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Table of Contents

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 June 30, 2011

Commission File Number 1-10312

LOGO

SYNOVUS FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

 

GEORGIA   58-1134883

(State or other jurisdiction of

incorporation or organization)

  (I.R.S. Employer Identification No.)

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 x            No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every interactive data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x            No ¨

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.

Large Accelerated Filer x        Accelerated Filer ¨          Non-Accelerated Filer ¨          Smaller Reporting Company ¨

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨            No x

Indicate the number of shares outstanding of each of the issuer’s class of common stock, as of the latest practicable date.

 

Class

     

July 31, 2011

Common Stock, $1.00 Par Value     790,972,646 shares


Table of Contents

SYNOVUS FINANCIAL CORP.

INDEX

 

Part I.

    

Financial Information

  

Item 1.

    

Unaudited Financial Statements

  
    

Consolidated Statements of Financial Position as of June 30, 2011 and December 31, 2010

     3   
    

Consolidated Statements of Operations for the Six and Three Months Ended June 30, 2011 and 2010

     4   
    

Consolidated Statements of Changes in Equity and Comprehensive Income (Loss) for the Six Months Ended June 30, 2011 and 2010

     5   
    

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010

     6   
    

Notes to Consolidated Financial Statements

     7   

Item 2.

    

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     39   

Item 3.

    

Quantitative and Qualitative Disclosures About Market Risk

     74   

Item 4.

    

Controls and Procedures

     75   

Part II.

    

Other Information

  

Item 1.

    

Legal Proceedings

     76   

Item 1A.

    

Risk Factors

     79   

Item 2.

    

Unregistered Sales of Equity Securities and Use of Proceeds

     81   

Item 6.

    

Exhibits

     82   

Signatures

          83   

Index to Exhibits

     84   

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

SYNOVUS FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(unaudited)

 

 

(in thousands, except share data)    June 30,
2011
    December 31,
2010
 

ASSETS

    

Cash and cash equivalents

   $ 409,302        389,021   

Interest bearing funds with Federal Reserve Bank

     2,845,277        3,103,896   

Interest earning deposits with banks

     24,133        16,446   

Federal funds sold and securities purchased under resale agreements

     127,580        160,502   

Trading account assets, at fair value

     16,130        22,294   

Mortgage loans held for sale, at fair value

     78,752        232,839   

Other loans held for sale

     89,139        127,365   

Investment securities available for sale, at fair value

     3,259,254        3,440,268   

Loans, net of deferred fees and costs

     20,504,810        21,585,763   

Allowance for loan losses

     (631,401     (703,547
  

 

 

   

 

 

 

Loans, net

     19,873,409        20,882,216   
  

 

 

   

 

 

 

Premises and equipment, net

     493,638        544,971   

Goodwill

     24,431        24,431   

Other intangible assets, net

     10,449        12,434   

Other real estate

     244,313        261,305   

Other assets

     818,103        875,160   
  

 

 

   

 

 

 

Total assets

   $ 28,313,910        30,093,148   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

Liabilities

    

Deposits:

    

Non-interest bearing deposits

   $ 4,877,267        4,298,372   

Interest bearing deposits

     17,997,750        20,201,932   
  

 

 

   

 

 

 

Total deposits

     22,875,017        24,500,304   
  

 

 

   

 

 

 

Federal funds purchased and other short-term borrowings

     452,466        499,226   

Long-term debt

     1,894,901        1,808,161   

Other liabilities

     240,588        260,910   
  

 

 

   

 

 

 

Total liabilities

     25,462,972        27,068,601   
  

 

 

   

 

 

 

Equity

    

Shareholders’ equity:

    

Cumulative perpetual preferred stock – no par value. Authorized 100,000,000 shares; 967,870 issued and outstanding at June 30, 2011 and December 31, 2010

     942,096        937,323   

Common stock - $1.00 par value. Authorized 1,200,000,000 shares; issued 790,972,646 at June 30, 2011 and 790,956,289 at December 31, 2010; outstanding 785,279,194 at June 30, 2011 and 785,262,837 at December 31, 2010

     790,973        790,956   

Additional paid-in capital

     2,353,854        2,351,508   

Treasury stock, at cost - 5,693,452 shares in 2011 and 2010

     (114,176     (114,176

Accumulated other comprehensive income

     65,905        57,158   

Accumulated deficit

     (1,187,714     (1,024,851
  

 

 

   

 

 

 

Total shareholders’ equity

     2,850,938        2,997,918   
  

 

 

   

 

 

 

Non-controlling interest in subsidiaries

     —          26,629   
  

 

 

   

 

 

 

Total equity

     2,850,938        3,024,547   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 28,313,910        30,093,148   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

 

 

3


Table of Contents

SYNOVUS FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

 

     Six Months Ended
June 30,
    Three Months Ended
June 30,
 
(in thousands, except per share data)    2011     2010     2011     2010  

Interest income:

        

Loans, including fees

   $ 521,634        603,801        256,597        299,035   

Investment securities available for sale

     57,350        69,482        27,925        34,413   

Trading account assets

     478        422        222        228   

Mortgage loans held for sale

     3,034        3,148        1,223        1,824   

Other loans held for sale

     297        21        236        6   

Federal funds sold and securities purchased under resale agreements

     71        102        25        61   

Interest on Federal Reserve Bank balances

     3,524        3,547        1,742        2,168   

Interest earning deposits with banks

     96        11        82        4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     586,484        680,534        288,052        337,739   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

        

Deposits

     95,432        159,772        45,869        76,065   

Federal funds purchased and other short-term borrowings

     594        1,087        297        544   

Long-term debt

     22,063        20,770        10,925        11,091   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     118,089        181,629        57,091        87,700   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     468,395        498,905        230,961        250,039   

Provision for losses on loans

     261,905        639,851        120,159        298,904   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (expense) after provision for losses on loans

     206,490        (140,946     110,802        (48,865
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest income:

        

Service charges on deposit accounts

     39,556        54,155        19,238        27,876   

Fiduciary and asset management fees

     23,416        22,695        11,879        11,357   

Brokerage revenue

     12,511        12,699        6,291        6,768   

Mortgage revenue, net

     8,042        12,132        5,547        6,318   

Bankcard fees

     22,782        19,315        12,125        9,800   

Investment securities gains (losses), net

     1,797        (431     377        17   

Other fee income

     10,220        10,932        5,289        5,402   

(Decrease) increase in fair value of private equity investments, net

     (169     2,181        (301     1,283   

Other non-interest income

     13,858        10,013        7,404        5,174   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income

     132,013        143,691        67,849        73,995   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest expense:

        

Salaries and other personnel expense

     184,849        207,951        91,749        103,929   

Net occupancy and equipment expense

     58,717        60,565        28,883        30,588   

FDIC insurance and other regulatory fees

     30,362        36,615        15,956        18,970   

Foreclosed real estate expense, net

     64,609        91,948        39,872        46,440   

(Gains) losses on other loans held for sale, net

     (1,746     73        480        12   

Professional fees

     20,129        20,976        10,893        11,595   

Data processing expense

     18,201        22,007        9,251        11,323   

Restructuring charges

     27,439               3,106          

Loss on curtailment of post-retirement defined benefit plan

     398                        

Other operating expenses

     59,173        71,424        22,225        35,905   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expense

     462,131        511,559        222,415        258,762   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations before income taxes

     (123,628     (508,814     (43,764     (233,632

Income tax benefit

     (5,220     (21,395     (4,764     (5,057
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations

     (118,408     (487,419     (39,000     (228,575

Income from discontinued operations, net of income taxes and non- controlling interest

            43,162                 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (118,408     (444,257     (39,000     (228,575

Net loss attributable to non-controlling interest

     (220     (590            (381
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to controlling interest

     (118,188     (443,667     (39,000     (228,194

Dividends and accretion of discount on preferred stock

     28,970        28,685        14,504        14,360   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common shareholders

   $ (147,158     (472,352     (53,504     (242,554
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per common share, basic and diluted:

        

Net loss from continuing operations attributable to common shareholders

   $ (0.19     (0.88     (0.07     (0.36
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common shareholders

     (0.19     (0.81     (0.07     (0.36
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding, basic and diluted

     785,260        583,697        785,277        676,753   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

 

 

4


Table of Contents

SYNOVUS FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

AND COMPREHENSIVE INCOME (LOSS)

(unaudited)

 

 

(in thousands, except per share data)   Preferred
Stock
    Common
Stock
    Additional
Paid-in
Capital
    Treasury
Stock
    Accumulated
Other
Comprehensive
Income (Loss)
    (Accumulated
Deficit)
    Non-
Controlling
Interest
    Total  

Balance at December 31, 2009

  $ 928,207        495,514        1,605,097        (114,155     84,806        (148,428     20,460        2,871,501   

Net loss

                                       (443,667     (590     (444,257

Other comprehensive income, net of tax:

               

Change in net unrealized gain on cash flow hedges

                                (6,580                   (6,580

Change in net unrealized gains and losses on investment securities available for sale, net of reclassification adjustment

                                23,575                      23,575   

Amortization of post-retirement unfunded health benefit

                                (728                   (728
         

 

 

       

 

 

 

Other comprehensive income

                                16,267                      16,267   
         

 

 

       

 

 

 

Comprehensive loss

                  (427,990
               

 

 

 

Cash dividends declared on common stock — $0.02 per share

                                       (12,749            (12,749

Cash dividends paid on preferred stock

                                       (24,197            (24,197

Accretion of discount on preferred stock

    4,488                                    (4,488              

Issuance of common stock, net of issuance costs

           293,250        475,761                                    769,011   

Issuance of prepaid common stock purchase contracts

                  265,503                                    265,503   

Settlement of prepaid common stock purchase contracts

           1,959        (1,959                                   

Treasury shares purchased

                         (19                          (19

Issuance of non-vested stock, net of forfeitures

           (6     6                                      

Restricted share unit activity

           31        (31                                   

Share-based compensation expense

                  4,296                                    4,296   

Stock options exercised

           1                                           1   

Share-based compensation tax deficiency

                  (1,772                                 (1,772

Change in ownership at majority-owned subsidiary

                                       217        2,432        2,649   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2010

  $ 932,695        790,749        2,346,901        (114,174     101,073        (633,312     22,302        3,446,234   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2010

  $ 937,323        790,956        2,351,508        (114,176     57,158        (1,024,851     26,629        3,024,547   

Net loss

                                       (118,188     (220     (118,408

Other comprehensive income, net of tax:

               

Change in net unrealized gains and losses on cash flow hedges

                                (4,360                   (4,360

Change in net unrealized gains and losses on investment securities available for sale, net of reclassification adjustment

                                13,107                      13,107   
         

 

 

       

 

 

 

Other comprehensive income

                                8,747                      8,747   
         

 

 

       

 

 

 

Comprehensive loss

                  (109,661
               

 

 

 

Cash dividends declared on common stock — $0.02 per share

                                       (15,705            (15,705

Cash dividends paid on preferred stock

                                       (24,197            (24,197

Accretion of discount on preferred stock

    4,773                                    (4,773              

Restricted share unit activity

           17        (17                                   

Share-based compensation expense

                  2,363                                    2,363   

Change in ownership at majority-owned subsidiary

                                              (26,409     (26,409
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2011

  $ 942,096        790,973        2,353,854        (114,176     65,905        (1,187,714            2,850,938   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

 

5


Table of Contents

SYNOVUS FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

 

     Six Months Ended
June 30,
 
(in thousands)    2011     2010  

Operating activities

    

Net loss

   $ (118,408     (444,257

Adjustments to reconcile net loss to net cash provided by operating activities:

    

Provision for losses on loans

     261,905        639,851   

Depreciation, amortization, and accretion, net

     23,412        21,772   

Deferred income tax benefit

     (5,304     (6,315

Decrease in interest receivable

     10,950        16,506   

Decrease in interest payable

     (10,248     (6,663

Decrease (increase) in trading account assets

     6,164        (5,639

Originations of mortgage loans held for sale

     (392,707     (543,309

Proceeds from sales of mortgage loans held for sale

     542,665        544,965   

Loss (gain) on sale of mortgage loans held for sale

     296        (4,818

Decrease in prepaid and other assets

     61,301        347,292   

(Decrease) increase in accrued salaries and benefits

     (6,388     2,328   

(Decrease) increase in other liabilities

     (3,687     27,035   

Investment securities (gains) losses, net

     (1,797     431   

(Gain) loss on sale of other loans held for sale

     (1,746     73   

Loss on other real estate

     54,543        79,302   

Decrease (increase) in fair value of private equity investments, net

     169        (2,181

Gain on sale of merchant services business

            (69,466

Loss on curtailment of post-retirement health benefit plan

     398          

Share-based compensation

     2,363        4,296   

Other, net

     3,675        (1,445
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     427,556        599,758   
  

 

 

   

 

 

 

Investing activities

    

Net (increase) decrease in interest earning deposits with banks

     (7,687     1,926   

Net decrease in federal funds sold and securities purchased under resale agreements

     32,922        43,966   

Net decrease (increase) in interest bearing funds with Federal Reserve Bank

     258,619        (1,755,701

Proceeds from maturities and principal collections of investment securities available for sale

     573,759        488,612   

Proceeds from sales of investment securities available for sale

     17,044        244   

Purchases of investment securities available for sale

     (389,724     (589,495

Proceeds from sale of loans

     194,220        194,141   

Principal repayments by borrowers on other loans held for sale

     28,305          

Proceeds from sale of other real estate

     88,003        142,006   

Net decrease in loans

     425,919        884,766   

Purchases of premises and equipment

     (9,014     (11,193

Proceeds from disposals of premises and equipment

     2,014        1,630   

Proceeds from sale of merchant services business

            69,466   
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     1,214,380        (529,632
  

 

 

   

 

 

 

Financing activities

    

Net decrease in demand and savings deposits

     (347,750     (71,122

Net decrease in certificates of deposit

     (1,277,537     (1,104,848

Net (decrease) increase in federal funds purchased and other short-term borrowings

     (46,760     1,536   

Principal repayments on long-term debt

     (74,706     (91,866

Proceeds from issuance of long-term debt

     165,000        220,355   

Treasury shares purchased

            (19

Dividends paid to common shareholders

     (15,705     (9,803

Dividends paid to preferred shareholders

     (24,197     (24,197

Proceeds from the issuance of prepaid common stock purchase contracts

            265,503   

Proceeds from issuance of common stock

            769,011   
  

 

 

   

 

 

 

Net cash used in financing activities

     (1,621,655     (45,450
  

 

 

   

 

 

 

Increase in cash and cash equivalents

     20,281        24,676   

Cash and due from banks at beginning of period

     389,021        564,482   
  

 

 

   

 

 

 

Cash and due from banks at end of period

   $ 409,302        589,158   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

 

 

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Notes to Consolidated Financial Statements (Unaudited)

Note 1 - Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q; therefore, they 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 (“GAAP”). 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 Synovus’ annual report on Form 10-K/A for the year ended December 31, 2010 (“Synovus’ 2010 10-K”) filed with the U.S. Securities and Exchange Commission (“SEC”). There have been no significant changes to the accounting policies as disclosed in Synovus’ 2010 10-K.

In preparing the consolidated financial statements in accordance with GAAP, 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.

Material estimates that are particularly susceptible to significant change relate to the determination of the fair value of investments; the allowance for loan losses; the valuation of other real estate; the valuation of impaired and other loans held for sale; the valuation of long-lived assets, and other intangible assets; the valuation of deferred tax assets; and the disclosures of contingent assets and liabilities. In connection with the determination of the allowance for loan losses and the valuation of certain impaired loans and other real estate, management obtains independent appraisals for significant properties and properties collateralizing impaired loans. For valuation of impaired loans and other real estate, management also considers other factors or recent developments such as changes in absorption rates or market conditions at the time of valuation and anticipated sales values based on management’s plans for disposition.

A substantial portion of Synovus’ loans are secured by real estate in five southeastern states (Georgia, Alabama, Florida, South Carolina, and Tennessee). Accordingly, the ultimate collectability of a substantial portion of Synovus’ loan portfolio is susceptible to changes in market conditions in these areas. Total commercial real estate loans represent 38.0% of the total loan portfolio at June 30, 2011. Due to declines in economic indicators and real estate values, the loans in the commercial real estate portfolio may have a greater risk of non-collection than other loans. Based on available information, management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions, the ability of borrowers to repay their loans, and management’s plans for disposition. In addition, various regulatory agencies, as an integral part of their examination process, periodically review Synovus’ allowance for loan losses. Such agencies may require Synovus to make changes to the allowance for loan losses based on their judgment of information available to them at the time of their examination.

Goodwill is tested for impairment on an annual basis and as events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Synovus completed its 2011 annual review as of June 30, 2011 and concluded there was no impairment of goodwill as of this date.

 

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Table of Contents

Notes to Consolidated Financial Statements (Unaudited)

 

Supplemental Cash Flow Information

Supplemental cash flow information for the six months ended June 30, 2011 and 2010 is presented in the table below.

 

 

     Six Months Ended June 30,  
(in thousands)    2011      2010  

Cash Paid (Received) During the Period for:

     

Income tax refunds, net of taxes paid

   $ 225         324,963   

Interest paid

     104,760         170,490   

Non-Cash Investing Activities (at Fair Value):

     

Increase in net unrealized gain on available for sale securities(1)

     20,666         38,581   

Decrease in unrealized gain on cash flow hedges(1)

     2,008         20,882   

Mortgage loans held for sale transferred to loans

     6,377         2,068   

Loans foreclosed and transferred to other real estate

     125,356         192,509   

Loans transferred to other loans held for sale

     289,587         274,188   

Other loans held for sale transferred to loans

     3,644           

Other loans held for sale foreclosed and transferred to other real estate

     8,137           

Premises and equipment transferred to other assets held for sale(1)

     28,048           

 

(1)

Changes in unrealized gains on available for sale securities and cash flow hedges have not been adjusted for the impact of deferred taxes.

(2)

Amounts transferred include $16.3 million related to branch closures discussed further in Note 2 “Restructuring Charges” herein and $11.8 million of vacant properties, primarily land held for future branch development. Amounts presented are net of impairment charges incurred to record the transferred assets at the lower of their cost or fair value consistent with ASC 360.

 

Cash and Cash Equivalents

Cash and cash equivalents consist of cash and due from banks. At June 30, 2011 and December 31, 2010, cash and cash equivalents include $51.6 million and $66.6 million, respectively, on deposit to meet Federal Reserve Bank requirements, and include $15.6 million at June 30, 2011 which is restricted as to withdrawal. There were no cash and cash equivalents restricted as to withdrawal at December 31, 2010.

Short-Term Investments

Short-term investments consist of interest bearing funds with the Federal Reserve Bank, interest earning deposits with banks, and federal funds sold and securities purchased under resale agreements. Interest earning deposits with banks include $12.9 million at June 30, 2011 and $11.3 million at December 31, 2010, which is pledged as collateral in connection with certain letters of credit. Federal funds sold include $125.4 million at June 30, 2011 and $154.6 million at December 31, 2010, which is pledged to collateralize derivative instruments in a net liability position.

Recently Adopted Accounting Standards Updates

Effective January 1, 2010, Synovus adopted certain of the new disclosure requirements of Accounting Standards Update (“ASU”) No. 2010-06, Improving Disclosures about Fair Value Measurements. ASU 2010-06 amends ASC 820-10, Fair Value Measurements and Disclosures–Overall, to add a new requirement to disclose details of significant transfers in and out of Level 1 and Level 2 measurements and the reasons for the transfers. The ASU clarifies that fair value disclosure of assets and liabilities should be by class rather than major category, and further clarifies that reporting entities must disclose the valuation techniques and inputs used in determining the fair value of each class of assets and liabilities. This clarifies that the existing disclosure requirement of ASC 820 applies to Level 2 as well as Level 3 measurements. Further, for recurring measurements, it clarifies that disclosure of the inputs used is required. On January 1, 2011, Synovus adopted the remaining disclosure requirement of ASU 2010-06, which requires the gross presentation of activity within the Level 3 roll forward, presenting separately information about purchases, sales, issuances, and settlements. The impact of adoption for Synovus was the inclusion of additional disclosures in Synovus’ consolidated financial statements.

Effective December 31, 2010, Synovus adopted certain of the key provisions of ASU No. 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, (“ASU 2010-20”). ASU 2010-20 amends ASC 310 by requiring more robust and disaggregated disclosures about the credit quality of an entity’s financing receivables and its allowance for loan losses. The objective of enhancing these disclosures is to improve financial statement users’ understanding of (1) the nature of an entity’s credit risk associated with its financing receivables and (2) the entity’s assessment of that risk in estimating its allowance for loan losses as well as changes in the allowance and reasons for those changes. Most of the new and amended disclosures in the ASU were effective December 31, 2010; however, the disclosures that include information for activity that occurs during a reporting period became effective January 1, 2011. Those disclosures include (1) the activity in the

 

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Table of Contents

Notes to Consolidated Financial Statements (Unaudited)

 

allowance for loan losses for each period and (2) disclosures about modifications of financing receivables. The impact of adoption for Synovus was the inclusion of additional disclosures in Synovus’ consolidated financial statements.

Effective January 1, 2011, Synovus adopted ASU No. 2010-28, When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (a consensus of the Financial Accounting Standards Board (“FASB”) Emerging Issues Task Force), (“ASU 2010-28”). Under ASC 350-20, step 1 of the goodwill impairment test requires companies to compare a reporting unit’s fair value to its carrying amount. If the reporting unit’s carrying amount exceeds its fair value, companies must perform Step 2 of the test and measure the amount of goodwill impairment, if any. When a reporting unit’s carrying amount is zero or negative, current guidance does not allow a company to proceed to Step 2, even though other factors may indicate that the goodwill was impaired. The EITF reached a final consensus with ASU 2010-28 that requires entities with reporting units with a zero or negative carrying value to assess, considering qualitative factors such as those listed in ASC 350-20-35-30 (these factors are not all-inclusive), whether it is more likely than not that goodwill impairment exists. If an entity concludes that it is more likely than not that goodwill impairment exists, the entity must perform step 2 of the goodwill impairment test. Synovus’ goodwill balance is associated with two financial management services reporting units, both of which had positive carrying amounts as of June 30, 2011. Therefore, Synovus does not expect that the adoption of the provisions of ASU 2010-28, will have a material impact on its financial position, results of operations, or cash flows.

Effective January 1, 2011, Synovus adopted ASU No. 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations (a consensus of the FASB Emerging Issues Task Force), (“ASU 2010-29”). ASU 2010-29 addresses differences in the ways entities have interpreted ASC 805’s requirements for disclosures about pro forma revenue and earnings in a business combination. ASU 2010-29 requires that if an entity presents comparable financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period. In addition, ASU 2010-29 expands the supplemental pro forma disclosures under ASC 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The impact of adoption will be inclusion of additional disclosures in Synovus’ consolidated financial statements in connection with any future business combinations.

Recently Issued Accounting Standards Updates

In January 2011, the FASB issued ASU 2011-01, Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. The amendments in this Update were effective upon issuance, as it provided a temporary delay in the effective date of the disclosures about troubled debt restructurings in Update 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, for public entities. The delay was intended to allow the Board time to complete its deliberations on what constitutes a troubled debt restructuring (“TDR”), as presented in a proposed ASU, Clarifications to Accounting for Troubled Debt Restructurings by Creditors. Under the existing effective date in Update 2010-20, public-entity creditors would have provided disclosures about TDRs for periods beginning on or after December 15, 2010. The amendments in this Update temporarily deferred that effective date enabling public-entity creditors to provide those disclosures after the Board clarified the guidance for determining what constitutes a TDR. The deferral in this Update will result in more consistent disclosures about TDRs. This amendment does not defer the effective date of the other disclosure requirements in Update 2010-20.

Effective April 2011, the FASB issued ASU 2011-02, A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring. The ASU provides additional guidance to creditors for evaluating whether a modification or restructuring of a receivable is a TDR by providing clarification to existing guidance on whether (1) the creditor has granted a concession and (2) whether the debtor is experiencing financial difficulties, which are the two criteria used to determine whether a modification or restructuring is a TDR. Specifically, the ASU provides additional guidance on determining whether a creditor has granted a concession, including guidance on collection of all amounts due, receipt of additional collateral or guarantees from the debtor, and restructuring the debt at a below-market interest rate; includes factors and examples for creditors to determine whether an insignificant delay in payment is considered a concession; prohibits creditors from using the borrower’s

 

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Table of Contents

Notes to Consolidated Financial Statements (Unaudited)

 

effective rate test in ASC 470-50, Debt, Modifications and Extinguishment, to evaluate whether a concession has been granted to the borrower; adds factors for creditors to use to determine whether the debtor is experiencing financial difficulties; and ends the FASB’s deferral of the additional disclosures about TDR activities required by ASU 2010-20. This ASU is effective for the first interim or annual period beginning on or after June 15, 2011. Early adoption is permitted. Synovus will be required to apply the ASU retrospectively for all modifications and restructuring activities that have occurred from the beginning of the annual period of adoption. For receivables that are newly considered impaired under the guidance, Synovus should measure the impairment of those receivables prospectively in the first period of adoption and disclose the total recorded investment in those receivables and the related allowance for credit losses as of the end of the period of adoption. In addition, Synovus must begin providing the new disclosures about TDR activities required by ASU 2010-20 in the period of adoption of ASU 2011-02. Synovus is currently evaluating the impact of adopting ASU 2011-02 on its financial position, results of operations, and disclosures. Synovus currently expects that the adoption of ASU 2011-02 will result in an increase in the number of loan modifications and renewals that will be reported as TDRs due mainly to the broader criteria for what constitutes a below-market rate. Additionally, Synovus does not expect a material impact to the allowance for loan losses, charge-offs, or provision for losses on loans upon implementation of ASU 2011-02 during the three months ending September 30, 2011.

On April 29, 2011, the FASB issued ASU 2011-03, Reconsideration of Effective Control for Repurchase Agreements. The ASU modifies the criteria for determining when repurchase agreements and other similar agreements would be accounted for as financings (secured borrowings/lending agreements) as opposed to sales (purchases) with commitments to repurchase (resell). In addition, ASU 2011-03 removes from the assessment of effective control the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in default by the transferee, which makes the level of cash collateral received by the transferor in a repossession or other similar agreement irrelevant in determining if it should be accounted for as a sale. As a result, more agreements will be accounted for as financings. The FASB believes that contractual rights and obligations determine effective control, and there does not need to be a requirement to assess the ability to exercise those rights. The guidance in this ASU is effective prospectively for new transfers and existing transactions that are modified in the first interim or annual period beginning on or after December 15, 2011. Early adoption is not permitted. Synovus is currently evaluating the impact of adopting ASU 2011-03 on its financial position and results of operations but has not yet completed its assessment.

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”). This guidance improves and aligns fair value measurement and disclosure requirements under U.S. GAAP and IFRS. ASU 2011-04 requires premiums and discounts, such as control premiums or non-controlling interest discounts, to be applied in a fair value measurement categorized within Level 2 or Level 3 of the fair value hierarchy if market participants would use such factors when pricing the asset or liability. However, blockage factors related to the size of a holding are not permitted in a fair value measurement because a fair value measurement reflects the value of the asset or liability to a market participant for a particular unit of account and is not necessarily representative of the value of the entire holding. This ASU also expands disclosure requirements about fair value measurements including information about the sensitivity of a fair value measurement categorized within Level 3 of the fair value hierarchy to changes in unobservable inputs and the categorization by level of the fair value hierarchy for items that are not measured at fair value in the Consolidate Balance Sheets, but for which the fair value of such items is required to be disclosed. ASU 2011-04 is effective for the first interim or annual period beginning on or after December 15, 2011. Early adoption is not permitted. Synovus is currently evaluating the impact of adopting ASU 2011-04 on its financial position and results of operations but has not yet completed its assessment.

Effective June 16, 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. The main provisions of this ASU provide the option to present comprehensive income in either one or two consecutive financial statements. A single statement presentation must include the components of net income and total net income, the components of other comprehensive income and total other comprehensive income, and a total for comprehensive income. In a two-statement approach, the components of net income and total net income are presented in the first statement. That statement must be immediately followed by a financial statement that presents the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. The option in current GAAP that permits the presentation of other comprehensive income in the statement of changes in equity has been eliminated. The amendments of this ASU will be applied retrospectively by Synovus and are

 

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Table of Contents

Notes to Consolidated Financial Statements (Unaudited)

 

effective for the first interim period beginning on or after December 31, 2011. Early adoption is permitted. The impact of adoption for Synovus will be a change in the format of presentation of comprehensive income. Synovus has not yet determined whether it will use a single statement or a two statement approach.

Reclassifications

Prior period consolidated financial statements are reclassified whenever necessary to conform to the current periods’ presentation.

Subsequent Events

Synovus has evaluated, for consideration or disclosure, all transactions, events, and circumstances subsequent to the balance sheet date and through the date the accompanying unaudited consolidated financial statements were issued, and has reflected or disclosed those items within the consolidated financial statements and related footnotes as deemed appropriate.

Note 2 - Restructuring Charges

In January 2011, Synovus announced efficiency and growth initiatives intended to streamline operations, boost productivity, reduce expenses and increase revenue. During the first quarter of 2011, Synovus recognized restructuring charges of $24.3 million associated with these initiatives. During the second quarter of 2011, Synovus incurred additional restructuring charges of $3.1 million ($1.7 million of severance charges and $1.4 million of professional fees and other charges). For the six months ended June 30, 2011, total restructuring charges are as follows:

 

 

(in thousands)       

Severance charges

   $ 16,310   

Lease termination charges

     3,107   

Asset impairment charges

     5,437   

Professional fees and other charges

     2,585   
  

 

 

 

Total restructuring charges

   $ 27,439   
  

 

 

 

 

As part of these efficiency and growth initiatives, Synovus closed 31 branches during the six months ended June 30, 2011 and transferred $16.3 million of premises and equipment, net of asset impairment charges, to other assets held for sale, a component of other assets on the consolidated statements of financial position. During the six months ended June 30, 2011, Synovus recognized impairment charges of $5.4 million upon transfer to other assets held for sale.

The liability for restructuring activities was $6.3 million at June 30, 2011, which includes estimated severance payments and lease termination payments. Cash payments associated with this liability are expected to occur over the next six months.

The liability for severance charges was recognized in accordance with the one-time employee termination benefit provisions of ASC 420-10-25 upon management’s commitment to a plan identifying the number of employees to be terminated, the terms of the benefit arrangement, and upon communication of this information to the employees to be terminated. While recognition of restructuring charges is triggered by communication of the plan and benefit information to affected employees, the timing of recognition depends on whether an employee is required to render further service in order to receive the termination benefits. For employees who are not required to render further service in order to receive termination benefits, or who are not required to render service beyond a minimum retention period of 60 days, a liability is recognized on the date of communication to affected employees. For employees who are required to work beyond the minimum retention period in order to receive termination benefits, the fair value of termination benefits at the communication date is recognized ratably over the future service period.

 

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Notes to Consolidated Financial Statements (Unaudited)

 

Restructuring charges resulting from the impairment of long-lived assets were recognized in accordance with ASC 360-10-35 upon a significant adverse change in the extent or manner in which a long-lived asset is being used (removed from service), or upon management’s commitment to a plan to sell an asset, and the asset is available for immediate sale, an active program to locate a buyer has been identified, the sale is probable, the asset is being marketed for a price that is reasonable in relation to its current fair value, and it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. Restructuring charges resulting from lease termination expenses were recognized in accordance with ASC 840-20 and ASC 840-30 upon notifying the lessor of Synovus’ intent to terminate a lease.

Note 3 – Comprehensive Income (Loss)

Other comprehensive income consists of the change in net unrealized losses on cash flow hedges, the change in net unrealized gains (losses) on investment securities available for sale, and the amortization of the post-retirement unfunded health benefit. Comprehensive loss consists of net loss plus other comprehensive income.

Comprehensive income (loss) for the six and three months ended June 30, 2011 and 2010 is presented below.

 

 

     Six Months Ended June 30,     Three Months Ended June 30,  
(in thousands)    2011     2010     2011     2010  

Net loss

   $ (118,408     (444,257     (39,000     (228,575

Other comprehensive income or loss, net of tax:

        

Change in net unrealized gains/losses on cash flow hedges

     (4,360     (6,580     (455     (1,661

Change in net unrealized gains/losses on investment securities available for sale, net of reclassification adjustment

     13,107        23,575        26,211        22,786   

Amortization of post-retirement unfunded health benefit

            (728            (774
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

     8,747        16,267        25,756        20,351   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

   $ (109,661     (427,990     (13,244     (208,224
  

 

 

   

 

 

   

 

 

   

 

 

 

 

Note 4 – Investment Securities

The following table summarizes Synovus’ available for sale investment securities as of June 30, 2011 and December 31, 2010.

 

 

     June 30, 2011  
(in thousands)    Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

U.S. Treasury securities

   $ 268,798         6,632                275,430   

U.S. Government agency securities

     47,947         3,454                51,401   

Securities issued by U.S. Government sponsored enterprises

     636,004         18,462         (379     654,087   

Mortgage-backed securities issued by U.S. Government agencies

     408,871         18,446                427,317   

Mortgage-backed securities issued by U.S. Government sponsored enterprises

     1,631,830         73,170         (840     1,704,160   

Collateralized mortgage obligations issued by U.S. Government sponsored enterprises

     16,888         519         (2     17,405   

State and municipal securities

     28,603         707         (23     29,287   

Equity securities

     12,783         2,006         (1,583     13,206   

Other investments

     85,787         1,174                86,961   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 3,137,511         124,570         (2,827     3,259,254   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

Notes to Consolidated Financial Statements (Unaudited)

 

     December 31, 2010  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

U.S. Treasury securities

   $ 251,842         5,830                257,672   

U.S. Government agency securities

     48,107         3,685         (1     51,791   

Securities issued by U.S. Government sponsored enterprises

     846,536         18,845         (3,061     862,320   

Mortgage-backed securities issued by U.S. Government agencies

     447,502         12,706         (370     459,838   

Mortgage-backed securities issued by U.S. Government sponsored enterprises

     1,569,955         65,421         (5,931     1,629,445   

Collateralized mortgage obligations issued by U.S. Government sponsored enterprises

     28,985         1,011         (2     29,994   

State and municipal securities

     49,385         1,066         (108     50,343   

Equity securities

     11,970         836                12,806   

Other investments

     84,909         1,150                86,059   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 3,339,191         110,550         (9,473     3,440,268   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

At June 30, 2011 and December 31, 2010, investment securities with a carrying value of $2.51 billion and $2.63 billion, respectively, were pledged to secure certain deposits, securities sold under repurchase agreements, payment network arrangements, and Federal Home Loan Bank (“FHLB”) advances as required by law and contractual agreements.

Synovus has reviewed investment securities that are in an unrealized loss position as of June 30, 2011 and December 31, 2010 for other-than-temporary impairment and does not consider any securities in an unrealized loss position to be other-than-temporarily impaired. Synovus does not intend to sell these investment securities at an unrealized loss position at June 30, 2011, and it is more likely than not that Synovus will not be required to sell these securities prior to recovery or maturity. The unrealized losses are related primarily to increases in interest rates on comparable securities from the date of purchase. Synovus regularly evaluates its investment securities portfolio to ensure that there are no conditions that would indicate that any unrealized losses are other-than-temporarily impaired. These factors include length of time that the security has been in a loss position, the extent that the fair value has been below amortized cost, and the credit standing of the issuer.

 

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Notes to Consolidated Financial Statements (Unaudited)

 

Gross unrealized losses on investment securities and the fair value of the related securities aggregated by investment category and length of time that individual securities had been in a continuous unrealized loss position at June 30, 2011 and December 31, 2010 were as follows:

 

 

     June 30, 2011  
     Less than 12 Months     12 Months or Longer     Total Fair Value  
(in thousands)    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
 

U.S. Treasury securities

   $                                         

U.S. Government agency
securities

                                             

Securities issued by U.S. Government
sponsored enterprises

     139,876         (379                    139,876         (379

Mortgage-backed securities
issued by U.S. Government agencies

                                             

Mortgage-backed securities
issued by U.S. Government
sponsored enterprises

     301,992         (840                    301,992         (840

Collateralized mortgage
obligations issued by
U.S. Government sponsored
enterprises

     885         (2                    885         (2

State and municipal securities

     2,763         (1     1,011         (22     3,774         (23

Equity securities

     6,840         (1,583                    6,840         (1,583

Other investments

                                             
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 452,356         (2,805     1,011         (22     453,367         (2,827
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     December 31, 2010  
     Less than 12 Months     12 Months or Longer     Total Fair Value  
(in thousands)    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
 

U.S. Treasury securities

   $                                         

U.S. Government agency
securities

     191         (1                    191         (1

Securities issued by U.S.
Government sponsored enterprises

     181,430         (3,061                    181,430         (3,061

Mortgage-backed securities
issued by U.S. Government agencies

     70,577         (370                    70,577         (370

Mortgage-backed securities
issued by U.S. Government
sponsored enterprises

     491,838         (5,931          491,838         (5,931

Collateralized mortgage
obligations issued by
U.S. Government sponsored
enterprises

     1,007         (2                    1,007         (2

State and municipal securities

     4,643         (70     1,506         (38     6,149         (108

Equity securities

                                             

Other investments

                                             
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 749,686         (9,435     1,506         (38     751,192         (9,473
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

The amortized cost and fair value by contractual maturity of investment securities available for sale at June 30, 2011 are shown below. The expected life of mortgage-backed securities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. For purposes of the maturity table, mortgage-backed securities, which are not due at a single maturity date, have been classified based on the contractual maturity date.

 

14


Table of Contents

Notes to Consolidated Financial Statements (Unaudited)

 

 

     Distribution of Maturities at June 30, 2011  
(in thousands)    Within
One Year
     1 to 5
Years
     5 to 10
Years
     More Than
10 Years
     No Stated
Maturity
     Total  

Amortized Cost

                 

U.S. Treasury securities

   $ 83,575         185,223                                 268,798   

U.S. Government agency securities

             2,391         34,437         11,119                 47,947   

Securities issued by U.S. Government sponsored enterprises

     14,963         621,041                                 636,004   

Mortgage-backed securities issued by U.S. Government agencies

             394         268         408,209                 408,871   

Mortgage-backed securities issued by U.S. Government sponsored enterprises

     608         33,060         376,547         1,221,615                 1,631,830   

Collateralized mortgage-backed securities issued by U.S. Government sponsored enterprises

             89         529         16,270                 16,888   

State and municipal securities

     4,515         11,183         7,974         4,931                 28,603   

Other investments

             81,337         450         4,000                 85,787   

Securities with no stated maturity (equity securities)

                                     12,783         12,783   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 103,661         934,718         420,205         1,666,144         12,783         3,137,511   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Fair Value

                 

U.S. Treasury securities

   $ 83,689         191,741                                 275,430   

U.S. Government agency securities

             2,490         36,887         12,024                 51,401   

Securities issued by U.S. Government sponsored enterprises

     15,568         638,519                                 654,087   

Mortgage-backed securities issued by U.S. Government agencies

             419         285         426,613                 427,317   

Mortgage-backed securities issued by U.S. Government sponsored enterprises

     621         34,299         391,618         1,277,622                 1,704,160   

Collateralized mortgage-backed securities issued by U.S. Government sponsored enterprises

             89         539         16,777                 17,405   

State and municipal securities

     4,556         11,566         8,131         5,034                 29,287   

Other investments

             82,511         450         4,000                 86,961   

Securities with no stated maturity (equity securities)

                                     13,206         13,206   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 104,434         961,634         437,910         1,742,070         13,206         3,259,254   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Note 5 – Other Loans Held for Sale

Loans are transferred to other loans held for sale at fair value when Synovus makes the determination to sell specifically identified loans. The fair value of the loans is primarily determined by analyzing the underlying collateral of the loan and the anticipated external market prices of similar assets less estimated costs to sell. At the time of transfer, if the fair value is less than the carrying amount, the difference is recorded as a charge-off against the allowance for loan losses. Decreases in the fair value subsequent to the transfer, as well as losses (gains) from sale of these loans, are recognized as a component of non-interest expense on the consolidated statements of operations.

During the six and three months ended June 30, 2011, Synovus transferred loans with a carrying value immediately preceding the transfer totaling $398.5 million and $167.4 million, respectively, to other loans held for sale. Synovus recognized charge-offs upon transfer on these loans totaling $108.9 million and $42.2 million for the six and three months ended June 30, 2011, respectively. These charge-offs which resulted in a new cost basis of $289.6 million and $125.1 million, respectively, for the loans transferred during the six and three months ended June 30, 2011 were based on the fair value, less estimated costs to sell, of the loans at the time of transfer.

During the six and three months ended June 30, 2010, Synovus transferred loans with a carrying value immediately preceding the transfer totaling $424.7 million and $112.5 million, respectively, to other loans held for sale.

 

15


Table of Contents

Notes to Consolidated Financial Statements (Unaudited)

 

Synovus recognized charge-offs upon transfer on these loans totaling $150.5 million and $36.5 million for the six and three months ended June 30, 2010, respectively. These charge-offs which resulted in a new cost basis of $274.2 million and $75.9 million, respectively, for the loans transferred during the six and three months ended June 30, 2010 were based on the fair value less estimated costs to sell of the loans at the time of transfer.

Note 6 – Loans and Allowance for Loan Losses

Loans outstanding, by classification, are summarized below.

 

 

(in thousands)    June 30,
2011
    December 31,
2010
 

Investment properties

   $ 4,765,113        5,059,102   

1-4 family properties

     1,851,043        2,102,787   

Land acquisition

     1,179,196        1,218,691   
  

 

 

   

 

 

 

Total commercial real estate

     7,795,352        8,380,580   
  

 

 

   

 

 

 

Commercial and industrial

     8,846,592        9,264,811   
  

 

 

   

 

 

 

Home equity lines

     1,612,279        1,648,039   

Consumer mortgages

     1,450,830        1,475,261   

Credit cards

     271,641        284,970   

Other retail loans

     536,903        542,538   
  

 

 

   

 

 

 

Total retail

     3,871,653        3,950,808   
  

 

 

   

 

 

 

Total loans

     20,513,597        21,596,199   
  

 

 

   

 

 

 

Deferred fees and costs, net

     (8,787     (10,436
  

 

 

   

 

 

 

Total loans, net of deferred fees and costs

   $ 20,504,810        21,585,763   
  

 

 

   

 

 

 

 

For purposes of the disclosures required pursuant to the adoption of amendments to ASC 310, Receivables, the loan portfolio was disaggregated into segments and then further disaggregated into classes for certain disclosures. A portfolio segment is defined as the level at which an entity develops and documents a systematic method for determining its allowance for loan losses. There are three loan portfolio segments that include commercial and industrial, commercial real estate, and retail. A class is generally determined based on the initial measurement attribute, risk characteristics of the loan, and an entity’s method for monitoring and assessing credit risk. Commercial and industrial is a separate commercial loan class while commercial loan classes within CRE include investment properties, 1-4 family properties, and land acquisition. Retail loan classes include home equity lines, consumer mortgages, credit cards, and other retail loans.

The following is a summary of current, accruing past due, and nonaccrual loans by portfolio class as of June 30, 2011 and December 31, 2010.

 

 

Summary of Current, Accruing Past Due, and Nonaccrual Loans

 

      June 30, 2011  
(in thousands)    Current      Accruing
30-89 Days
Past Due
     Accruing
90 Days
or Greater

Past Due
     Total
Accruing
Past Due
     Nonaccrual      Total  

Investment properties

   $ 4,637,387         16,030         1,005         17,035         110,691         4,765,113   

1-4 family properties

     1,578,509         19,762         688         20,450         252,084         1,851,043   

Land acquisition

     949,349         11,724         90         11,814         218,033         1,179,196   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial real estate

     7,165,245         47,516         1,783         49,299         580,808         7,795,352   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial and industrial

     8,519,515         87,479         13,969         101,448         225,629         8,846,592   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Home equity lines

     1,571,960         14,492         624         15,116         25,203         1,612,279   

Consumer mortgages

     1,380,654         18,636         3,998         22,634         47,542         1,450,830   

Credit cards

     265,974         3,090         2,577         5,667                 271,641   

Other retail loans

     525,209         5,356         284         5,640         6,054         536,903   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total retail

     3,743,797         41,574         7,483         49,057         78,799         3,871,653   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 19,428,557         176,569         23,235         199,804         885,236         20,513,597   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

16


Table of Contents

Notes to Consolidated Financial Statements (Unaudited)

 

      December 31, 2010  
(in thousands)    Current      Accruing
30-89 Days
Past Due
     Accruing
Greater Than
90 Days
Past Due
     Total
Accruing
Past Due
     Nonaccrual      Total  

Investment properties

   $ 4,927,147         21,134         1,398         22,532         109,423         5,059,102   

1-4 family properties

     1,773,062         29,749         2,397         32,146         297,579         2,102,787   

Land acquisition

     998,658         12,656         2,853         15,509         204,524         1,218,691   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial real estate

     7,698,867         63,539         6,648         70,187         611,526         8,380,580   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial and industrial

     8,998,715         50,248         4,230         54,478         211,618         9,264,811   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Home equity lines

     1,616,006         14,132         153         14,285         17,748         1,648,039   

Consumer mortgages

     1,405,781         22,979         1,153         24,132         45,348         1,475,261   

Credit cards

     277,442         3,715         3,813         7,528                 284,970   

Other retail loans

     531,010         5,921         225         6,146         5,382         542,538   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total retail

     3,830,239         46,747         5,344         52,091         68,478         3,950,808   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 20,527,821         160,534         16,222         176,756         891,622         21,596,199   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Nonaccrual loans as of June 30, 2011 and December 31, 2010 were $885.2 million and $891.6 million, respectively. Interest income on nonaccrual loans outstanding at June 30, 2011 and December 31, 2010 that would have been recorded for the three months ended June 30, 2011 and December 31, 2010 if the loans had been accruing was $19.2 million and $21.9 million, respectively. Interest payments received on these loans during the three months ended June 30, 2011 and December 31, 2010 were $2.3 million and $4.9 million, respectively. These payments have been recorded as a reduction in loan principal.

The credit quality of the loan portfolio is summarized no less frequently than quarterly using the standard asset classification system utilized by the federal banking agencies. These classifications are divided into three groups – Not Classified (“Pass”), Special Mention, and Classified or Adverse rating (“Substandard”, “Doubtful”, and “Loss”) and are defined as follows:

Pass - loans which are well protected by the current net worth and paying capacity of the obligor (or guarantors, if any) or by the fair value, less cost to acquire and sell, of any underlying collateral in a timely manner.

Special Mention - loans which have potential weaknesses that deserve management’s close attention. These loans are not adversely classified and do not expose an institution to sufficient risk to warrant an adverse classification.

Substandard - loans which are inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged, if any. Loans with this classification are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful - loans which have all the weaknesses inherent in loans classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable on the basis of currently known facts, conditions, and values.

Loss - loans which are considered by management to be uncollectible and of such little value that its continuance on the institution’s books as an asset, without establishment of a specific valuation allowance or charge-off is not warranted.

In the following tables, retail loans are classified as pass except when a retail loan reaches 90 days past due, it is downgraded to substandard, and upon reaching 120 days past due, it is downgraded to loss and charged off, in accordance with the Federal Financial Institutions Examination Council’s (“FFIEC”) Uniform Retail Credit Classification and Account Management Policy.

 

17


Table of Contents

Notes to Consolidated Financial Statements (Unaudited)

 

 

Loan Portfolio Credit Exposure by Risk Grade

 

  

     June 30, 2011  
(in thousands)    Pass      Special
Mention
     Substandard(1)      Doubtful      Loss     Total  

Investment properties

   $ 3,475,897         791,783         487,544         9,889                4,765,113   

1-4 family properties

     1,024,010         315,504         493,311         18,218                1,851,043   

Land acquisition

     485,517         168,408         519,587         5,684                1,179,196   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total commercial real estate

     4,985,424         1,275,695         1,500,442         33,791                7,795,352   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Commercial and industrial

     6,953,014         1,057,949         817,462         18,162         5 (2)      8,846,592   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Home equity lines

     1,569,765                 41,516                 998 (4)      1,612,279   

Consumer mortgages

     1,394,512                 55,106                 1,212 (4)      1,450,830   

Credit cards

     269,064                 2,577                        271,641   

Other retail loans

     524,873                 11,256                 774 (4)      536,903   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total retail

     3,758,214                 110,455                 2,984        3,871,653   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total loans

   $ 15,696,652         2,333,644         2,428,359         51,953         2,989        20,513,597   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     December 31, 2010  
(in thousands)    Pass      Special
Mention
     Substandard(1)      Doubtful      Loss     Total  

Investment properties

   $ 3,650,849         886,286         507,912         14,055                5,059,102   

1-4 family properties

     1,132,634         383,287         573,364         13,502                2,102,787   

Land acquisition

     512,531         158,107         545,167         2,886                1,218,691   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total commercial real estate

     5,296,014         1,427,680         1,626,443         30,443                8,380,580   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Commercial and industrial

     7,324,860         1,075,590         842,156         22,196         9 (3)      9,264,811   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Home equity lines

     1,610,285                 37,229                 525 (4)      1,648,039   

Consumer mortgages

     1,412,630                 62,334                 297 (4)      1,475,261   

Credit cards

     284,970                                        284,970   

Other retail loans

     530,573                 11,275                 690 (4)      542,538   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total retail

     3,838,458                 110,838                 1,512        3,950,808   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total loans

   $ 16,459,332         2,503,270         2,579,437         52,639         1,521        21,596,199   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(1)

Includes $830.3 million and $837.8 million of nonaccrual substandard loans at June 30, 2011 and December 31, 2010, respectively.

(2)

Amount is fully reserved at June 30, 2011 and will be charged off during the third quarter of 2011.

(3)

Amount was fully reserved at December 31, 2010 and was charged off during the first quarter of 2011.

(4)

Represent amounts that were 120 days past due. Per regulatory guidance, these credits are downgraded to the loss category with an allowance for loan losses equal to the full loan amount and are charged off in the subsequent quarter.

 

 

The following table details the change in the allowance for loan losses for the six and three months ended June 30, 2011 and 2010 by loan segment.

 

 

Allowance for Loan Losses and Recorded Investment in Loans

 

     As Of and For The Six Months Ended June 30, 2011  
(in thousands)    Commercial
Real Estate
    Commercial &
Industrial
    Retail     Unallocated     Total  

Allowance for loan losses

          

Beginning balance

   $ 353,923        222,058        43,478        84,088        703,547   

Charge-offs

     (214,327     (104,275     (43,816            (362,418

Recoveries

     15,415        7,570        5,382               28,367   

Provision

     202,568        59,717        35,745        (36,125     261,905   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 357,579        185,070        40,789        47,963        631,401   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ 62,631        29,842        447               92,920   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

18


Table of Contents

Notes to Consolidated Financial Statements (Unaudited)

 

Loans

          

Ending balance

   $ 7,795,352        8,846,592        3,871,653               20,513,597 (1) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ 849,172        302,309        32,358               1,183,839   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     As Of and For The Six Months Ended June 30, 2010  
(in thousands)    Commercial
Real Estate
    Commercial &
Industrial
    Retail     Unallocated     Total  

Allowance for loan losses

          

Beginning balance

   $ 619,179        186,311        54,526        83,709        943,725   

Charge-offs

     (561,363     (145,391     (62,059            (768,813

Recoveries

     8,681        6,930        4,148               19,759   

Provision

     451,714        139,708        55,844        (7,415     639,851   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 518,211        187,558        52,459        76,294        834,522   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ 86,244        22,901        105               109,250   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans

          

Ending balance

   $ 9,591,042        9,704,744        4,062,364               23,358,150 (2) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ 1,022,445        242,711        14,483               1,279,639   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Total excludes $8.8 million in net deferred fees and costs.

(2)

Total excludes $15.2 million in net deferred fees and costs.

 

     As Of and For The Three Months Ended June 30, 2011  
(in thousands)    Commercial
Real Estate
    Commercial &
Industrial
    Retail     Unallocated     Total  

Allowance for loan losses

          

Beginning balance

   $ 337,130        216,363        43,042        81,891        678,426   

Charge-offs

     (99,215     (61,874     (20,553            (181,642

Recoveries

     8,462        3,499        2,497               14,458   

Provision

     111,202        27,082        15,803        (33,928     120,159   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 357,579        185,070        40,789        47,963        631,401   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ 62,631        29,842        447               92,920   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans

          

Ending balance

   $ 7,795,352        8,846,592        3,871,653               20,513,597 (1) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ 849,172        302,309        32,358               1,183,839   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     As Of and For The Three Months Ended June 30, 2010  
(in thousands)    Commercial
Real Estate
    Commercial &
Industrial
    Retail     Unallocated     Total  

Allowance for loan losses

          

Beginning balance

   $ 637,058        190,765        53,679        87,195        968,697   

Charge-offs

     (335,700     (77,747     (28,866            (442,313

Recoveries

     3,732        3,515        1,987               9,234   

Provision

     213,121        71,025        25,659        (10,901     298,904   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 518,211        187,558        52,459        76,294        834,522   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ 86,244        22,901        105               109,250   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans

          

Ending balance

   $ 9,591,042        9,704,744        4,062,364               23,358,150 (2) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ 1,022,445        242,711        14,483               1,279,639   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
(1)

Total excludes $8.8 million in net deferred fees and costs.

(2)

Total excludes $15.2 million in net deferred fees and costs.

 

 

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Notes to Consolidated Financial Statements (Unaudited)

 

 

Impaired Loans (including accruing TDRs)

 

    At June 30, 2011     Six Months Ended
June 30, 2011
    Three Months Ended
June 30, 2011
 
(in thousands)   Recorded
Investment
    Unpaid
Principal
Balance
    Related
Allowance
    Average
Recorded
Investment
    Interest
Income
Recognized(1)
    Average
Recorded
Investment
    Interest
Income
Recognized(2)
 

With no related allowance recorded

             

Investment properties

  $ 77,377        120,034               67,516               67,878          

1-4 family properties

    158,145        350,215               184,748               166,923          

Land acquisition

    165,971        291,389               165,942               165,838          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial real estate

    401,493        761,638               418,206               400,639          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial and industrial

    83,320        127,760               80,421               82,738          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Home equity lines

    5,592        6,777               4,461               4,859          

Consumer mortgages

    3,992        5,228               3,656               3,304          

Credit cards

                                                

Other retail loans

    8        10               8               8          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total retail

    9,592        12,015          8,125          8,171     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    494,405        901,413               506,752               491,548          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

With allowance recorded

             

Investment properties

    236,155        238,198        27,908        248,376        3,363        248,220        1,931   

1-4 family properties

    110,382        124,787        14,559        99,447        1,094        107,428        608   

Land acquisition

    101,142        101,161        20,164        92,187        1,179        94,563        526   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial real estate

    447,679        464,146        62,631        440,010        5,636        450,211        3,065   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial and industrial

    218,989        220,562        29,842        203,265        2,781        203,711        1,371   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Home equity lines

    940        1,221        222        2,475        11        1,719        4   

Consumer mortgages

    21,070        21,115        208        15,006        192        21,573        173   

Credit cards

                                                

Other retail loans

    756        756        17        578        9        816        8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total retail

    22,766        23,092        447        18,059        212        24,108        185   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    689,434        707,800        92,920        661,334        8,629        678,030        4,621   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total impaired loans

  $ 1,183,839        1,609,213          1,168,086          1,169,578     
 

 

 

   

 

 

     

 

 

     

 

 

   

 

(1)

During the time within the six months ended June 30, 2011 that the loans were impaired.

(2)

During the time within the three months ended June 30, 2011 that the loans were impaired.

 

      December 31, 2010  
(in thousands)    Recorded
Investment
     Unpaid
Principal Balance
     Related
Allowance
 

With no related allowance recorded

        

Investment properties

   $ 72,978         124,689           

1-4 family properties

     204,548         452,338           

Land acquisition

     160,842         273,135           
  

 

 

    

 

 

    

 

 

 

Total commercial real estate

     438,368         850,162           
  

 

 

    

 

 

    

 

 

 

Commercial and industrial

     78,761         125,600           
  

 

 

    

 

 

    

 

 

 

Home equity lines

     3,775         5,572           

Consumer mortgages

     5,424         7,588           

Credit cards

                       

Other retail loans

     9         10           
  

 

 

    

 

 

    

 

 

 

Total retail

     9,208         13,170      
  

 

 

    

 

 

    

 

 

 

Total

     526,337         988,932           
  

 

 

    

 

 

    

 

 

 

With allowance recorded

        

Investment properties

     197,118         197,443         17,538   

1-4 family properties

     85,460         89,705         22,317   

Land acquisition

     88,631         91,772         14,111   
  

 

 

    

 

 

    

 

 

 

Total commercial real estate

     371,209         378,920         53,966   
  

 

 

    

 

 

    

 

 

 

Commercial and industrial

     196,294         199,337         30,222   
  

 

 

    

 

 

    

 

 

 

Home equity lines

     3,199         3,200         247   

Consumer mortgages

     3,396         3,396         799   

Credit cards

                       

Other retail loans

     79         79         5   
  

 

 

    

 

 

    

 

 

 

Total retail

     6,674         6,675         1,051   
  

 

 

    

 

 

    

 

 

 

Total

     574,177         584,932         85,239   
  

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 1,100,514         1,573,864      
  

 

 

    

 

 

    

 

 

20


Table of Contents

Notes to Consolidated Financial Statements (Unaudited)

 

The average recorded investment in impaired loans was $1.31 billion for the three months ended December 31, 2010. Excluding accruing TDRs, there was no interest income recognized for the investment in impaired loans for the three months ended December 31, 2010. For the three months ended December 31, 2010, interest income recognized for accruing TDRs was $6.5 million (during the time within the three months ended December 31, 2010 that the loans were impaired).

During the second quarter of 2011, Synovus completed loan sales with total carrying values of $128.4 million and proceeds from sale of $88.1 million. These loan sales consisted of $107.7 million of commercial real estate loans, $17.9 million of commercial and industrial loans, and $2.9 million of retail loans. Total loan charge-offs of $40.4 million were recorded during the second quarter of 2011 related to these sales.

During the first six months of 2011, Synovus completed loan sales with total carrying values of $276.4 million and proceeds from sales of $194.2 million. These loan sales consisted of $209.7 million of commercial real estate loans, $55.2 million of commercial and industrial loans, and $11.5 million of retail loans. Total loan charge-offs of $82.2 million were recorded during the first six months of 2011 relating to these sales.

Note 7 - Other Real Estate

Other real estate (“ORE”) consists of properties obtained through a foreclosure proceeding or through an in-substance foreclosure in satisfaction of loans. In accordance with provisions of Accounting Standards Codification (“ASC”) 310-10-35 regarding subsequent measurement of loans for impairment and ASC 310-40-15 regarding accounting for troubled debt restructurings by a creditor, a loan is classified as an in-substance foreclosure when Synovus has taken possession of the collateral regardless of whether formal foreclosure proceedings have taken place.

ORE is reported at the lower of cost or fair value determined on the basis of current appraisals, comparable sales, and other estimates of fair value obtained principally from independent sources, adjusted for estimated selling costs. Management also considers other factors or recent developments such as changes in absorption rates or market conditions from the time of valuation, and anticipated sales values considering management’s plans for disposition, which could result in adjustment to lower the collateral value estimates indicated in the appraisals. At the time of foreclosure or initial possession of collateral, any excess of the loan balance over the fair value of the real estate held as collateral, less costs to sell, is recorded as a charge against the allowance for loan losses. Revenue and expenses from ORE operations as well as gains or losses on sales and any subsequent declines in the fair value are recorded as foreclosed real estate expense, a component of non-interest expense on the consolidated statements of operations.

The carrying value of ORE was $244.3 million and $261.3 million at June 30, 2011 and December 31, 2010, respectively. During the six months ended June 30, 2011 and 2010, approximately $126.2 million and $192.5 million of loans were foreclosed and transferred to other real estate at fair value, respectively. During the six months ended June 30, 2011 and 2010, Synovus recognized foreclosed real estate expenses of $64.6 million and $91.9 million, respectively. Synovus recognized foreclosed real estate expenses of $39.9 million and $46.4 million during the three months ended June 30, 2011 and 2010, respectively. These expenses included write-downs for declines in fair value of ORE subsequent to the date of foreclosure and realized gains and losses resulting from sales transactions totaling $54.5 million and $79.3 million for the six months ended June 30, 2011 and 2010, respectively, and $35.9 million and $41.3 million for the three months ended June 30, 2011 and 2010, respectively.

Note 8 - Fair Value Accounting

Synovus carries various assets and liabilities at fair value based on the fair value accounting guidance under ASC 820 and ASC 825. Fair value is defined 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. Synovus determines the fair values of its financial instruments based on the fair value hierarchy established under ASC 820-10, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels of inputs are as follows:

 

Level 1

 

Quoted prices in active markets for identical assets or liabilities. Level 1 assets include equity securities as well as U.S. Treasury securities that are highly liquid and are actively traded in over-the-counter markets.

 

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Notes to Consolidated Financial Statements (Unaudited)

 

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 agency securities, mortgage-backed securities issued by U.S. Government sponsored enterprises and agencies, obligations of states and municipalities, collateralized mortgage obligations issued by U.S. Government sponsored enterprises, derivative contracts, and mortgage loans held-for-sale. Certain private equity investments that hold mutual fund investments that invest in publicly traded companies are also included in Level 2 assets.

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 collateral-dependent impaired loans, other real estate, certain equity investments, and certain private equity investments and certain derivative contracts.

Fair Value Option

Synovus has elected the fair value option for mortgage loans held for sale primarily to ease the operational burdens required to maintain hedge accounting for these loans. Synovus is still able to achieve effective economic hedges on mortgage loans held for sale without the operational time and expense needed to manage a hedge accounting program.

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

The fair values of trading account assets and liabilities and investment securities available-for-sale are primarily based on actively traded markets where prices are based on either quoted market prices or observed transactions. These securities are classified as Level 1 within the valuation hierarchy and include U.S. Treasury securities and equity securities. Liquidity is a significant factor in the determination of the fair value of certain trading account assets and liabilities and certain available-for-sale securities. The fair values of these instruments also take into account recent market activity as well as other market observable data such as interest rate, spread and prepayment information, volatility, and U.S. Treasury and swap curves. When quoted market prices are not available, which generally occurs due to the lack of liquidity for certain securities, fair values are estimated using bid prices and quoted market prices of pool 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 debt securities, debt securities of U.S. Government-sponsored enterprises and agencies, corporate debt, state and municipal bonds, and certificates of deposit. In both cases, Synovus has evaluated the valuation methodologies of its third-party pricing services to determine whether such valuations are representative of an exit price in Synovus’ principal markets. In a few cases where there is limited activity or less transparency around inputs to valuation, securities are classified as Level 3 within the valuation hierarchy.

Mortgage Loans Held for Sale

Synovus elected to apply the fair value option for mortgage loans originated with the intent to sell to investors. 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 sold in the secondary market and predominantly used as collateral for securitizations, the valuation model

 

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Notes to Consolidated Financial Statements (Unaudited)

 

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 include equity method investments in venture capital funds which are classified as Level 3 within the valuation hierarchy. The valuation of these 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. Based on these factors, the ultimate realizable value of these investments could differ significantly from the value 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 determination of 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 determination of fair value.

Also, Synovus holds an interest in a private equity investment that consists of a mutual fund that invests in publicly traded financial services companies. Although the fund holds investments in publicly traded entities, the fair value of this investment is classified as Level 2 in the valuation hierarchy because there is no actively traded market for the fund itself, and the value of the investment is based on the aggregate market value of the publicly traded companies that are held in the fund for investment.

Derivative Assets and Liabilities

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. The majority of derivatives entered into by Synovus are executed over-the-counter and consist of interest rate swaps. The fair values of these derivative instruments are determined based on an internally developed model that uses readily observable market data, as quoted market prices are not available for these instruments. The valuation models and inputs depend on the type of derivative and the nature of the underlying instrument and include interest rates, prices and indices to generate continuous yield or pricing curves, volatility factors, and customer credit related adjustments. The principal techniques used to model the value these instruments are an income approach, discounted cash flows, Black-Scholes or Binomial Pricing models. The sale of to-be-announced (“TBA”) mortgage-backed securities for current month delivery or in the future and the purchase of option contracts of similar duration are derivatives utilized by Synovus’ mortgage subsidiary, and are valued by obtaining prices directly from dealers in the form of quotes for identical securities or options using a bid pricing convention with a spread between bid and offer quotations. Interest rate swaps, floors, caps and collars, and TBA mortgage-backed securities are classified as Level 2 within the valuation hierarchy.

The mortgage subsidiary originates mortgage loans which are classified as derivatives prior to the loan closing when there is a lock commitment outstanding to a borrower to close a loan at a specific interest rate. The fair values of these derivative positions, which are related to mortgage loan commitments, are determined based on a bid pricing convention as mentioned above. The determination of fair value of interest rate lock commitments includes fall-out ratio assumptions related to the likelihood that a commitment will ultimately result in a closed loan, which is a significant unobservable assumption. Therefore, this type of derivative instrument is classified as Level 3 within the valuation hierarchy. These amounts, however, are insignificant.

In November 2009, Synovus sold certain Visa Class B shares to another Visa USA member financial institution. The sales price was based on the Visa stock conversion ratio in effect at the time for conversion of Visa Class B shares to Visa Class A unrestricted shares at a future date. In conjunction with the sale, Synovus entered into a derivative contract with the purchaser (the “Visa Derivative”) which provides for settlements between the parties based upon a change in the ratio for conversion of Visa Class B shares to Visa Class A shares. The fair value of the Visa derivative is measured using a discounted cash flow methodology for estimated future cash flows determined through use of probability weighting for estimates of Visa’s aggregate exposure to the covered litigation. The conversion rate derivative is classified as Level 3 within the valuation hierarchy as the value is determined using discounted cash flow methodologies and involves unobservable inputs which are not supported by market activity for the liability.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Synovus adopted certain of the new disclosure requirements of ASU 2010-06, Improving Disclosures about Fair Value Measurements, effective January 1, 2010. The guidance requires fair value disclosures

 

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Notes to Consolidated Financial Statements (Unaudited)

 

by class of assets and liabilities rather than by major category. For equity and debt securities, class was determined based on the nature and risks of the investments. Transfers between levels were inconsequential for the six months ended June 30, 2011 and the year ended December 31, 2010. 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 June 30, 2011 and December 31, 2010, according to the valuation hierarchy included in ASC 820-10.

 

 

     June 30, 2011  
(in thousands)        Level 1              Level 2              Level 3          Total
Assets/Liabilities
at Fair Value
 

Assets

           

Trading securities:

           

U.S. Treasury securities

   $                           

Mortgage-backed securities issued by U.S. Government agencies

             1,771                 1,771   

Collateralized mortgage obligations issued by U.S. Government sponsored enterprises

             4,580                 4,580   

Other U.S. Government agencies

                               

State and municipal securities

             692                 692   

Corporate and other debt

             8,887                 8,887   

Equity, mutual funds, and other

             200                 200   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total trading securities

             16,130                 16,130   

Mortgage loans held for sale

             78,752                 78,752   

Investment securities available for sale:

           

U.S. Treasury securities

     275,430                         275,430   

U.S. Government agency securities

             51,401                 51,401   

Securities issued by U.S. Government

sponsored enterprises

             654,087                 654,087   

Mortgage-backed securities issued by U.S.

Government agencies

             427,317                 427,317   

Mortgage-backed securities issued by U.S. Government sponsored enterprises

             1,704,160                 1,704,160   

Collateralized mortgage obligations issued by U.S. Government sponsored enterprises

             17,405                 17,405   

State and municipal securities

             29,287                 29,287   

Equity securities

     5,257                 7,949         13,206   

Other investments(1)

             81,512         5,449         86,961   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities available for sale

     280,687         2,965,169         13,398         3,259,254   

Private equity investments

             632         20,273         20,904   

Derivative assets:

           

Interest rate contracts

             78,436                 78,436   

Mortgage derivatives

                     1,229         1,229   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivative assets

   $         78,436         1,229         79,665   

Liabilities

           

Trading account liabilities:

           

U.S. Treasury securities

   $                           

Mortgage-backed securities issued by U.S. Government sponsored enterprises

             1,731                 1,731   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total trading liabilities

             1,731