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SNV > SEC Filings for SNV > Form 10-Q on 8-May-2014All Recent SEC Filings

Show all filings for SYNOVUS FINANCIAL CORP

Form 10-Q for SYNOVUS FINANCIAL CORP


8-May-2014

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


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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 competition in the financial services industry may adversely affect our future earnings and growth;

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

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

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

(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 risk that any future economic downturn could have a material adverse effect on our capital, financial condition, results of operations and future growth;

(7) the risk that we could realize additional losses if our levels of non-performing assets increase and/or if we determine to sell certain non-performing assets and the proceeds we receive are lower than the carrying value of such assets;

(8) 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;

(9) the risk that if we pursue acquisitions in the future as part of our growth strategy, we may not be able to complete such acquisitions or successfully integrate bank or nonbank acquisitions into our existing operations;

(10) 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;

(11) 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;

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

(13) the impact of the Dodd-Frank Act, the capital requirements promulgated by the Basel Committee on Banking Supervision 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;


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(14) 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;

(15) 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 a further reduction in our credit ratings;

(16) the impact on our borrowing costs, capital costs and our liquidity due to our status as a non-investment grade issuer;

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

(18) the risk that we may be unable to pay dividends on our Common Stock or Series C Preferred Stock or Synovus Bank may be unable to pay dividends to us;

(19) the risk that for our 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;

(20) 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;

(21) risks related to recent and proposed changes in the mortgage banking industry, including the risk that we may be required to repurchase mortgage loans sold to third parties and the impact of the "ability to pay" and "qualified mortgage" rules on our loan origination process and foreclosure proceedings;

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

(23) risks related to the fluctuation in our stock price;

(24) the effects of any damages to Synovus' reputation resulting from developments related to any of the items identified above; 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' 2013 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' 2013 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.
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 three months ended March 31, 2014 and 2013, 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' 2013 Form 10-K.


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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, capital resources, 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
After a year-end announcement by the Federal Reserve Bank that a tapering of the Quantitative Easing program lifted the country's economic optimism, new year enthusiasm was quickly tempered as record storms affected the country in January and February, impacting several metrics pertaining to manufacturing, sales, heating costs, and distribution. However, the second half of the quarter exhibited a strong bounce-back that most likely included suppressed demand from the first half of the quarter. The final fourth quarter 2013 GDP estimate of 2.6% was delivered in March, and the Federal Reserve stayed on pace to finalize the asset purchase component of quantitative easing by the end of the year. Unemployment at quarter-end remained unchanged at 6.7% from year-end 2013; overall, there were slight labor force gains in the US, reversing the trends seen at the end of 2013. Many Synovus markets exhibited increases in unemployment rates, yet most of these fluctuations were related to increasing labor force numbers chasing organic job creation, particularly in Synovus' Florida markets. Synovus markets in Georgia and Tennessee experienced lower unemployment rates produced by higher declines in labor force relative to declines in employment. Synovus' South Carolina markets showed the largest drops in unemployment rates due to a combination of declining labor force figures and increasing job creation numbers. Within the Synovus footprint Metropolitan Statistical Areas (MSA), the lowest unemployment rate for the first quarter of 2014 was 4.5% in the Crestview-Fort Walton Beach-Destin, Florida MSA, with Greenville-Anderson-Mauldin, South Carolina MSA trailing at 4.6%. The highest Synovus MSA unemployment rate was 9% in the Dalton, Georgia MSA (though this market exhibited a 190+ bps improvement year over year).
The Conference Board Consumer Confidence Index ended the quarter at 82.3, surpassing a recent 81.8 peak set in August 2013. Consumer spending was muted by winter storms but recovered by the end of the quarter. Automobile sales reached an annualized level of 16.4 million units in March, a level which exceeded even the most optimistic estimates for the month and which likely included pent-up demand from January and February. The National Federation of Independent Businesses Small Business Optimism Index progressed from a 2013 year-end reading of 92.5 to a March reading of 93.4, showing that initial concerns regarding 2014 conditions and the ramifications of the Affordable Care Act have been somewhat mitigated.
Although the Federal Reserve began tapering its Treasury and Mortgage Backed Securities purchases early in the year, thirty-year, fixed-rate mortgages ultimately decreased to a rate of 4.56% by the end of March, after reaching a quarter high of 4.76% in January. The pace of permitting in residential construction (including multi-family) continued to decline, as evidenced by reductions in permit volume in many MSAs within the Synovus footprint. Median single family home sale prices generally increased year-over-year during the quarter (9.9% annualized), though the pace slowed substantially since peak quarters in 2013. Average single family prices are increasing at an annualized rate of 7.7% nationally. The Case-Shiller 10 and 20 City Composite indices both show positive gains of 13.5% and 13.2% annualized, respectively. 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. The hospitality segment continued its recovery during the first quarter, specifically in Atlanta, where gains were realized in occupancies, revenues, and bookings. 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. On the whole, both office and retail properties should exhibit slow but positive progress throughout the remainder of 2014, as they did in the first


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quarter. Although Synovus' Florida markets lead the company in CRE metric gains and job creation, Synovus' South Carolina markets are yielding impressive returns, primarily due to port growth, manufacturing, and logistics. Nashville has experienced strong gains in its hospitality sector and currently has the lowest multifamily vacancy rate in the footprint at 4.1%.
Geopolitical events seemed to be concentrated in Russia throughout the quarter, first with the Winter Olympic Games and then with the mounting, and still unresolved, political unrest in Ukraine. The economy in Europe continues to be burdened by a struggle between creditor and debtor members, with improved productivity and growth in some areas but nagging unemployment and expense concerns in others. Japan recently increased a nationwide sales tax from 5% to 8%, but did not expand its loose monetary policy to compensate for the hike, due to its improving economy. China's economy is slowing in time with decreased worldwide demand, with estimates of its first quarter GDP at 7.3%. There is concern that Federal Reserve policy actions will impact developing economies over the course of 2014. 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 three months ended March 31,
2014 and 2013 is set forth in the table below.
                                                  Three Months Ended March 31,
(dollars in thousands, except per share data)     2014         2013       Change
Net interest income                             200,514      199,814       0.4%
Provision for loan losses                         9,511       35,696       (73.4 )
Non-interest income                              70,182       64,721         8.4
Non-interest expense                            184,161      182,286         1.0
Adjusted non-interest expense(1)                167,060      163,804         2.0
Income before income taxes                       77,024       46,553        65.5
Adjusted pre-tax, pre-credit costs income(1)     96,516      100,686        (4.1 )
Net income available to common shareholders      45,857       14,798       209.9
Net income per common share, basic                 0.05         0.02       150.8
Net income per common share, diluted               0.05         0.02       189.0
Net interest margin                                3.39 %       3.43     (4) bps
Net charge-off ratio                               0.30         1.18    (88) bps




                                                                 Sequential
(dollars in thousands,                           December 31,      Quarter                           Year Over
except per share data)        March 31, 2014         2013          Change        March 31, 2013     Year Change
Loans, net of deferred fees
and costs                    $    20,159,004     20,057,798       101,206       $    19,367,887      791,117
Total deposits                    20,950,891     20,876,790        74,101            20,561,193      389,698
Core deposits(1)                  19,584,952     19,782,788      (197,836 )          19,228,561      356,391
Core deposits excluding time
deposits(1)                       16,364,879     16,284,588        80,291            15,746,365      618,514

                                                                                                       (101)
Non-performing assets ratio             2.46 %         2.67      (21) bps                  3.47 %        bps
Past due loans over 90 days             0.03           0.02          1 bp                  0.03            -

Tier 1 capital               $     2,430,790      2,351,493        79,297       $     2,866,490     (435,700 )
Tier 1 common equity(1)            2,294,810      2,215,631        79,179             1,896,485      398,325
Total risk-based capital           2,981,130      2,900,865        80,265             3,493,091     (511,961 )
                                                                                                       (265)
Tier 1 capital ratio                   10.85 %        10.54        31 bps                 13.50 %        bps
Tier 1 common equity
ratio(1)                               10.24           9.93        31 bps                  8.93      131 bps
Total risk-based capital                                                                               (314)
ratio                                  13.31          13.00        31 bps                 16.45          bps
Total shareholders' equity                                                                             (231)
to total assets ratio                  11.34          11.25         9 bps                 13.65          bps
Tangible common equity to
tangible assets ratio(1)               10.78          10.68        10 bps                  9.89       89 bps

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

Results for the Three Months Ended March 31, 2014 For the three months ended March 31, 2014, net income available to common shareholders was $45.9 million, or $0.05 per diluted common share, compared to net income available to common shareholders of $35.9 million, or $0.04 per diluted common share, for the three months ended December 31, 2013, and net income available to common shareholders of $14.8 million, or $0.02 per diluted common share, for the three months ended March 31, 2013. The first quarter of 2014 results include a $5.8 million net gain from the Memphis transaction, a $3.1 million gain on a branch property sale, and $8.6 million in restructuring charges. The fourth quarter of 2013 included $10.0 million in litigation loss contingency expense and $3.8 million in restructuring charges, while the first quarter of 2013 included restructuring charges of $4.9 million.


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The first quarter of 2014 results reflect continued broad-based improvement in credit quality. Credit costs continued to decline and totaled $17.6 million for the three months ended March 31, 2014, compared to $22.3 million for the three months ended December 31, 2013 and $49.3 million for the three months ended March 31, 2013. Net charge-offs for the three months ended March 31, 2014 totaled $15.2 million or 0.30% of average loans annualized, down from $25.1 million or 0.51% of average loans annualized for the three months ended December 31, 2013 and $57.3 million or 1.18% of average loans annualized for the three months ended March 31, 2013. NPL inflows were $35.5 million for the three months ended March 31, 2014, down from $41.2 million for the three months ended December 31, 2013, and down 57.7% from $83.9 million for the three months ended March 31, 2013. Total non-performing assets declined $41.4 million from $539.6 million at December 31, 2013 to $498.2 million at March 31, 2014, and declined $179.4 million, or 26.5%, from March 31, 2013.
Adjusted pre-tax, pre-credit costs income (which excludes provision for loan losses, other credit costs, restructuring charges, litigation loss contingency expense, securities gains and losses, gain on Memphis transaction, and certain other items) increased $262 thousand or 0.3% to $96.5 million for the three months ended March 31, 2014, compared to $96.3 million for three months ended December 31, 2013, and declined 4.1% compared to $100.7 million for the three months ended March 31, 2013. The sequential quarter increase of $262 thousand in adjusted pre-tax, pre-credit costs income was primarily driven by a $3.1 million gain from a branch property sale which helped offset the impact of fewer calendar days. The decrease of $4.2 million in adjusted pre-tax, pre-credit costs income compared to the three months ended March 31, 2013 was driven by a $3.4 million decrease in mortgage banking income and a $3.3 million increase in adjusted non-interest expense (primarily due to higher FDIC expense, higher employee incentive expense, and expense associated with additional investments in technology). See reconciliation of "Non-GAAP Financial Measures" in this Report.
The net interest margin for the three months ended March 31, 2014 was 3.39%, up 1 basis point from the prior quarter and down 4 basis points compared to 3.43%, for the three months ended March 31, 2013. Earning asset yields increased by 1 basis point compared to the three months ended December 31, 2013 while the effective cost of funds was unchanged.
At March 31, 2014, total loans outstanding were $20.16 billion, a sequential quarter increase of $101.2 million, or 2.0% annualized. Excluding the impact from the Memphis transaction, loans grew $190.8 million , or 3.9%, annualized. See reconciliation of "Non-GAAP Financial Measures" in this Report. Synovus experienced strong loan growth in key markets including Atlanta, Tampa, Jacksonville, Orlando, and Charleston.
At March 31, 2014, total deposits were $20.95 billion, a sequential quarter increase of $74.1 million, or 1.4% annualized. Excluding the impact from the Memphis transaction, deposits increased $265.4 million or 5.2% annualized compared to December 31, 2013. Core deposits, excluding time deposits and the impact from the Memphis transaction, increased $232.5 million or 5.8% compared to December 31, 2013. See reconciliation of "Non-GAAP Financial Measures" in this Report.
Total shareholders' equity was $3.00 billion at March 31, 2014, compared to $2.95 billion at December 31, 2013.
Recent Developments
On April 24, 2014, at Synovus' 2014 Annual Shareholders' Meeting ("Annual Meeting"), Synovus' shareholders approved a proposal authorizing Synovus' Board of Directors to effect a one-for-seven reverse stock split of Synovus' common stock. Following the Annual Meeting, Synovus' Board of Directors authorized the one-for-seven reverse stock split. The reverse stock split will become effective on May 16, 2014, and Synovus' shares of common stock will begin trading on a post-split basis on the New York Stock Exchange (NYSE) at the opening of trading on May 19, 2014. Share and per share amounts included in this Report have not been restated to reflect the approval of the one-for-seven reverse stock split because the split will not be effective until after the filing of this Report.
Additionally, on April 24, 2014, Synovus' shareholders also approved an amendment to Synovus' articles of incorporation to increase the number of authorized shares of Synovus' common stock from 1.2 billion shares to 2.4 billion shares. Synovus effected the increase in the number of authorized shares on April 24, 2014. Upon the effective date of the reverse stock split, the number of Synovus' authorized shares of common stock will be proportionately reduced from 2.4 billion shares to 342.9 million shares. Changes in Financial Condition
During the three months ended March 31, 2014, total assets increased $233.8 million from $26.20 billion at December 31, 2013 to $26.44 billion. The principal components of this increase were an increase of $240.2 million in interest bearing funds with the Federal Reserve Bank due to increases in deposits and borrowings and a $101.2 million increase in loans, net of deferred fees and costs. These increases were partially offset by a $67.0 million decrease in investment securities available for sale and a $32.5 million decrease in net deferred tax assets.


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Loans
The following table compares the composition of the loan portfolio at March 31,
2014, December 31, 2013, and March 31, 2013.
                                                            Reported
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