SYNOVUS FINANCIAL CORPORATION
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2008
Commission File Number 1-10312
SYNOVUS FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
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GEORGIA
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58-1134883 |
(State or other jurisdiction of
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(I.R.S. Employer Identification No.) |
incorporation or organization) |
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1111 Bay Avenue, Suite # 500
P.O. Box 120
Columbus, Georgia 31902
(Address of principal executive offices)
(706) 649-2311
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definition of accelerated filer, large
accelerated filer and smaller reporting company in Rule 12B-2 of the Exchange Act.
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Large Accelerated Filer þ
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Accelerated Filer o
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Non-Accelerated Filer o
(Do not check if a smaller reporting company)
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Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12B-2 of the
Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers class of common stock, as of the
latest practicable date.
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Class
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April 30, 2008 |
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Common Stock, $1.00 Par Value
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330,089,200 shares |
SYNOVUS FINANCIAL CORP.
INDEX
2
PART I. FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
SYNOVUS FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
(unaudited)
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March 31, |
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December 31, |
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(In thousands, except share data) |
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2008 |
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2007 |
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ASSETS |
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Cash and due from banks |
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$ |
589,640 |
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|
682,583 |
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Interest earning deposits with banks |
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2,440 |
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10,950 |
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Federal funds sold and securities purchased under resale agreements |
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101,855 |
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76,086 |
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Trading account assets |
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34,730 |
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17,803 |
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Mortgage loans held for sale at fair value |
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141,598 |
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153,437 |
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Impaired
loans held for sale |
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42,270 |
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Investment securities available for sale |
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3,779,877 |
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3,666,974 |
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Loans, net of unearned income |
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27,117,510 |
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26,498,585 |
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Allowance for loan losses |
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(394,848 |
) |
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(367,613 |
) |
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Loans, net |
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26,722,662 |
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26,130,972 |
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Premises and equipment, net |
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565,887 |
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547,437 |
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Goodwill |
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519,138 |
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519,138 |
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Other intangible assets, net |
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26,156 |
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28,007 |
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Other assets |
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1,233,637 |
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1,185,065 |
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Total assets |
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$ |
33,759,890 |
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33,018,452 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Liabilities: |
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Deposits: |
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Non-interest bearing retail and commercial deposits |
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$ |
3,508,246 |
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3,472,423 |
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Interest bearing retail and commercial deposits |
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17,713,901 |
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17,734,851 |
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Total retail and commercial deposits |
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21,222,147 |
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21,207,274 |
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Brokered deposits ($232,626 and $293,842 at fair value as of
March 31, 2008 and December 31, 2007) |
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4,441,040 |
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3,752,542 |
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Total deposits |
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25,663,187 |
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24,959,816 |
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Federal funds purchased and securities sold under repurchase agreements |
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2,108,109 |
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2,319,412 |
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Long-term debt |
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1,992,750 |
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1,890,235 |
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Other liabilities |
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442,270 |
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407,399 |
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Total liabilities |
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30,206,316 |
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29,576,862 |
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Minority interest in consolidated subsidiaries |
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22,772 |
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Shareholders equity: |
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Common stock $1.00 par value. Authorized 600,000,000 shares;
issued 335,749,571 in 2008 and 335,529,482 in 2007; outstanding
330,088,033 in 2008 and 329,867,944 in 2007 |
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335,750 |
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335,529 |
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Additional paid-in capital |
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1,106,049 |
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1,101,209 |
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Treasury stock, at cost 5,661,538 shares |
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(113,944 |
) |
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(113,944 |
) |
Accumulated other comprehensive income |
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92,076 |
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31,439 |
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Retained earnings |
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2,110,871 |
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2,087,357 |
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Total shareholders equity |
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3,530,802 |
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3,441,590 |
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Total liabilities and shareholders equity |
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$ |
33,759,890 |
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33,018,452 |
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See accompanying notes to consolidated financial statements.
3
SYNOVUS FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
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Three Months Ended |
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March 31, |
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(In thousands, except per share data) |
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2008 |
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2007 |
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Interest income: |
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Loans, including fees |
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$ |
455,307 |
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502,056 |
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Investment securities available for sale |
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45,156 |
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40,453 |
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Trading account assets |
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634 |
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907 |
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Mortgage loans held for sale |
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1,697 |
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2,437 |
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Federal funds sold and securities purchased under resale agreements |
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1,019 |
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1,478 |
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Interest earning deposits with banks |
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68 |
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568 |
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Total interest income |
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503,881 |
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547,899 |
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Interest expense: |
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Deposits |
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187,181 |
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226,067 |
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Federal funds purchased and securities sold under repurchase agreements |
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17,830 |
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20,642 |
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Long-term debt |
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20,221 |
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18,241 |
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Total interest expense |
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225,232 |
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264,950 |
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Net interest income |
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278,649 |
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282,949 |
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Provision for losses on loans |
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91,049 |
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20,515 |
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Net interest income after provision for losses on loans |
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187,600 |
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262,434 |
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Non-interest income: |
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Service charges on deposit accounts |
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28,391 |
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26,370 |
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Fiduciary and asset management fees |
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12,621 |
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12,473 |
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Brokerage and investment banking revenue |
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8,487 |
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7,449 |
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Mortgage banking income |
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8,161 |
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7,226 |
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Bankcard fees |
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12,218 |
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11,880 |
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Net gains (losses) on sales of available for sale investment securities |
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447 |
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Other fee income |
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11,185 |
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9,427 |
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Other operating income |
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20,370 |
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12,231 |
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Proceeds from redemption of Visa shares |
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38,542 |
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Total non-interest income |
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139,975 |
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87,503 |
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Non-interest expense: |
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Salaries and other personnel expense |
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122,130 |
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113,927 |
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Net occupancy and equipment expense |
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30,211 |
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27,290 |
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Other operating expenses |
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66,463 |
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53,580 |
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Visa litigation expense |
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(17,430 |
) |
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Total non-interest expense |
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201,374 |
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194,797 |
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Minority interest in consolidated subsidiaries |
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1,559 |
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Income from continuing operations before income taxes |
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124,642 |
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|
155,140 |
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Income tax expense |
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43,648 |
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54,733 |
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Income from continuing operations |
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80,994 |
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100,407 |
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Income from discontinued operations, net of income taxes and minority interest |
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46,346 |
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Net income |
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$ |
80,994 |
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146,753 |
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Basic earnings per share: |
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Income from continuing operations |
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$ |
0.25 |
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|
0.31 |
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Net income |
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0.25 |
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|
0.45 |
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Diluted earnings per share: |
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Income from continuing operations |
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$ |
0.24 |
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0.30 |
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Net income |
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0.24 |
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0.45 |
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Weighted average shares outstanding: |
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Basic |
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328,970 |
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325,687 |
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Diluted |
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331,719 |
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329,573 |
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See accompanying notes to consolidated financial statements.
4
SYNOVUS FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
AND COMPREHENSIVE INCOME
(unaudited)
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Accum |
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ulated |
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Other |
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Compre- |
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Additional |
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hensive |
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Shares |
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Common |
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Paid-In |
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Treasury |
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Income |
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Retained |
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(In thousands, except per share data) |
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Issued |
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Stock |
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Capital |
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|
Stock |
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(Loss) |
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Earnings |
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Total |
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Balance at December 31, 2006 |
|
|
331,214 |
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|
$ |
331,214 |
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|
|
1,033,055 |
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(113,944 |
) |
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(2,129 |
) |
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|
2,460,454 |
|
|
|
3,708,650 |
|
Cumulative effect of adoption of FIN No. 48 |
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(230 |
) |
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|
(230 |
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Net Income |
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|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
146,753 |
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|
146,753 |
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Other comprehensive income, net of tax: |
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Net unrealized gain on cash flow hedges |
|
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|
|
|
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|
1,511 |
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|
1,511 |
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Change in unrealized gains (losses) on
investment securities available for
sale, net of reclassification adjustment |
|
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|
7,694 |
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7,694 |
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Loss on foreign currency translation |
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(87 |
) |
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(87 |
) |
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
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Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
9,118 |
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|
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|
9,118 |
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|
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|
|
|
|
|
|
|
|
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Comprehensive income |
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
155,871 |
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|
|
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|
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|
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|
|
|
|
|
|
|
|
|
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Cash dividends declared $0.21 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(67,004 |
) |
|
|
(67,004 |
) |
Issuance of non-vested stock |
|
|
57 |
|
|
|
57 |
|
|
|
(57 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense |
|
|
|
|
|
|
|
|
|
|
5,711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,711 |
|
Stock options exercised |
|
|
1,179 |
|
|
|
1,179 |
|
|
|
21,939 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,118 |
|
Share-based tax benefit |
|
|
|
|
|
|
|
|
|
|
4,869 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,869 |
|
Ownership change at majority-owned
subsidiary |
|
|
|
|
|
|
|
|
|
|
2,982 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,982 |
|
Issuance of common stock for acquisition |
|
|
62 |
|
|
|
62 |
|
|
|
2,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2007 |
|
|
332,512 |
|
|
$ |
332,512 |
|
|
|
1,070,553 |
|
|
|
(113,944 |
) |
|
|
6,989 |
|
|
|
2,539,973 |
|
|
|
3,836,083 |
|
|
|
|
|
|
|
|
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|
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|
Balance at December 31, 2007 |
|
|
335,529 |
|
|
$ |
335,529 |
|
|
|
1,101,209 |
|
|
|
(113,944 |
) |
|
|
31,439 |
|
|
|
2,087,357 |
|
|
|
3,441,590 |
|
Cumulative effect of adoption of EITF
Issue No. 06-4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,420 |
) |
|
|
(1,420 |
) |
Cumulative effect of adoption of SFAS No.
159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58 |
|
|
|
58 |
|
Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80,994 |
|
|
|
80,994 |
|
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain on cash flow hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,301 |
|
|
|
|
|
|
|
12,301 |
|
Change in unrealized gains (losses) on
investment securities available for
sale, net of reclassification adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,290 |
|
|
|
|
|
|
|
48,290 |
|
Amortization of post-retirement unfunded
health benefit, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46 |
|
|
|
|
|
|
|
46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,637 |
|
|
|
|
|
|
|
60,637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
141,631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared $0.17 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(56,118 |
) |
|
|
(56,118 |
) |
Issuance of non-vested stock, net |
|
|
(17 |
) |
|
|
(17 |
) |
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense |
|
|
|
|
|
|
|
|
|
|
3,590 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,590 |
|
Stock options exercised |
|
|
238 |
|
|
|
238 |
|
|
|
961 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,199 |
|
Share-based tax benefit |
|
|
|
|
|
|
|
|
|
|
272 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
272 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2008 |
|
|
335,750 |
|
|
$ |
335,750 |
|
|
|
1,106,049 |
|
|
|
(113,944 |
) |
|
|
92,076 |
|
|
|
2,110,871 |
|
|
|
3,530,802 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
5
SYNOVUS FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
(In thousands) |
|
2008 |
|
|
2007 |
|
Operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
80,994 |
|
|
|
146,753 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Provision for losses on loans |
|
|
91,049 |
|
|
|
20,515 |
|
Depreciation, amortization and accretion, net |
|
|
26,650 |
|
|
|
48,027 |
|
Equity in loss (income) of equity investments |
|
|
1,160 |
|
|
|
(2,334 |
) |
Deferred tax expense (benefit) |
|
|
1,159 |
|
|
|
(1,006 |
) |
Decrease (increase) in interest receivable |
|
|
23,867 |
|
|
|
(7,517 |
) |
(Decrease) increase in interest payable |
|
|
(4,588 |
) |
|
|
4,183 |
|
Minority interest in subsidiaries net income |
|
|
1,559 |
|
|
|
11,278 |
|
Increase in trading account assets |
|
|
(16,927 |
) |
|
|
(30,023 |
) |
Originations of mortgage loans held for sale |
|
|
(317,442 |
) |
|
|
(394,538 |
) |
Proceeds from sales of mortgage loans held for sale |
|
|
329,104 |
|
|
|
388,372 |
|
Gain on sale of mortgage loans held for sale |
|
|
(4,116 |
) |
|
|
(2,880 |
) |
Increase in prepaid and other assets |
|
|
(4,819 |
) |
|
|
(41,278 |
) |
Decrease in accrued salaries and benefits |
|
|
(22,488 |
) |
|
|
(97,917 |
) |
Increase in other liabilities |
|
|
73,909 |
|
|
|
50,929 |
|
Net gains on sales of available for sale investment securities |
|
|
|
|
|
|
(447 |
) |
Increase in fair value of private equity investments |
|
|
(4,946 |
) |
|
|
|
|
Impairment of private equity investment |
|
|
|
|
|
|
1,068 |
|
Gain on redemption of Visa shares |
|
|
(38,542 |
) |
|
|
|
|
Decrease in liability for Visa litigation |
|
|
(17,430 |
) |
|
|
|
|
Share-based compensation |
|
|
3,653 |
|
|
|
7,339 |
|
Excess tax benefit from share-based payment arrangements |
|
|
(230 |
) |
|
|
(4,629 |
) |
Impairment of developed software |
|
|
|
|
|
|
620 |
|
Other, net |
|
|
2,535 |
|
|
|
28,336 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
204,111 |
|
|
|
124,851 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
Net decrease (increase) in interest earning deposits with banks |
|
|
8,510 |
|
|
|
(16,197 |
) |
Net increase in federal funds sold and securities purchased under resale agreements |
|
|
(25,769 |
) |
|
|
(89,423 |
) |
Proceeds from maturities and principal collections of investment securities available for sale |
|
|
413,453 |
|
|
|
217,908 |
|
Proceeds from sales of investment securities available for sale |
|
|
|
|
|
|
7,010 |
|
Purchases of investment securities available for sale |
|
|
(444,454 |
) |
|
|
(390,631 |
) |
Net increase in loans |
|
|
(770,029 |
) |
|
|
(569,493 |
) |
Purchases of premises and equipment |
|
|
(33,410 |
) |
|
|
(40,989 |
) |
Proceeds from disposals of premises and equipment |
|
|
865 |
|
|
|
110 |
|
Net proceeds from redemption of Visa shares |
|
|
38,542 |
|
|
|
|
|
Additions to other intangible assets |
|
|
|
|
|
|
7,018 |
|
Contract acquisition costs |
|
|
|
|
|
|
(7,144 |
) |
Additions to licensed computer software from vendors |
|
|
|
|
|
|
(3,884 |
) |
Additions to internally developed computer software |
|
|
|
|
|
|
(3,039 |
) |
|
|
|
|
|
|
|
Net cash used by investing activities |
|
|
(812,292 |
) |
|
|
(888,754 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
Net increase in demand and savings deposits |
|
|
472,321 |
|
|
|
402,115 |
|
Net increase in certificates of deposit |
|
|
231,050 |
|
|
|
145,816 |
|
Net decrease in federal funds purchased and other securities sold under repurchase agreements |
|
|
(211,303 |
) |
|
|
(12,279 |
) |
Principal repayments on long-term debt |
|
|
(66,432 |
) |
|
|
(104,313 |
) |
Proceeds from issuance of long-term debt |
|
|
155,800 |
|
|
|
307,805 |
|
Excess tax benefit from share-based payment arrangements |
|
|
230 |
|
|
|
4,629 |
|
Dividends paid to shareholders |
|
|
(67,626 |
) |
|
|
(63,476 |
) |
Proceeds from issuance of common stock |
|
|
1,198 |
|
|
|
23,118 |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
515,238 |
|
|
|
703,415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalent balances held in foreign currencies |
|
|
|
|
|
|
(571 |
) |
|
|
|
|
|
|
|
|
Decrease in cash and due from banks |
|
|
(92,943 |
) |
|
|
(61,059 |
) |
Cash and due from banks at beginning of period |
|
|
682,583 |
|
|
|
889,975 |
|
|
|
|
|
|
|
|
Cash and due from banks at end of period |
|
$ |
589,640 |
|
|
|
828,916 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
6
SYNOVUS FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with
the instructions to Form 10-Q and therefore do not include all information and footnotes necessary
for a fair presentation of financial position, results of operations, and cash flows in conformity
with U.S. generally accepted accounting principles. All adjustments consisting of normally
recurring accruals that, in the opinion of management, are necessary for a fair presentation of the
financial position and results of operations for the periods covered by this report have been
included. The accompanying unaudited consolidated financial statements should be read in
conjunction with the Synovus Financial Corp. (Synovus) consolidated financial statements and
related notes appearing in the 2007 Annual Report previously filed on Form 10-K.
In preparing the consolidated financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities as of the date of the respective balance sheets and the reported
amounts of revenues and expenses for the periods presented. Actual results could differ
significantly from those estimates.
Certain prior year amounts have been reclassified to conform to the presentation adopted in 2008.
Note 2 Supplemental Cash Flow Information
For the three months ended March 31, 2008 and 2007, Synovus paid income taxes (net of refunds
received) of $96 thousand and $53.6 million, respectively. The amount for the three months ended
March 31, 2008 is impacted by tax overpayment credits from 2007 that were applied towards the 2008
income tax liability. For the three months ended March 31, 2008 and 2007, Synovus paid interest of
$218.8 million and $256.2 million, respectively.
Non-cash investing activities consisted of loans of approximately $45.0 million and $7.8 million,
which were foreclosed and transferred to other real estate during the three months ended March 31,
2008 and 2007, respectively, and impaired loans of approximately $42.3 million which were
transferred to impaired loans held for sale during the three months ended March 31, 2008.
Note 3 Comprehensive Income
Other comprehensive income (loss) consists of the change in net unrealized gains (losses) on cash
flow hedges, the change in net unrealized gains (losses) on investment securities available for
sale, gains (losses) on foreign currency translation, and the change in accumulated other
comprehensive income related to post-retirement healthcare plans. Comprehensive income consists of
net income plus other comprehensive income (loss).
7
Comprehensive income for the three months ended March 31, 2008 and 2007 is presented below:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
(in thousands) |
|
2008 |
|
|
2007 |
|
Net income |
|
$ |
80,994 |
|
|
|
146,753 |
|
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
Change in net unrealized gains (losses) on cash flow hedges |
|
|
12,301 |
|
|
|
1,511 |
|
Change in net unrealized gains (losses) on investment securities
available for sale, net of reclassification adjustment |
|
|
48,290 |
|
|
|
7,694 |
|
Gains on foreign currency translation |
|
|
|
|
|
|
(87 |
) |
Change in accumulated OCI related to postretirement healthcare plans |
|
|
46 |
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
|
60,637 |
|
|
|
9,118 |
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
141,631 |
|
|
|
155,871 |
|
|
|
|
|
|
|
|
Note 4 Impaired Loans Held for Sale
Loans or pools of loans are transferred to the impaired loans held for sale portfolio when the
intent to hold the loans has changed due to portfolio management or risk mitigation strategies and
when there is a plan to sell the loans within a reasonable period of time. The value of the loans
or pools of loans is primarily determined by analyzing the underlying collateral of the loan and
the external market prices of similar assets. At the time of transfer, if the fair value is less
than the cost, the difference attributable to declines in credit quality is recorded as a
charge-off against the allowance for loan losses. Decreases in fair value subsequent to the
transfer are recognized as a component of non-interest expense. During the three months ended March
31, 2008, Synovus transferred loans totaling $63.3 million to the impaired loans held for sale
portfolio. At the time of the transfer, Synovus recognized a $21.0 million charge-off on these
loans, which resulted in a new cost basis of $42.3 million at March 31, 2008.
Note 5 Fair Value Accounting Adoption of SFAS Nos. 157 and 159
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standard No. 157, Fair Value Measurements (SFAS No. 157). SFAS No. 157 defines fair
value, establishes a framework for measuring fair value under U.S Generally Accepted Accounting
Principles (GAAP), and expands disclosures about fair value measurements. This statement does not
introduce any new requirements mandating the use of fair value; rather, it unifies the meaning of
fair value and adds additional fair value disclosures. The provisions of this statement are
effective for financial statements issued for fiscal years beginning after November 15, 2007 and
interim periods within those fiscal years. Effective January 1, 2008, Synovus adopted SFAS No. 157
for financial assets and liabilities. As permitted under FASB Staff Position No. FAS 157-2,
Synovus has elected to defer the application of SFAS No. 157 to non-financial assets and
liabilities until January 1, 2009.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (SFAS No. 159). SFAS No.159 permits entities to make an
irrevocable election, at specified election dates, to measure eligible financial instruments and
certain other instruments at fair value. As of January 1, 2008, Synovus has elected the fair value
option (FVO) for mortgage loans held for sale and certain callable brokered certificates of
deposit. Accordingly, a cumulative adjustment of $58 thousand ($91 thousand less $33 thousand of
income taxes) was recorded as an increase to retained earnings.
8
The following is a description of the assets and liabilities for which fair value has been elected,
including the specific reasons for electing fair value.
Mortgage Loans Held for Sale
Mortgage loans held for sale (MLHFS) have been previously accounted for on a lower of aggregate
cost or fair value basis pursuant to SFAS No. 65, Accounting for Certain Mortgage Banking
Activities (SFAS No. 65). For certain mortgage loan types, fair value hedge accounting was
utilized by Synovus to hedge a given mortgage loan pool, and the underlying mortgage loan balances
were adjusted for the change in fair value related to the hedged risk (fluctuation in market
interest rates) in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended and interpreted (SFAS No. 133). For those certain mortgage loan types,
Synovus is still able to achieve an effective economic hedge by being able to mark-to-market the
underlying mortgage loan balances through the income statement, but has eliminated the operational
time and expense needed to manage a hedge accounting program under SFAS No. 133. Previously under
SFAS No. 65, Synovus was exposed, from an accounting perspective, only to the downside risk of
market volatilities; however by electing FVO, Synovus may now also recognize the associated gains
on the mortgage loan portfolio as favorable changes in the market occur.
Certain Callable Brokered Certificates of Deposit
Synovus has elected FVO for certain callable brokered certificates of deposit (CDs) to ease the
operational burdens required to maintain hedge accounting for such instruments under the constructs
of SFAS No. 133. Prior to the adoption of SFAS No. 159, Synovus was highly effective in hedging
the risk related to changes in fair value, due to fluctuations in market interest rates, by
engaging in various interest rate derivatives. However, SFAS No. 133 requires an elaborate
documentation process for each hedging relationship and an extensive process related to assessing
the effectiveness and measuring ineffectiveness related to such hedges. By electing FVO on these
previously hedged callable brokered CDs, Synovus is still able to achieve an effective economic
hedge by being able to mark-to-market the underlying CDs through the income statement, but has
eliminated the operational time and expense needed to manage a hedge accounting program under SFAS
No. 133.
The following table summarizes the impact of adopting the fair value option for these financial
instruments as of January 1, 2008. Amounts shown represent the carrying value of the affected
instruments before and after the changes in accounting resulting from the adoption of SFAS No. 159.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending |
|
|
|
|
|
|
Opening |
|
|
|
Balance |
|
|
Cumulative |
|
|
Balance |
|
|
|
Sheet |
|
|
Effect |
|
|
Sheet |
|
|
|
December |
|
|
Adjustment |
|
|
January 1, |
|
(Dollars in thousands) |
|
31, 2007 |
|
|
Gain, net |
|
|
2008 |
|
Mortgage loans held for sale |
|
$ |
153,437 |
|
|
$ |
91 |
|
|
$ |
153,528 |
|
Certain callable brokered CDs |
|
|
293,841 |
|
|
|
|
|
|
|
293,841 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax cumulative effect of adoption of the fair value option |
|
|
|
|
|
|
91 |
|
|
|
|
|
Deferred tax liability |
|
|
|
|
|
|
(33 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of adoption of the fair value option
(increase to retained earnings) |
|
|
|
|
|
$ |
58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
Determination of Fair Value
SFAS No. 157 defines fair value as the exchange price that would be received for an asset or paid
to transfer a liability (an exit price) in the principal or most advantageous market for the asset
or liability in an orderly transaction between market participants on the measurement date. SFAS
No. 157 also establishes a fair value hierarchy for disclosure of fair value measurements based on
significant inputs used to determine the fair value. The three levels of inputs are as follows:
|
|
|
Level 1
|
|
Quoted prices in active markets for identical assets or
liabilities. Level 1 assets and liabilities include corporate debt
and equity securities, certain derivative contracts, as well as
certain U.S. Treasury and U.S. Government-sponsored enterprise
debt securities that are highly liquid and are actively traded in
over-the-counter markets. |
|
|
|
Level 2
|
|
Observable inputs other than Level 1 prices such as quoted prices
for similar assets or liabilities; quoted prices in markets that
are not active; or other inputs that are observable or can be
corroborated by observable market data for substantially the full
term of the assets or liabilities. Level 2 assets and liabilities
include debt securities with quoted prices that are traded less
frequently than exchange-traded instruments and derivative
contracts whose value is determined using a pricing model with
inputs that are observable in the market or can be derived
principally from or corroborated by observable market data. This
category generally includes certain U.S. Government-sponsored
enterprises and agency mortgage-backed debt securities,
obligations of states and municipalities, certain callable
brokered certificates of deposit, collateralized mortgage
obligations, corporate debt securities, derivative contracts, and
mortgage loans held-for-sale. |
|
|
|
Level 3
|
|
Unobservable inputs that are supported by little if any market
activity for the asset or liability. Level 3 assets and
liabilities include financial instruments whose value is
determined using pricing models, discounted cash flow
methodologies, or similar techniques, as well as instruments for
which the determination of fair value requires significant
management judgment or estimation. This category primarily
includes Federal Home Loan Bank and Federal Reserve Bank stock,
collateral-dependent impaired loans, and certain private equity
investments. |
Following is a description of the valuation methodologies used for the major categories of
financial assets and liabilities measured at fair value.
Trading Account Assets/Liabilities and Investment Securities Available for Sale
Where quoted market prices are available in an active market, securities are valued via
independent providers at the last traded price by obtaining feeds from a number of live data
sources including active market makers and inter-dealer brokers. These securities are
classified as Level 1 within the valuation hierarchy and include U.S. Treasury securities,
obligations of U.S. Government-sponsored enterprises, and corporate debt and equity
securities. If quoted market prices are not available, then fair values are estimated by the
independent providers using bid prices and quoted prices of pools or tranches of securities
with similar characteristics. These types of securities are classified as Level 2 within the
valuation hierarchy and consist of collateralized mortgage obligations, mortgage-backed
securities, debt securities of U.S. Government-sponsored enterprises and agencies, and state
and municipal bonds. In both cases, Synovus has evaluated the valuation methodologies of
these third party providers to determine whether such valuations are representative of an
exit price in the Synovus principal markets. In certain cases where there is limited
activity or less transparency around inputs to valuation, securities are classified as Level
3 within the valuation hierarchy. These Level 3 items are primarily Federal Home Loan Bank
(FHLB) and Federal Reserve Bank (FRB) stock.
10
Mortgage Loans Held for Sale
Since quoted market prices are not available, fair value is derived from a
hypothetical-securitization model used to project the exit price of the loan in
securitization. The bid pricing convention is used for loan pricing for similar assets.
The valuation model is based upon forward settlement of a pool of loans of identical coupon, maturity,
product, and credit attributes. The inputs to the model are continuously updated with available market and
historical data. As the loans are predominantly used as collateral for securitizations, the
valuation model represents the highest and best use of the loans in Synovus principal
market. Mortgage loans held for sale are classified within Level 2 of the valuation
hierarchy.
Private Equity Investments
Private equity investments consist primarily of investments in venture capital funds. The
valuation of these instruments requires significant management judgment due to the absence of
quoted market prices, inherent lack of liquidity, and the long-term nature of such assets.
Based on these factors, the ultimate realizable value of Level 3 private equity investments
could differ significantly from the values reflected in the accompanying financial
statements. Private equity investments are valued initially based upon transaction price.
Thereafter, Synovus uses information provided by the fund managers in the initial
determination of estimated fair value. Valuation factors such as recent or proposed purchase
or sale of debt or equity of the issuer, pricing by other dealers in similar securities, size
of position held, liquidity of the market and changes in economic conditions affecting the
issuer are used in the final determination of estimated fair value. These private equity
investments are classified as Level 3 within the valuation hierarchy.
Private equity investments may also include investments in publicly traded equity securities,
which have restrictions on their sale, generally obtained through an initial public offering.
Investments in the restricted publicly traded equity securities are recorded at fair value
based on the quoted market value less adjustments for regulatory or contractual sales
restrictions. Discounts for restrictions are determined based upon the length of the
restriction period and the volatility of the equity security. Investments in restricted
publicly traded equity securities are classified as Level 2 within the valuation hierarchy.
Derivative Assets and Liabilities
Equity derivatives are valued using quoted market prices and are classified as Level 1 within
the valuation hierarchy. All other derivatives are valued using internally developed models.
These derivatives include interest rate swaps, floors, caps, and collars. To-be-announced
option contracts to purchase or sell mortgage-backed securities in the future and mandatory
forward sales commitments are derivatives utilized by Synovus mortgage subsidiary, and are
valued by obtaining prices directly from dealers in the form of quotes for identical options
using a bid pricing convention with a spread between bid and offer quotations. All of these
types of derivatives are classified as Level 2 within the valuation hierarchy. The mortgage
subsidiary also utilizes mortgage commitments to fund derivatives, and they are valued based
on the other mortgage derivatives mentioned above except there is a fall-out ratio for
interest rate lock commitments that is an additional input which is Level 3. Therefore, this
type of derivative instrument is classified as Level 3 within the valuation hierarchy. These
amounts, however, are insignificant.
11
Certain Callable Brokered Certificates of Deposit
The fair value of certain callable brokered certificates of deposit is derived using several
inputs in a valuation model that calculates the discounted cash flows based upon a yield
curve. Once the yield curve is constructed, it is applied against the standard certificate
of deposit terms that may include the principal balance, payment frequency, term to maturity,
and interest accrual to arrive at the discounted cash flow based fair value. When valuing
the call option, as applicable, implied volatility is obtained for a similarly dated interest
rate swaption, and it is also entered in the model. These types of certificates of deposit
are classified as Level 2 within the valuation hierarchy.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents all financial instruments measured at fair value on a recurring
basis, including financial instruments for which Synovus has elected the fair value option as
of March 31, 2008 according to the SFAS No. 157 valuation hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets/Liabilities at |
(in thousands) |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Fair Value |
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading account assets |
|
$ |
4,168 |
|
|
|
30,562 |
|
|
|
|
|
|
$ |
34,730 |
|
Mortgage loans held for sale |
|
|
|
|
|
|
141,598 |
|
|
|
|
|
|
|
141,598 |
|
Investment securities available for sale |
|
|
5,233 |
|
|
|
3,642,098 |
|
|
|
132,546 |
(2) |
|
|
3,779,877 |
|
Private equity investments |
|
|
|
|
|
|
|
|
|
|
61,082 |
|
|
|
61,082 |
|
Derivative assets |
|
|
8,055 |
|
|
|
182,627 |
|
|
|
|
|
|
|
190,682 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brokered certificates of deposit (1) |
|
$ |
|
|
|
|
232,626 |
|
|
|
|
|
|
$ |
232,626 |
|
Trading account liabilities |
|
|
|
|
|
|
5,034 |
|
|
|
|
|
|
|
5,034 |
|
Derivative liabilities |
|
|
8,055 |
|
|
|
100,917 |
|
|
|
|
|
|
|
108,972 |
|
|
|
|
(1) |
|
Amounts represent the value of the certain callable brokered certificates of deposit
for which Synovus has elected the fair value option under SFAS No. 159. |
|
(2) |
|
This amount primarily consists of FHLB (Federal Home Loan Bank) stock and FRB (Federal
Reserve Bank) stock of approximately $111.5 million and $7.4 million, respectively. |
12
Changes in Fair Value FVO Items
The following table presents the changes in fair value included in the consolidated statement of
income for items which the fair value election was made. The table does not reflect the change in
fair value attributable to the related economic hedges Synovus used to mitigate interest rate risk
associated with the financial instruments. These changes in fair value were recorded as a
component of mortgage banking income and other operating income, as appropriate, and substantially
offset the change in fair value of the financial instruments referenced below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2008 |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Mortgage |
|
Other |
|
Changes in |
|
|
Banking |
|
Operating |
|
Fair Value |
(in thousands) |
|
Income |
|
Income |
|
Recorded |
Mortgage loans held for sale |
|
$ |
50,000 |
|
|
|
|
|
|
$ |
50,000 |
|
Certain callable brokered CDs |
|
$ |
|
|
|
|
(1,878 |
) |
|
$ |
1,878 |
|
Changes in Level Three Fair Value Measurements
As noted above, Synovus uses significant unobservable inputs (Level 3) to fair-value certain
assets and liabilities as of March 31, 2008. The table below includes a roll forward of the
balance sheet amount for the three months ended March 31, 2008 (including the change in fair
value), for financial instruments of a material nature that are classified by Synovus within
Level 3 of the fair value hierarchy and are measured at fair value on a recurring basis.
|
|
|
|
|
|
|
|
|
|
|
Investment |
|
|
|
|
|
|
Securities |
|
|
|
|
|
|
Available |
|
|
Private Equity |
|
(in thousands) |
|
for Sale |
|
|
Investments |
|
Beginning balance January 1, 2008 |
|
$ |
126,715 |
|
|
|
55,581 |
|
Total gains or (losses) (realized/unrealized), net of minority interest: |
|
|
|
|
|
|
|
|
Included in earnings |
|
|
|
|
|
|
3,702 |
|
Included in other comprehensive income |
|
|
(73 |
) |
|
|
|
|
Purchases, sales, issuances, and settlements, net |
|
|
5,904 |
|
|
|
1,799 |
|
Transfers in and/or out of Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance March 31, 2008 |
|
$ |
132,546 |
|
|
|
61,082 |
|
|
|
|
|
|
|
|
The amount of total gains or (losses) for the period included in earnings
attributable to the change in unrealized gains or losses relating to
assets and liabilities still held at March 31, 2008 |
|
$ |
(73 |
) |
|
|
3,702 |
|
The table below summarizes gains and losses due to changes in fair value, including both
realized and unrealized gains and losses, recorded in earnings or changes in net assets for
material Level 3 assets and liabilities for the three months ended March 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2008 |
|
|
Investment |
|
|
|
|
Securities |
|
|
|
|
Available |
|
Private Equity |
(in thousands) |
|
for Sale |
|
Investments |
Total change in earnings, net of minority interest |
|
$ |
|
|
|
|
3,404 |
|
Change in unrealized gains or losses relating to
assets and liabilities still held
at March 31, 2008 |
|
$ |
(73 |
) |
|
|
|
|
13
Assets Measured at Fair Value on a Non-recurring Basis
Loans under the scope of SFAS No. 114, Accounting by Creditors for Impairment of a Loan (SFAS No.
114), are evaluated for impairment using the present value of the expected future cash flows
discounted at the loans effective interest rate, or as a practical expedient, a loans observable
market price, or the fair value of the collateral if the loan is collateral dependent. The
measurement of impaired loans using future cash flows discounted at the loans effective interest
rate rather than the market rate of interest is not a fair value measurement and is therefore
excluded from the requirements of SFAS No. 157. Impaired loans measured by applying the practical
expedient in SFAS No. 114 are included in the requirements of SFAS No. 157.
Under the practical expedient, Synovus measures the fair value of collateral-dependent impaired
loans based on the fair value of the collateral securing these loans. These measurements are
classified as Level 3 within the valuation hierarchy. All impaired loans are secured by real
estate. The fair value of these real estate properties is generally determined based upon
appraisals performed by a certified or licensed appraiser using inputs such as absorption rates,
capitalization rates, and comparables. Management also considers other factors or recent
developments which could result in adjustments to the collateral value estimates indicated in the
appraisals such as changes in absorption rates or market conditions from the time of valuation.
Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment
and adjusted accordingly, based on the same factors identified above.
The fair value of collateral-dependent impaired loans (including impaired loans held for
sale) totaled $433.6 million at March 31, 2008, compared to $264.9 million at December 31,
2007.
Note 6 Derivative Instruments
Synovus accounts for its derivative financial instruments as either assets or liabilities on the
balance sheet at fair value through adjustments to either the hedged items, accumulated other
comprehensive income (loss), or current earnings, as appropriate. As part of its overall interest
rate risk management activities, Synovus utilizes derivative instruments to manage its exposure to
various types of interest rate risk. These derivative instruments consist of interest rate swaps,
commitments to sell fixed-rate mortgage loans, and interest rate lock commitments made to
prospective mortgage loan customers. Interest rate lock commitments represent derivative
instruments since it is intended that such loans will be sold.
Synovus originates first lien residential mortgage loans for sale into the secondary market and
generally does not hold the originated loans for investment purposes. Mortgage loans are either
converted to securities or are sold to a third party servicing aggregator.
At March 31, 2008, Synovus had commitments to fund fixed-rate mortgage loans to customers in the
amount of $141.8 million. The fair value of these commitments at March 31, 2008 resulted in an
unrealized gain of $1.7 million, which was recorded as a component of mortgage banking income in
the consolidated statements of income.
At March 31, 2008, outstanding commitments to sell fixed-rate mortgage loans amounted to
approximately $276.3 million. Such commitments are entered into to reduce the exposure to market
risk arising from potential changes in interest rates, which could affect the fair value of
mortgage loans held for sale and outstanding commitments to originate residential mortgage loans
for resale.
14
The commitments to sell mortgage loans are at fixed prices and are scheduled to settle at specified
dates that generally do not exceed 90 days. The fair value of outstanding commitments to sell
mortgage loans at March 31, 2008 resulted in an unrealized loss of $887 thousand, which was
recorded as a component of mortgage banking income in the consolidated statements of income.
Synovus utilizes interest rate swaps to manage interest rate risks, primarily arising from its core
banking activities. These interest rate swap transactions generally involve the exchange of fixed
and floating rate interest rate payment obligations without the exchange of underlying principal
amounts. Entering into interest rate derivatives potentially exposes Synovus to the risk of
counterparties failure to fulfill their legal obligations including, but not limited to, potential
amounts due or payable under each derivative contract. Notional principal amounts are often used to
express the volume of these transactions, but the amounts potentially subject to credit risk are
much smaller.
The receive fixed interest rate swap contracts at March 31, 2008 are being utilized to hedge $750
million in floating rate loans and $1.56 billion in fixed-rate liabilities. A summary of interest
rate swap contracts and their terms at March 31, 2008 is shown below. In accordance with the
provisions of SFAS No. 133, the fair value (net unrealized gains and losses) of these contracts has
been recorded on the consolidated balance sheets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
|
|
|
|
Net |
|
|
|
|
|
|
|
|
|
|
Maturity |
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
(Dollars in |
|
Notional |
|
|
Receive |
|
|
Pay |
|
|
In |
|
|
Unrealized |
|
|
Gains |
|
thousands) |
|
Amount |
|
|
Rate |
|
|
Rate(*) |
|
|
Months |
|
|
Gains |
|
|
Losses |
|
|
(Losses) |
|
Receive fixed swaps: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value hedges |
|
$ |
1,557,500 |
|
|
|
4.87 |
% |
|
|
2.75 |
% |
|
|
28 |
|
|
$ |
32,377 |
|
|
|
(7 |
) |
|
|
32,370 |
|
Cash flow hedges |
|
|
750,000 |
|
|
|
8.08 |
% |
|
|
5.25 |
% |
|
|
31 |
|
|
|
51,153 |
|
|
|
|
|
|
|
51,153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,307,500 |
|
|
|
5.91 |
% |
|
|
3.56 |
% |
|
|
29 |
|
|
$ |
83,530 |
|
|
|
(7 |
) |
|
|
83,523 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*) |
|
Variable pay rate based upon contract rates in effect at March 31, 2008. |
Synovus designates hedges of floating rate loans as cash flow hedges. These swaps hedge against the
variability of cash flows from specified pools of floating rate prime based loans. Synovus
calculates effectiveness of the hedging relationship quarterly using regression analysis for all
cash flow hedges entered into after March 31, 2007. The cumulative dollar offset method is used for
all hedges entered into prior to that date. As of March 31, 2008, cumulative ineffectiveness for
Synovus portfolio of cash flow hedges represented a gain of approximately $1.4 million.
Ineffectiveness from cash flow hedges is recognized in the consolidated statements of income as a
component of other operating income.
Synovus expects to reclassify from accumulated other comprehensive income (loss) approximately
$14.2 million as net-of-tax income during the next twelve months, as the related payments for
interest rate swaps and amortization of deferred gains (losses) are recorded.
Synovus designates hedges of fixed rate liabilities as fair value hedges. These swaps hedge against
the change in fair market value of various fixed rate liabilities due to changes in the benchmark
interest rate LIBOR. Synovus calculates effectiveness of the hedging relationships quarterly using
regression analysis for all fair value hedges entered into after March 31, 2007.
15
As of March 31, 2008, cumulative ineffectiveness for Synovus portfolio of fair value hedges
represented a gain of approximately $1.8 million. Ineffectiveness from fair value hedges is
recognized in the consolidated statements of income as other operating income.
Synovus also enters into derivative financial instruments to meet the financing and interest rate
risk management needs of its customers. Upon entering into these instruments to meet customer
needs, Synovus enters into offsetting positions in order to minimize the risk to Synovus. These
derivative financial instruments are recorded at fair value with any resulting gain or loss
recorded in current period earnings. As of March 31, 2008, the notional amount of customer related
interest rate derivative financial instruments, including both the customer position and the
offsetting position, was $3.47 billion, an increase of $512.0 million compared to December 31,
2007.
Synovus also enters into derivative financial instruments to meet the equity risk management needs
of its customers. Upon entering into these instruments to meet customer needs, Synovus enters into
offsetting positions in order to minimize the risk to Synovus. These derivative financial
instruments are recorded at fair value with any resulting gain or loss recorded in current period
earnings. As of March 31, 2008, the notional amount of customer related equity derivative
financial instruments, including both the customer position and the offsetting position, was $10.7
million.
Note 7 Share-Based Compensation
General Description of Share-Based Compensation Plans
Synovus has various long-term incentive plans under which the Compensation Committee of the Board
of Directors has the authority to grant share-based compensation to
Synovus employees.
At March 31, 2008, Synovus had a total of 19,944,889 shares of its authorized but unissued common
stock reserved for future grants under the 2007 Omnibus Plan. The general terms of each of these
plans are substantially the same, permitting the grant of share-based compensation including stock
options, non-vested shares, restricted share units, and stock appreciation rights. These plans
generally include vesting periods ranging from three to five years and contractual terms ranging
from five to ten years. Stock options are granted at exercise prices which equal the fair market
value of a share of common stock on the grant-date. Synovus historically issues new shares to
satisfy share option exercises.
16
Share-Based Compensation Expense
Synovus share-based compensation costs are recorded as a component of salaries and other personnel
expense in the consolidated statements of income. Share-based compensation expense is recognized
for plan participants on a straight-line basis over the shorter of the vesting period or the period
until reaching retirement eligibility. Share-based compensation expense from continuing operations
recognized in income is presented below:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
(in thousands) |
|
2008 |
|
|
2007 |
|
Share-based compensation expense: |
|
|
|
|
|
|
|
|
Stock options |
|
$ |
1,137 |
|
|
|
2,524 |
|
Non-vested shares |
|
|
2,516 |
|
|
|
1,766 |
|
|
|
|
|
|
|
|
Total share-based compensation expense |
|
$ |
3,653 |
|
|
|
4,290 |
|
|
|
|
|
|
|
|
Stock Option Awards
During the three months ended March 31, 2008, Synovus granted 3,042,911 options to purchase shares
of Synovus common stock to certain key Synovus employees at a weighted-average exercise price of
$13.18. At March 31, 2008, there were 31,643,702 options to purchase shares of Synovus common
stock outstanding with a weighted-average exercise price of $10.86.
Non-Vested Shares and Restricted Share Units
During the three months ended March 31, 2008, Synovus awarded 94,709 restricted share units and
18,257 non-vested shares of non-transferable Synovus common stock to certain key employees and
non-employee directors of Synovus. The weighted-average grant-date fair value of both the awarded
stock and the stock units for the three months ended March 31, 2008 was $13.06. All holders of
non-vested shares of Synovus common stock on December 31, 2007 received Total System Services, Inc.
(TSYS) non-vested shares based on the distribution ratio applicable to all Synovus shares in
connection with the spin-off of TSYS. At March 31, 2008, there were 1,011,183 non-vested Synovus
shares and restricted share units outstanding and 433,470 non-vested shares of TSYS stock
outstanding with a weighted-average grant-date fair value of $26.14.
In addition, 12,677 non-transferable non-vested shares of Synovus common stock and 6,135 non-vested
shares of TSYS common stock were awarded to a key Synovus executive from a 2005 authorized grant of
63,386 shares under a performance vesting schedule during the three-month period ended March 31,
2008, with a grant-date fair value of $23.42.
Note 8 Discontinued Operations
TSYS
Spin-off
On December 31, 2007, Synovus completed the tax-free spin-off of its shares of TSYS common stock to
Synovus shareholders. The distribution of approximately 80.6% of TSYS outstanding shares owned by
Synovus was made to shareholders of record on December 18, 2007 (the record date). Each Synovus
shareholder received 0.483921 of a share of TSYS common stock for each share of Synovus common
stock held as of the record date. Synovus shareholders received cash in lieu of fractional shares
for amounts of less than one share of TSYS common
17
stock. Pursuant to the agreement and plan of distribution, TSYS paid on a pro rata basis to its
shareholders, including Synovus, a one-time cash dividend of $600 million or $3.0309 per TSYS share
based on the number of TSYS shares outstanding as of the record date. Based on the number of TSYS
shares owned by Synovus as of the record date, Synovus received $483.8 million in proceeds from
this one-time cash dividend. The dividend was paid on December 31, 2007.
In accordance with the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, and SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities, the historical consolidated results of operations of TSYS, as well as all costs
associated with the spin-off of TSYS are now presented as a component of income from discontinued
operations. The balance sheet for the periods ended March 31, 2008 and December 31, 2007 does not
include assets and liabilities of TSYS.
The following amounts have been segregated from continuing operations and included in income from
discontinued operations, net of income taxes and minority interest, in the consolidated statements
of income:
|
|
|
|
|
|
|
Three Months |
|
|
|
Ended |
|
|
|
March 31, |
|
(In thousands) |
|
2007 |
|
TSYS |
|
|
|
|
TSYS revenues |
|
$ |
436,606 |
|
|
TSYS income, net of minority interest and before taxes |
|
|
81,237 |
|
Income tax expense |
|
|
(34,891 |
) |
|
|
|
|
Income from discontinued operations, net of income taxes |
|
$ |
46,346 |
|
|
|
|
|
Cash flows of discontinued operations for the three months ended March 31, 2007 are presented
below.
|
|
|
|
|
|
|
Three Months |
|
|
|
Ended |
|
|
|
March 31, |
|
(In thousands) |
|
2007 |
|
Cash provided by operating activities |
|
$ |
66,450 |
|
Cash used in investing activities |
|
|
(31,772 |
) |
Cash used in financing activities |
|
|
(1,519 |
) |
Effect of exchange rates on cash and cash equivalents |
|
|
(571 |
) |
|
|
|
|
Cash provided by discontinued operations |
|
$ |
32,588 |
|
|
|
|
|
18
Note 9 Goodwill and Other Intangible Assets
Goodwill
at March 31, 2008 and December 31, 2007 was
$519.1 million. An extended period of future significant
deterioration in credit markets could impair Synovus goodwill in
the future.
Intangible assets (excluding goodwill) net of accumulated amortization as of March 31, 2008 and
December 31, 2007, respectively, are presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
(In thousands) |
|
2008 |
|
|
2007 |
|
Other intangible assets: |
|
|
|
|
|
|
|
|
Purchased trust revenues |
|
$ |
2,292 |
|
|
|
2,362 |
|
Acquired customer contracts |
|
|
2,246 |
|
|
|
2,407 |
|
Core deposit premiums |
|
|
21,062 |
|
|
|
22,668 |
|
Other |
|
|
556 |
|
|
|
570 |
|
|
|
|
|
|
|
|
Total carrying value |
|
$ |
26,156 |
|
|
|
28,007 |
|
|
|
|
|
|
|
|
Note 10 Income Taxes
Synovus files income tax returns in the U.S. Federal jurisdiction and various state jurisdictions,
and is subject to examinations by these taxing authorities unless statutory examination periods
lapse. Synovus U.S. Federal income tax return is filed on a consolidated basis. Most state
income tax returns are filed on a separate entity basis. Synovus is no longer subject to U.S.
Federal income tax examinations for years before 2004 and Synovus is no longer subject to income
tax examinations from state and local tax authorities for years before 2001. There is currently no
Federal tax examination in progress. However, certain state tax examinations are in progress by
the relevant state tax authorities. Although Synovus is unable to determine the ultimate outcome
of these examinations, Synovus believes that its liability for uncertain tax positions relating to
these jurisdictions for such years is adequate.
During the three months ended March 31, 2008, Synovus increased its liability for uncertain income
tax positions by a net amount of approximately $625 thousand (net of the Federal tax effect)
including $27 thousand in interest and penalties. This net increase resulted from new information
impacting the potential resolution of prior years uncertain tax positions which were partially
reduced by expiring state audit period statutes and was recorded as an increase to state income tax
expense in the quarter.
19
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows
(1):
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Three Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
March 31, |
|
|
March 31, |
|
(in thousands) |
|
2008 |
|
|
2007 |
|
Beginning balance |
|
$ |
7,074 |
|
|
$ |
9,057 |
|
Current activity: |
|
|
|
|
|
|
|
|
Additions based on tax positions related to current year |
|
|
171 |
|
|
|
285 |
|
Additions for tax positions of prior years |
|
|
1,299 |
|
|
|
|
|
Reductions for tax positions of prior years |
|
|
(337 |
) |
|
|
(1,159 |
) |
Settlements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net, current activity |
|
|
1,133 |
|
|
|
(874 |
) |
|
|
|
|
|
|
|
Ending balance |
|
$ |
8,207 |
|
|
$ |
8,183 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Unrecognized state tax benefits are not adjusted for the Federal tax impact. |
Synovus recognizes accrued interest and penalties related to unrecognized income tax benefits as a
component of income tax expense. Accrued interest and penalties on unrecognized tax benefits
totaled $1.1 million and $1.2 million as of January 1, 2008 and March 31, 2008, respectively. The
total amount of unrecognized income tax benefits as of January 1, 2008 and March 31, 2008 that, if
recognized, would affect the effective tax rate is $5.4 million and $6.2 million (net of the
Federal benefit on state tax issues), respectively, which includes interest and penalties of $745
thousand and $829 thousand.
The total liability for uncertain tax positions under FASB Interpretation No. 48 (FIN 48),
Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 at March
31, 2008 is $6.2 million. Synovus is not able to reasonably estimate the amount by which the
liability will increase or decrease over time; however, at this time, Synovus does not expect a
significant payment related to these obligations within the next year. Synovus expects that
approximately $447 thousand of uncertain tax positions will be either settled or resolved during
the next twelve months.
Note 11 Visa Initial Public Offering and Litigation Expense
Synovus is a member of the Visa USA network. Under Visa USA bylaws, Visa members are obligated to
indemnify Visa USA and/or its parent company, Visa, Inc., for potential future settlement of, or
judgments resulting from, certain litigation, which Visa refers to as the covered litigation.
Synovus indemnification obligation is limited to its membership proportion of Visa USA. On
November 7, 2007, Visa announced the settlement of its American Express litigation, and disclosed
in its annual report to the U.S. Securities and Exchange commission (SEC) on Form 10-K for the year
ended September 30, 2007 that Visa had accrued a contingent liability for the estimated settlement
of its Discover litigation. During the second half of 2007, Synovus recognized a contingent
liability in the amount of $36.8 million as an estimate for its membership proportion of the
American Express settlement and the potential Discover settlement, as well as its membership
proportion of the amount that Synovus estimates will be required for Visa to settle the remaining
covered litigation.
20
Visa, Inc. completed an initial public offering (the Visa IPO) in March 2008. Visa used a portion
of the proceeds from the IPO to establish a $3.0 billion escrow for settlement of covered
litigation and used substantially all of the remaining portion to redeem class B and class C shares
held by Visa issuing members. During the three months ended March 31, 2008, Synovus recognized a
pre-tax gain of $38.5 million on redemption proceeds received from Visa, Inc. and reduced the $36.8
million litigation accrual recognized in the second half of 2007 by $17.4 million for its pro-rata
share of the $3.0 billion escrow funded by Visa, Inc. The redemption of shares and reduction of the
accrued liability following the Visa IPO resulted in a gain of $34.1 million, net of tax, or $0.10
per diluted share for the three months ended March 31, 2008.
Note 12 Recently Adopted Accounting Pronouncements
In September 2006, the FASBs Emerging Issues Task Force (EITF) reached a consensus on EITF Issue
No. 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement
Split-Dollar Life Insurance Arrangements (EITF 06-4). EITF 06-4 requires an employer to recognize
a liability for future benefits based on the substantive agreement with the employee. EITF 06-4
requires a company to use the guidance prescribed in SFAS No. 106, Employers Accounting for
Postretirement Benefits Other Than Pensions and Accounting Principles Board Opinion No. 12,
Omnibus Opinion, when entering into an endorsement split-dollar life insurance agreement and
recognizing the liability. EITF 06-4 was effective for fiscal periods beginning after December 15,
2007. Synovus adopted the provisions of EITF 06-4 effective January 1, 2008 and recognized
approximately $1.4 million, net of tax, as a cumulative effect adjustment to retained earnings.
In November 2006, the EITF reached a consensus on EITF Issue No. 06-10, Accounting for Deferred
Compensation and Postretirement Benefit Aspects of Collateral Assignment Split-Dollar Life
Insurance Arrangements (EITF 06-10). Under EITF 06-10, an employer should recognize a liability
for the postretirement benefit related to a collateral assignment split-dollar life insurance
arrangement. The recognition of an asset should be based on the nature and substance of the
collateral, as well as the terms of the arrangement such as (1) future cash flows to which the
employer is entitled and (2) employees obligation (and ability) to repay the employer. EITF 06-10
was effective for fiscal periods beginning after December 15, 2007. Synovus adopted the provisions
of EITF 06-10 effective January 1, 2008. There was no impact to Synovus upon adoption of EITF
06-10.
In November 2006, the EITF reached a consensus on EITF Issue No. 06-11, Accounting for Income Tax
Benefits of Dividends on Share-Based Payment Awards (EITF 06-11). Employees may receive dividend
payments (or the equivalent of) on vested and non-vested share-based payment awards. Under EITF
06-11, the Task Force concluded that a realized income tax benefit from dividends (or dividend
equivalents) that are charged to retained earnings and are paid to employees for equity classified
nonvested equity shares, nonvested equity share units, and outstanding equity share options should
be recognized as an increase in additional paid-in capital. Once the award is settled, the Company
should determine whether the cumulative tax deduction exceeded the cumulative compensation cost
recognized on the income statement. If the total tax benefit exceeds the tax effect of the
cumulative compensation cost, the excess would be an increase to additional paid-in capital. EITF
06-11 was effective for fiscal periods beginning after September 15, 2007. The impact of adoption
of EITF 06-11 was not material to Synovus financial position, results of operations or cash flows.
21
In November 2007, the SEC issued Staff Accounting Bulletin (SAB) No. 109, Written Loan Commitments
Recorded at Fair Value Through Earnings. SAB 109 supercedes SAB 105, Application of Accounting
Principles to Loan Commitments. SAB 109, consistent with SFAS No. 156, Accounting for Servicing
of Financial Assets, and SFAS No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities, requires that the expected net future cash flows related to the associated servicing
of the loan should be included in the measurement of all written loan commitments that are
accounted for at fair value through earnings. A separate and distinct servicing asset or liability
is not recognized for accounting purposes until the servicing rights have been contractually
separated from the underlying loan by sale or securitization of the loan with servicing retained.
The provisions of this bulletin were effective for derivative loan commitments issued or modified
in fiscal quarters beginning after December 15, 2007. The impact of adoption of SAB 109 was an
increase in mortgage revenues of approximately $1.2 million for the three months ended March 31,
2008.
In December 2007, the SEC issued SAB 110, Share-Based Payment. SAB 110 allows eligible public
companies to continue to use a simplified method for estimating the expected term of stock options
if their own historical exercise data no longer provides a reasonable basis. Under SAB 107,
Share-Based Payment, the simplified method was scheduled to expire for all grants made after
December 31, 2007. The provisions of this bulletin were effective on January 1, 2008. Due to the
spin-off of TSYS on December 31, 2007 and recent changes to the terms of stock option agreements,
Synovus elected to continue using the simplified method for determining the expected term component
for all share options granted during 2008.
22
ITEM 2 MANAGEMENTS DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Executive Summary
The following financial review provides a discussion of Synovus financial condition, changes in
financial condition, and results of operations.
About
Our Business
Synovus is a financial services holding company, based in Columbus, Georgia, with approximately $34
billion in assets. Synovus provides integrated financial services including banking, financial
management, insurance, mortgage, and leasing services through 37 wholly-owned subsidiary banks and
other Synovus offices in Georgia, Alabama, South Carolina, Tennessee, and Florida. At March 31,
2008, our banks ranged in size from $110.8 million to $6.09 billion in total assets.
Our Key
Financial Performance Indicators
In terms of how we measure success in our business, the following are our key financial performance
indicators:
|
|
|
|
|
|
|
Loan Growth
|
|
Credit Quality |
|
|
Core Deposit Growth
|
|
Fee Income Growth |
|
|
Net Interest Margin
|
|
Expense Management |
2008 Financial Performance Highlights
|
|
|
Net income of $81.0 million, down 19.3%, for the three months ended
March 31, 2008 as compared to income from continuing operations for the
prior year (down 53.3% excluding the net gain from the Visa IPO). |
|
|
|
|
Diluted earnings per share (EPS): $0.24, down 19.9% from continuing
operations for 2007 (down 53.6% excluding the net gain from the Visa
IPO). |
|
|
|
|
Net interest margin: 3.71% for the three months ended March 31,
2008, compared to 4.05% for the three months ended March 31, 2007, and
down 15 basis points from 3.86% for the three months ended December 31,
2007 (excluding the impact of credit costs, down 12 basis points on a
sequential quarter basis). |
|
|
|
|
Loan growth: increase of 7.5% from March 31, 2007 and 9.4%
annualized increase from December 31, 2007. |
|
|
|
|
Credit quality: |
|
|
|
Non-performing assets ratio of 2.49%, compared to 1.67% at
December 31, 2007 and 0.68% at March 31, 2007. |
|
|
|
|
Past dues over 90 days and still accruing interest as a
percentage of total loans of 0.16%, compared to 0.13% at
December 31, 2007 and 0.11% at March 31, 2007. |
|
|
|
|
Total past dues over 30 days and still accruing interest as
a percentage of total loans of 1.39% compared to 1.02% at
December 31, 2007 and 0.60% at March 31, 2007. |
|
|
|
|
Net charge-off ratio of 0.95% for the three months ended
March 31, 2008 compared to 0.91% for the three months ended |
23
|
|
|
December 31, 2007, and 0.13% for the three months ended March
31, 2007. |
|
|
|
Core deposits (total deposits less brokered deposits): declined by
2.0% from March 31, 2007. |
|
|
|
|
Non-interest income: up 60.0% for the three months ended March 31,
2008 compared to the corresponding period in the prior year. (up 15.9%
excluding the gain from the Visa IPO). |
|
|
|
|
Non-interest expense up 3.4% for the three months ended March 31,
2008, compared to the corresponding period in the prior year (up 12.3%
excluding the reduction in the Visa litigation accrual). |
Other highlights at Synovus include:
|
|
|
Visa, Inc. completed an initial public offering (the Visa IPO) in March 2008. Visa used
a portion of the proceeds from the Visa IPO to establish a $3.0 billion escrow for
settlement of covered litigation and used substantially all of the remaining portion to
redeem class B and class C shares held by Visa issuing members. Synovus recognized a
pre-tax gain of $38.5 million on redemption proceeds received from Visa, Inc. and reduced
the $36.8 million litigation accrual recognized in the second half of 2007 by $17.4 million
for its pro-rata share of the $3.0 billion escrow funded by Visa. Inc, The redemption
proceeds and reduction of the Visa litigation accrual resulted in a gain of $34.1 million,
net of tax, or $0.10 per diluted share. Synovus currently holds 1.4 million Visa class B shares which are subject to certain restrictions on sale. |
Critical Accounting Policies
The accounting and financial reporting policies of Synovus conform to U.S. generally accepted
accounting principles and to general practices within the banking industry. Synovus has
identified certain of its accounting policies as critical accounting policies. In determining
which accounting policies are critical in nature, Synovus has identified the policies that require
significant judgment or involve complex estimates. The application of these policies has a
significant impact on Synovus financial statements. Synovus financial results could differ
significantly if different judgments or estimates are applied in the application of these policies.
Allowance for Loan Losses
Notes 1 and 6 to the consolidated financial statements in Synovus 2007 annual report contain a
discussion of the allowance for loan losses. The allowance for loan losses at March 31, 2008 was
$394.8 million.
The allowance for loan losses is determined based on an analysis which assesses the probable loss
within the loan portfolio. The allowance for loan losses consists of two components: the allocated
and unallocated allowances. Both components of the allowance are available to cover inherent losses
in the portfolio. Significant judgments or estimates made in the determination of the allowance for
loan losses consist of the risk ratings for loans in the commercial loan portfolio, the valuation
of the collateral for loans that are classified as collateral-dependent impaired loans, and the
loss factors.
24
Commercial Loans Risk Ratings and Expected Loss Factors
Commercial loans are assigned a risk rating on a nine point scale. For commercial loans that are
not considered impaired, the allocated allowance for loan losses is determined based upon the
expected loss percentage factors that correspond to each risk rating.
The risk ratings are based on the borrowers credit risk profile, considering factors such as debt
service history and capacity, inherent risk in the credit (e.g., based on industry type and source
of repayment), and collateral position. Ratings 6 through 9 are modeled after the bank regulatory
classifications of special mention, substandard, doubtful, and loss. Expected loss percentage
factors are based on the probable loss including qualitative factors. The probable loss considers
the probability of default, the loss given default, and certain qualitative factors as determined
by loan category and risk rating. The probability of default and loss given default are based on
industry data. Industry data will continue to be used until sufficient internal data becomes
available. The qualitative factors consider credit concentrations, recent levels and trends in
delinquencies and nonaccrual loans, and growth in the loan portfolio. The occurrence of certain
events could result in changes to the expected loss factors. Accordingly, these expected loss
factors are reviewed periodically and modified as necessary.
Each loan is assigned a risk rating during the approval process. This process begins with a rating
recommendation from the loan officer responsible for originating the loan. The rating
recommendation is subject to approvals from other members of management and/or loan committees
depending on the size and type of credit. Ratings are re-evaluated at least every twelve months in
connection with the loan review process at each bank. Additionally, an independent holding company
credit review function evaluates each banks risk rating process at least every twelve to eighteen
months.
Impaired Loans
Management considers a loan to be impaired when the ultimate collectibility of all amounts due
according to the contractual terms of the loan agreement are in doubt. A majority of our impaired
loans are collateral-dependent. The net carrying amount of collateral-dependent impaired loans is
equal to the fair value of the collateral (less estimated costs to sell) not only at the date at
which impairment is initially recognized, but also at each subsequent reporting period.
Accordingly, our policy requires that we update the fair value of the collateral securing
collateral-dependent impaired loans each calendar quarter. Impaired loans had a net carrying value
of $391.3 million at March 31, 2008. These loans are secured by real estate, with the majority
classified as collateral-dependent loans. The fair value of the real estate securing these loans is
generally determined based upon appraisals performed by a certified or licensed appraiser.
Management also considers other factors or recent developments which could result in adjustments to
the collateral value estimates indicated in the appraisals.
Estimated losses on collateral-dependent impaired loans are typically charged-off. At March 31,
2008, $336.5 million or 65.3% of non-performing loans consisted of collateral-dependent impaired
loans for which there is no allowance for loan losses as the estimated losses have been
charged-off. These loans are recorded at the estimated fair value of the underlying collateral net
of selling costs. However, if a collateral-dependent loan is placed on impaired status at or near
the end of a calendar quarter, management records an allowance for loan losses based on the loans
risk rating while an appraisal is being obtained. At March 31, 2008, Synovus had $54.8 million in
collateral-dependent impaired loans with a recorded allocated allowance for loan
losses of $13.1 million, or 23.9% of the principal balance. The estimated losses on these loans
25
will be recorded as a charge-off during the second quarter of 2008 after the receipt of a current
appraisal or fair value estimate based on current market conditions, including absorption rates.
Management does not expect a material difference between the current allocated allowance on these
loans and the actual charge-off.
Retail Loans Expected Loss Factors
The allocated allowance for loan losses for retail loans is generally determined by segregating the
retail loan portfolio into pools of homogeneous loan categories. Expected loss factors applied to
these pools are based on the probable loss including qualitative factors. The probable loss
considers the probability of default, the loss given default, and certain qualitative factors as
determined by loan category and risk rating. Through December 31, 2007, the probability of default
loss factors were based on industry data. Beginning January 1, 2008, the probability of default
loss factors are based on internal default experience because this was the first reporting period
when sufficient internal default data became available. Synovus believes that this data provides a
more accurate estimate of probability of default considering the
lower inherent risk of the retail
portfolio and lower than expected charge-offs. This change resulted in a reduction in the allocated
allowance for loan losses for the retail portfolio of approximately $19 million during the three
months ended March 31, 2008. The loss given default factors continue to be based on industry data
because sufficient internal data is not yet available. The qualitative factors consider credit
concentrations, recent levels and trends in delinquencies and nonaccrual loans, and growth in the
loan portfolio. The occurrence of certain events could result in changes to the loss factors.
Accordingly, these loss factors are reviewed periodically and modified as necessary.
Unallocated Component
The unallocated component of the allowance for loan losses is considered necessary to provide for
certain environmental and economic factors that effect the probable loss inherent in the entire
loan portfolio. Unallocated loss factors included in the determination of the unallocated allowance
are economic factors, changes in the experience, ability, and depth of lending management and
staff, and changes in lending policies and procedures, including underwriting standards. Certain
macro- economic factors and changes in business conditions and developments could have a material
impact on the collectibility of the overall portfolio. As an example, a rapidly rising interest
rate environment could have a material impact on certain borrowers ability to pay. The unallocated
component is meant to cover such risks.
Income Taxes
Note 17 to the consolidated financial statements in Synovus 2007 Annual Report contains a
discussion of income taxes. The calculation of Synovus income tax provision is complex and
requires the use of estimates and judgments in its determination. As part of Synovus overall
business strategy, management must consider tax laws and regulations that apply to the specific
facts and circumstances under consideration. This analysis includes the amount and timing of the
realization of income tax liabilities or benefits. Management closely monitors tax developments on
both the state and federal level in order to evaluate the effect they may have on Synovus overall
tax position. At March 31, 2008, Synovus concluded that it did not need a valuation allowance for
its deferred income tax assets and had a net accrual of $6.2 million for unrecognized tax benefits.
26
Asset Impairment
Goodwill
The net carrying value of goodwill was $519.1 million at March 31, 2008 and December 31, 2007.
Under SFAS No. 142 (SFAS No. 142), Goodwill and Other Intangible Assets, goodwill is required to
be tested for impairment annually. The combination of the income approach utilizing the discounted
cash flow (DCF) method and the market approach, utilizing readily available market valuation
multiples, is used to estimate the fair value of the reporting unit.
Under the DCF method, the fair value of the reporting unit reflects the present value of the
projected earnings that will be generated by each reporting unit after taking into account the
revenues and expenses associated with the reporting unit, the relative risk that the cash flows
will occur, the contribution of other assets, and an appropriate discount rate to reflect the value
of invested capital. Cash flows are estimated for future periods based on historical data and
projections provided by management. If the actual cash flows are not consistent with Synovus
estimates, an impairment charge may result.
Under the market approach, the fair value of the reporting unit reflects the price at which similar
companies are exchanged. The multiples utilized are the average price to tangible book value, and
the average price to the previous twelve months earnings multiple.
An extended period of future significant deterioration in credit markets could impair Synovus goodwill.
Long-Lived Assets and Other Intangibles
Synovus reviews long-lived assets, such as property and equipment and other intangibles subject to
amortization, including core deposit premiums and customer relationships, for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by
the asset. If the actual cash flows are not consistent with Synovus estimates, an impairment
charge may result.
Discontinued Operations
Refer to Note 8 to the consolidated financial statements (unaudited) as of and for the three months
ended March 31, 2008 for a discussion of discontinued operations.
Balance Sheet
During the first three months of 2008, total assets increased $741.4 million. The more significant
increases consisted of loans, net of unearned income, up $618.9 million and investment securities
available for sale up $112.9 million.
Providing the necessary funding for the balance sheet growth during the first three months of 2008,
brokered deposits grew $688.5 million, Federal Home Loan Bank advances (a component of long-term
debt) increased $89.4 million, and shareholders equity increased $89.2 million compared to the
prior quarter.
27
Adoption of SFAS Nos. 157 and 159
SFAS No. 157 establishes a framework for measuring fair value in accordance with U.S. GAAP,
clarifies the definition of fair value within that framework, and expands disclosures about the use
of fair value measurements. SFAS No. 159 permits entities to make an irrevocable election, at
specified election dates, to measure eligible financial instruments and certain other items at fair
value. Fair value is used on a recurring basis for certain assets and liabilities in which fair
value is the primary basis of accounting. Fair value is used on a non-recurring basis for
collateral-dependent impaired loans. Examples of recurring use of fair value include trading
account assets, mortgage loans held for sale, investment securities available for sale, private
equity investments, derivative instruments, and trading account liabilities. The extent to which
fair value is used on a recurring basis was expanded upon the adoption of SFAS No. 159 during the
first quarter, effective on January 1, 2008. At March 31, 2008, approximately $4.64 billion, or
13.7%, of total assets were recorded at fair value, which includes items measured on a recurring
and non-recurring basis.
Fair value is the price that could be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants. Fair value determination in accordance with
SFAS No. 157 requires that a number of significant judgments be made. The standard also
establishes a three-level hierarchy for fair value measurements based upon the transparency of
inputs to the valuation of an asset or liability as of the measurement date. Synovus has an
established and well-documented process for determining fair values and fair value hierarchy
classifications. Fair value is based upon quoted market prices, where available (Level 1). Where
prices for identical assets and liabilities are not available, SFAS No. 157 requires that similar
assets and liabilities are identified (Level 2). If observable market prices are unavailable or
impracticable to obtain, or similar assets cannot be identified, then fair value is estimated using
internally-developed valuation modeling techniques such as discounted cash flow analyses that
primarily use as inputs market-based or independently sourced market parameters (Level 3). These
modeling techniques incorporate assessments regarding assumptions that market participants would
use in pricing the asset or the liability. The assessments with respect to assumptions that market
participants would make are inherently difficult to determine and use of different assumptions
could result in material changes to these fair value measurements.
The following table summarizes the assets accounted for at fair value on a recurring basis by level
within the valuation hierarchy at March 31, 2008.
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
Investment |
|
|
|
|
|
|
|
|
|
|
|
|
Trading |
|
|
Mortgage |
|
|
securities |
|
|
|
|
|
|
|
|
|
|
|
|
account |
|
|
loans held |
|
|
available for |
|
|
Private equity |
|
|
Derivative |
|
|
|
|
(dollars in millions) |
|
assets |
|
|
for sale |
|
|
sale |
|
|
investments |
|
|
assets |
|
|
Total |
|
Level 1 |
|
|
12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
|
% |
Level 2 |
|
|
88 |
|
|
|
100 |
|
|
|
96 |
|
|
|
|
|
|
|
96 |
|
|
|
95 |
|
Level 3 |
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
100 |
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets held at
fair value on
the balance sheet |
|
$ |
34.7 |
|
|
$ |
141.6 |
|
|
$ |
3,779.9 |
|
|
$ |
61.1 |
|
|
$ |
190.7 |
|
|
$ |
4,208.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 assets as a
percentage of total
assets measured at
fair value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.60 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
The following table summarizes the liabilities accounted for at fair value on a recurring basis by
level within the valuation hierarchy at March 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008 |
|
|
|
Brokered |
|
|
|
|
|
|
|
|
|
|
|
|
certificates of |
|
|
Trading account |
|
|
Derivative |
|
|
|
|
(dollars in millions) |
|
deposit |
|
|
liabilities |
|
|
liabilities |
|
|
Total |
|
Level 1 |
|
|
|
% |
|
|
|
|
|
|
7 |
|
|
|
2 |
% |
Level 2 |
|
|
100 |
|
|
|
100 |
|
|
|
93 |
|
|
|
98 |
|
Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
held at fair value
on the balance
sheet |
|
$ |
232.6 |
|
|
$ |
5.0 |
|
|
$ |
109.0 |
|
|
$ |
346.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 liabilities
as a percentage of
total liabilities
measured at fair
value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
In estimating the fair values for investment securities and most derivative financial instruments,
independent, third-party market prices are the best evidence of exit price and where available,
Synovus bases estimates on such prices. If such third-party market prices are not available on the
exact securities that Synovus owns, fair values are based on the market prices of similar
instruments, third-party broker quotes, or are estimated using industry-standard or proprietary
models whose inputs may be unobservable. When market observable data is not available, the
valuation of financial instruments becomes more subjective and involves substantial judgment. The
need to use unobservable inputs generally results from the lack of market liquidity for certain
types of loans and securities, which results in diminished observability of both actual trades and
assumptions that would otherwise be available to value these instruments. When fair values are
estimated based on internal models, relevant market indices that correlate to the underlying
collateral are considered, along with assumptions such as interest rates, prepayment speeds,
default rates, and discount rates.
The valuation for MLHFS is based upon forward settlement of a pool of loans of identical coupon,
maturity, product, and credit attributes. The model is continuously updated with available market
and historical data. The valuation methodology of nonpublic private equity investments requires
significant management judgment due to the absence of quoted market prices, inherent lack of
liquidity, and the long-term nature of such assets. Private equity investments are valued
initially based upon transaction price. Thereafter, Synovus uses information provided by the fund
managers in the initial determination of estimated fair value. Valuation factors such as recent or
proposed purchase or sale of debt or equity of the issuer, pricing by other dealers in similar
securities, size of position held, liquidity of the market and changes in economic conditions
affecting the issuer are used in the final determination of estimated fair value.
Valuation methodologies are reviewed each quarter to ensure that fair value estimates are
appropriate. Any changes to the valuation methodologies are reviewed by management to confirm the
changes are justified. As markets and products develop and the pricing for certain products
becomes more or less transparent, Synovus continues to refine its valuation methodologies. For a
detailed discussion of valuation methodologies, refer to Note 5 to the consolidated financial
statements (unaudited) as of and for the three months ended March 31, 2008.
29
Trading Account Assets
The trading account assets portfolio is substantially comprised of mortgage-backed securities which
are bought and held principally for sale and delivery to correspondent and retail customers of
Synovus. Trading account assets are reported on the consolidated balance sheets at fair value,
with unrealized gains and losses included in other operating income on the consolidated statements
of income. Synovus recognized a net gain on trading account assets of $758 thousand for the three
months ended March 31, 2008, compared to a net gain of $238 thousand for the same period in the
prior year.
30
Loans
The following table compares the composition of the loan portfolio at March 31, 2008, December 31,
2007, and March 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans |
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
|
|
|
|
March 31, |
|
|
|
|
|
|
|
|
|
|
|
2008 vs. |
|
|
|
|
|
|
2008 vs. |
|
|
|
Total Loans |
|
|
Dec. 31, |
|
|
|
|
|
March 31, |
|
(Dollars in thousands) |
|
March 31, |
|
|
Dec. 31, |
|
|
2007 |
|
|
March 31, |
|
|
2007 |
|
Loan Type |
|
2008 |
|
|
2007 |
|
|
% change(1) |
|
|
2007 |
|
|
% change |
|
Multi-family |
|
$ |
505,828 |
|
|
$ |
452,163 |
|
|
|
47.7 |
% |
|
$ |
519,219 |
|
|
|
(2.6 |
)% |
Hotels |
|
|
707,916 |
|
|
|
614,979 |
|
|
|
60.8 |
|
|
|
661,985 |
|
|
|
6.9 |
|
Office buildings |
|
|
983,935 |
|
|
|
953,093 |
|
|
|
13.0 |
|
|
|
852,973 |
|
|
|
15.4 |
|
Shopping centers |
|
|
890,651 |
|
|
|
834,025 |
|
|
|
27.3 |
|
|
|
742,344 |
|
|
|
20.0 |
|
Commercial
development |
|
|
891,681 |
|
|
|
961,271 |
|
|
|
(29.1 |
) |
|
|
866,921 |
|
|
|
2.9 |
|
Other investment
property |
|
|
835,686 |
|
|
|
714,296 |
|
|
|
68.4 |
|
|
|
563,993 |
|
|
|
48.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment
Properties |
|
|
4,815,697 |
|
|
|
4,529,827 |
|
|
|
25.4 |
|
|
|
4,207,435 |
|
|
|
14.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family construction |
|
|
2,153,555 |
|
|
|
2,238,925 |
|
|
|
(15.3 |
) |
|
|
2,404,235 |
|
|
|
(10.4 |
) |
1-4 family perm
/mini-perm |
|
|
1,310,397 |
|
|
|
1,273,843 |
|
|
|
11.5 |
|
|
|
1,145,235 |
|
|
|
14.4 |
|
Residential development |
|
|
2,314,776 |
|
|
|
2,311,459 |
|
|
|
0.6 |
|
|
|
2,178,573 |
|
|
|
6.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total 1-4 Family
Properties |
|
|
5,778,728 |
|
|
|
5,824,227 |
|
|
|
(3.1 |
) |
|
|
5,728,043 |
|
|
|
0.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Acquisition |
|
|
1,545,146 |
|
|
|
1,545,933 |
|
|
|
(0.2 |
) |
|
|
1,516,526 |
|
|
|
1.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commercial
Real Estate |
|
|
12,139,571 |
|
|
|
11,899,987 |
|
|
|
8.1 |
|
|
|
11,452,004 |
|
|
|
6.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial,
and agricultural |
|
|
6,657,591 |
|
|
|
6,420,689 |
|
|
|
14.8 |
|
|
|
6,052,487 |
|
|
|
10.0 |
|
Owner-occupied |
|
|
4,315,945 |
|
|
|
4,226,707 |
|
|
|
8.5 |
|
|
|
4,090,859 |
|
|
|
5.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commercial and
Industrial |
|
|
10,973,536 |
|
|
|
10,647,396 |
|
|
|
12.3 |
|
|
|
10,143,346 |
|
|
|
8.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity |
|
|
1,584,299 |
|
|
|
1,543,701 |
|
|
|
10.6 |
|
|
|
1,401,898 |
|
|
|
13.0 |
|
Consumer mortgages |
|
|
1,663,132 |
|
|
|
1,667,924 |
|
|
|
(1.2 |
) |
|
|
1,518,168 |
|
|
|
9.5 |
|
Credit card |
|
|
297,099 |
|
|
|
291,149 |
|
|
|
8.2 |
|
|
|
273,462 |
|
|
|
8.6 |
|
Other retail loans |
|
|
503,943 |
|
|
|
494,591 |
|
|
|
7.6 |
|
|
|
483,412 |
|
|
|
4.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Retail |
|
|
4,048,473 |
|
|
|
3,997,365 |
|
|
|
5.1 |
|
|
|
3,676,940 |
|
|
|
10.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned Income |
|
|
(44,070 |
) |
|
|
(46,163 |
) |
|
|
(18.2 |
) |
|
|
(48,609 |
) |
|
|
(9.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
27,117,510 |
|
|
$ |
26,498,585 |
|
|
|
9.4 |
% |
|
$ |
25,223,681 |
|
|
|
7.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Percentage changes are annualized. |
31
At March 31, 2008, loans outstanding were $27.12 billion, an increase of $1.89 billion, or 7.5%,
compared to March 31, 2007. On a sequential quarter basis, total loans outstanding grew by $618.9
million or 9.4% annualized.
Total loans as of March 31, 2008 for the five southeastern state areas in which Synovus banks are
located are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec. 31, |
|
|
March 31, |
|
|
|
March 31, 2008 |
|
|
2007 |
|
|
2007 |
|
|
|
|
|
|
|
As a % of |
|
|
As a % of |
|
|
As a % of |
|
|
|
|
|
|
|
Total Loan |
|
|
Total Loan |
|
|
Total Loan |
|
(Dollars in thousands) |
|
Total Loans |
|
|
Portfolio |
|
|
Portfolio |
|
|
Portfolio |
|
Georgia |
|
$ |
14,305,323 |
|
|
|
52.8 |
% |
|
|
52.5 |
|
|
|
52.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Atlanta |
|
|
5,403,563 |
|
|
|
19.9 |
% |
|
|
19.9 |
|
|
|
19.7 |
|
Florida |
|
|
3,608,887 |
|
|
|
13.3 |
% |
|
|
13.6 |
|
|
|
13.8 |
|
West Coast of Florida |
|
|
2,851,037 |
|
|
|
10.5 |
% |
|
|
10.8 |
|
|
|
11.1 |
|
South Carolina |
|
|
4,075,206 |
|
|
|
15.0 |
% |
|
|
15.0 |
|
|
|
14.7 |
|
Myrtle Beach |
|
|
599,570 |
|
|
|
2.2 |
% |
|
|
2.2 |
|
|
|
2.4 |
|
Tennessee |
|
|
1,277,372 |
|
|
|
4.7 |
% |
|
|
4.8 |
|
|
|
4.4 |
|
Alabama |
|
|
3,850,722 |
|
|
|
14.2 |
% |
|
|
14.1 |
|
|
|
14.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
27,117,510 |
|
|
|
100.0 |
% |
|
|
100.0 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2008, total loans in the Atlanta market were $5.40 billion, or 19.9% of the total loan
portfolio, and increased $435.6 million, or 8.8%, compared to the same period in the prior year.
The Atlanta market includes commercial real estate (CRE) loans of $3.13 billion (which includes
$1.67 billion in 1-4 family properties) and commercial and industrial (C&I) loans of $1.88 billion
at March 31, 2008. Compared to March 31, 2007, CRE loans and C&I loans in the Atlanta market
increased by $118.5 million, or 3.9%, and $294.5 million, or 18.6%, respectively. On a sequential
quarter basis, Atlanta market loans grew at an annualized rate of 9.0%, CRE loans grew at an
annualized rate of 7.4% (including a 3.4% decline in 1-4 family properties), and C&I loans grew at
an annualized rate of 12.1%.
Total loans in the West Coast of Florida market were $2.85 billion, or 10.5% of the total loan
portfolio at March 31, 2008, and increased $55.1 million, or 2.0% compared to the same period in
the prior year. The West Coast of Florida market includes CRE loans of $1.36 billion (which
includes $538.5 million in 1-4 family properties) and C&I loans of $1.15 billion at March 31, 2008.
Compared to March 31, 2007, CRE loans in the West Coast of Florida market decreased by $120.3
million, or 8.1%, and C&I loans increased by $152.2 million, or 15.2%, respectively. On a
sequential quarter basis, loans within the West Coast of Florida market declined at an annualized
rate of 1.8%, CRE loans declined at an annualized rate of 17.5%, and C&I loans grew at an
annualized rate of 15.0%.
Loans for investment property grew by $285.9 million, or 25.4% annualized, from December 31, 2007,
and $608.3 million, or 14.5%, from March 31, 2007. The primary areas which contributed to the
growth within the investment property portfolio were within the multi-family, hotel, and other
investment property (primarily leased warehouses) categories. The growth reflects the
32
impact of a lack of exit capabilities in the market place with commercial mortgage-backed
securities (CMBS), which has increased the duration of the investment property portfolio.
Commercial loans for 1-4 family properties at March 31, 2008 were $5.78 billion, down 3.1%
annualized from December 31, 2007 and accounted for 21.2% of total loans outstanding as of March
31, 2008. The following table shows the composition of the 1-4 family portfolio as of March 31,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008 |
|
|
|
|
|
|
|
% of Total |
|
|
|
|
|
|
% of Total |
|
|
|
1-4 Family |
|
|
1-4 Family |
|
|
1-4 Family |
|
|
1-4 Family |
|
(Dollars in thousands) |
|
Portfolio |
|
|
Portfolio |
|
|
NPL |
|
|
NPL |
|
Georgia |
|
$ |
3,360,096 |
|
|
|
58.1 |
% |
|
$ |
239,197 |
|
|
|
69.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Atlanta |
|
|
1,672,430 |
|
|
|
28.9 |
% |
|
|
199,188 |
|
|
|
57.5 |
% |
Florida |
|
|
697,617 |
|
|
|
12.1 |
% |
|
|
62,512 |
|
|
|
18.1 |
% |
West Coast of Florida |
|
|
538,455 |
|
|
|
9.3 |
% |
|
|
61,677 |
|
|
|
17.8 |
% |
South Carolina |
|
|
935,900 |
|
|
|
16.2 |
% |
|
|
32,368 |
|
|
|
9.3 |
% |
Myrtle Beach |
|
|
236,900 |
|
|
|
4.1 |
% |
|
|
28,400 |
|
|
|
8.2 |
% |
Tennessee |
|
|
183,803 |
|
|
|
3.2 |
% |
|
|
3,353 |
|
|
|
1.0 |
% |
Alabama |
|
|
601,312 |
|
|
|
10.4 |
% |
|
|
8,753 |
|
|
|
2.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,778,728 |
|
|
|
100.0 |
% |
|
$ |
346,183 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail loans at March 31, 2008 totaled $4.05 billion, representing 14.9% of the total loan
portfolio. Total retail loans grew by 10.1% compared to March 31, 2007 and grew 5.1% annualized
compared to December 31, 2007, led principally by growth in home equity and consumer mortgage
loans. The home equity loan portfolio consists primarily of loans with strong credit scores,
conservative debt-to-income ratios, and appropriate loan-to-value ratios. The utilization rate
(total amount outstanding as a percentage of total available lines) of this portfolio was
approximately 58%, unchanged from December 31, 2007. These loans are primarily extended to
customers who have an existing banking relationship with Synovus.
Credit Quality
The
non-performing assets ratio (NPA ratio-non-performing loans plus impaired loans held for sale and other
real estate divided by total loans plus other real estate) at March 31, 2008 was 2.49% compared to
0.68% at March 31, 2007 and 1.67% at December 31, 2007. The net charge-off ratio for the three
months ended March 31, 2008 was 0.95% compared to 0.13% for the three months ended March 31, 2007
and 0.46% for the year ended December 31, 2007.
Non-performing assets were $679.3 million at March 31, 2008, an increase of $235.8 million compared
to December 31, 2007, which included increases of $173.2 million in non-performing loans, $42.3
million in impaired loans held for sale, and $20.3 million in other real estate (ORE). The increase
in non-performing assets was significantly impacted by the Atlanta market, which increased by $145
million in non-performing loans during the three months ended March 31, 2008. Total loans within
the Atlanta portfolio accounted for 117 basis points of the non-performing assets ratio at March
31, 2008, and 57 basis points of the sequential quarter increase. To a lesser extent, total loans
within the West Coast of Florida portfolio also impacted non-performing assets and accounted for 54
basis points of the non-performing assets ratio as of March 31, 2008 and 1 basis point of the
sequential quarter increase.
The following table shows the NPA ratio by state as of March 31, 2008, December 31, 2007, and March
31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
March 31, |
|
|
December 31, |
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2007 |
|
Georgia |
|
|
2.96 |
% |
|
|
1.70 |
% |
|
|
0.75 |
% |
Atlanta |
|
|
5.82 |
|
|
|
3.06 |
|
|
|
1.14 |
|
Florida |
|
|
4.16 |
|
|
|
4.12 |
|
|
|
0.87 |
|
West Coast of Florida |
|
|
5.11 |
|
|
|
5.11 |
|
|
|
1.01 |
|
South Carolina |
|
|
1.28 |
|
|
|
0.55 |
|
|
|
0.35 |
|
Myrtle Beach |
|
|
4.93 |
|
|
|
0.56 |
|
|
|
|
|
Tennessee |
|
|
1.15 |
|
|
|
0.63 |
|
|
|
0.81 |
|
Alabama |
|
|
0.87 |
|
|
|
0.71 |
|
|
|
0.51 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2.49 |
% |
|
|
1.67 |
% |
|
|
0.68 |
% |
|
|
|
|
|
|
|
|
|
|
33
Net charge-offs for the three months ended March 31, 2008 were $63.8 million, an increase of $55.7
million compared to the same period a year ago, and an increase of $3.9 million compared to the
three months ended December 31, 2007. Net charge-offs for the three months ended March 31, 2008
consisted of $28.2 million, or 43 basis points, of charge-offs within the West Coast of Florida
portfolio (which included $21 million in charge-offs for impaired loans held for sale), $18.5
million or 28 basis points in charge-offs from the Atlanta market, and $4.8 million in charge-offs
from the Myrtle Beach portfolio.
Provision expense for the three months ended March 31, 2008 was $91.0 million, an increase of $20.4
million compared to the three months ended December 31, 2007 and $70.5 million compared to the
three months ended March 31, 2007. The majority of the increase in provision expense was related
to the West Coast of Florida market, which accounted for $35.8 million of the total provision
expense (including a $21 million provision expense to provide for charge-offs that were recorded on
impaired loans that are now held for sale and therefore carried at the estimated sales value.
Additionally, the Atlanta market accounted for $17.5 million of the total provision expense for the
first quarter. For the three months ended March 31, 2008, total provision expense covered net
charge-offs by 1.43 times compared to 2.52 times for the same period a year ago. The decrease in
the provision expense to net charge-off ratio is primarily due to an increase in
collateral-dependent impaired loans with no reserve, which increased $274.7 million to $336.5
million at March 31, 2008 compared to the same period in the prior year.
Total past due loans (and still accruing interest) were 1.39% of total loans at March 31, 2008
compared to 1.02% at December 31, 2007, and 0.60% at March 31, 2007. The sequential quarter
increase was primarily due to increases in the one to four family residential portfolios in the
Atlanta and West Coast of Florida markets. Loans over 90 days past due and still accruing interest
at March 31, 2008 were $43.0 million, or 0.16% of total loans, compared to 0.13% at December 31,
2007, and 0.11% at March 31, 2007.
The allowance for loan losses was $394.8 million, or 1.46% of net loans, at March 31, 2008 compared
to $367.6 million, or 1.39% of net loans, at December 31, 2007, and $326.8 million, or 1.30% of net
loans, at March 31, 2007. The allowance for loan losses to non-performing loans coverage was
76.62% at March 31, 2008, compared to 107.46% at December 31, 2007, and 235.48% at March 31, 2007.
The decline in the coverage ratio was impacted by the increase in collateral-dependent impaired
loans, which have no allowance for loan losses as the estimated losses on these credits have been
charged-off. Therefore, a more meaningful allowance for loan losses coverage ratio is the
allowance to non-performing loans (excluding collateral-dependent impaired loans for which there is
no related allowance for loan losses), which was 220.89% at March 31, 2008, compared to 337.49% at
December 31, 2007 and 424.79% at March 31, 2007.
During times when non-performing loans are not significant, this coverage ratio which measures
the allowance for loan losses (which is there for the entire loan portfolio) against a small
non-performing loans total appears very large. As non-performing loans increase, this ratio will
decline even with significant incremental additions to the allowance.
34
The allowance for loan losses allocated to non-performing loans (exclusive of collateral-dependent
impaired loans which have no allowance, as the estimated losses on these loans have already been
recognized) is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
(Dollars in millions) |
|
March 31, 2008 |
|
2007 |
|
March 31, 2007 |
Non-performing loans,
excluding collateral
dependent impaired
loans which have no
allowance |
|
$ |
178.8 |
|
|
$ |
108.9 |
|
|
$ |
76.9 |
|
Total allocated
allowance for loan
losses on above loans |
|
$ |
37.4 |
|
|
$ |
20.5 |
|
|
$ |
11.1 |
|
Allocated allowance
as a % of loans |
|
|
20.9 |
% |
|
|
18.8 |
% |
|
|
14.4 |
% |
Collateral-dependent impaired loans which have no allowance at March 31, 2008 (because they are
carried at fair value net of selling costs) totaled $336.5 million, or 65.3% of non-performing
loans. Net charge-offs recognized on collateral dependent impaired loans during the three months
ended March 31, 2008 were $35.7 million (in addition to $21 million in charge-offs recognized
during the same period on impaired loans that are now held for sale and therefore carried at the
estimated liquidation value).
35
The table below includes selected credit quality metrics.
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
March 31, 2008 |
|
|
December 31, 2007 |
|
Non-performing loans (1) |
|
$ |
515,302 |
|
|
|
342,082 |
|
Impaired loans held for sale (2) |
|
|
42,270 |
|
|
|
|
|
Other real estate |
|
|
121,753 |
|
|
|
101,487 |
|
|
|
|
|
|
|
|
Non-performing assets |
|
$ |
679,325 |
|
|
|
443,569 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs Quarter |
|
$ |
63,813 |
|
|
|
59,916 |
|
|
|
|
|
|
|
|
Net charge-offs/Avg. loans Quarter |
|
|
0.95 |
% |
|
|
0.91 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans over 90 days past due and still
accruing |
|
$ |
43,009 |
|
|
|
33,663 |
|
|
|
|
|
|
|
|
As a % of loans |
|
|
0.16 |
% |
|
|
0.13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total past due loans and still accruing |
|
$ |
377,999 |
|
|
|
270,496 |
|
|
|
|
|
|
|
|
As a % of loans |
|
|
1.39 |
% |
|
|
1.02 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
$ |
394,848 |
|
|
|
367,613 |
|
|
|
|
|
|
|
|
Allowance for loan losses as a % of
loans |
|
|
1.46 |
% |
|
|
1.39 |
% |
|
|
|
|
|
|
|
Non-performing loans as a % of total
loans |
|
|
1.90 |
% |
|
|
1.29 |
% |
|
|
|
|
|
|
|
Non-performing assets as a % of total
loans, impaired loans held for sale,
and ORE |
|
|
2.49 |
% |
|
|
1.67 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance to non-performing loans |
|
|
76.62 |
% |
|
|
107.46 |
% |
|
|
|
|
|
|
|
Allowance to non-performing loans,
excluding impaired loans for which
there is no related allowance for loan
losses (3) |
|
|
220.89 |
% |
|
|
337.49 |
% |
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes $336.5 million and $233.2 million at March 31, 2008 and December 31, 2007,
respectively, of loans considered to be impaired (consisting of collateral-dependent loans)
for which there is no related allowance for loan losses determined in accordance with SFAS
No. 114, Accounting by Creditors for Impairment of a Loan. The allowance on these loans
is zero because the estimated losses on collateral-dependent impaired loans have been
charged-off, at the time these loans were considered to be impaired. |
|
(2) |
|
Represent impaired loans that are intended to be sold. Held for sale loans are carried
at lower of cost or fair value. |
|
(3) |
|
Impaired loans for which there is no related allowance for loan losses as described in
note (1). |
Management continuously monitors non-performing and past due loans, to prevent further
deterioration regarding the condition of these loans. Management believes non-performing loans and
loans past due over 90 days and still accruing include all material loans where known information
about possible credit problems of borrowers causes management to have serious doubts as to the
collectibility of amounts due according to the contractual terms of the loan agreement.
36
The following table shows the composition of the loan portfolio and non-performing loans
(classified by loan type) as of March 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Total |
|
|
|
|
|
|
|
% of |
|
|
Non- |
|
|
Non- |
|
(Dollars in thousands) |
|
|
|
|
|
Total Loans |
|
|
performing |
|
|
performing |
|
Loan Type |
|
Total Loans |
|
|
Outstanding |
|
|
Loans |
|
|
Loans |
|
Multi-family |
|
$ |
505,828 |
|
|
|
1.9 |
% |
|
$ |
1,751 |
|
|
|
0.3 |
% |
Hotels |
|
|
707,916 |
|
|
|
2.6 |
|
|
|
437 |
|
|
|
0.1 |
|
Office buildings |
|
|
983,935 |
|
|
|
3.6 |
|
|
|
2,590 |
|
|
|
0.5 |
|
Shopping centers |
|
|
890,651 |
|
|
|
3.3 |
|
|
|
734 |
|
|
|
0.1 |
|
Commercial development |
|
|
891,681 |
|
|
|
3.3 |
|
|
|
12,060 |
|
|
|
2.4 |
|
Other investment property |
|
|
835,686 |
|
|
|
3.1 |
|
|
|
3,493 |
|
|
|
0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment
Properties |
|
|
4,815,697 |
|
|
|
17.8 |
|
|
|
21,065 |
|
|
|
4.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family construction |
|
|
2,153,555 |
|
|
|
7.9 |
|
|
|
193,715 |
|
|
|
37.6 |
|
1-4 family perm
/mini-perm |
|
|
1,310,397 |
|
|
|
4.8 |
|
|
|
36,306 |
|
|
|
7.1 |
|
Residential development |
|
|
2,314,776 |
|
|
|
8.5 |
|
|
|
116,161 |
|
|
|
22.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total 1-4 Family
Properties |
|
|
5,778,728 |
|
|
|
21.2 |
|
|
|
346,182 |
|
|
|
67.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Acquisition |
|
|
1,545,146 |
|
|
|
5.8 |
|
|
|
46,996 |
|
|
|
9.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commercial Real
Estate |
|
|
12,139,571 |
|
|
|
44.8 |
|
|
|
414,243 |
|
|
|
80.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial,
and agricultural |
|
|
6,657,591 |
|
|
|
24.6 |
|
|
|
61,701 |
|
|
|
12.0 |
|
Owner-occupied |
|
|
4,315,945 |
|
|
|
15.9 |
|
|
|
21,317 |
|
|
|
4.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commercial and
Industrial Loans |
|
|
10,973,536 |
|
|
|
40.5 |
|
|
|
83,018 |
|
|
|
16.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity |
|
|
1,584,299 |
|
|
|
5.8 |
|
|
|
5,689 |
|
|
|
1.1 |
|
Consumer mortgages |
|
|
1,663,132 |
|
|
|
6.1 |
|
|
|
10,734 |
|
|
|
2.1 |
|
Credit card |
|
|
297,099 |
|
|
|
1.1 |
|
|
|
|
|
|
|
|
|
Other retail loans |
|
|
503,943 |
|
|
|
1.9 |
|
|
|
1,618 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Retail |
|
|
4,048,473 |
|
|
|
14.9 |
|
|
|
18,041 |
|
|
|
3.5 |
|
Unearned Income |
|
|
(44,070 |
) |
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
27,117,510 |
|
|
|
100.0 |
% |
|
$ |
515,302 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
37
Deposits
Total deposits at March 31, 2008 were $25.66 billion, an increase of $703.4 million, or 11.3%
annualized, compared to December 31, 2007, and an increase of $566.1 million, or 2.3%, compared to
March 31, 2007. Total deposits excluding brokered deposits (core deposits) remained relatively
flat, and increased $14.9 million, or 0.3% annualized, compared to December 31, 2007, and decreased
$424.8 million, or 2.0%, compared to March 31, 2007 . On a sequential quarter basis, average core
deposits declined $324.7 million, or 6.1% annualized. The primary contributor to the minimal growth
in core deposits on a sequential quarter basis was a seasonal decline in money market and NOW
accounts, primarily state, county, and municipal deposits. On a year over year basis the decline
was primarily related to a run-off of premium rate certificates of deposit. Actions currently being
taken by Synovus to address deposit growth include modifications to the incentive compensation
programs to include a significant component of actual incentives paid to be based on core deposits
growth. Additionally, Synovus implemented a new company-wide sales campaign on April 1st
with a focus on non-interest bearing deposit accounts in both the commercial and retail customer
bases. Synovus has also developed money market and NOW account products which will be offered to
commercial and retail customers beginning May of 2008.
Capital Resources and Liquidity
Synovus has always placed great emphasis on maintaining a strong capital base and continues to
exceed regulatory capital requirements. Management is committed to maintaining a capital level
sufficient to assure shareholders, customers, and regulators that Synovus is financially sound, and
to enable Synovus to sustain an appropriate degree of leverage to provide a desirable level of
profitability. Based on internal calculations and previous regulatory exams, each of the subsidiary
banks is currently in compliance with regulatory capital guidelines. Total risk-based capital was
$3.99 billion at March 31, 2008, compared to $3.99 billion at December 31, 2007. The ratio of
total risk-based capital to risk-weighted assets was 12.46% at March 31, 2008 compared to 12.66% at
December 31, 2007. The leverage ratio was 8.96% at March 31, 2008 compared to 8.65% at December
31, 2007. The equity-to-assets ratio was 10.46% at March 31, 2008 compared to 10.42% at year-end
2007. The tangible equity-to-assets ratio was 8.99% at March 31, 2008 compared to 8.91% at
December 31, 2007.
Synovus management, operating under liquidity and funding policies approved by the Board of
Directors, actively analyzes and manages the liquidity position in coordination with the subsidiary
banks. Management must ensure that adequate liquidity, at a reasonable cost, is available to meet
the cash flow needs of depositors, borrowers, and creditors. Management constantly monitors and
maintains appropriate levels of assets and liabilities so as to provide adequate funding sources to
meet estimated customer deposit withdrawals and future loan requests. Subsidiary banks have access
to overnight federal funds lines with various financial institutions, which can be drawn upon for
short-term liquidity needs. Subsidiary banks utilization of this funding source declined during
the first quarter due to increases in long-term debt and total deposits.
The Parent Company requires cash for various operating needs including dividends to shareholders,
acquisitions, capital infusions into subsidiaries, the servicing of debt, and the payment of
general corporate expenses. The primary source of liquidity for the Parent Company is dividends
from the subsidiary banks, which are governed by certain rules and regulations of various state and
federal banking regulatory agencies. As a short-term liquidity source, the
Parent Company has access to a $25 million line of credit with an unaffiliated banking
38
organization. Synovus had no borrowings outstanding on this line of credit at March 31, 2008.
The consolidated statements of cash flows detail cash flows from operating, investing, and
financing activities. For the three months ended March 31, 2008, operating activities provided net
cash of $204.1 million, investing activities used $812.3 million, and financing activities provided
$515.2 million, resulting in a decrease in cash and due from banks of $92.9 million.
Earning Assets, Sources of Funds, and Net Interest Income
Average total assets of continuing operations for the first three months of 2008 were $33.04
billion, an increase of 7.8% compared to the first three months of 2007. Average earning assets
increased 6.6% in the first three months of 2008 compared to the same period in 2007, and
represented 91.8% of average total assets. When compared to the same period last year, average
deposits increased $605.4 million, average federal funds purchased and other short-term liabilities
increased $553.3 million, average long-term debt increased $489.2 million, and average
shareholders equity increased $728.6 million. This growth provided the funding for $1.82 billion
growth in average net loans and $153.6 million growth in average investment securities available
for sale.
Net interest income for the three months ended March 31, 2008 was $278.6 million, a decrease of
$4.3 million, or 1.5%, compared to $282.9 million for the three months ended March 31, 2007.
The net interest margin for the three months ended March 31, 2008 was 3.71%, down 34 basis points
from 4.05% for the three months ended March 31, 2007. Compared to the three months ended March 31,
2007, earning asset yields decreased by 113 basis points, principally driven by a 134 basis point
decrease in loan yields, which was partially offset by a decrease of 79 basis points in the
effective cost of funds. The decrease in the effective cost of funds compared to the three months
ended March 31, 2007 was primarily due to an overall decline in short-term interest rates. This
decline in market rates impacted all funding sources, the most significant of which were core money
market accounts which decreased 148 basis points and federal funds purchased and other short-term
liabilities which decreased by 168 basis points.
On a sequential quarter basis, net interest income decreased by $8.0 million, while the net
interest margin decreased 15 basis points to 3.71%. The net interest margin decline included a 3
basis point decrease related to increased credit costs, but was principally driven by reductions in
short-term rates by the Federal Reserve Bank totaling 200 basis points during the quarter. Yields
on earning assets declined by 73 basis points as loan yields decreased by 85 basis points. This
decrease was due to a 130 basis point decrease in the average prime rate and a higher level of
non-performing loans and interest charge-offs. The effective cost of funds decreased by 58 basis
points. This decrease was driven by a 93 basis point decrease in core money market yields and a
119 basis point decrease in the cost of federal funds purchased and other short-term liabilities.
Synovus anticipates some further margin pressure in the near term as the impact of the short-term
interest rate decreases implemented by the Federal Reserve Bank in
March and April is fully realized.
The direction of the margin during the remainder of 2008 will be significantly influenced by trends
in credit costs, deposit pricing competition, and any additional Federal Reserve rate actions.
Moderation of these factors could have a favorable impact on the net interest margin.
39
Quarterly yields earned on average interest-earning assets and rates paid on average
interest-bearing liabilities for the five most recent quarters are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
First |
|
|
Fourth |
|
|
Third |
|
|
Second |
|
|
First |
|
(dollars in thousands) |
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
Interest Earning Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable investment securities |
|
$ |
3,485,370 |
|
|
|
3,496,843 |
|
|
|
3,495,017 |
|
|
|
3,420,831 |
|
|
|
3,301,137 |
|
Yield |
|
|
5.01 |
% |
|
|
4.90 |
|
|
|
4.82 |
|
|
|
4.83 |
|
|
|
4.77 |
|
Tax-exempt investment securities |
|
$ |
154,408 |
|
|
|
164,587 |
|
|
|
170,211 |
|
|
|
178,183 |
|
|
|
185,012 |
|
Yield |
|
|
7.00 |
% |
|
|
6.82 |
|
|
|
6.72 |
|
|
|
6.75 |
|
|
|
6.84 |
|
Trading account assets |
|
$ |
36,652 |
|
|
|
29,698 |
|
|
|
56,217 |
|
|
|
59,311 |
|
|
|
64,204 |
|
Yield |
|
|
6.96 |
% |
|
|
7.05 |
|
|
|
7.15 |
|
|
|
6.47 |
|
|
|
5.65 |
|
Commercial loans (1) |
|
$ |
22,763,954 |
|
|
|
22,157,460 |
|
|
|
21,820,687 |
|
|
|
21,739,107 |
|
|
|
21,242,921 |
|
Yield |
|
|
6.79 |
% |
|
|
7.69 |
|
|
|
8.13 |
|
|
|
8.20 |
|
|
|
8.24 |
|
Consumer loans |
|
$ |
931,644 |
|
|
|
928,942 |
|
|
|
915,847 |
|
|
|
896,267 |
|
|
|
928,256 |
|
Yield |
|
|
7.86 |
% |
|
|
8.05 |
|
|
|
8.17 |
|
|
|
8.14 |
|
|
|
8.01 |
|
Mortgage loans |
|
$ |
1,241,018 |
|
|
|
1,237,962 |
|
|
|
1,152,621 |
|
|
|
1,110,754 |
|
|
|
1,081,760 |
|
Yield |
|
|
6.84 |
% |
|
|
7.04 |
|
|
|
7.10 |
|
|
|
7.03 |
|
|
|
6.98 |
|
Credit card loans |
|
$ |
296,428 |
|
|
|
285,410 |
|
|
|
277,445 |
|
|
|
275,105 |
|
|
|
270,444 |
|
Yield |
|
|
9.65 |
% |
|
|
10.26 |
|
|
|
10.96 |
|
|
|
10.64 |
|
|
|
11.17 |
|
Home equity loans |
|
$ |
1,557,852 |
|
|
|
1,517,510 |
|
|
|
1,444,411 |
|
|
|
1,407,005 |
|
|
|
1,385,012 |
|
Yield |
|
|
6.48 |
% |
|
|
7.34 |
|
|
|
7.80 |
|
|
|
7.82 |
|
|
|
7.68 |
|
Allowance for loan losses |
|
$ |
(381,695 |
) |
|
|
(357,283 |
) |
|
|
(335,406 |
) |
|
|
(329,028 |
) |
|
|
(317,977 |
) |
|
|
|
Loans, net |
|
$ |
26,409,201 |
|
|
|
25,770,001 |
|
|
|
25,275,605 |
|
|
|
25,099,210 |
|
|
|
24,590,416 |
|
Yield |
|
|
6.94 |
% |
|
|
7.79 |
|
|
|
8.21 |
|
|
|
8.26 |
|
|
|
8.28 |
|
Mortgage loans held for sale |
|
$ |
121,806 |
|
|
|
108,044 |
|
|
|
176,448 |
|
|
|
163,364 |
|
|
|
160,482 |
|
Yield |
|
|
5.57 |
% |
|
|
6.12 |
|
|
|
6.91 |
|
|
|
6.18 |
|
|
|
6.07 |
|
Federal funds sold and other
short-term investments |
|
$ |
128,381 |
|
|
|
110,745 |
|
|
|
85,094 |
|
|
|
131,029 |
|
|
|
147,857 |
|
Yield |
|
|
3.41 |
% |
|
|
4.63 |
|
|
|
5.76 |
|
|
|
5.37 |
|
|
|
5.55 |
|
|
|
|
Total Interest Earning Assets |
|
$ |
30,335,818 |
|
|
|
29,679,918 |
|
|
|
29,258,592 |
|
|
|
29,051,928 |
|
|
|
28,449,108 |
|
Yield |
|
|
6.69 |
% |
|
|
7.42 |
|
|
|
7.78 |
|
|
|
7.81 |
|
|
|
7.82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Bearing Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand deposits |
|
$ |
3,200,650 |
|
|
|
3,200,408 |
|
|
|
3,047,279 |
|
|
|
3,141,899 |
|
|
|
3,113,531 |
|
Rate |
|
|
1.56 |
% |
|
|
1.99 |
|
|
|
2.24 |
|
|
|
2.28 |
|
|
|
2.30 |
|
Money market accounts |
|
$ |
7,115,062 |
|
|
|
7,502,063 |
|
|
|
7,421,900 |
|
|
|
7,217,265 |
|
|
|
6,977,950 |
|
Rate |
|
|
2.99 |
% |
|
|
3.92 |
|
|
|
4.40 |
|
|
|
4.46 |
|
|
|
4.47 |
|
Savings deposits |
|
$ |
448,581 |
|
|
|
454,204 |
|
|
|
479,479 |
|
|
|
497,422 |
|
|
|
502,948 |
|
Rate |
|
|
0.28 |
% |
|
|
0.35 |
|
|
|
0.48 |
|
|
|
0.57 |
|
|
|
0.68 |
|
Time deposits under $100,000 |
|
$ |
2,777,764 |
|
|
|
2,790,869 |
|
|
|
2,917,089 |
|
|
|
3,020,881 |
|
|
|
3,037,815 |
|
Rate |
|
|
4.44 |
% |
|
|
4.69 |
|
|
|
4.81 |
|
|
|
4.85 |
|
|
|
4.79 |
|
Time deposits over $100,000 (less
brokered time deposits) |
|
$ |
4,171,716 |
|
|
|
4,006,351 |
|
|
|
4,029,091 |
|
|
|
4,118,221 |
|
|
|
4,101,471 |
|
Rate |
|
|
4.69 |
% |
|
|
4.98 |
|
|
|
5.12 |
|
|
|
5.19 |
|
|
|
5.15 |
|
|
|
|
Total interest bearing core deposits |
|
$ |
17,713,773 |
|
|
|
17,953,894 |
|
|
|
17,894,838 |
|
|
|
17,995,688 |
|
|
|
17,733,715 |
|
Rate |
|
|
3.29 |
% |
|
|
3.84 |
|
|
|
4.16 |
|
|
|
4.20 |
|
|
|
4.22 |
|
Brokered money market accounts |
|
$ |
756,967 |
|
|
|
467,346 |
|
|
|
476,378 |
|
|
|
426,988 |
|
|
|
358,574 |
|
Rate |
|
|
3.44 |
% |
|
|
4.89 |
|
|
|
5.34 |
|
|
|
5.45 |
|
|
|
5.47 |
|
Brokered time deposits |
|
$ |
3,300,677 |
|
|
|
2,941,592 |
|
|
|
3,188,310 |
|
|
|
3,175,161 |
|
|
|
3,030,793 |
|
Rate |
|
|
4.35 |
% |
|
|
4.98 |
|
|
|
5.19 |
|
|
|
5.05 |
|
|
|
5.08 |
|
|
|
|
Total interest bearing deposits |
|
$ |
21,771,417 |
|
|
|
21,362,832 |
|
|
|
21,559,525 |
|
|
|
21,597,837 |
|
|
|
21,123,082 |
|
Rate |
|
|
3.46 |
% |
|
|
4.02 |
|
|
|
4.33 |
|
|
|
4.35 |
|
|
|
4.34 |
|
Federal funds purchased and other
short-term liabilities |
|
$ |
2,253,640 |
|
|
|
2,472,339 |
|
|
|
1,930,598 |
|
|
|
1,720,535 |
|
|
|
1,700,304 |
|
Rate |
|
|
3.18 |
% |
|
|
4.37 |
|
|
|
4.84 |
|
|
|
4.96 |
|
|
|
4.86 |
|
Long-term debt |
|
$ |
1,930,412 |
|
|
|
1,819,198 |
|
|
|
1,660,788 |
|
|
|
1,552,310 |
|
|
|
1,441,241 |
|
Rate |
|
|
4.21 |
% |
|
|
5.08 |
|
|
|
5.32 |
|
|
|
5.18 |
|
|
|
5.07 |
|
|
|
|
Total Interest Bearing Liabilities |
|
$ |
25,955,469 |
|
|
|
25,654,369 |
|
|
|
25,150,911 |
|
|
|
24,870,682 |
|
|
|
24,264,627 |
|
Rate |
|
|
3.48 |
% |
|
|
4.12 |
|
|
|
4.43 |
|
|
|
4.44 |
|
|
|
4.42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing demand
deposits |
|
$ |
3,338,106 |
|
|
|
3,422,684 |
|
|
|
3,405,622 |
|
|
|
3,428,246 |
|
|
|
3,381,056 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Margin |
|
|
3.71 |
% |
|
|
3.86 |
|
|
|
3.97 |
|
|
|
4.00 |
|
|
|
4.05 |
|
|
|
|
|
|
|
(1) |
|
Impaired loans held for sale are included in commercial loans. |
40
The following table summarizes the components of net interest income for the three months ended
March 31, 2008, including the tax-equivalent adjustment that is required in making yields on tax-exempt loans and investment
securities comparable to taxable loans and investment securities.
The taxable-equivalent adjustment is based on a 35% Federal income tax rate.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
(In thousands) |
|
2008 |
|
|
2007 |
|
Interest income |
|
$ |
503,881 |
|
|
|
547,899 |
|
Taxable-equivalent adjustment |
|
|
1,176 |
|
|
|
1,344 |
|
|
|
|
|
|
|
|
Interest income, |
|
|
|
|
|
|
|
|
Taxable-equivalent |
|
|
505,057 |
|
|
|
549,243 |
|
Interest expense |
|
|
225,232 |
|
|
|
264,950 |
|
|
|
|
|
|
|
|
Net interest income, |
|
|
|
|
|
|
|
|
Taxable-equivalent |
|
$ |
279,825 |
|
|
|
284,293 |
|
|
|
|
|
|
|
|
Non-Interest Income
Total non-interest income for the three months ended March 31, 2008 was $140.0 million, up 60.0%,
from the same period in 2007. Excluding the $38.5 million gain on redemption
of Visa shares, total non-interest
income increased $13.9 million, or 15.9%, compared to same period a year ago.
Service
charges on deposit accounts, the single largest component of fee
income, were $28.4 million
for the three months ended March 31, 2008, up 7.7% from the same period in 2007. Service charges
on deposit accounts consist of non-sufficient funds (NSF) fees (which represent 66.2% of the total
for the three months ended March 31, 2008), account analysis fees, and all other service charges.
NSF fees for the three months ended March 31, 2008 were $18.8 million,
up $698 thousand or 3.9%
from the same period in 2007. Account analysis fees increased by $1.6 million, or 44.3%, to $5.2
million for the three months ended March 31, 2008 compared to the same period in the prior year.
The increase was primarily due to lower earnings credits on
commercial demand deposit accounts. All other service charges on deposit accounts, which consist primarily of
monthly fees on retail demand deposit and saving accounts, were $4.4 million for the three months ended
March 31, 2008, down $271 thousand, or 5.8%, compared to the same period in 2007. The decline in
all other service charges was largely due to growth in the number of checking accounts with no
monthly service charges.
Financial
management services revenues (which primarily consist of fiduciary and asset management fees,
brokerage and investment banking revenue, and customer interest rate swap revenue which is included
in other fee income) increased $4.1 million or 19.7% to $25.0 million for the three months ended
March 31, 2008, as compared to the same period in 2007. The financial management services revenue
growth was led by increases in fees from customer interest rate swaps
and brokerage and investment banking revenues. Mortgage banking income
41
increased $935 thousand, or 12.9%, for the three months ended March 31, 2008, as compared to the
same period in 2007. The results for the three months ended
March 31, 2008 include a $1.2 million increase in revenues
due to the adoption of the SECs Staff Accounting Bulletin (SAB)
No. 109, Written Loan Commitments Recorded at Fair Value
Through Earnings. Other operating income increased $8.1 million, or 66.5%, for the three months ended March 31, 2008,
as compared to the three months ended March 31, 2007. This increase included a $4.9 million gain
on increase in the fair value of private equity investments.
Synovus recognized a pre-tax gain of
$38.5 million on redemption of a portion of its membership
interest in Visa, Inc. as a result of Visas initial public
offering (the Visa IPO). The gain from the proceeds of the IPO is
reflected as a component of non-interest income for the three months ended March 31, 2008. For further discussion of
Visa, see section titled Non-Interest Expense below.
Non-Interest Expense
The following table summarizes non-interest expense for the three months ended March 31, 2008 and
2007.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
(In thousands) |
|
2008 |
|
|
2007 |
|
Salaries and other personnel expense |
|
$ |
122,130 |
|
|
|
113,927 |
|
Net occupancy and equipment expense |
|
|
30,211 |
|
|
|
27,290 |
|
Other operating expenses |
|
|
66,463 |
|
|
|
53,580 |
|
Visa litigation expense |
|
|
(17,430 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expense |
|
$ |
201,374 |
|
|
|
194,797 |
|
|
|
|
|
|
|
|
Non-interest expense increased by 3.4% for the three months ended March 31, 2008, compared to the
three months ended March 31, 2007. Excluding the reduction in the Visa litigation accrual,
non-interest expense increased by 12.3%.
For the three months ended March 31, 2008, salaries and other personnel expenses increased by $8.2
million, or 7.2%, compared to the same period in the prior year. Employment expenses associated
with the net addition of 15 new branch banking locations since March 31, 2007 plus annual
compensation adjustments are reflected in these increases.
Total employees at March 31, 2008 were 7,331 compared to 7,385 at December 31, 2007 and 7,229 at
March 31, 2007. The net addition of 102 employees since March 31, 2007 is primarily due to new
branch openings which resulted in increases in branch and teller positions.
Net occupancy and equipment expense for the three months ended March 31, 2008 increased by $2.9
million, or 10.7% compared to the three months ended March 31, 2007. Other operating expenses for
the three months ended March 31, 2008 increased by $12.9 million, or 24.0%, compared to the three
months ended March 31, 2007. The increase in occupancy and
equipment expenses is primarily due to incremental
costs associated with the addition of new branch locations.
Other operating expenses for the three months ended March 31, 2008 include other real estate (ORE)
related expenses, consisting primarily of write-downs to current fair market values as well as net
losses on sales of ORE. These expenses were $7.9 million, up $7.3 million from the same period in
the prior year. Other operating expenses are also impacted by the increase in Federal Deposit
Insurance Corporation (FDIC) premium rates. FDIC premiums for the three months ended March 31,
2008 were $4.5 million, up $3.7 million from the same period in the prior year.
During the second half of 2007, Synovus recognized litigation expenses of $36.8 million associated
with indemnification obligations arising from Synovus ownership interest in Visa. During the
three months ended March 31, 2008, Synovus reversed $17.4 million of the accrued
42
litigation expense it recognized in the second half of 2007 as its proportionate share of the $3.0
billion escrow fund established by Visa to settle covered litigation out of the Visa IPO proceeds.
For further discussion of Visa,
see section titled Non-Interest Income above.
Income Tax Expense
Income tax expense based on income was $43.6 million for the three months ended March 31, 2008 and
income tax expense based on income from continuing operations was $54.7 million for the three
months ended March 31, 2007. The effective income tax rate was 35.0% and 35.3% for the three
months ended March 31, 2008 and 2007.
In the normal course of business, Synovus is subject to examinations from various tax authorities.
These examinations may alter the timing or amount of taxable income or deductions or the allocation
of income among tax jurisdictions. The total liability for uncertain tax positions under FIN 48 is
$6.2 million and $6.4 million at March 31, 2008 and 2007. Synovus is not able to reasonably
estimate the amount by which the liability will increase or decrease over time; however, at this
time, Synovus does not expect a significant payment related to these obligations within the next
year.
Synovus continually monitors and evaluates the potential impact of current events and circumstances
on the estimates and assumptions used in the analysis of its income tax positions, and,
accordingly, Synovus effective tax rate may fluctuate in the future.
Dividends per Share
As a result of the TSYS spin-off, Synovus adjusted its cash dividend so that Synovus shareholders
who retained their TSYS shares would initially receive, in the aggregate, the same cash dividends
per share that were paid before the spin-off. As a result, Synovus lowered its cash dividend per
share for the three months ended March 31, 2008 to $0.1700, a decrease of 17.1% from $0.2050 for
the same period in 2007. The dividend payout ratio for the three months ended March 31, 2008 was
70.40%, as compared to 46.04% for the same period in 2007.
Legal Proceedings
Synovus and its subsidiaries are subject to various legal proceedings and claims that arise in the
ordinary course of its business. In the ordinary course of business, Synovus and its subsidiaries
are also subject to regulatory examinations, information gathering requests, inquiries and
investigations. Synovus establishes accruals for litigation and regulatory matters when those
matters present loss contingencies that Synovus determines to be both probable and reasonably
estimable. Based on current knowledge, advice of counsel and available insurance coverage,
management does not believe that the eventual outcome of pending litigation and/or regulatory
matters, including the pending regulatory matter described below, will have a material adverse
effect on Synovus consolidated financial condition, results of operations or cash flows. However,
in the event of unexpected future developments, it is possible that the ultimate resolution of
these matters, if unfavorable, may be material to Synovus results of operations for any particular
period.
The FDIC is currently conducting an investigation of the policies, practices and procedures used by
Columbus Bank and Trust Company (CB&T), a wholly owned banking subsidiary of
Synovus, in connection with the credit card programs offered pursuant to its Affinity Agreement
43
with CompuCredit Corporation (CompuCredit). CB&T issues credit cards that are marketed and
serviced by CompuCredit pursuant to the Affinity Agreement. A provision of the Affinity Agreement
generally requires CompuCredit to indemnify CB&T for losses incurred as a result of the failure of
credit card programs offered pursuant to the Agreement to comply with applicable law. Synovus is
subject to a per event 10% share of any such loss, but Synovus 10% payment obligation is limited
to a cumulative total of $2 million for all losses incurred.
CB&T is cooperating with the FDICs investigation, which is at an advanced stage. Synovus cannot
predict the eventual outcome of the FDICs investigation; however, the investigation has resulted
in material changes to CB&Ts policies, practices and procedures in connection with the credit card
programs offered pursuant to the Affinity Agreement. It is likely that the investigation may result
in further changes to CB&Ts policies, practices and procedures in connection with the credit card
programs offered pursuant to the Affinity Agreement and the imposition of one or more regulatory
sanctions, including a civil money penalty and/or restitution of certain fees to affected
cardholders. At this time, however, management of Synovus does not expect the ultimate resolution
of the investigation to have a material adverse effect on its consolidated financial condition,
results of operations or cash flows primarily due to the expected performance by CompuCredit of its
indemnification obligations described in the paragraph above.
Recently Issued Accounting Standards
In December 31, 2007, the FASB issued SFAS No. 141R, Business Combinations. SFAS No. 141R
clarifies the definitions of both a business combination and a business. All business combinations
will be accounted for under the acquisition method (previously referred to as the purchase method).
This standard defines the acquisition date as the only relevant date for recognition and
measurement of the fair value of consideration paid. SFAS No. 141R requires the acquirer to
expense all acquisition related costs. SFAS No. 141R will also require acquired loans to be
recorded net of the allowance for loan losses on the date of acquisition. SFAS No. 141R defines
the measurement period as the time after the acquisition date during which the acquirer may make
adjustments to the provisional amounts recognized at the acquisition date. This period cannot
exceed one year, and any subsequent adjustments made to provisional amounts are done
retrospectively and restate prior period data. The provisions of this statement are effective for
business combinations during fiscal years beginning after December 15, 2008. Synovus is currently
evaluating the impact that SFAS No. 141R will have on its financial position and results of
operations and believes that such determination will not be meaningful until Synovus enters into a
business combination.
In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated
Financial Statements An Amendment of ARB No. 51. SFAS No. 160 requires non-controlling
interests to be treated as a separate component of equity, not as a liability or other item outside
of equity. Disclosure requirements include net income and comprehensive income to be displayed for
both the controlling and noncontrolling interests and a separate schedule that shows the effects of
any transactions with the noncontrolling interests on the equity attributable to the controlling
interests. The provisions for this statement are effective for fiscal years beginning after
December 31, 2008. This statement should be applied prospectively except for the presentation and
disclosure requirements which shall be applied retrospectively for all periods presented. Synovus
does not expect the impact of SFAS No. 160 on its financial position, results of operations or cash
flows to be material.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities An Amendment of FASB Statement No. 133. SFAS No. 161 changes the
44
disclosure
requirements for derivative instruments and hedging activities. Disclosure requirements include
qualitative disclosures about objectives and strategies for using derivatives, quantitative
disclosures about fair value amounts of and gains/losses on derivative investments, and disclosures
about credit-risk-related contingent features in derivative agreements. The provisions for this
statement are effective for fiscal years beginning after December 31, 2009. The impact to Synovus
will be additional disclosure in SEC filings.
Forward-Looking Statements
Certain statements contained in this document which are not statements of historical fact
constitute forward-looking statements within the meaning of the Private Securities Litigation
Reform Act (the Act). These forward-looking statements include, among others, statements
regarding: (i) the expected financial impact of recent accounting pronouncements; (ii) Synovus
belief with respect to certain tax matters; (iii) managements expectation that there will not be a
material difference between the current allocated allowance on collateral-dependent impaired loans
and the actual charge-off; (iv) managements belief with respect to legal proceedings and other
claims, including the pending regulatory matter with respect to credit card programs offered by
CB&T pursuant to its agreement with CompuCredit; (v) managements belief with respect to the
inclusion of all material loans in which serious doubt exists as to collectibility in nonperforming
loans and loans past due over 90 days and still accruing; and the assumptions underlying such
statements. In addition, certain statements in future filings by Synovus with the Securities and
Exchange Commission, in press releases, and in oral and written statements made by or with the
approval of Synovus which are not statements of historical fact constitute forward-looking
statements within the meaning of the Act. Examples of forward-looking statements include, but are
not limited to: (i) projections of revenues, income or loss, earnings or loss per share, the
payment or non-payment of dividends, capital structure, efficiency ratios and other financial
terms; (ii) statements of plans and objectives of Synovus or its management or Board of Directors,
including those relating to products or services; (iii) statements of future economic performance;
and (iv) statements of assumptions underlying such statements. Words such as believes,
anticipates, expects, intends, targeted, estimates, projects, plans, may, could,
should, would, and similar expressions are intended to identify forward-looking statements but
are not the exclusive means of identifying such statements.
These 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: (i) competitive pressures arising from aggressive competition from other financial
service providers; (ii) factors that affect the delinquency rate of Synovus loans and the rate at
which Synovus loans are charged off; (iii) changes in the cost and availability of funding due to
changes in the deposit market and credit market, or the way in which Synovus is perceived in such
markets, including a reduction in our debt ratings; (iv) the strength of the U.S. economy in
general and the strength of the local economies in which operations are conducted may be different
than expected; (v) the effects of and changes in trade, monetary and fiscal policies, and laws,
including interest rate policies of the Federal Reserve Board; (vi) inflation, interest rate,
market and monetary fluctuations; (vii) the timely development of and acceptance of new products
and services and perceived overall value of
these products and services by users; (viii) changes in consumer spending, borrowing, and saving
habits; (ix) technological changes are more difficult or expensive than anticipated; (x)
acquisitions are more difficult to integrate than anticipated; (xi) the ability to increase market
45
share and control expenses; (xii) the effect of changes in governmental policy, laws and
regulations, or the interpretation or application thereof, including restrictions, limitations
and/or penalties arising from banking, securities and insurance laws, regulations and examinations;
(xiii) the impact of the application of and/or the effect of changes in accounting policies and
practices, as may be adopted by the regulatory agencies, the Financial Accounting Standards Board,
or other authoritative bodies; (xiv) changes in Synovus organization, compensation, and benefit
plans; (xv) the costs and effects of litigation, investigations or similar matters, or adverse
facts and developments related thereto including the FDICs investigation of the policies,
practices and procedures used by CB&T in connection with the credit card programs offered pursuant
to its Affinity Agreement with CompuCredit; (xvi) a deterioration in credit quality or a reduced
demand for credit; (xvii) Synovus inability to successfully manage any impact from slowing
economic conditions or consumer spending; (xviii) successfully managing the potential both for
patent protection and patent liability in the context of rapidly developing legal framework for
expansive software patent protection; (xix) the impact on Synovus business, as well as on the
risks set forth above, of various domestic or international military or terrorist activities or
conflicts; (xx) the expected benefits associated with the spin-off may not be achieved; (xxi)
Synovus indemnification obligation in connection with the Visa covered litigation may be greater
than expected; and (xxii) the success of Synovus at managing the risks involved in the foregoing.
These forward-looking statements speak only as of the date on which the statements are made, and
Synovus undertakes no obligation to update any forward-looking statement to reflect events or
circumstances after the date on which the statement is made to reflect the occurrence of
unanticipated events.
46
ITEM 3 QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Interest rate risk is the primary market risk Synovus is potentially exposed to. As of the end of
the first quarter, the interest rate risk position of Synovus has not changed significantly as
compared to December 31, 2007. A further decline in short-term interest rates would be expected to
have a modest negative impact on net interest income as implied rate floors are reached on lower
cost core deposits. This impact has been moderated somewhat by a significant amount of variable
rate loans reaching a floor rate and effectively becoming fixed rate loans in a declining rate
environment. A rising rate environment would be expected to have a moderately positive impact on
net interest income. This impact is due to variable rate loans repricing upward and an expectation
of a limited initial upward repricing of deposit costs.
Synovus measures its sensitivity to changes in market interest rates through the use of a
simulation model. Synovus uses this simulation model to determine a baseline net interest income
forecast and the sensitivity of this forecast to changes in interest rates. These simulations
include all of Synovus earning assets, liabilities, and derivative instruments. Forecasted
balance sheet changes, primarily reflecting loan and deposit growth forecasts, are included in the
periods modeled. Anticipated deposit mix changes in each interest rate scenario are also included
in the periods modeled.
Synovus models its baseline net interest income forecast assuming an unchanged or flat interest
rate environment. Synovus has modeled the impact of a gradual increase and decrease in short-term
rates of 100 basis points to determine the sensitivity of net interest income for the next twelve
months. The following table represents the estimated sensitivity of net interest income to these
gradual changes in short term interest rates at March 31, 2008, with comparable information for
December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
Estimated % Change in Net Interest Income |
|
|
as Compared to Unchanged Rates |
|
|
(for the next twelve months) |
Change in Short-Term |
|
|
|
|
Interest Rates |
|
|
|
|
(in basis points) |
|
March 31, 2008 |
|
December 31, 2007 |
+ 100 |
|
|
0.8 |
% |
|
|
(0.1 |
)% |
- 100 |
|
|
(1.3 |
)% |
|
|
(1.5 |
)% |
|
|
|
|
|
|
|
|
|
While these estimates are reflective of the general interest rate sensitivity of Synovus, local
market conditions and their impact on loan and deposit pricing would be expected to have a
significant impact on the realized level of net interest income. Actual realized balance sheet
growth and mix would also impact the realized level of net interest income. Synovus also considers
the interest rate sensitivity of non-interest income, primarily deposit account analysis fees,
mortgage banking income, and financial management services income, in determining the appropriate
net interest income sensitivity positioning.
47
ITEM 4 CONTROLS AND PROCEDURES
We have evaluated the effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this quarterly report as required by Rule 13a-15
of the Securities Exchange Act of 1934, as amended. This evaluation was carried out under the
supervision and with the participation of our management, including our chief executive officer and
chief financial officer. Based on this evaluation, these officers have concluded that our
disclosure controls and procedures are effective in timely alerting them to material information
relating to Synovus (including its consolidated subsidiaries) required to be included in our
periodic SEC filings. No change in Synovus internal control over financial reporting occurred
during the period covered by this report that materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
48
PART II OTHER INFORMATION
ITEM 1A RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the
factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year
ended December 31, 2007, which could materially affect our financial position, results of
operations or cash flows. The risks described in our Annual Report on Form 10-K are not the only
risks facing Synovus. Additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial may also materially adversely affect our financial position,
results of operations or cash flows.
49
ITEM 2 UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS
The following table sets forth information regarding Synovus purchases of its common stock on a
monthly basis during the three months ended March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum |
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
Number of Shares |
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased |
|
|
That May Yet Be |
|
|
|
|
|
|
|
|
|
|
|
as Part of |
|
|
Purchased Under |
|
|
|
Total Number of |
|
|
Average Price Paid |
|
|
Announced Plans |
|
|
the Plans or |
|
Period |
|
Shares Purchased |
|
|
per Share |
|
|
or Programs |
|
|
Programs |
|
|
January 2008 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
February 2008 |
|
|
4,321 |
(1) |
|
|
10.87 |
|
|
|
|
|
|
|
|
|
March 2008 |
|
|
6,362 |
(1) |
|
|
13.22 |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
10,683 |
(1) |
|
$ |
24.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Consists of delivery of previously owned shares to Synovus in payment of the exercise price
of stock options and shares withheld to cover taxes on vesting for nonvested shares granted. |
50
ITEM 6 EXHIBITS
|
|
|
(a) Exhibits |
|
Description |
31.1
|
|
Certification of Chief Executive Officer |
|
|
|
31.2
|
|
Certification of Chief Financial Officer |
|
|
|
32
|
|
Certification of Periodic Report |
51
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
SYNOVUS FINANCIAL CORP. |
|
|
|
|
|
Date:
May 12, 2008
|
|
BY:
|
|
/s/ Thomas J. Prescott |
|
|
|
|
|
|
|
|
|
Thomas J. Prescott |
|
|
|
|
Executive Vice President and |
|
|
|
|
Chief Financial Officer |
52
INDEX TO EXHIBITS
|
|
|
Exhibit Number |
|
Description |
31.1
|
|
Certification of Chief Executive Officer |
|
|
|
31.2
|
|
Certification of Chief Financial Officer |
|
|
|
32
|
|
Certification of Periodic Report |
53