due loans over 90 days                0.02              0.02             -                     0.05       (3) bp

Tier 1 capital(1)            $        2,292,758         2,904,985      (612,227 )     $        2,835,950     (543,192 )
Tier 1 common equity(1)               2,157,358         1,932,260       225,098                1,871,260      286,098
Total risk-based capital              2,835,108         3,445,161      (610,053 )              3,465,950     (630,842 )
                                                                                                                (268)
Tier 1 capital ratio(1)                   10.55 %           13.49      (294) bp                    13.23 %        bps
Tier 1 common equity
ratio(1)                                   9.93              8.97        96 bps                     8.73      120 bps
Total risk-based capital                                                                                        (312)
ratio                                     13.04             15.99     (295) bps                    16.16          bps
Total shareholders' equity
to total assets ratio(1)                  11.18             13.43     (225) bps                    11.16        2 bps
Tangible common equity to
tangible assets ratio(1)                  10.61              9.71        90 bps                     7.35      326 bps

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

Results for the Nine and Three Months Ended September 30, 2013 For the nine months ended September 30, 2013, net income available to common shareholders was $82.7 million, or $0.09 per diluted common share, compared to net income available to common shareholders of $62.2 million, or $0.07 per diluted common share for the nine months ended September 30, 2012. For the three months ended September 30, 2013, net income available to common shareholders was $37.2 million, or $0.04 per diluted common share, compared to $16.0 million and $0.02 per diluted common share for the same period a year ago. Net income available to common shareholders for the nine months ended September 30, 2013 includes $72.1 million in income tax expense, while net income available to common shareholders for the same period a year ago includes an income tax benefit of $2.4 million. For 2013, earnings are subject to income tax expense at an effective rate of approximately 37% following the reversal of substantially all of the deferred tax asset valuation allowance during the three months ended December 31, 2012. Income before taxes for the nine months ended September 30, 2013 was $192.9 million, an $89.1 million, or 85.9%, increase over the nine months ended September 30, 2012.


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Overall improvement for the nine months ended September 30, 2013 compared to the same period one year ago is due to a $151.2 million decrease in total credit costs and an $18.3 million decrease in adjusted non-interest expense, partially offset by a $40.8 million decrease in net interest income and a $40.5 million decrease in non-interest income. All key credit quality metrics continued to improve during the three months ended September 30, 2013. Credit costs continued to decline and totaled $22.4 million for the three months ended September 30, 2013, compared to $24.0 million for the three months ended June 30, 2013 and $85.6 million for the three months ended September 30, 2012. Net charge-offs for the three months ended September 30, 2013 totaled $23.0 million or 0.47% of average loans annualized, down from $30.0 million or 0.61% of average loans annualized for the three months ended June 30, 2013. The annualized net charge-off ratio for the nine months ended September 30, 2013 is 0.75%, the lowest level since the first quarter of 2008. NPL inflows were $47.4 million for the three months ended September 30, 2013, down from $66.9 million for the three months ended June 30, 2013, and down 58.7% from $114.8 million for the three months ended September 30, 2012. Total non-performing assets declined $48.3 million from $635.2 million at June 30, 2013 to $586.9 million at September 30, 2013, and declined $312.5 million or 34.7% from September 30, 2012. As a percentage of total loans outstanding, past due loans remained at favorable levels with total loans past due and still accruing interest of 0.40% at September 30, 2013 compared to 0.41% and 0.55% at June 30, 2013 and September 30, 2012, respectively, and loans 90 days past due and still accruing interest were 0.02% at September 30, 2013 compared to 0.02% at June 30, 2013 and 0.05% at September 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) decreased 10.5% to $294.1 million for the nine months ended September 30, 2013, compared to $328.7 million for nine months ended September 30, 2012, and declined 14.5% to $95.4 million for the three months ended September 30, 2013, compared to $111.5 million for the three months ended September 30, 2012. As compared to the three months ended June 30, 2013, pre-tax, pre-credit costs income decreased 2.7% to $95.4 million during the three months ended September 30, 2013. The decrease in pre-tax, pre-credit costs income was primarily driven by a $1.5 million decrease in non-interest income (primarily due to a $2.0 million decrease in mortgage banking income) and a $3.3 million increase in adjusted non-interest expense (primarily due to higher employment expenses), and was partially offset by a $1.9 million increase in net interest income (due primarily to one additional calendar day in the quarter). The $16.1 million decline from the three months ended September 30, 2012 was driven by an $8.4 million decrease in net interest income, a $4.1 million decrease in adjusted non-interest income, and a $3.6 million increase in adjusted non-interest expense. See reconciliation of "Non-GAAP Financial Measures" in this Report.
The net interest margin for the nine months ended September 30, 2013 was 3.41%, down 10 bps from 3.51%, for the nine months ended September 30, 2012. Earning asset yields decreased by 24 bps compared to the nine months ended September 30, 2012 while the effective cost of funds decreased by 14 bps. The primary factors negatively impacting earning asset yields were a 41 bps decrease in the yield on taxable investment securities and a 32 bps decline in loan yields. The investment yield decrease was due to lower yields available for the reinvestment of maturing higher yielding securities and a higher level of purchased premium amortization. Loan yield decreases were primarily driven by downward pricing of maturing and prepaid loans. A reduction in low yielding funds held at the Federal Reserve Bank had a modest positive impact on earning asset yields. 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 and long term debt. As compared to the nine months ended September 30, 2012, core certificates of deposit declined by 33 bps, core money market deposits declined by 8 bps, and the cost of long term debt declined by 81 bps. See reconciliation of core deposits in the "Non-GAAP Financial Measures" in this Report.
At September 30, 2013, total loans outstanding were $19.71 billion, a sequential quarter increase of $103.3 million, or 2.1% annualized. The growth was led by retail loans which grew $83.3 million, or 9.5% annualized. Additionally, commercial and industrial loans grew by $18.1 million, and commercial real estate loans grew by $3.2 million.
At September 30, 2013, total deposits were $20.97 billion, a sequential quarter increase of $263.2 million, or 5.0% annualized. The increase in total deposits was driven by increases in non-interest bearing demand deposits and time deposit . . .

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