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EX-31.1 - EXHIBIT 31.1 - SYNOVUS FINANCIAL CORPsnv-09302017xex311.htm
EX-32 - EXHIBIT 32 - SYNOVUS FINANCIAL CORPsnv-09302017xex32.htm
EX-31.2 - EXHIBIT 31.2 - SYNOVUS FINANCIAL CORPsnv-09302017xex312.htm
EX-12.1 - EXHIBIT 12.1 - SYNOVUS FINANCIAL CORPsnv-0930x2017xex121.htm
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 September 30, 2017
Commission file number 1-10312
 
______________________________
financialappendix930a29.jpg
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, Columbus, Georgia
 
31901
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (706) 649-2311
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock, $1.00 Par Value
Series B Participating Cumulative Preferred Stock Purchase Rights
Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series C
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
______________________________
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 (232.405 of this chapter) 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check One):
Large accelerated filer
x
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
Smaller reporting company
¨
 
 
 
 
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section 7(a)2(B) of the Securities Act.  ¨ 
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
 
 
 
November 2, 2017

Common Stock, $1.00 Par Value
 
 
 
119,514,829





Table of Contents
 
 
 
 
 
Page
Financial Information
 
 
 
Index of Defined Terms
 
Item 1.
Financial Statements (Unaudited)
 
 
 
Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016
 
 
Consolidated Statements of Income for the Nine and Three Months Ended September 30, 2017 and 2016
 
 
Consolidated Statements of Comprehensive Income for the Nine and Three Months Ended September 30, 2017 and 2016
 
 
Consolidated Statements of Changes in Shareholders' Equity for the Nine Months Ended September 30, 2017 and 2016
 
 
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016
 
 
Notes to Unaudited Interim Consolidated Financial Statements
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
Item 3.
 
Item 4.
Controls and Procedures
 
 
 
 
 
Other Information
 
 
Item 1.
Legal Proceedings
 
Item 1A.
Risk Factors
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
Item 3.
Defaults Upon Senior Securities
 
Item 4.
Mine Safety Disclosures
 
Item 5.
Other Information
 
Item 6.
Exhibits
 
Signatures
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 






SYNOVUS FINANCIAL CORP.
INDEX OF DEFINED TERMS
ALCO – Synovus' Asset Liability Management Committee
ASC – Accounting Standards Codification
ASU – Accounting Standards Update
ATM – Automatic teller machine
Basel III – A global regulatory framework developed by the Basel Committee on Banking Supervision
BOLI – Bank-Owned Life Insurance
BOV – Broker’s opinion of value
bp – Basis point (bps - basis points)
C&I – Commercial and industrial loans
CET1 – Common Equity Tier 1 Capital defined by Basel III capital rules
CME – Chicago Mercantile Exchange
CMO – Collateralized Mortgage Obligation
Cabela’s Transaction – The transaction completed on September 25, 2017 whereby Synovus Bank acquired certain assets and assumed certain liabilities of WFB and then immediately thereafter sold WFB’s credit card assets and certain related liabilities to Capital One Bank (USA), National Association, a bank subsidiary of Capital One Financial Corporation.  As a part of this transaction, Synovus Bank retained WFB’s $1.10 billion brokered time deposit portfolio and received a $75.0 million fee from Cabela’s and Capital One.  Throughout this Report, we refer to this transaction as the “Cabela’s Transaction” and the associated $75.0 million fee received from Cabela’s and Capital One as the “Cabela’s Transaction Fee
Code – Internal Revenue Code of 1986, as amended
Company – Synovus Financial Corp. and its wholly-owned subsidiaries, except where the context requires otherwise
Covered Litigation – Certain Visa litigation for which Visa is indemnified by Visa USA members
CRE – Commercial real estate
DIF – Deposit Insurance Fund
Dodd-Frank Act – The Dodd-Frank Wall Street Reform and Consumer Protection Act
EVE – economic value of equity
Exchange Act – Securities Exchange Act of 1934, as amended
FASB – Financial Accounting Standards Board
FDIC – Federal Deposit Insurance Corporation
Federal Reserve Bank – The 12 banks that are the operating arms of the U.S. central bank. They implement the policies of the Federal Reserve Board and also conduct economic research
Federal Reserve Board – The 7-member Board of Governors that oversees the Federal Reserve System, establishes monetary policy, and monitors the economic health of the country. Its members are appointed by the President, subject to Senate confirmation, and serve 14-year terms
Federal Reserve System – The 12 Federal Reserve Banks, with each one serving member banks in its own district. This system, supervised by the Federal Reserve Board, has broad regulatory powers over the money supply and the credit structure
FFIEC – Federal Financial Institutions Examination Council
FHLB – Federal Home Loan Bank
FICO – Fair Isaac Corporation
GA DBF – Georgia Department of Banking and Finance

i


GAAP – Generally Accepted Accounting Principles in the United States of America
GGL – government guaranteed loans
Global One – Entaire Global Companies, Inc., the parent company of Global One Financial, Inc., as acquired by Synovus on October 1, 2016. Throughout this Report, we refer to this acquisition as "Global One"
HELOC – Home equity line of credit
LTV – Loan-to-collateral value ratio
NAICS – North American Industry Classification System
nm – not meaningful
NPA – Non-performing assets
NPL – Non-performing loans
NSF – Non-sufficient funds
OCI – Other comprehensive income
OTC– Over-the-counter
ORE – Other real estate
OTTI – Other-than-temporary impairment
Parent Company – Synovus Financial Corp.
SBA – Small Business Administration
SCM – State, county, and municipal
SEC – U.S. Securities and Exchange Commission
Securities Act – Securities Act of 1933, as amended
Series C Preferred Stock – Synovus' Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series C, $25 liquidation preference
Synovus – Synovus Financial Corp.
Synovus Bank – A Georgia state-chartered bank and wholly-owned subsidiary of Synovus through which Synovus conducts its banking operations
Synovus' 2016 Form 10-K – Synovus' Annual Report on Form 10-K for the year ended December 31, 2016
Synovus Mortgage – Synovus Mortgage Corp., a wholly-owned subsidiary of Synovus Bank
Synovus Securities – Synovus Securities, Inc., a wholly-owned subsidiary of Synovus
Synovus Trust – Synovus Trust Company, N.A., a wholly-owned subsidiary of Synovus Bank
TDR – Troubled debt restructuring (as defined in ASC 310-40)
Treasury – United States Department of the Treasury
VIE – Variable interest entity, as defined in ASC 810-10
Visa – The Visa U.S.A., Inc. card association or its affiliates, collectively
Visa Class B shares – Class B shares of common stock issued by Visa which are subject to restrictions with respect to sale until all of the Covered Litigation has been settled
Visa Derivative – A derivative contract with the purchaser of Visa Class B shares which provides for settlements between the purchaser and Synovus based upon a change in the ratio for conversion of Visa Class B shares into Visa Class A shares
Warrant – A warrant issued to the Treasury by Synovus to purchase up to 2,215,820 shares of Synovus common stock at a per share exercise price of $65.52 expiring on December 19, 2018, as was issued by Synovus to Treasury in 2008 in connection with the Capital Purchase Program, promulgated under the Emergency Stabilization Act of 2008
WFB – World's Foremost Bank, a wholly-owned subsidiary of Cabela's Incorporated

ii



PART I. FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
SYNOVUS FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except share and per share data)
September 30, 2017
 
December 31, 2016
ASSETS
 
 
 
Cash and cash equivalents
$
386,459

 
395,175

Interest bearing funds with Federal Reserve Bank
1,297,581

 
527,090

Interest earning deposits with banks
6,047

 
18,720

Federal funds sold and securities purchased under resale agreements
48,820

 
58,060

Trading account assets, at fair value
12,329

 
9,314

Mortgage loans held for sale, at fair value
54,072

 
51,545

Other loans held for sale
31,253

 

Investment securities available for sale, at fair value
3,825,443

 
3,718,195

Loans, net of deferred fees and costs
24,487,360

 
23,856,391

Allowance for loan losses
(249,683
)
 
(251,758
)
Loans, net
$
24,237,677

 
23,604,633

Premises and equipment, net
423,245

 
417,485

Goodwill
57,315

 
59,678

Other intangible assets
11,548

 
13,223

Other real estate
10,551

 
22,308

Deferred tax asset, net
272,052

 
395,356

Other assets
967,731

 
813,220

Total assets
$
31,642,123

 
30,104,002

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
Liabilities
 
 
 
Deposits:
 
 
 
Non-interest bearing deposits
$
7,302,682

 
7,085,804

Interest bearing deposits, excluding brokered deposits
16,420,319

 
16,183,273

Brokered deposits
2,463,227

 
1,378,983

Total deposits
26,186,228

 
24,648,060

Federal funds purchased and securities sold under repurchase agreements
141,539

 
159,699

Long-term debt
1,882,607

 
2,160,881

Other liabilities
434,671

 
207,438

Total liabilities
$
28,645,045

 
27,176,078

Shareholders' Equity
 
 
 
Series C Preferred Stock – no par value. Authorized 100,000,000 shares; 5,200,000 shares issued and outstanding at September 30, 2017 and December 31, 2016
$
125,980

 
125,980

Common stock - $1.00 par value. Authorized 342,857,143 shares; 142,525,139 issued at September 30, 2017 and 142,025,720 issued at December 31, 2016; 119,566,625 outstanding at September 30, 2017 and 122,266,106 outstanding at December 31, 2016
142,525

 
142,026

Additional paid-in capital
3,033,682

 
3,028,405

Treasury stock, at cost – 22,958,514 shares at September 30, 2017 and 19,759,614 shares at December 31, 2016
(800,509
)
 
(664,595
)
Accumulated other comprehensive loss
(39,596
)
 
(55,659
)
Retained earnings
534,996

 
351,767

Total shareholders’ equity
2,997,078

 
2,927,924

Total liabilities and shareholders' equity
$
31,642,123

 
30,104,002

 
 
 
 
See accompanying notes to unaudited interim consolidated financial statements.

1


SYNOVUS FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
 
Nine Months Ended September 30,
 
Three Months Ended September 30,
(in thousands, except per share data)
2017
 
2016
 
2017
 
2016
Interest income:
 
 
 
 
 
 
 
      Loans, including fees
$
785,166

 
700,340

 
$
273,847

 
237,448

      Investment securities available for sale
60,112

 
49,926

 
20,014

 
16,269

      Trading account assets
90

 
46

 
41

 
13

      Mortgage loans held for sale
1,478

 
1,966

 
506

 
727

      Federal Reserve Bank balances
4,084

 
3,170

 
1,569

 
1,151

      Other earning assets
4,633

 
2,822

 
1,675

 
946

Total interest income
855,563

 
758,270

 
297,652

 
256,554

Interest expense:
 
 
 
 
 
 
 
Deposits
55,874

 
48,072

 
20,798

 
15,858

Federal funds purchased and securities sold under repurchase agreements
125

 
154

 
42

 
58

Long-term debt
45,967

 
44,394

 
14,240

 
14,631

Total interest expense
101,966

 
92,620

 
35,080

 
30,547

Net interest income
753,597

 
665,650

 
262,572

 
226,007

Provision for loan losses
58,620

 
21,741

 
39,686

 
5,671

Net interest income after provision for loan losses
694,977

 
643,909

 
222,886

 
220,336

Non-interest income:
 
 
 
 
 
 
 
Service charges on deposit accounts
59,848

 
60,772

 
20,255

 
20,822

Fiduciary and asset management fees
37,290

 
34,691

 
12,615

 
11,837

Brokerage revenue
21,947

 
20,019

 
7,511

 
6,199

Mortgage banking income
17,151

 
18,755

 
5,603

 
7,329

Bankcard fees
24,339

 
24,988

 
7,901

 
8,269

Cabela's Transaction Fee
75,000

 

 
75,000

 

Investment securities (losses) gains, net
(289
)
 
126

 
(7,956
)
 
59

Decrease in fair value of private equity investments, net
(3,193
)
 
(527
)
 
(27
)
 
(249
)
Other fee income
16,127

 
15,255

 
5,094

 
5,171

Other non-interest income
27,754

 
25,109

 
9,439

 
8,718

Total non-interest income
275,974

 
199,188

 
135,435

 
68,155

Non-interest expense:
 
 
 
 
 
 
 
Salaries and other personnel expense
322,079

 
300,364

 
109,675

 
101,945

Net occupancy and equipment expense
89,837

 
81,480

 
30,573

 
28,120

Third-party processing expense
39,882

 
34,033

 
13,659

 
11,219

FDIC insurance and other regulatory fees
20,723

 
20,100

 
7,078

 
6,756

Professional fees
20,048

 
19,794

 
7,141

 
6,486

Advertising expense
14,868

 
15,358

 
3,610

 
5,597

Foreclosed real estate expense, net
10,847

 
9,998

 
7,265

 
2,725

Earnout liability adjustments
3,766

 

 
2,059

 

Merger-related expense
110

 
550

 
23

 
550

Loss on early extinguishment of debt, net

 
4,735

 

 

Fair value adjustment to Visa derivative

 
1,079

 

 
360

Restructuring charges, net
7,043

 
8,225

 
519

 
1,243

Other operating expenses
65,577

 
67,000

 
24,044

 
20,870

Total non-interest expense
594,780

 
562,716

 
205,646

 
185,871

Income before income taxes
376,171

 
280,381

 
152,675

 
102,620

Income tax expense
130,303

 
102,148

 
54,668

 
37,375

Net income
245,868

 
178,233

 
98,007

 
65,245

Dividends on preferred stock
7,678

 
7,678

 
2,559

 
2,559

Net income available to common shareholders
$
238,190

 
170,555

 
$
95,448

 
62,686

Net income per common share, basic
$
1.96

 
1.36

 
$
0.79

 
0.51

Net income per common share, diluted
1.94

 
1.36

 
0.78

 
0.51

Weighted average common shares outstanding, basic
121,796

 
125,076

 
120,900

 
122,924

Weighted average common shares outstanding, diluted
122,628

 
125,712

 
121,814

 
123,604

 
 
 
 
 
 
 
 
See accompanying notes to unaudited interim consolidated financial statements.

2


SYNOVUS FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)

 
Nine Months Ended September 30,
 
2017
 
2016
(in thousands)
Before-tax Amount
 
Tax (Expense) Benefit
 
Net of Tax Amount
 
Before-tax Amount
 
Tax (Expense) Benefit
 
Net of Tax Amount
Net income
$
376,171

 
(130,303
)
 
245,868

 
280,381

 
(102,148
)
 
178,233

Net change related to cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
Reclassification adjustment for losses realized in net income
130

 
(50
)
 
80

 
402

 
(155
)
 
247

Net unrealized gains on investment securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
Reclassification adjustment for net losses (gains) realized in net income
289

 
(111
)
 
178

 
(126
)
 
49

 
(77
)
Net unrealized gains arising during the period
25,715

 
(9,903
)
 
15,812

 
56,648

 
(21,821
)
 
34,827

Net unrealized gains
26,004

 
(10,014
)
 
15,990

 
56,522

 
(21,772
)
 
34,750

Post-retirement unfunded health benefit:
 
 
 
 
 
 
 
 
 
 
 
Reclassification adjustment for gains realized in net income
(74
)
 
29

 
(45
)
 
(124
)
 
48

 
(76
)
Actuarial gains arising during the period
61

 
(23
)

38

 
102

 
(39
)
 
63

Net unrealized (realized) gains
$
(13
)
 
6

 
(7
)
 
(22
)
 
9

 
(13
)
Other comprehensive income
$
26,121

 
(10,058
)
 
16,063

 
56,902

 
(21,918
)
 
34,984

Comprehensive income
 
 
 
 
$
261,931

 
 
 
 
 
213,217

 
 
 
 
 
 
 
 
 
 
 
 

 
Three Months Ended September 30,
 
2017
 
2016
(in thousands)
Before-tax Amount
 
Tax (Expense) Benefit
 
Net of Tax Amount
 
Before-tax Amount
 
Tax (Expense) Benefit
 
Net of Tax Amount
Net income
$
152,675

 
(54,668
)
 
98,007

 
102,620

 
(37,375
)
 
65,245

Net change related to cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
Reclassification adjustment for losses realized in net income

 

 

 
65

 
(25
)
 
40

Net unrealized gains (losses) on investment securities available for sale:


 


 
 
 
 
 
 
 
 
Reclassification adjustment for net losses (gains) realized in net income
7,956

 
(3,063
)
 
4,893

 
(59
)
 
23

 
(36
)
Net unrealized gains (losses) arising during the period
5,465

 
(2,106
)
 
3,359

 
(9,567
)
 
3,672

 
(5,895
)
Net unrealized gains (losses)
13,421

 
(5,169
)
 
8,252

 
(9,626
)
 
3,695

 
(5,931
)
Post-retirement unfunded health benefit:
 
 


 
 
 
 
 
 
 
 
Reclassification adjustment for gains realized in net income
(34
)
 
13

 
(21
)
 
(20
)
 
8

 
(12
)
Actuarial gains arising during the period
61

 
(23
)

38

 
102

 
(39
)
 
63

Net unrealized (realized) gains
$
27

 
(10
)
 
17

 
82

 
(31
)
 
51

Other comprehensive income (loss)
$
13,448

 
(5,179
)
 
8,269

 
(9,479
)
 
3,639

 
(5,840
)
Comprehensive income
 
 
 
 
$
106,276

 
 
 
 
 
59,405

 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to unaudited interim consolidated financial statements.

3


SYNOVUS FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(unaudited)
(in thousands, except per share data)
Series C Preferred Stock
 
Common
Stock
 
Additional
Paid-in
Capital
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained Earnings
 
Total
Balance at December 31, 2015
$
125,980

 
140,592

 
2,989,981

 
(401,511
)
 
(29,819
)
 
174,973

 
3,000,196

Net income

 

 

 

 

 
178,233

 
178,233

Other comprehensive income, net of income taxes

 

 

 

 
34,984

 

 
34,984

Cash dividends declared on common stock -$0.36 per share

 

 

 

 

 
(44,737
)
 
(44,737
)
Cash dividends paid on Series C Preferred Stock

 

 

 

 

 
(7,678
)
 
(7,678
)
Repurchases of common stock

 

 
(10,581
)
 
(252,503
)
 

 

 
(263,084
)
Restricted share unit activity

 
301

 
(4,860
)
 

 

 
(89
)
 
(4,648
)
Stock options exercised

 
173

 
2,808

 

 

 

 
2,981

Share-based compensation net tax benefit

 

 
199

 

 

 

 
199

Share-based compensation expense

 

 
10,213

 

 

 

 
10,213

Balance at September 30, 2016
$
125,980

 
141,066

 
2,987,760

 
(654,014
)
 
5,165

 
300,702

 
2,906,659

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2016
$
125,980

 
142,026

 
3,028,405

 
(664,595
)
 
(55,659
)
 
351,767

 
2,927,924

Net income

 

 

 

 

 
245,868

 
245,868

Other comprehensive income, net of income taxes

 

 

 

 
16,063

 

 
16,063

Cash dividends declared on common stock - $0.45 per share

 

 

 

 

 
(54,671
)
 
(54,671
)
Cash dividends paid on Series C Preferred Stock

 

 

 

 

 
(7,678
)
 
(7,678
)
Repurchases of common stock

 

 

 
(135,914
)
 

 

 
(135,914
)
Restricted share unit activity

 
335

 
(8,007
)
 

 

 
(290
)
 
(7,962
)
Stock options exercised

 
164

 
2,708

 

 

 

 
2,872

Share-based compensation expense

 

 
10,576

 

 

 

 
10,576

Balance at September 30, 2017
$
125,980

 
$
142,525

 
3,033,682

 
(800,509
)
 
(39,596
)
 
534,996

 
2,997,078

 
 
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to unaudited interim consolidated financial statements.

4


SYNOVUS FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
Nine Months Ended September 30,
(in thousands)
2017
 
2016
Operating Activities
 
 
 
Net income
$
245,868

 
178,233

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan losses
58,620

 
21,741

Depreciation, amortization, and accretion, net
44,786

 
43,615

Deferred income tax expense
114,205

 
94,436

Decrease in trading account assets
(3,014
)
 
(2,212
)
Originations of mortgage loans held for sale
(490,202
)
 
(512,572
)
Proceeds from sales of mortgage loans held for sale
500,786

 
486,690

Gain on sales of mortgage loans held for sale, net
(10,587
)
 
(10,828
)
Increase in other assets
(18,598
)
 
(38,577
)
Increase in other liabilities
17,718

 
37,068

Investment securities losses (gains), net
289

 
(126
)
Losses and write-downs on other real estate, net
9,869

 
8,194

Decrease in fair value of private equity investments, net
3,193

 
527

Losses and write-downs on other assets held for sale, net
1,872

 
7,205

Loss on early extinguishment of debt, net

 
4,735

Share-based compensation expense
10,576

 
10,213

Net cash provided by operating activities
$
485,381

 
328,342

 
 
 
 
Investing Activities
 
 
 
Net decrease (increase) in interest earning deposits with banks
12,673

 
(988
)
Net decrease (increase) in federal funds sold and securities purchased under resale agreements
9,240

 
(1,934
)
Net increase in interest bearing funds with Federal Reserve Bank
(770,491
)
 
(155,889
)
Proceeds from maturities and principal collections of investment securities available for sale
483,307

 
711,882

Proceeds from sales of investment securities available for sale
812,293

 
596,824

Purchases of investment securities available for sale
(1,195,302
)
 
(1,233,236
)
Proceeds from sales of loans
26,386

 
8,433

Proceeds from sales of other real estate
8,359

 
25,415

Net increase in loans
(755,231
)
 
(879,200
)
Purchases of bank-owned life insurance policies
(150,000
)
 

Net increase in premises and equipment
(34,717
)
 
(24,491
)
Proceeds from sales of other assets held for sale
3,158

 
5,673

Net cash used in investing activities
$
(1,550,325
)
 
(947,511
)
 
 
 
 
Financing Activities
 
 
 
Net increase in demand and savings deposits
335,438

 
1,054,389

Net increase (decrease) in certificates of deposit
1,202,926

 
(105,698
)
Net (decrease) increase in federal funds purchased and securities sold under repurchase agreements
(18,160
)
 
18,000

Repayments on long-term debt
(1,653,613
)
 
(1,730,106
)
Proceeds from issuance of long-term debt
1,375,000

 
1,700,000

Dividends paid to common shareholders
(36,681
)
 
(44,737
)
Dividends paid to preferred shareholders
(7,678
)
 
(7,678
)
Stock options exercised
2,872

 
2,981

Repurchases of common stock
(135,914
)
 
(263,084
)
Restricted stock activity
(7,962
)
 
(4,648
)
Net cash provided by financing activities
$
1,056,228

 
619,419

(Decrease) increase in cash and cash equivalents
(8,716
)
 
250

Cash and cash equivalents at beginning of period
395,175

 
367,092

Cash and cash equivalents at end of period
$
386,459

 
367,342

 
 
 
 

5


Supplemental Cash Flow Information
 
 
 
Cash paid during the period for:
 
 
 
Income tax payments, net
$
11,195

 
6,828

Interest paid
101,632

 
93,479

Non-cash Activities
 
 
 
Premises and equipment transferred to other assets held for sale
1,063

 
23,667

Other assets held for sale transferred to premises and equipment
4,450

 

Loans foreclosed and transferred to other real estate
6,571

 
15,017

Loans transferred to other loans held for sale at fair value
77,774

 
10,482

   Securities purchased during the period but settled after period-end
193,286

 
49,479

   Dividends declared on common stock during the period but paid after period-end
17,990

 

 
 
 
 
See accompanying notes to unaudited interim consolidated financial statements.

6



Notes to Unaudited Interim Consolidated Financial Statements
Note 1 - Significant Accounting Policies
Business Operations
The accompanying unaudited interim consolidated financial statements of Synovus Financial Corp. include the accounts of the Parent Company and its consolidated subsidiaries. Synovus Financial Corp. is a financial services company based in Columbus, Georgia. Through its wholly-owned subsidiary, Synovus Bank, a Georgia state-chartered bank that is a member of the Federal Reserve System, the company provides commercial and retail banking in addition to a full suite of specialized products and services including private banking, treasury management, wealth management, premium finance and international banking.
Synovus Bank is positioned in some of the highest growth markets in the Southeast, with 249 branches and 328 ATMs in Georgia, Alabama, South Carolina, Florida, and Tennessee.
Basis of Presentation
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with the instructions to the SEC Form 10-Q and Article 10 of Regulation S-X; therefore, they do not include all information and footnotes necessary for a fair presentation of financial position, results of operations, comprehensive income, and cash flows in conformity with GAAP. All adjustments consisting of normally recurring accruals that, in the opinion of management, are necessary for a fair presentation of the consolidated financial position and results of operations for the periods covered by this Report have been included. The accompanying unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes appearing in Synovus' 2016 Form 10-K. There have been no significant changes to the accounting policies as disclosed in Synovus' 2016 Form 10-K.
In preparing the unaudited interim 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 consolidated 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 allowance for loan losses, the fair value of investment securities, and the fair value of private equity investments.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and due from banks. At December 31, 2016, $533 thousand of the due from banks balance was restricted as to withdrawal. There were no cash and cash equivalents restricted as to withdrawal at September 30, 2017.
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. At September 30, 2017 and December 31, 2016, interest bearing funds with the Federal Reserve Bank included $57.7 million and $130.0 million, respectively, on deposit to meet Federal Reserve Bank requirements. Interest earning deposits with banks include $6.0 million and $5.6 million at September 30, 2017 and December 31, 2016, respectively, which are pledged as collateral in connection with certain letters of credit. Federal funds sold include $45.8 million and $56.1 million at September 30, 2017 and December 31, 2016, respectively, which are pledged to collateralize certain derivative financial instruments. Federal funds sold and securities purchased under resale agreements, and federal funds purchased and securities sold under repurchase agreements, generally mature in one day.
Recently Adopted Accounting Standards Updates
During 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 simplified various aspects of the accounting for employee share-based payment transactions for both public and nonpublic entities, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. This accounting standard update included a requirement to record all tax effects associated with share-based compensation through the income statement. Prior to 2017, tax benefits in excess of compensation cost (“windfalls”) and tax deficiencies (“shortfalls”) were recorded in equity. During the nine and three months ended September 30, 2017, Synovus recognized $4.7 million and $211 thousand, respectively, of income tax benefits from excess tax benefits that occurred during the nine months ended September 30, 2017 from the vesting of restricted share units and exercise of stock options. As of January 1, 2017, Synovus had no previously unrecognized excess tax benefits. Additionally, beginning January 1, 2017, Synovus modified the denominator in the diluted earnings per common share calculation under the treasury stock method to exclude future excess tax benefits as part of the assumed proceeds. Synovus elected to retain its existing accounting policy election to estimate award forfeitures.

7


During 2015, the FASB issued ASU 2015-17, Income Taxes: Balance Sheet Classification of Deferred Taxes, which became effective January 1, 2017. ASU 2015-17 required deferred income tax liabilities and assets be classified as noncurrent in the statement of financial position instead of separating deferred taxes into current and noncurrent amounts. Also, valuation allowances will no longer be classified between current and noncurrent because these allowances will be required to be classified as noncurrent under the new standard. This ASU only impacts classification in the balance sheet, and has no impact on required deferred tax footnote disclosures (i.e., required presentation of “gross” deferred tax assets and “gross” deferred tax liabilities). The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by this ASU. There is no impact to our balance sheet as a result of this standard because Synovus has not historically distinguished deferred taxes on the balance sheet as current vs. non-current.
Reclassifications
Prior periods' consolidated financial statements are reclassified whenever necessary to conform to the current periods' presentation.

Note 2 - Acquisitions
Cabela's Transaction
On September 25, 2017, Synovus' wholly owned subsidiary, Synovus Bank, completed the acquisition of certain assets and assumption of certain liabilities of WFB. Immediately following the closing of this transaction, Synovus Bank sold WFB’s credit card assets and related liabilities to Capital One Bank (USA), National Association, a bank subsidiary of Capital One Financial Corporation.
Synovus retained WFB’s $1.10 billion brokered time deposits portfolio, which had a weighted average remaining maturity of approximately 2.53 years and a weighted average rate of 1.83% as of September 25, 2017. The transaction was accounted for as an assumption of a liability (accounted for under the asset acquisition model). In accordance with ASC 820, Fair Value Measurements and Disclosures, the brokered time deposit portfolio was recorded at $1.10 billion, which was the amount of cash received for the deposits and represented the estimated fair value of the deposits at the transaction date. Additionally, Synovus received a $75.0 million transaction fee from Cabela’s and Capital One, which was recognized into earnings upon closing of the transaction, based on having achieved the recognition criteria outlined in SEC SAB Topic 13.A, Revenue Recognition.
Acquisition of Global One
On October 1, 2016, Synovus completed its acquisition of all of the outstanding stock of Global One. Prior to its acquisition, Global One was an Atlanta-based private specialty financial services company that lended primarily to commercial entities, with all loans fully collateralized by cash value life insurance policies and/or annuities issued by investment grade life insurance companies. Under the terms of the merger agreement, Synovus acquired Global One for an up-front payment of $30 million, consisting of the issuance of 821 thousand shares of Synovus common stock valued at $26.6 million and $3.4 million in cash, with additional payments to Global One's former shareholders over the next three to five years based on earnings from the Global One business as further discussed below.
The acquisition of Global One constituted a business combination. Accordingly, the assets acquired and liabilities assumed were recorded at their estimated fair values as shown in the following table. The determination of fair value required management to make estimates about discount rates, future expected earnings and cash flows, market conditions, future loan growth, and other future events that are highly subjective in nature and subject to change. These fair value estimates reflect measurement period adjustments to the amounts reported as of December 31, 2016, the most significant of which consist of a reduction in goodwill of $2.4 million and a decrease in the estimated fair value of contingent consideration of $1.8 million (the income statement impact of such adjustments was insignificant).

8


Global One
 
October 1, 2016
(in thousands)
 
Fair Value
Assets acquired:
 
 
Cash and due from banks
 
$
9,554

      Commercial and industrial loans(1)
 
357,307

Goodwill(2)
 
32,884

Other intangible assets
 
12,500

Other assets
 
3,681

Total assets acquired
 
$
415,926

 
 
 
Liabilities assumed:
 
 
Notes payable(3)
 
$
358,560

Contingent consideration
 
12,234

Deferred tax liability, net
 
3,229

Other liabilities
 
11,903

Total liabilities assumed
 
$
385,926

Consideration paid
 
$
30,000

 
 
 
Cash paid
 
$
3,408

Fair value of common stock issued
 
26,592

 
 
 
(1) The unpaid principal balance of the loans was $356.7 million.  
(2) The goodwill is not expected to be deductible for tax purposes.
(3) The unpaid principal balance of the notes payable was $357.0 million.
Under the terms of the merger agreement, the purchase price includes additional annual payments ("Earnout Payments") to Global One's former shareholders over the next three to five years, with amounts based on a percentage of "Global One Earnings," as defined in the merger agreement. The Earnout Payments will consist of shares of Synovus common stock as well as a smaller cash consideration component.
Other intangible assets consist of existing borrower relationships (11 years useful life), trade name (10 years useful life), and distribution network (8 years useful life) with September 30, 2017 net carrying values of $9.8 million, $990 thousand, and $525 thousand, respectively.
The following is a description of the methods used to determine the fair values of significant assets and liabilities:
Commercial and industrial loans: The fair value of loans was determined based on a discounted cash flow approach. The most significant assumptions used in the valuation of the loan portfolio consisted of the prepayment rate, the probability of extension at maturity, the interest rates on extended loans, and the discount rates. All loans are fully collateralized by cash value life insurance policies and/or annuities issued by investment grade insurance companies. Based on a history of no principal losses on the loan portfolio since inception as well as the collateral position, no losses were estimated in the event of default.
Notes payable: The notes payable were extinguished immediately after the closing of the acquisition. Accordingly, the fair value of notes payable was determined based on the amounts paid to extinguish such notes, inclusive of applicable prepayment penalties, which is consistent with the perspective of a market participant.
Contingent consideration: The fair value of the contingent consideration, which represents the fair value of the above referenced Earnout Payments, was determined based on option pricing methods and a Monte Carlo simulation. The most significant assumptions used in the valuation of the contingent consideration were the expected cash flows, volatility, and discount rates. Subsequent changes in the fair value of the contingent consideration are recognized in earnings until the contingent consideration arrangement is settled.
Note 3 - Share Repurchase Program
Synovus' Board of Directors authorized an up to $200 million share repurchase program that will expire at the end of 2017. This program was announced on January 17, 2017. As of September 30, 2017, Synovus had repurchased under this program a total of $135.9 million, or 3.2 million shares, at an average price of $42.47 per share.

9


Note 4 - Investment Securities
The amortized cost, gross unrealized gains and losses, and estimated fair values of investment securities available for sale at September 30, 2017 and December 31, 2016 are summarized below.
 
 
September 30, 2017
(in thousands)
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
 Fair Value
U.S. Treasury securities
 
$
83,550

 

 
(369
)
 
83,181

U.S. Government agency securities
 
10,772

 
266

 

 
11,038

Mortgage-backed securities issued by U.S. Government agencies
 
127,521

 
715

 
(852
)
 
127,384

Mortgage-backed securities issued by U.S. Government sponsored enterprises
 
2,663,959

 
7,917

 
(20,024
)
 
2,651,852

Collateralized mortgage obligations issued by U.S. Government agencies or sponsored enterprises
 
943,583

 

 
(12,143
)
 
931,440

State and municipal securities
 
180

 
1

 

 
181

Corporate debt and other securities
 
20,297

 
286

 
(216
)
 
20,367

Total investment securities available for sale
 
$
3,849,862

 
9,185

 
(33,604
)
 
3,825,443

 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
(in thousands)
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
U.S. Treasury securities
 
$
108,221

 
225

 
(644
)
 
107,802

U.S. Government agency securities
 
12,727

 
266

 

 
12,993

Mortgage-backed securities issued by U.S. Government agencies
 
174,440

 
1,116

 
(1,354
)
 
174,202

Mortgage-backed securities issued by U.S. Government sponsored enterprises
 
2,543,495

 
5,416

 
(42,571
)
 
2,506,340

Collateralized mortgage obligations issued by U.S. Government agencies or sponsored enterprises
 
905,789

 
1,214

 
(16,561
)
 
890,442

State and municipal securities
 
2,780

 
14

 

 
2,794

Equity securities
 
919

 
2,863

 

 
3,782

Corporate debt and other securities
 
20,247

 

 
(407
)
 
19,840

Total investment securities available for sale
 
$
3,768,618

 
11,114

 
(61,537
)
 
3,718,195

 
 
 
 
 
 
 
 
 
At September 30, 2017 and December 31, 2016, investment securities with a carrying value of $1.69 billion and $2.04 billion, respectively, were pledged to secure certain deposits and securities sold under repurchase agreements as required by law and contractual agreements.
Synovus has reviewed investment securities that are in an unrealized loss position as of September 30, 2017 and December 31, 2016 for OTTI and does not consider any securities in an unrealized loss position to be other-than-temporarily impaired. If Synovus intended to sell a security in an unrealized loss position, the entire unrealized loss would be reflected in earnings. Synovus does not intend to sell investment securities in an unrealized loss position prior to the recovery of the unrealized loss, which may not be until maturity, and has the ability and intent to hold those securities for that period of time. Additionally, Synovus is not currently aware of any circumstances which will require it to sell any of the securities that are in an unrealized loss position prior to the respective securities' recovery of all such unrealized losses.
Declines in the fair value of available for sale securities below their cost that are deemed to have OTTI are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. Currently, unrealized losses on debt securities are attributable 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 unrealized losses represent OTTI. These factors include the length of time the security has been in a loss position, the extent that the fair value is below amortized cost, and the credit standing of the issuer. As of September 30, 2017, Synovus had 75 investment securities in a loss position for less than twelve months and 13 investment securities in a loss position for twelve months or longer.

10


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 have been in a continuous unrealized loss position, at September 30, 2017 and December 31, 2016 are presented below.
 
September 30, 2017
 
Less than 12 Months
 
12 Months or Longer
 
Total
(in thousands)
Fair
Value
 
Gross Unrealized
Losses
 
Fair
Value
 
Gross Unrealized
Losses
 
Fair
Value
 
Gross Unrealized
Losses
U.S. Treasury securities
$
64,351

 
369

 

 

 
64,351

 
369

Mortgage-backed securities issued by U.S. Government agencies
80,303

 
552

 
7,636

 
300

 
87,939

 
852

Mortgage-backed securities issued by U.S. Government sponsored enterprises
1,696,906

 
19,128

 
48,596

 
896

 
1,745,502

 
20,024

Collateralized mortgage obligations issued by U.S. Government agencies or sponsored enterprises
569,191

 
5,617

 
240,355

 
6,526

 
809,546

 
12,143

Corporate debt and other securities

 

 
5,081

 
216

 
5,081

 
216

    Total
$
2,410,751

 
25,666

 
301,668

 
7,938

 
2,712,419

 
33,604

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
Less than 12 Months
 
12 Months or Longer
 
Total
(in thousands)
Fair
Value
 
Gross Unrealized
Losses
 
Fair
Value
 
Gross Unrealized
Losses
 
Fair
Value
 
Gross Unrealized
Losses
U.S. Treasury securities
$
64,023

 
644

 

 

 
64,023

 
644

Mortgage-backed securities issued by U.S. Government agencies
128,121

 
1,240

 
3,626

 
114

 
131,747

 
1,354

Mortgage-backed securities issued by U.S. Government sponsored enterprises
2,123,181

 
42,571

 

 

 
2,123,181

 
42,571

Collateralized mortgage obligations issued by U.S. Government agencies or sponsored enterprises
682,492

 
15,653

 
24,801

 
908

 
707,293

 
16,561

Corporate debt and other securities
14,952

 
48

 
4,888

 
359

 
19,840

 
407

Total
$
3,012,769

 
60,156

 
33,315

 
1,381

 
3,046,084

 
61,537

 
 
 
 
 
 
 
 
 
 
 
 

11


The amortized cost and fair value by contractual maturity of investment securities available for sale at September 30, 2017 are shown below. The expected life of mortgage-backed securities or CMOs 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 and CMOs, which are not due at a single maturity date, have been classified based on the final contractual maturity date.
 
Distribution of Maturities at September 30, 2017
(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
$
18,830

 
64,720

 

 

 

 
83,550

U.S. Government agency securities
2,331

 
6,437

 
2,004

 

 

 
10,772

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

 

 
32,956

 
94,565

 

 
127,521

Mortgage-backed securities issued by U.S. Government sponsored enterprises
44

 
2,015

 
446,255

 
2,215,645

 

 
2,663,959

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

 

 
20,910

 
922,673

 

 
943,583

State and municipal securities
180

 

 

 

 

 
180

Corporate debt and other securities

 

 
15,000

 
2,000

 
3,297

 
20,297

Total amortized cost
$
21,385

 
73,172

 
517,125

 
3,234,883

 
3,297

 
3,849,862

 
 
 
 
 
 
 
 
 
 
 
 
Fair Value
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
18,830

 
64,351

 

 

 

 
83,181

U.S. Government agency securities
2,385

 
6,529

 
2,124

 

 

 
11,038

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

 

 
33,073

 
94,311

 

 
127,384

Mortgage-backed securities issued by U.S. Government sponsored enterprises
45

 
2,127

 
444,701

 
2,204,979

 

 
2,651,852

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

 

 
20,666

 
910,774

 

 
931,440

State and municipal securities
181

 

 

 

 

 
181

Corporate debt and other securities

 

 
15,286

 
1,919

 
3,162

 
20,367

Total fair value
$
21,441

 
73,007

 
515,850

 
3,211,983

 
3,162

 
3,825,443

 
 
 
 
 
 
 
 
 
 
 
 
Proceeds from sales, gross gains, and gross losses on sales of securities available for sale for the nine and three months ended September 30, 2017 and 2016 are presented below. The specific identification method is used to reclassify gains and losses out of other comprehensive income at the time of sale.
 
 
Nine Months Ended September 30,
 
Three Months Ended September 30,
(in thousands)
 
2017
 
2016
 
2017
 
2016
Proceeds from sales of investment securities available for sale
 
$
812,293

 
596,824

 
$
473,912

 
353,215

Gross realized gains on sales
 
7,942

 
2,590

 

 
1,635

Gross realized losses on sales
 
(8,231
)
 
(2,464
)
 
(7,956
)
 
(1,576
)
Investment securities (losses) gains, net
 
$
(289
)
 
126

 
$
(7,956
)
 
59

 
 
 
 
 
 
 
 
 

12


Note 5 - Restructuring Charges
For the nine and three months ended September 30, 2017 and 2016, total restructuring charges consist of the following components:
 
Nine Months Ended September 30,
 
Three Months Ended September 30,
(in thousands)
2017
 
2016
 
2017
 
2016
Severance charges
$
6,428

 

 
$
(24
)
 

Asset impairment charges
511

 
8,120

 
515

 
1,240

Other charges
104

 
105

 
28

 
3

Total restructuring charges, net
$
7,043

 
8,225

 
$
519

 
1,243

 
 
 
 
 
 
 
 
Restructuring charges of $7.0 million were recorded during the nine months ended September 30, 2017 consisting primarily of severance charges of $6.4 million recorded during the first quarter of 2017. Severance charges included $6.2 million for termination benefits incurred in conjunction with a voluntary early retirement program offered during the first quarter of 2017. This program was part of Synovus' ongoing efficiency initiatives. The $6.2 million accrual was based on the benefits to be paid to employees who accepted the early retirement offer on or prior to the expiration of the program on March 30, 2017. The accrual balance for severance charges associated with the voluntary early retirement program was $1.2 million at September 30, 2017. For the three months ended September 30, 2017, Synovus recorded restructuring charges of $519 thousand due to additional asset impairment charges of $515 thousand on properties previously identified for disposition. During the nine months ended September 30, 2016, Synovus recorded restructuring charges of $8.2 million with $4.8 million of those charges related to corporate real estate optimization activities and $3.3 million associated with branch closures.
The following tables present aggregate activity within the accrual for restructuring charges for the nine and three months ended September 30, 2017 and 2016:
(in thousands)
Severance Charges
 
Lease Termination Charges
 
Total
Balance at December 31, 2016
$
81

 
3,968

 
4,049

Accruals for voluntary and involuntary termination benefits
6,428

 

 
6,428

Payments
(5,304
)
 
(540
)
 
(5,844
)
Balance at September 30, 2017
$
1,205

 
3,428

 
4,633

 
 
 
 
 
 
Balance at July 1, 2017
3,731

 
3,530

 
7,261

Accruals for voluntary and involuntary termination benefits
(24
)
 

 
(24
)
Payments
(2,502
)
 
(102
)
 
(2,604
)
Balance at September 30, 2017
$
1,205

 
3,428

 
4,633

 
 
 
 
 
 
(in thousands)
Severance Charges
 
Lease Termination Charges
 
Total
Balance at December 31, 2015
$
1,930

 
4,687

 
6,617

Accruals for lease terminations

 
6

 
6

Payments
(1,702
)
 
(533
)
 
(2,235
)
Balance at September 30, 2016
$
228

 
4,160

 
4,388

 
 
 
 
 
 
Balance at July 1, 2016
593

 
4,375

 
4,968

Accruals for lease terminations

 
(25
)
 
(25
)
Payments
(365
)
 
(190
)
 
(555
)
Balance at September 30, 2016
$
228

 
4,160

 
4,388

 
 
 
 
 
 
All other charges were paid in the quarters that they were incurred. No other restructuring charges resulted in payment accruals.

13


Note 6 - Loans and Allowance for Loan Losses
The following is a summary of current, accruing past due, and non-accrual loans by portfolio class as of September 30, 2017 and December 31, 2016.
Current, Accruing Past Due, and Non-accrual Loans
 
 
September 30, 2017
 
(in thousands)
Current
 
Accruing 30-89 Days Past Due
 
Accruing 90 Days or Greater Past Due
 
Total Accruing Past Due
 
Non-accrual
 
 Total
 
Investment properties
$
5,919,393

 
3,454

 
186

 
3,640

 
2,063

 
5,925,096

 
1-4 family properties
784,520

 
6,588

 
796

 
7,384

 
2,712

 
794,616

 
Land and development
494,488

 
5,732

 
65

 
5,797

 
6,927

 
507,212

 
Total commercial real estate
7,198,401

 
15,774

 
1,047

 
16,821

 
11,702

 
7,226,924

 
Commercial, financial and agricultural
6,871,204

 
30,010

 
2,356

 
32,366

 
58,139

 
6,961,709

 
Owner-occupied
4,751,269

 
9,586

 
618

 
10,204

 
3,960

 
4,765,433

 
Total commercial and industrial
11,622,473

 
39,596

 
2,974

 
42,570

 
62,099

 
11,727,142

 
Home equity lines
1,505,556

 
7,535

 
160

 
7,695

 
15,638

 
1,528,889

 
Consumer mortgages
2,545,986

 
5,225

 
137

 
5,362

 
6,332

 
2,557,680

 
Credit cards
222,176

 
2,312

 
1,237

 
3,549

 

 
225,725

 
Other consumer loans
1,234,355

 
8,726

 
130

 
8,856

 
2,067

 
1,245,278

 
Total consumer
5,508,073

 
23,798

 
1,664

 
25,462

 
24,037

 
5,557,572

 
Total loans
$
24,328,947

 
79,168

 
5,685

 
84,853

 
97,838

 
24,511,638

(1 
) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
(in thousands)
Current
 
Accruing 30-89 Days Past Due
 
Accruing 90 Days or Greater Past Due
 
Total Accruing Past Due
 
Non-accrual
 
 Total
 
Investment properties
$
5,861,198

 
2,795

 

 
2,795

 
5,268

 
5,869,261

 
1-4 family properties
873,231

 
4,801

 
161

 
4,962

 
9,114

 
887,307

 
Land and development
598,624

 
1,441

 

 
1,441

 
16,233

 
616,298

 
Total commercial real estate
7,333,053

 
9,037

 
161

 
9,198

 
30,615

 
7,372,866

 
Commercial, financial and agricultural
6,839,699

 
9,542

 
720

 
10,262

 
59,074

 
6,909,035

 
Owner-occupied
4,601,356

 
17,913

 
244

 
18,157

 
16,503

 
4,636,016

 
Total commercial and industrial
11,441,055

 
27,455

 
964

 
28,419

 
75,577

 
11,545,051

 
Home equity lines
1,585,228

 
10,013

 
473

 
10,486

 
21,551

 
1,617,265

 
Consumer mortgages
2,265,966

 
7,876

 
81

 
7,957

 
22,681

 
2,296,604

 
Credit cards
229,177

 
1,819

 
1,417

 
3,236

 

 
232,413

 
Other consumer loans
809,419

 
5,771

 
39

 
5,810

 
2,954

 
818,183

 
Total consumer
4,889,790

 
25,479

 
2,010

 
27,489

 
47,186

 
4,964,465

 
Total loans
$
23,663,898

 
61,971

 
3,135

 
65,106

 
153,378

 
23,882,382

(2 
) 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Total before net deferred fees and costs of $24.3 million.
(2) Total before net deferred fees and costs of $26.0 million.







14


The credit quality of the loan portfolio is reviewed and updated 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 Criticized (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 in a timely manner, of any underlying collateral.
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 net 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 their 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, consumer loans are generally assigned a risk grade similar to the classifications described above; however, upon reaching 90 days and 120 days past due, they are generally downgraded to Substandard and Loss, respectively, in accordance with the FFIEC Uniform Retail Credit Classification and Account Management Policy. Additionally, in accordance with the Interagency Supervisory Guidance on Allowance for Loan and Lease Losses Estimation Practices for Loans and Lines of Credit Secured by Junior Liens on 1-4 Family Residential Properties, the risk grade classifications of consumer loans (home equity lines and consumer mortgages) secured by junior liens on 1-4 family residential properties also consider available information on the payment status of any associated senior liens with other financial institutions.

15


Loan Portfolio Credit Exposure by Risk Grade
 
 
September 30, 2017
 
(in thousands)
Pass
 
Special
Mention
 
Substandard(1)
 
Doubtful(2)
 
Loss
 
Total
 
Investment properties
$
5,847,902

 
60,423

 
16,771

 

 

 
5,925,096

 
1-4 family properties
756,665

 
20,286

 
17,438

 
227

 

 
794,616

 
Land and development
451,141

 
36,523

 
16,419

 
3,129

 

 
507,212

 
Total commercial real estate
7,055,708

 
117,232

 
50,628

 
3,356

 

 
7,226,924

 
Commercial, financial and agricultural
6,704,805

 
106,117

 
149,456

 
1,250

 
81

(3) 
6,961,709

 
Owner-occupied
4,632,930

 
52,797

 
79,633

 
73

 

 
4,765,433

 
Total commercial and industrial
11,337,735

 
158,914

 
229,089

 
1,323

 
81

 
11,727,142

 
Home equity lines
1,505,724

 

 
20,771

 
355

 
2,039

(3) 
1,528,889

 
Consumer mortgages
2,547,272

 

 
10,125

 
177

 
106

(3) 
2,557,680

 
Credit cards
224,488

 

 
523

 

 
714

(4) 
225,725

 
Other consumer loans
1,242,211

 

 
2,754

 
299

 
14

(3) 
1,245,278

 
Total consumer
5,519,695

 

 
34,173

 
831

 
2,873

 
5,557,572

 
Total loans
$
23,913,138

 
276,146

 
313,890

 
5,510

 
2,954

 
24,511,638

(5 
) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
(in thousands)
Pass
 
Special
Mention
 
Substandard(1)
 
Doubtful(2)
 
Loss
 
Total
 
Investment properties
$
5,794,626

 
43,336

 
31,299

 

 

 
5,869,261

 
1-4 family properties
826,311

 
33,928

 
26,790

 
278

 

 
887,307

 
Land and development
521,745

 
60,205

 
27,361

 
6,987

 

 
616,298

 
Total commercial real estate
7,142,682

 
137,469

 
85,450

 
7,265

 


7,372,866

 
Commercial, financial and agricultural
6,635,756

 
126,268

 
140,425

 
6,445

 
141

(3) 
6,909,035

 
Owner-occupied
4,462,420

 
60,856

 
111,330

 
1,410

 


4,636,016

 
Total commercial and industrial
11,098,176

 
187,124

 
251,755

 
7,855

 
141


11,545,051

 
Home equity lines
1,589,199

 

 
22,774

 
2,892

 
2,400

(3) 
1,617,265

 
Consumer mortgages
2,271,916

 

 
23,268

 
1,283

 
137

(3) 
2,296,604

 
Credit cards
230,997

 

 
637

 

 
779

(4) 
232,413

 
Other consumer loans
814,844

 

 
3,233

 
42

 
64

(3) 
818,183

 
Total consumer
4,906,956

 

 
49,912

 
4,217

 
3,380

 
4,964,465

 
Total loans
$
23,147,814

 
324,593

 
387,117

 
19,337

 
3,521

 
23,882,382

(6 
) 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Includes $224.5 million and $256.6 million of Substandard accruing loans at September 30, 2017 and December 31, 2016, respectively.
(2) The loans within this risk grade are on non-accrual status. Commercial loans generally have an allowance for loan losses in accordance with ASC 310, and retail loans generally have an allowance for loan losses equal to 50% of the loan amount.
(3) The loans within this risk grade are on non-accrual status and have an allowance for loan losses equal to the full loan amount.
(4) Represent amounts that were 120 days past due. These credits are downgraded to the Loss category with an allowance for loan losses equal to the full loan amount and are generally charged off upon reaching 181 days past due in accordance with the FFIEC Uniform Retail Credit Classification and Account Management Policy.
(5) Total before net deferred fees and costs of $24.3 million.
(6) Total before net deferred fees and costs of $26.0 million.

16



The following table details the changes in the allowance for loan losses by loan segment for the nine and three months ended September 30, 2017.
Allowance for Loan Losses and Recorded Investment in Loans

 
As Of and For The Nine Months Ended September 30, 2017
(in thousands)
Commercial Real Estate
 
Commercial & Industrial
 
Retail
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
Beginning balance
$
81,816

 
125,778

 
44,164

 
251,758

Charge-offs
(11,336
)
 
(41,390
)
 
(24,023
)
 
(76,749
)
Recoveries
6,191

 
5,181

 
4,682

 
16,054

Provision for loan losses
1,289

 
36,934

 
20,397

 
58,620

Ending balance(1)
$
77,960

 
126,503

 
45,220

 
249,683

Ending balance: individually evaluated for impairment
4,108

 
7,360

 
783

 
12,251

Ending balance: collectively evaluated for impairment
$
73,852

 
119,143

 
44,437

 
237,432

Loans:
 
 
 
 
 
 
 
Ending balance: total loans(1)(2)
$
7,226,924

 
11,727,142

 
5,557,572

 
24,511,638

Ending balance: individually evaluated for impairment    
64,909

 
109,434

 
30,132

 
204,475

Ending balance: collectively evaluated for impairment
$
7,162,015

 
11,617,708

 
5,527,440

 
24,307,163

 
 
 
 
 
 
 
 
 
As Of and For The Nine Months Ended September 30, 2016
(in thousands)
Commercial Real Estate
 
Commercial & Industrial
 
Retail
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
Beginning balance
$
87,133

 
122,989

 
42,374

 
252,496

Charge-offs
(13,361
)
 
(17,098
)
 
(10,611
)
 
(41,070
)
Recoveries
10,927

 
6,122

 
3,601

 
20,650

Provision for loan losses
(3,597
)
 
18,875

 
6,463

 
21,741

Ending balance(1)
$
81,102

 
130,888

 
41,827

 
253,817

Ending balance: individually evaluated for impairment
11,066

 
11,474

 
1,724

 
24,264

Ending balance: collectively evaluated for impairment
$
70,036

 
119,414

 
40,103

 
229,553

Loans:
 
 
 
 
 
 
 
Ending balance: total loans(1)(3)
$7,472,551
 
11,009,021

 
4,807,511

 
23,289,083

Ending balance: individually evaluated for impairment
102,837

 
118,442

 
37,820

 
259,099

Ending balance: collectively evaluated for impairment
$
7,369,714

 
10,890,579

 
4,769,691

 
23,029,984

 
 
 
 
 
 
 
 
(1) As of and for the nine months ended September 30, 2017 and 2016, there were no purchased credit-impaired loans and no allowance for loan losses for purchased credit-impaired loans.
(2) Total before net deferred fees and costs of $24.3 million.
(3) Total before net deferred fees and costs of $26.2 million.





17


Allowance for Loan Losses and Recorded Investment in Loans

 
As Of and For The Three Months Ended September 30, 2017
(in thousands)
Commercial Real Estate
 
Commercial & Industrial
 
Consumer
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
Beginning balance
$
77,527

 
123,437

 
47,131

 
248,095

Charge-offs
(8,129
)
 
(21,855
)
 
(14,367
)
 
(44,351
)
Recoveries
2,543

 
1,899

 
1,811

 
6,253

Provision for loan losses
6,019

 
23,022

 
10,645

 
39,686

Ending balance(1)
$
77,960

 
126,503

 
45,220

 
249,683

Ending balance: individually evaluated for impairment
4,108

 
7,360

 
783

 
12,251

Ending balance: collectively evaluated for impairment
$
73,852

 
119,143

 
44,437

 
237,432

Loans:
 
 
 
 
 
 
 
Ending balance: total loans(1)(2)
$
7,226,924

 
11,727,142

 
5,557,572

 
24,511,638

Ending balance: individually evaluated for impairment    
64,909

 
109,434

 
30,132

 
204,475

Ending balance: collectively evaluated for impairment
$
7,162,015

 
11,617,708

 
5,527,440

 
24,307,163

 
 
 
 
 
 
 
 
 
As Of and For The Three Months Ended September 30, 2016
(in thousands)
Commercial Real Estate
 
Commercial & Industrial
 
Consumer
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
Beginning balance
$
79,359

 
129,633

 
46,084

 
255,076

Charge-offs
(4,084
)
 
(6,437
)
 
(3,463
)
 
(13,984
)
Recoveries
4,237

 
1,780

 
1,037

 
7,054

Provision for loan losses
1,590

 
5,912

 
(1,831
)
 
5,671

Ending balance(1)
$
81,102

 
130,888

 
41,827

 
253,817

Ending balance: individually evaluated for impairment
11,066

 
11,474

 
1,724

 
24,264

Ending balance: collectively evaluated for impairment
$
70,036

 
119,414

 
40,103

 
229,553

Loans:
 
 
 
 
 
 
 
Ending balance: total loans(1)(3)
$
7,472,551

 
11,009,021

 
4,807,511

 
23,289,083

Ending balance: individually evaluated for impairment
102,837

 
118,442

 
37,820

 
259,099

Ending balance: collectively evaluated for impairment
$
7,369,714

 
10,890,579

 
4,769,691

 
23,029,984

 
 
 
 
 
 
 
 
(1) As of and for the three months ended September 30, 2017 and 2016, there were no purchased credit-impaired loans and no allowance for loan losses for purchased credit-impaired loans.
(2) Total before net deferred fees and costs of $24.3 million.
(3) Total before net deferred fees and costs of $26.2 million.




18


The tables below summarize impaired loans (including accruing TDRs) as of September 30, 2017 and December 31, 2016.
Impaired Loans (including accruing TDRs)
 
September 30, 2017
 
Nine Months Ended September 30, 2017
 
Three Months Ended September 30, 2017
(in thousands)
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
 
Average Recorded Investment
 
Interest Income Recognized
 
Average Recorded Investment
 
Interest Income Recognized
With no related allowance recorded
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment properties
$

 

 

 
164

 

 

 

1-4 family properties
253

 
2,582

 

 
374

 

 
253

 

Land and development
1,488

 
3,172

 

 
2,084

 

 
1,911

 

Total commercial real estate
1,741

 
5,754

 

 
2,622

 

 
2,164

 

Commercial, financial and agricultural
20,696

 
22,122

 

 
23,094

 

 
25,583

 

Owner-occupied
97

 
744

 

 
8,875

 

 
7,164

 

Total commercial and industrial
20,793

 
22,866

 

 
31,969

 

 
32,747

 

Home equity lines
1,072

 
1,072

 

 
1,063

 

 
1,069

 

Consumer mortgages

 

 

 
661

 

 
496

 

Credit cards

 

 

 

 

 

 

Other consumer loans

 

 

 

 

 

 

Total consumer
1,072

 
1,072

 

 
1,724

 

 
1,565

 

Total impaired loans with no
related allowance recorded
$
23,606

 
29,692

 

 
36,315

 

 
36,476



With allowance recorded
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment properties
$
28,651

 
28,651

 
1,116

 
29,325

 
903

 
28,826

 
306

1-4 family properties
15,741

 
15,741

 
452

 
16,552

 
664

 
15,665

 
278

Land and development
18,776

 
18,832

 
2,540

 
24,825

 
347

 
18,544

 
48

Total commercial real estate
63,168

 
63,224

 
4,108

 
70,702

 
1,914

 
63,035

 
632

Commercial, financial and agricultural
51,819

 
52,019

 
5,730

 
48,694

 
1,175

 
53,040

 
388

Owner-occupied
36,822

 
36,855

 
1,630

 
41,627

 
1,002

 
37,004

 
328

Total commercial and industrial
88,641

 
88,874

 
7,360

 
90,321

 
2,177

 
90,044

 
716

Home equity lines
5,995

 
5,995

 
119

 
7,807

 
265

 
6,534

 
82

Consumer mortgages
18,336

 
18,336

 
382

 
19,270

 
687

 
18,369

 
222

Credit cards

 

 

 

 

 

 

Other consumer loans
4,729

 
4,729

 
282

 
4,507

 
191

 
4,224

 
59

Total consumer
29,060

 
29,060


783

 
31,584

 
1,143

 
29,127

 
363

Total impaired loans with
allowance recorded
$
180,869

 
181,158

 
12,251

 
192,607

 
5,234

 
182,206

 
1,711

Total impaired loans
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment properties
$
28,651

 
28,651


1,116

 
29,489

 
903


28,826

 
306

1-4 family properties
15,994

 
18,323


452

 
16,926

 
664


15,918

 
278

Land and development
20,264

 
22,004


2,540

 
26,909

 
347


20,455

 
48

Total commercial real estate
64,909

 
68,978


4,108

 
73,324

 
1,914


65,199

 
632

Commercial, financial and agricultural
72,515

 
74,141


5,730

 
71,788

 
1,175


78,623

 
388

Owner-occupied
36,919

 
37,599


1,630

 
50,502

 
1,002


44,168

 
328

Total commercial and industrial
109,434

 
111,740


7,360

 
122,290

 
2,177


122,791

 
716

Home equity lines
7,067

 
7,067


119

 
8,870

 
265


7,603

 
82

Consumer mortgages
18,336

 
18,336


382

 
19,931

 
687


18,865

 
222

Credit cards

 



 

 



 

Other consumer loans
4,729

 
4,729


282

 
4,507

 
191


4,224

 
59

Total consumer
30,132

 
30,132


783

 
33,308

 
1,143


30,692

 
363

Total impaired loans
$
204,475

 
210,850


12,251

 
228,922

 
5,234


218,682

 
1,711

 
 
 
 
 
 
 
 
 
 
 
 
 
 

19


Impaired Loans (including accruing TDRs)
 
December 31, 2016
 
Year Ended December 31, 2016
(in thousands)
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
 
Average Recorded Investment
 
Interest Income Recognized
With no related allowance recorded
 
 
 
 
 
 
 
 
 
Investment properties
$
748

 
793

 

 
2,013

 

1-4 family properties
643

 
2,939

 

 
1,021

 

Land and development
2,099

 
7,243

 

 
6,769

 

Total commercial real estate
3,490

 
10,975

 

 
9,803

 

Commercial, financial and agricultural
17,958

 
20,577

 

 
6,321

 

Owner-occupied
5,508

 
7,377

 

 
8,394

 

Total commercial and industrial
23,466

 
27,954

 

 
14,715

 

Home equity lines
1,051

 
1,051

 

 
1,045

 

Consumer mortgages
744

 
814

 

 
870

 

Credit cards

 

 

 

 

Other consumer loans

 

 

 

 

Total consumer
1,795

 
1,865

 

 
1,915

 

Total impaired loans with no
related allowance recorded
$
28,751

 
40,794

 

 
26,433

 

With allowance recorded
 
 
 
 
 
 
 
 
 
Investment properties
$
31,489

 
31,489

 
2,044

 
42,659

 
1,436

1-4 family properties
23,642

 
23,649

 
769

 
39,864

 
855

Land and development
32,789

 
32,788

 
5,103

 
25,568

 
995

Total commercial real estate
87,920

 
87,926

 
7,916

 
108,091

 
3,286

Commercial, financial and agricultural
43,386

 
45,913

 
5,687

 
51,968

 
1,215

Owner-occupied
53,708

 
53,942

 
2,697

 
52,300

 
1,946

Total commercial and industrial
97,094

 
99,855

 
8,384

 
104,268

 
3,161

Home equity lines
9,638

 
9,638

 
971

 
9,668

 
432

Consumer mortgages
20,953

 
20,953

 
673

 
20,993

 
1,014

Credit cards

 

 

 

 

Other consumer loans
5,140

 
5,140

 
167

 
5,062

 
303

Total consumer
35,731

 
35,731

 
1,811

 
35,723

 
1,749

Total impaired loans with
allowance recorded
$
220,745

 
223,512

 
18,111

 
248,082

 
8,196

Total impaired loans
 
 
 
 
 
 
 
 
 
Investment properties
$
32,237

 
32,282

 
2,044

 
44,672

 
1,436

1-4 family properties
24,285

 
26,588

 
769

 
40,885

 
855

Land and development
34,888

 
40,031

 
5,103

 
32,337

 
995

Total commercial real estate
91,410

 
98,901

 
7,916

 
117,894

 
3,286

Commercial, financial and agricultural
61,344

 
66,490

 
5,687

 
58,289

 
1,215

Owner-occupied
59,216

 
61,319

 
2,697

 
60,694

 
1,946

Total commercial and industrial
120,560

 
127,809

 
8,384

 
118,983

 
3,161

Home equity lines
10,689

 
10,689

 
971

 
10,713

 
432

Consumer mortgages
21,697

 
21,767

 
673

 
21,863

 
1,014

Credit cards

 

 

 

 

Other consumer loans
5,140

 
5,140

 
167

 
5,062

 
303

Total consumer
37,526

 
37,596

 
1,811

 
37,638

 
1,749

Total impaired loans
$
249,496

 
264,306

 
18,111

 
274,515

 
8,196

 
 
 
 
 
 
 
 
 
 

20


The average recorded investment in impaired loans was $281.2 million and $263.0 million, respectively, for the nine and three months ended September 30, 2016. Excluding accruing TDRs, there was no interest income recognized for the investment in impaired loans for the nine and three months ended September 30, 2016. Interest income recognized for accruing TDRs was $6.1 million and $2.1 million, respectively, for the nine and three months ended September 30, 2016. At September 30, 2017 and December 31, 2016, impaired loans of $37.6 million and $53.7 million, respectively, were on non-accrual status.
Concessions provided in a TDR are primarily in the form of providing a below market interest rate given the borrower's credit risk, a period of time generally less than one year with a reduction of required principal and/or interest payments (e.g., interest only for a period of time), or an extension of the maturity of the loan generally for less than one year. Insignificant periods of reduction of principal and/or interest payments, or one-time deferrals of 3 months or less, are generally not considered to be financial concessions.

21


The following tables represent, by concession type, the post-modification balance for loans modified or renewed during the nine and three months ended September 30, 2017 and 2016 that were reported as accruing or non-accruing TDRs.
TDRs by Concession Type
 
 
 
Nine Months Ended September 30, 2017
 
(in thousands, except contract data)
Number of Contracts
 
Principal Forgiveness
 
Below Market Interest Rate
 
Term Extensions and/or Other Concessions
 
Total
 
Investment properties

 
$

 

 

 

 
1-4 family properties
21

 

 
2,090

 
1,477

 
3,567

 
Land acquisition
4

 

 
157

 
895

 
1,052

 
Total commercial real estate
25

 

 
2,247

 
2,372

 
4,619

 
Commercial, financial and agricultural
50

 

 
8,703

 
12,145

 
20,848

 
Owner-occupied
4

 

 
35

 
1,705

 
1,740

 
Total commercial and industrial
54

 

 
8,738

 
13,850

 
22,588

 
Home equity lines

 

 

 

 

 
Consumer mortgages
8

 

 
248

 
1,190

 
1,438

 
Credit cards

 

 

 

 

 
Other retail loans
25

 

 
682

 
958

 
1,640

 
Total retail
33

 

 
930

 
2,148

 
3,078

 
Total TDRs
112

 
$

 
11,915

 
18,370

 
30,285

(1 
) 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2017
 
(in thousands, except contract data)
Number of Contracts
 
Principal Forgiveness
 
Below Market Interest Rate
 
Term Extensions
and/or Other Concessions
 
Total
 
Investment properties

 
$

 

 

 

 
1-4 family properties
5

 

 

 
964

 
964

 
Land and development
3

 

 
157

 
760

 
917

 
Total commercial real estate
8

 

 
157

 
1,724

 
1,881

 
Commercial, financial and agricultural
22

 

 
2,943

 
5,866

 
8,809

 
Owner-occupied
3

 

 
35

 
1,683

 
1,718

 
Total commercial and industrial
25

 

 
2,978

 
7,549

 
10,527

 
Home equity lines

 

 

 

 

 
Consumer mortgages
7

 

 
248

 
1,181

 
1,429

 
Credit cards

 

 

 

 

 
Other consumer loans
17

 

 
682

 
388

 
1,070

 
Total consumer
24

 

 
930

 
1,569

 
2,499

 
Total TDRs
57

 
$

 
4,065

 
10,842

 
14,907

(1 
) 
 
 
 
 
 
 
 
 
 
 
 
(1) No net charge-offs were recorded during the nine and three months ended September 30, 2017 upon restructuring of these loans.




22


TDRs by Concession Type
 
 
 
Nine Months Ended September 30, 2016
 
(in thousands, except contract data)
Number of Contracts
 
Principal Forgiveness
 
Below Market Interest Rate
 
Term Extensions and/or Other Concessions
 
Total
 
Investment properties
4

 
$

 
1,826

 
3,518

 
5,344

 
1-4 family properties
23

 

 
3,703

 
1,211

 
4,914

 
Land acquisition
13

 

 

 
1,766

 
1,766

 
Total commercial real estate
40

 

 
5,529

 
6,495

 
12,024

 
Commercial, financial and agricultural
50

 

 
13,948

 
5,232

 
19,180

 
Owner-occupied
7

 

 
5,458

 
550

 
6,008

 
Total commercial and industrial
57

 

 
19,406

 
5,782

 
25,188

 
Home equity lines
5

 

 
224

 
123

 
347

 
Consumer mortgages
6

 

 
354

 
51

 
405

 
Credit cards

 

 

 

 

 
Other retail loans
24

 

 
394

 
1,828

 
2,222

 
Total retail
35

 

 
972

 
2,002

 
2,974

 
Total TDRs
132

 
$

 
25,907

 
14,279

 
40,186

(2 
) 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2016
 
(in thousands, except contract data)
Number of Contracts
 
Principal Forgiveness
 
Below Market Interest Rate
 
Term Extensions
and/or Other Concessions
 
Total
 
Investment properties
1

 
$

 

 
3,370

 
3,370

 
1-4 family properties
4

 

 
213

 
47

 
260

 
Land and development
2

 

 

 
497

 
497

 
Total commercial real estate
7

 

 
213

 
3,914

 
4,127

 
Commercial, financial and agricultural
5

 

 

 
387

 
387

 
Owner-occupied
1

 

 
2,791

 

 
2,791

 
Total commercial and industrial
6

 

 
2,791

 
387

 
3,178

 
Home equity lines
2

 

 

 
123

 
123

 
Consumer mortgages

 

 

 

 

 
Credit cards

 

 

 

 

 
Other consumer loans
7

 

 
70

 
294

 
364

 
Total consumer
9

 

 
70

 
417

 
487

 
Total TDRs
22

 
$

 
3,074

 
4,718

 
7,792

(2 
) 
 
 
 
 
 
 
 
 
 
 
 
(2) No net charge-offs were recorded during the nine and three months ended September 30, 2016 upon restructuring of these loans.

For the nine and three months ended September 30, 2017, there were four defaults with a recorded investment of $498 thousand and one default with a recorded investment of $206 thousand, respectively, on accruing TDRs restructured during the previous twelve months (defaults are defined as the earlier of the TDR being placed on non-accrual status or reaching 90 days past due with respect to principal and/or interest payments) compared to two defaults with a recorded investment of $181 thousand and one default with a recorded investment of $89 thousand, respectively, for the nine and three months ended September 30, 2016.
If, at the time a loan was designated as a TDR, the loan was not already impaired, the measurement of impairment that resulted from the TDR designation closely approximates the reserve derived through specific loan measurement of impairment in accordance with ASC 310-10-35. Generally, the change in the allowance for loan losses resulting from such TDR designation is not significant. At September 30, 2017, the allowance for loan losses allocated to accruing TDRs totaling $166.9 million was $8.5 million compared to accruing TDRs of $195.8 million with an allocated allowance for loan losses of $9.8 million at December 31, 2016. Non-accrual, non-homogeneous loans (commercial-type impaired loans greater than $1 million) that are designated as TDRs are individually measured for the amount of impairment, if any, both before and after the TDR designation.

23


Note 7 - Other Comprehensive Income (Loss)
The following tables illustrate activity within the balances in accumulated other comprehensive income (loss) by component for the nine and three months ended September 30, 2017 and 2016.
Changes in Accumulated Other Comprehensive Income (Loss) by Component (Net of Income Taxes)
(in thousands)
Net unrealized gains (losses) on cash flow hedges
 
Net unrealized gains (losses) on investment securities available for sale
 
Post-retirement unfunded health benefit
 
Total
Balance at December 31, 2016
$
(12,217
)
 
(44,324
)
 
882

 
(55,659
)
Other comprehensive income before reclassifications

 
15,812

 
38

 
15,850

Amounts reclassified from accumulated other comprehensive income (loss)
80

 
178

 
(45
)
 
213

Net current period other comprehensive income
80

 
15,990

 
(7
)
 
16,063

Balance as of September 30, 2017
$
(12,137
)
 
(28,334
)
 
875

 
(39,596
)
 
 
 
 
 
 
 
 
Balance as of July 1, 2017
$
(12,137
)
 
(36,586
)
 
858

 
(47,865
)
Other comprehensive income before reclassifications

 
3,359

 
38

 
3,397

Amounts reclassified from accumulated other comprehensive income (loss)

 
4,893

 
(21
)
 
4,872

Net current period other comprehensive income

 
8,252

 
17

 
8,269

Balance as of September 30, 2017
$
(12,137
)
 
(28,334
)
 
875

 
(39,596
)
 
 
 
 
 
 
 
 
Changes in Accumulated Other Comprehensive Income (Loss) by Component (Net of Income Taxes)
(in thousands)
Net unrealized gains (losses) on cash flow hedges
 
Net unrealized gains (losses) on investment securities available for sale
 
Post-retirement unfunded health benefit
 
Total
Balance at December 31, 2015
$
(12,504
)
 
(18,222
)
 
907

 
(29,819
)
Other comprehensive income before reclassifications

 
34,827

 
63

 
34,890

Amounts reclassified from accumulated other comprehensive income (loss)
247

 
(77
)
 
(76
)
 
94

Net current period other comprehensive income
247

 
34,750

 
(13
)
 
34,984

Balance as of September 30, 2016
$
(12,257
)
 
16,528

 
894

 
5,165

 
 
 
 
 
 
 
 
Balance as of July 1, 2016
$
(12,297
)
 
22,459

 
843

 
11,005

Other comprehensive income (loss) before reclassifications

 
(5,895
)
 
63

 
(5,832
)
Amounts reclassified from accumulated other comprehensive income (loss)
40

 
(36
)
 
(12
)
 
(8
)
Net current period other comprehensive income (loss)
40

 
(5,931
)
 
51

 
(5,840
)
Balance as of September 30, 2016
$
(12,257
)
 
16,528

 
894

 
5,165

 
 
 
 
 
 
 
 
In accordance with ASC 740-20-45-11(b), a deferred tax asset valuation allowance associated with unrealized gains and losses not recognized in income is charged directly to other comprehensive income (loss). During the years 2010 and 2011, Synovus recorded a deferred tax asset valuation allowance associated with unrealized gains and losses not recognized in income directly to other comprehensive income (loss) by applying the portfolio approach for allocation of the valuation allowance. Synovus has consistently applied the portfolio approach which treats derivative financial instruments, equity securities, and debt securities as

24


a single portfolio. As of September 30, 2017, the balance in net unrealized gains (losses) on cash flow hedges and net unrealized gains (losses) on investment securities available for sale includes unrealized losses of $12.1 million and $13.3 million, respectively, related to the residual tax effects remaining in OCI due to a previously established deferred tax asset valuation allowance. Under the portfolio approach, these unrealized losses are realized at the time the entire portfolio is sold or disposed.
Reclassifications out of Accumulated Other Comprehensive Income (Loss)
Details About
Accumulated Other Comprehensive Income (Loss) Components
 
Amount Reclassified from
Accumulated Other
Comprehensive Income (Loss)
 
Affected Line Item
in the Statement Where
Net Income is Presented
 
 
For the Nine Months Ended September 30,
 
 
 
 
2017
 
2016
 
 
Net unrealized gains (losses) on cash flow hedges:
 
 
 
 
 
 
  Amortization of deferred losses
 
$
(130
)
 
(205
)
 
Interest expense
  Amortization of deferred losses
 

 
(197
)
 
Loss on early extinguishment of debt, net
 
 
50

 
155

 
Income tax (expense) benefit
 
 
$
(80
)
 
(247
)
 
Reclassifications, net of income taxes
 
 
 
 
 
 
 
Net unrealized (losses) gains on investment securities available for sale:
 
 
 
 
 
 
  Realized (losses) gains on sale of securities
 
$
(289
)
 
126

 
Investment securities (losses) gains, net
 
 
111

 
(49
)
 
Income tax (expense) benefit
 
 
$
(178
)
 
77

 
Reclassifications, net of income taxes
Post-retirement unfunded health benefit:
 
 
 
 
 
 
  Amortization of actuarial gains
 
$
74

 
124

 
Salaries and other personnel expense
 
 
(29
)
 
(48
)
 
Income tax (expense) benefit
 
 
$
45

 
76

 
Reclassifications, net of income taxes
 
 
 
 
 
 
 
Reclassifications out of Accumulated Other Comprehensive Income (Loss)
Details About
Accumulated Other Comprehensive Income (Loss) Components
 
Amount Reclassified from
Accumulated Other
Comprehensive Income (Loss)
Affected Line Item
in the Statement Where
Net Income is Presented
 
 
For the Three Months Ended September 30,
 
 
 
2017
 
2016
 
Net unrealized gains (losses) on cash flow hedges:
 
 
 
 
 
  Amortization of deferred losses
 
$

 
(65
)
Interest expense
 
 

 
25

Income tax (expense) benefit
 
 
$

 
(40
)
Reclassifications, net of income taxes
 
 
 
 
 
 
Net unrealized gains on investment securities available for sale:
 
 
 
 
 
  Realized net (loss)gain on sale of securities
 
$
(7,956
)
 
59

Investment securities (losses) gains, net
 
 
3,063

 
(23
)
Income tax (expense) benefit
 
 
$
(4,893
)
 
36

Reclassifications, net of income taxes
Post-retirement unfunded health benefit:
 
 
 
 
 
  Amortization of actuarial gains
 
$
34

 
20

Salaries and other personnel expense
 
 
(13
)
 
(8
)
Income tax (expense) benefit
 
 
$
21

 
12

Reclassifications, net of income taxes
 
 
 
 
 
 

25


Note 8 - Fair Value Accounting
Synovus carries various assets and liabilities at fair value based on the fair value accounting guidance under ASC 820, Fair Value Measurements, and ASC 825, Financial Instruments. 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.
Fair Value Hierarchy
Synovus determines the fair value 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. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the financial instrument's fair value measurement in its entirety. There are three levels of inputs that may be used to measure fair value. The three levels of inputs of the valuation hierarchy are defined below:
Level 1
Quoted prices (unadjusted) in active markets for identical assets and liabilities for the instrument or security to be valued. Level 1 assets include marketable equity securities, U.S. Treasury securities, and mutual funds.
Level 2
Observable inputs other than Level 1 quoted prices, such as quoted prices for similar assets and liabilities in active markets, quoted prices in markets that are not active or model-based valuation techniques for which all significant assumptions are derived principally from or corroborated by observable market data. 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 by using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. 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, and mortgage loans held-for-sale are generally included in this category.
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 models and similar techniques, and may also include the use of market prices of assets or liabilities that are not directly comparable to the subject asset or liability. These methods of valuation may result in a significant portion of the fair value being derived from unobservable assumptions that reflect Synovus' own estimates for assumptions that market participants would use in pricing the asset or liability. This category primarily includes collateral-dependent impaired loans, other real estate, certain equity investments, private equity investments, GGL/SBA loan servicing assets, and contingent consideration.

See "Part II - Item 8. Financial Statements and Supplementary Data - Note 16 - Fair Value Accounting" to the consolidated financial statements of Synovus' 2016 Form 10-K for a description of valuation methodologies for assets and liabilities measured at fair value on a recurring and non-recurring basis.

















26


Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents all financial instruments measured at fair value on a recurring basis as of September 30, 2017 and December 31, 2016, according to the valuation hierarchy included in ASC 820-10. For equity and debt securities, class was determined based on the nature and risks of the investments. Synovus did not have any transfers between levels during the nine and three months ended September 30, 2017 and year ended December 31, 2016.
 
September 30, 2017
(in thousands)
Level 1
 
Level 2
 
Level 3
 
Total Assets and Liabilities at Fair Value
Assets
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
Mortgage-backed securities issued by U.S. Government sponsored enterprises

 
494

 

 
494

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

 
10,484

 

 
10,484

  State and municipal securities

 
1,101

 

 
1,101

  Other investments

 
250

 

 
250

Total trading securities
$

 
12,329

 

 
12,329

Mortgage loans held for sale

 
54,072

 

 
54,072

 
 
 
 
 
 
 
 
Investment securities available for sale:
 
 
 
 
 
 
 
U.S. Treasury securities
83,181

 

 

 
83,181

U.S. Government agency securities

 
11,038

 

 
11,038

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

 
127,384

 

 
127,384

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

 
2,651,852

 

 
2,651,852

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

 
931,440

 

 
931,440

State and municipal securities

 
181

 

 
181

 Corporate debt and other securities(1)    
3,162

 
15,287

 
1,918

 
20,367

Total investment securities available for sale
$
86,343

 
3,737,182

 
1,918

 
3,825,443

Private equity investments

 

 
15,671

 
15,671

Mutual funds held in rabbi trusts
13,439

 

 

 
13,439

GGL/SBA loans servicing asset

 

 
4,270

 
4,270

Derivative assets:
 
 
 
 
 
 
 
Interest rate contracts

 
14,896

 

 
14,896

Mortgage derivatives(2)

 
974

 

 
974

Total derivative assets
$

 
15,870

 

 
15,870

Liabilities
 
 
 
 
 
 
 
Trading account liabilities

 
7,860

 

 
7,860

Earnout liability(3)

 

 
16,000

 
16,000

Derivative liabilities:
 
 
 
 
 
 
 
Interest rate contracts

 
12,369

 

 
12,369

Mortgage derivatives(2)

 
32

 

 
32

Visa derivative

 

 
4,693

 
4,693

Total derivative liabilities
$

 
12,401

 
4,693

 
17,094

 
 
 
 
 
 
 
 

27


 
December 31, 2016
(in thousands)
Level 1
 
Level 2
 
Level 3
 
Total Assets and Liabilities at Fair Value
Assets
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
Mortgage-backed securities issued by U.S. Government agencies

 
3,460

 

 
3,460

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

 
3,438

 

 
3,438

State and municipal securities

 
426

 

 
426

Other investments
1,890

 
100

 

 
1,990

Total trading securities
$
1,890

 
7,424

 

 
9,314

Mortgage loans held for sale

 
51,545

 

 
51,545

 
 
 
 
 
 
 
 
Investment securities available for sale:
 
 
 
 
 
 
 
     U.S. Treasury securities
107,802

 

 

 
107,802

U.S. Government agency securities

 
12,993

 

 
12,993

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

 
174,202

 

 
174,202

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

 
2,506,340

 

 
2,506,340

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

 
890,442

 

 
890,442

State and municipal securities

 
2,794

 

 
2,794

Equity securities
3,782

 

 

 
3,782

 Corporate debt and other securities(1)    
3,092

 
14,952

 
1,796

 
19,840

Total investment securities available for sale
$
114,676

 
3,601,723

 
1,796

 
3,718,195

Private equity investments

 

 
25,493

 
25,493

Mutual funds held in rabbi trusts
11,479

 

 

 
11,479

Derivative assets:
 
 
 
 
 
 
 
Interest rate contracts

 
17,157

 

 
17,157

Mortgage derivatives(2)

 
3,466

 

 
3,466

Total derivative assets
$

 
20,623

 

 
20,623

Liabilities
 
 
 
 
 
 
 
Earnout liability(3) 

 

 
14,000

 
14,000

Derivative liabilities:
 
 
 
 
 
 
 
Interest rate contracts

 
17,531

 

 
17,531

Visa derivative

 

 
5,768

 
5,768

Total derivative liabilities
$

 
17,531

 
5,768

 
23,299

 
 
 
 
 
 
 
 
(1) Based on an analysis of the nature and risks of these investments, Synovus has determined that presenting these investments as a single asset class is appropriate.
(2) Mortgage derivatives consist of customer interest rate lock commitments that relate to the potential origination of mortgage loans, which would be classified as held for sale and forward loan sales commitments with third-party investors.
(3) Earnout liability consists of contingent consideration obligation related to the Global One acquisition.

28


Fair Value Option
The following table summarizes the difference between the fair value and the unpaid principal balance of mortgage loans held for sale measured at fair value and the changes in fair value of these loans. Mortgage loans held for sale are initially measured at fair value with subsequent changes in fair value recognized in earnings. Changes in fair value are recorded as a component of mortgage banking income in the Consolidated Statements of Income. An immaterial portion of these changes in fair value was attributable to changes in instrument-specific credit risk.
Changes in Fair Value Included in Net Income
 
 
 
 
 
 
 
 
For the Nine Months Ended September 30,
 
For the Three Months Ended September 30,
(in thousands)
2017
 
2016
 
2017
 
2016
Mortgage loans held for sale
$
850

 
1,762

 
$
(104
)
 
(87
)
 
 
 
 
 
 
 
 

Mortgage Loans Held for Sale
 
(in thousands)
As of September 30, 2017
 
As of December 31, 2016
Fair value
$
54,072

 
51,545

Unpaid principal balance
52,791

 
51,114

Fair value less aggregate unpaid principal balance
$
1,281

 
431

 
 
 
 

29


Changes in Level 3 Fair Value Measurements and Quantitative Information about Level 3 Fair Value Measurements
As noted above, Synovus uses significant unobservable inputs in determining the fair value of assets and liabilities classified as Level 3 in the fair value hierarchy. The table below includes a roll-forward of the amounts on the Consolidated Balance Sheets for the nine and three months ended September 30, 2017 and 2016 (including the change in fair value), for financial instruments of a material nature that are classified by Synovus within Level 3 of the fair value hierarchy and are measured at fair value on a recurring basis. Transfers between fair value levels are recognized at the end of the reporting period in which the associated changes in inputs occur. During the nine and three months ended September 30, 2017 and 2016, Synovus did not have any transfers between levels in the fair value hierarchy.
 
 
 
Nine Months Ended September 30, 2017
(in thousands)
Investment Securities Available for Sale
 
Private Equity Investments
 
Visa Derivative
 
Earnout
Liability(1) 
 
GGL / SBA
Loans Servicing Asset(2)
Beginning balance, January 1,
$
1,796

 
25,493

 
(5,768
)
 
(14,000
)
 

Total (losses) gains realized/unrealized:
 
 
 
 
 
 
 
 
 
Included in earnings    

 
(3,193
)
 

 
(3,766
)
 
(721
)
Unrealized gains (losses) included in other comprehensive income
122

 

 

 

 

Additions

 

 

 

 
539

Sales and settlements

 
(6,629
)
 
1,075

 

 

Transfer from amortization method to fair value

 

 

 

 
4,452

Measurement period adjustments related to Global One acquisition

 

 

 
1,766

 

Ending balance, September 30,
$
1,918

 
15,671

 
(4,693
)
 
(16,000
)
 
4,270

Total net (losses) gains for the period included in earnings attributable to the change in unrealized gains (losses) relating to assets/liabilities still held at September 30,
$

 
(3,193
)
 

 
(3,766
)
 
(721
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2017
(in thousands)
Investment Securities Available
for Sale
 
 Private Equity Investments
 
Visa Derivative
 
Earnout
Liability(1) 
 
GGL / SBA
Loans Servicing Asset(2)
Beginning balance, July 1,
$
1,927

 
15,698

 
(5,053
)
 
(13,941
)
 
4,297

Total (losses) gains realized/unrealized:
 
 
 
 
 
 
 
 
 
Included in earnings    

 
(27
)
 

 
(2,059
)
 
(27
)
Unrealized gains (losses) included in other comprehensive income
(9
)
 

 

 

 

Additions

 

 

 

 

Sales and settlements

 

 
360

 

 

Measurement period adjustments related to Global One acquisition

 

 

 

 

Ending balance, September 30,
$
1,918

 
15,671

 
(4,693
)
 
(16,000
)
 
4,270

Total net (losses) gains for the period included in earnings attributable to the change in unrealized gains (losses) relating to assets/liabilities still held at September 30,
$

 
(27
)
 

 
(2,059
)
 
(27
)
 
 
 
 
 
 
 
 
 
 
(1) Earnout liability consists of contingent consideration obligation related to the Global One acquisition.  
(2) Effective January 1, 2017, Synovus elected the fair value option for determining the value of the GGL/SBA loans servicing asset. Synovus has retained servicing responsibilities on sold GGL/SBA loans and receives a servicing fee. The servicing asset is established at fair value at the time of the sale based on an analysis of future cash flows that incorporates estimates for discount rates, prepayment speeds, and delinquency rates. The servicing asset is measured at fair value on a quarterly basis with changes in fair value included with the associated servicing fee in other non-interest income. Prior to 2017, Synovus accounted for the GGL/SBA loans servicing asset using the amortization method.



30


 
 
 
Nine Months Ended September 30, 2016
(in thousands)
Investment Securities Available for Sale
 
Private Equity Investments
 
Visa Derivative
Beginning balance, January 1,
$
1,745

 
27,148

 
(1,415
)
Total (losses) gains realized/unrealized:
 
 
 
 
 
Included in earnings    

 
(527
)
 
(1,080
)
Unrealized gains (losses) included in other comprehensive income
28

 

 

Settlements

 
(629
)
 
1,080

Ending balance, September 30,
$
1,773

 
25,992

 
(1,415
)
Total net (losses) gains for the period included in earnings attributable to the change in unrealized gains (losses) relating to assets still held at September 30,
$

 
(527
)
 
(1,080
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2016
(in thousands)
Investment Securities Available
for Sale
 
 Private Equity Investments
 
Visa Derivative
Beginning balance, July 1,
$
1,625

 
26,866

 
(1,415
)
Total (losses) gains realized/unrealized:
 
 
 
 
 
Included in earnings    

 
(249
)
 
(360
)
Unrealized gains (losses) included in other comprehensive income
148

 

 

Settlements

 
(625
)
 
360

Ending balance, September 30,
$
1,773

 
25,992

 
(1,415
)
Total net (losses) gains for the period included in earnings attributable to the change in unrealized gains (losses) relating to assets still held at September 30,
$

 
(249
)
 
(360
)
 
 
 
 
 
 



31


The table below provides an overview of the valuation techniques and significant unobservable inputs used in those techniques to measure financial instruments that are classified within Level 3 of the valuation hierarchy and are measured at fair value on a recurring basis.
 
 
 
 
September 30, 2017
 
December 31, 2016
 
 
Valuation Technique
Significant Unobservable Input
Range/Weighted Average
 
Range/Weighted Average
Assets and liabilities
measured at fair value
on a recurring basis
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment Securities Available for Sale - Other Investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
Trust preferred securities
 
Discounted cash flow analysis
Credit spread embedded in discount rate
398 bps
 
442 bps
 
 
 
 
 
 
 
Private equity investments
 
Individual analysis of each investee company
Multiple factors, including but not limited to, current operations, financial condition, cash flows, evaluation of business management and financial plans, and recently executed financing transactions related to the investee companies
N/A
 
N/A
 
 
 
Discount for lack of liquidity(1)
N/A
 
15%
 
 
 
 
 
 
 
GGL/SBA loans servicing asset
 
Discounted cash flow analysis
Discount rate Prepayment speeds
12.19% 6.75%
 
N/A
 
 
 
 
 
 
 
Earnout liability
 
Option pricing methods and Monte Carlo simulation
Global One Earnout, as defined in merger agreement, for the five years ending October 1, 2021
$11.8 million -
$16.7 million
 
$9.3 million -
$14.2 million
 
 
 
 
 
 
 
Visa derivative liability
 
Discounted cash flow analysis
Estimated timing of resolution of covered litigation, future cumulative deposits to the litigation escrow for settlement of the covered litigation, and estimated future monthly fees payable to the derivative counterparty
1-5 years
 
1-5 years
 
 
 
 
 
 
 
(1) Represents management's estimate of discount that market participants would require based on the instrument's lack of liquidity.

32


Assets Measured at Fair Value on a Non-recurring Basis
Certain assets are recorded at fair value on a non-recurring basis. These non-recurring fair value adjustments typically are a result of the application of lower of cost or fair value accounting or a write-down occurring during the period. For example, if the fair value of an asset in these categories falls below its cost basis, it is considered to be at fair value at the end of the period of the adjustment. The following table presents assets measured at fair value on a non-recurring basis as of the dates indicated for which there was a fair value adjustment during the period.


September 30, 2017
 
December 31, 2016
(in thousands)
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Impaired loans*
$

 

 
3,114

 
3,114

 

 

 
21,742

 
21,742

Other loans held for sale

 

 
31,253

 
31,253

 

 

 

 

Other real estate




8,137


8,137

 

 

 
19,305

 
19,305

Other assets held for sale

 

 
4,033

 
4,033

 

 

 
12,083

 
12,083

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
* Collateral-dependent impaired loans that were written down to fair value during the period.

The following table presents fair value adjustments recognized in earnings for the nine and three months ended September 30, 2017 and 2016 for the assets measured at fair value on a non-recurring basis.
 
Nine Months Ended September 30,
 
Three Months Ended September 30,
(in thousands)
2017
 
2016
 
2017
 
2016
Impaired loans*
$
1,075

 
1,329

 
$
83

 
59

Other loans held for sale
25,051

 
2,096

 
25,051

 
2,096

Other real estate
5,165

 
2,405

 
5,165

 
968

Other assets held for sale
1,683

 
7,532

 
1,683

 
907

 
 
 
 
 
 
 
 
* Collateral-dependent impaired loans that were written down to fair value during the period.

    

















33


The table below provides an overview of the valuation techniques and significant unobservable inputs used in those techniques to measure financial instruments that are classified within Level 3 of the valuation hierarchy and are measured at fair value on a non-recurring basis. The range of sensitivities that management utilized in its fair value calculations is deemed acceptable in the industry with respect to the identified financial instruments.
 
 
 
 
September 30, 2017
 
December 31, 2016
 
 
Valuation Technique
Significant Unobservable Input
Range
(Weighted Average)(1)
 
Range
(Weighted Average)(1)
Assets measured at fair
value on a non-recurring basis
 
 
 
 
 
 
 
 
 
 
 
 
 
Collateral dependent impaired loans
 
Third-party appraised value of collateral less estimated selling costs
Discount to appraised value (2)
Estimated selling costs
0% - 60% (43%)
0% - 10% (7%)
 
0%-52% (25%)
0%-10% (7%)
 
 
 
 
 
 
 
Other loans held for sale
 
Third-party appraised value of collateral less estimated selling costs
Discount to appraised value (2)
Estimated selling costs
0% - 85% (48%)
0% - 10% (2%)
 
N/A
 
 
 
 
 
 
 
Other real estate
 
Third-party appraised value of real estate less estimated selling costs
Discount to appraised value (2)
Estimated selling costs
0% - 86% (32%)
0% - 10% (7%)
 
0%-10% (5%)
0%-10% (7%)
 
 
 
 
 
 
 
Other assets held for sale
 
Third-party appraised value less estimated selling costs or BOV
Discount to appraised value (2)
Estimated selling costs
15%-46% (22%)
0%-10% (7%)
 
0%-81% (47%)
0%-10% (7%)
 
 
 
 
 
 
 
(1) The range represents management's estimate of the high and low of the value that would be assigned to a particular input. For assets measured at fair value on a non-recurring basis, the weighted average is the measure of central tendencies; it is not the value that management is using for the asset or liability.
(2) Synovus also makes adjustments to the values of the assets listed above for reasons including age of the appraisal, information known by management about the property, such as occupancy rates, changes to the physical condition of the property, and other factors. 3Q17 included certain balance sheet restructuring actions which included discounts to fair value for planned accelerated dispositions of other loans held for sale, other real estate, and other assets held for sale.

Fair Value of Financial Instruments
The following table presents the carrying and fair values of financial instruments at September 30, 2017 and December 31, 2016. The fair values represent management’s estimates based on various methodologies and assumptions. For financial instruments that are not recorded at fair value on the balance sheet, such as loans held for investment, interest bearing deposits (including brokered deposits), and long-term debt, the fair value amounts should not be taken as an estimate of the amount that would be realized if all such financial instruments were to be settled immediately.
 










34


The carrying and estimated fair values of financial instruments, as well as the level within the fair value hierarchy, as of September 30, 2017 and December 31, 2016 are as follows:
 
September 30, 2017

(in thousands)
Carrying Value
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Financial assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
386,459

 
386,459

 
386,459

 

 

Interest bearing funds with Federal Reserve Bank
1,297,581

 
1,297,581

 
1,297,581

 

 

Interest earning deposits with banks
6,047

 
6,047

 
6,047

 

 

Federal funds sold and securities purchased under resale agreements
48,820

 
48,820

 
48,820

 

 

Trading account assets
12,329

 
12,329

 

 
12,329

 

Mortgage loans held for sale
54,072

 
54,072

 

 
54,072

 

Other loans held for sale
31,253

 
31,253

 

 

 
31,253

Investment securities available for sale
3,825,443

 
3,825,443

 
86,343

 
3,737,182

 
1,918

Private equity investments
15,671

 
15,671

 

 

 
15,671

Mutual funds held in rabbi trusts
13,439

 
13,439

 
13,439

 

 

Loans, net of deferred fees and costs
24,487,360

 
24,193,343

 

 

 
24,193,343

GGL/SBA loans servicing asset
4,270

 
4,270

 

 

 
4,270

Derivative assets
15,870

 
15,870

 

 
15,870

 

 
 
 
 
 
 
 
 
 
 
Financial liabilities
 
 
 
 
 
 
 
 
 
Trading account liabilities
7,860

 
7,860

 
 
 
7,860

 
 
Non-interest bearing deposits
7,302,682

 
7,302,682

 

 
7,302,682

 

Interest bearing deposits
18,883,546

 
18,891,446

 

 
18,891,446

 

Federal funds purchased, other short-term borrowings and other short-term liabilities
141,539

 
141,539

 
141,539

 

 

Long-term debt
1,882,607

 
1,929,043

 

 
1,929,043

 

Other liabilities
16,000

 
16,000

 

 

 
16,000

Derivative liabilities
17,094

 
17,094

 

 
12,401

 
4,693

 
 
 
 
 
 
 
 
 
 
 
December 31, 2016

(in thousands)
Carrying Value
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Financial assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
395,175

 
395,175

 
395,175

 

 

Interest bearing funds with Federal Reserve Bank
527,090

 
527,090

 
527,090

 

 

Interest earning deposits with banks
18,720

 
18,720

 
18,720

 

 

Federal funds sold and securities purchased under resale agreements
58,060

 
58,060

 
58,060

 

 

Trading account assets
9,314

 
9,314

 
1,890

 
7,424

 

Mortgage loans held for sale
51,545

 
51,545

 

 
51,545

 

Investment securities available for sale
3,718,195

 
3,718,195

 
114,676

 
3,601,723

 
1,796

Private equity investments
25,493

 
25,493

 

 

 
25,493

Mutual funds held in rabbi trusts
11,479

 
11,479

 
11,479

 

 

Loans, net of deferred fees and costs
23,856,391

 
23,709,434

 

 

 
23,709,434

Derivative assets
20,623

 
20,623

 

 
20,623

 

 
 
 
 
 
 
 
 
 
 
Financial liabilities
 
 
 
 
 
 
 
 
 
Non-interest bearing deposits
7,085,804

 
7,085,804

 

 
7,085,804

 

Interest bearing deposits
17,562,256

 
17,560,021

 

 
17,560,021

 

Federal funds purchased, other short-term borrowings and other short-term liabilities
159,699

 
159,699

 
159,699

 

 

Long-term debt
2,160,881

 
2,217,544

 

 
2,217,544

 

Other liabilities
14,000

 
14,000

 

 

 
14,000

Derivative liabilities
23,299

 
23,299

 

 
17,531

 
5,768

 
 
 
 
 
 
 
 
 
 

35


Note 9 - Derivative Instruments
As part of its overall interest rate risk management activities, Synovus utilizes derivative instruments to manage its exposure to various types of interest rate risk. These derivative instruments generally consist of interest rate swaps, interest rate lock commitments made to prospective mortgage loan customers, and commitments to sell fixed-rate mortgage loans. Interest rate lock commitments represent derivative instruments since it is intended that such loans will be sold.
Synovus may also utilize interest rate swaps to manage interest rate risks primarily arising from its core banking activities. These interest rate swap transactions generally involve the exchange of fixed and floating interest rate payment obligations without the exchange of underlying principal amounts. Swaps may be designated as either cash flow hedges or fair value hedges, as discussed below. As of September 30, 2017 and December 31, 2016, Synovus had no outstanding interest rate swap contracts utilized to manage interest rate risk related to core banking activities.
Synovus is party to master netting arrangements with its dealer counterparties; however, Synovus does not offset assets and liabilities under these arrangements for financial statement presentation purposes.
Counterparty Credit Risk and Collateral
Entering into derivative contracts potentially exposes Synovus to the risk of counterparties’ failure to fulfill their legal obligations, including, but not limited to, potential amounts due or payable under each derivative contract. Notional principal amounts are often used to express the volume of these transactions, but the amounts potentially subject to credit risk are much smaller. Synovus assesses the credit risk of its dealer counterparties by regularly monitoring publicly available credit rating information, evaluating other market indicators, and periodically reviewing detailed financials. Dealer collateral requirements are determined via risk-based policies and procedures and in accordance with existing agreements. Synovus seeks to minimize dealer credit risk by dealing with highly rated counterparties and by obtaining collateral for exposures above certain predetermined limits. Management closely monitors credit conditions within the customer swap portfolio, which management deems to be of higher risk than dealer counterparties. Collateral is secured at origination and credit related fair value adjustments are recorded against the asset value of the derivative as deemed necessary based upon an analysis, which includes consideration of the current asset value of the swap, customer credit rating, collateral value, and customer standing with regards to its swap contractual obligations and other related matters. Such asset values fluctuate based upon changes in interest rates regardless of changes in notional amounts and changes in customer specific risk.
Cash Flow Hedges
As of September 30, 2017 and December 31, 2016, there were no cash flow hedges outstanding. The unamortized deferred net loss balance from previously terminated cash flow hedges at December 31, 2016 of $(130) thousand was recognized during the nine months ended September 30, 2017.
Fair Value Hedges
As of September 30, 2017 and December 31, 2016, there were no fair value hedges outstanding. The unamortized deferred gain balance on all previously terminated fair value hedges at December 31, 2016 of $873 thousand was recognized during the nine months ended September 30, 2017.
Customer Related Derivative Positions
Synovus enters into interest rate swap agreements to facilitate the risk management strategies of a small number of commercial banking customers. Synovus mitigates this risk by entering into equal and offsetting interest rate swap agreements with highly rated counterparties. The interest rate swap agreements are free-standing derivatives and are recorded at fair value on Synovus' Consolidated Balance Sheets. Fair value changes are recorded as a component of non-interest income. As of September 30, 2017, the notional amount of customer related interest rate derivative financial instruments, including both the customer position and the offsetting position, was $1.54 billion, an increase of $216.9 million compared to December 31, 2016.
Visa Derivative
In conjunction with the sale of Class B shares of common stock issued by Visa to Synovus as a Visa USA member, Synovus entered into a derivative contract with the purchaser, 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 conversion ratio changes when Visa deposits funds to a litigation escrow established by Visa to pay settlements for certain litigation, for which Visa is indemnified by Visa USA members. The litigation escrow is funded by proceeds from Visa’s conversion of Class B shares. The fair value of the derivative contract was $4.7 million and $5.8 million at September 30, 2017 and December 31, 2016, respectively. The fair value of the derivative contract is determined based on management's estimate of the timing and amount of the Covered Litigation settlement, and the resulting payments due to the counterparty under the terms of the contract. Management believes that the estimate of Synovus' exposure to the Visa indemnification and fees associated with the Visa derivative is adequate based on current information, including Visa's recent announcements and disclosures. However, future developments in the litigation could require potentially significant

36


changes to Synovus' estimate. See "Part II - Item 8. Financial Statements and Supplementary Data - Note 19 - Visa Shares and Related Agreements" of Synovus' 2016 Form 10-K for further information.
Mortgage Derivatives
Synovus originates first lien residential mortgage loans for sale into the secondary market. Mortgage loans are sold by Synovus for conversion to securities and the servicing of these loans is generally sold to a third-party servicing aggregator, or Synovus sells the mortgage loans as whole loans to investors either individually or in bulk on a servicing released basis.
Synovus enters into interest rate lock commitments for residential mortgage loans which commits it to lend funds to a potential borrower at a specific interest rate and within a specified period of time. Interest rate lock commitments that relate to the origination of mortgage loans that, if originated, will be held for sale, are considered derivative financial instruments under applicable accounting guidance. Outstanding interest rate lock commitments expose Synovus to the risk that the price of the mortgage loans underlying the commitments may decline due to increases in mortgage interest rates from inception of the rate lock to the funding of the loan.
At September 30, 2017 and December 31, 2016, Synovus had commitments to fund at a locked interest rate, primarily fixed-rate mortgage loans to customers in the amount of $64.3 million and $88.2 million, respectively. Fair value adjustments related to these commitments resulted in a loss of $595 thousand and a gain of $1.0 million for the nine months ended September 30, 2017 and 2016, respectively, which was recorded as a component of mortgage banking income in the Consolidated Statements of Income.
At September 30, 2017 and December 31, 2016, outstanding commitments to sell primarily fixed-rate mortgage loans amounted to $83.0 million and $126.5 million, respectively. Such commitments are entered into to reduce the exposure to market risk arising from potential changes in interest rates, which could affect the fair value of mortgage loans held for sale and outstanding rate lock commitments, which guarantee a certain interest rate if the loan is ultimately funded or granted by Synovus as a mortgage loan held for sale. The commitments to sell mortgage loans are at fixed prices and are scheduled to settle at specified dates that generally do not exceed 90 days. Fair value adjustments related to these outstanding commitments to sell mortgage loans resulted in a loss of $1.9 million and $830.0 thousand for the nine months ended September 30, 2017 and 2016, respectively, which were recorded as a component of mortgage banking income in the Consolidated Statements of Income.
Collateral Requirements
Pursuant to the Dodd-Frank Act, certain derivative transactions have collateral requirements, both at the inception of the trade and as the value of each derivative position changes. As of September 30, 2017, collateral totaling $45.8 million of federal funds sold was pledged to the derivative counterparties to comply with collateral requirements. Effective January 3, 2017, the CME amended its rulebook to legally characterize variation margin cash payments for cleared OTC derivatives as settlement rather than as collateral. As a result, in 2017, Synovus began reducing the corresponding derivative asset and liability balances for CME-cleared OTC derivatives to reflect the settlement of those positions via the exchange of variation margin.
The impact of derivative instruments on the Consolidated Balance Sheets at September 30, 2017 and December 31, 2016 is presented below.

37


 
Fair Value of Derivative Assets
 
Fair Value of Derivative Liabilities

(in thousands)
Location on Consolidated Balance Sheets
 
September 30, 2017
 
December 31, 2016
 
Location on Consolidated Balance Sheets
 
September 30, 2017
 
December 31, 2016
Derivatives not designated
  as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
Other assets
 
$
14,896

 
17,157

 
Other liabilities
 
12,369

 
17,531

Mortgage derivatives
Other assets
 
974

 
3,466

 
Other liabilities
 
32

 

Visa derivative
 
 

 

 
Other liabilities
 
4,693

 
5,768

 Total derivatives not
  designated as hedging
  instruments    
 
 
$
15,870

 
20,623

 
 
 
17,094

 
23,299

 
 
 
 
 
 
 
 
 
 
 
 
The pre-tax effect of fair value hedges on the Consolidated Statements of Income for the nine and three months ended September 30, 2017 and 2016 is presented below.
 
 
Location of Gain (Loss) Recognized in Income
 
Gain (Loss) Recognized in Income
(in thousands)
 
 
Nine Months Ended September 30,
Derivatives not designated as hedging instruments
 
 
2017
 
2016
Interest rate contracts(1)    
 
Other non-interest income
 
$
(5
)
 
39

Mortgage derivatives(2)    
 
Mortgage banking income
 
(2,524
)
 
189

Total
 
 
 
$
(2,529
)
 
228

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gain (Loss) Recognized in Income
(in thousands)
 
 
 
Three Months Ended September 30,
Derivatives not designated as hedging instruments
 
Location of Gain (Loss) Recognized in Income
 
2017
 
2016
Interest rate contracts(1)    
 
Other non-interest income
 
$
(4
)
 
5

Mortgage derivatives(2)    
 
Mortgage banking income
 
(451
)
 
674

Total
 
 
 
$
(455
)
 
679

 
 
 
 
 
 
 
(1) Gain (loss) represents net fair value adjustments (including credit related adjustments) for customer swaps and offsetting positions.
(2) Gain (loss) represents net fair value adjustments recorded for interest rate lock commitments and commitments to sell mortgage loans to third-party investors.
During the nine months ended September 30, 2017 and 2016, Synovus reclassified $873 thousand and $1.4 million, respectively, from hedge-related basis adjustment, a component of long-term debt, as a reduction to interest expense. During the nine months ended September 30, 2016, Synovus reclassified $1.3 million from hedge-related basis adjustment, as a reduction to loss on early extinguishment of debt, net. As of September 30, 2017, all deferred gains related to hedging relationships that had been previously terminated had been recognized into earnings.

38


Note 10 - Net Income Per Common Share
The following table displays a reconciliation of the information used in calculating basic and diluted earnings per common share for the nine and three months ended September 30, 2017 and 2016.

Nine Months Ended September 30,
 
Three Months Ended September 30,
(in thousands, except per share data)
2017
 
2016
 
2017
 
2016
Basic Net Income Per Common Share:
 
 
 
 
 
 
 
Net income available to common shareholders
$
238,190

 
170,555

 
$
95,448

 
62,686

Weighted average common shares outstanding
121,796

 
125,076

 
120,900

 
122,924

Net income per common share, basic
$
1.96

 
1.36

 
$
0.79

 
0.51

Diluted Net Income Per Common Share:
 
 
 
 
 
 
 
Net income available to common shareholders
$
238,190

 
170,555

 
$
95,448

 
62,686

Weighted average common shares outstanding
121,796

 
125,076

 
120,900

 
122,924

Potentially dilutive shares from outstanding equity-based awards and Earnout Payments
832

 
636

 
914

 
680

Weighted average diluted common shares
122,628

 
125,712

 
121,814

 
123,604

Net income per common share, diluted
$
1.94

 
1.36

 
$
0.78

 
0.51

 
 
 
 
 
 
 
 
Basic net income per common share is computed by dividing net income by the average common shares outstanding for the period. Diluted net income per common share reflects the dilution that could occur if securities or other contracts to issue common stock were exercised or converted. The dilutive effect of outstanding options and restricted share units is reflected in diluted net income per common share, unless the impact is anti-dilutive, by application of the treasury stock method.
As of September 30, 2017 and 2016, there were 2.2 million and 2.5 million, respectively, potentially dilutive shares related to the Warrant and stock options to purchase shares of common stock that were outstanding during 2017 and 2016, but were not included in the computation of diluted net income per common share because the effect would have been anti-dilutive.
Note 11 - Share-based Compensation
General Description of Share-based Plans
Synovus has a long-term incentive plan under which the Compensation Committee of the Board of Directors has the authority to grant share-based awards to Synovus employees. At September 30, 2017, Synovus had a total of 5.7 million shares of its authorized but unissued common stock reserved for future grants under the 2013 Omnibus Plan. The 2013 Omnibus Plan authorizes 8.6 million common share equivalents available for grant, where grants of options count as one share equivalent and grants of full value awards (e.g., restricted share units, market restricted share units, and performance share units) count as two share equivalents. Any restricted share units that are forfeited and options that expire unexercised will again become available for issuance under the Plan. The Plan permits grants of share-based compensation including stock options, restricted share units, market restricted share units, and performance share units. The grants generally include vesting periods ranging from three to five years and contractual terms of ten years. Stock options are granted at exercise prices which equal the fair value of a share of common stock on the grant-date. Market restricted share units and performance share units are granted at target and are compared annually to required market and performance metrics to determine final units vested and compensation expense. Synovus has historically issued new shares to satisfy share option exercises and share unit conversions. Dividend equivalents are paid on outstanding restricted share units, market restricted share units, and performance share units in the form of additional restricted share units that vest over the same vesting period or the vesting period left on the original restricted share unit grant.
Share-based Compensation Expense
Total share-based compensation expense was $10.6 million and $3.7 million for the nine and three months ended September 30, 2017, respectively, and $10.2 million and $3.4 million for the nine and three months ended September 30, 2016, respectively.
Stock Options
No stock option grants were made during the nine months ended September 30, 2017. At September 30, 2017, there were 809 thousand outstanding stock options to purchase shares of common stock with a weighted average exercise price of $17.82 per share.

39


Restricted Share Units, Performance Share Units, and Market Restricted Share Units
During the nine months ended September 30, 2017, Synovus awarded 235 thousand restricted share units that have a service-based vesting period of three years and awarded 73 thousand performance share units that vest upon service and performance conditions. Synovus also granted 73 thousand market restricted share units during the nine months ended September 30, 2017. The weighted average grant-date fair value of the awarded restricted share units, performance share units and market restricted share units was $41.95 per share. Market restricted share units and performance share units are granted at target and are compared annually to required market and performance metrics. The performance share units vest upon meeting certain service and performance conditions. Return on average assets (ROAA) performance is evaluated each year over a three-year performance period, with share distribution determined at the end of the three years. The number of performance share units that will ultimately vest ranges from 0% to 150% of target based on Synovus' three-year weighted average ROAA (as defined). The market restricted share units have a three-year service-based vesting component as well as a total shareholder return multiplier. The number of market restricted share units that will ultimately vest ranges from 75% to 125% of target based on Synovus' total shareholder return. At September 30, 2017, including dividend equivalents granted, there were 973 thousand restricted share units, performance share units and market restricted share units outstanding with a weighted average grant-date fair value of $32.91 per share.
Note 12 - Commitments and Contingencies
In the normal course of business, Synovus enters into commitments to extend credit such as loan commitments and letters of credit to meet the financing needs of its customers. Synovus uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.
The contractual amount of these financial instruments represents Synovus' maximum credit risk should the counterparty draw upon the commitment, and should the counterparty subsequently fail to perform according to the terms of the contract. Since many of the commitments are expected to expire without being drawn upon, total commitment amounts do not necessarily represent future cash requirements. Additionally, certain commitments (primarily consumer) can generally be canceled by providing notice to the borrower.
The allowance for credit losses associated with unfunded commitments and letters of credit is a component of the unfunded commitments reserve recorded within other liabilities on the Consolidated Balance Sheets. Additionally, unearned fees relating to letters of credit are recorded within other liabilities on the Consolidated Balance Sheets. These amounts are not material to Synovus' Consolidated Balance Sheets.
Unfunded lending commitments and letters of credit at September 30, 2017 and December 31, 2016 are presented below.
(in thousands)
September 30, 2017
 
December 31, 2016
Letters of credit*
$
152,082

 
150,948

Commitments to fund commercial real estate, construction, and land development loans
1,309,144

 
1,394,162

Unused credit card lines
1,170,429

 
1,103,431

Commitments under home equity lines of credit
1,133,569

 
1,096,052

Commitments to fund commercial and industrial loans
5,164,553

 
4,792,834

Other loan commitments
326,672

 
307,772

Total unfunded lending commitments and letters of credit
$
9,256,449

 
8,845,199

 
 
 
 
* Represent the contractual amount net of risk participations of approximately $63 million and $83 million at September 30, 2017 and December 31, 2016, respectively.
Note 13 - Legal Proceedings
Synovus and its subsidiaries are subject to various legal proceedings and claims that arise in the ordinary course of its business. Additionally, in the ordinary course of its business, Synovus and its subsidiaries are subject to regulatory examinations, information gathering requests, inquiries and investigations. Synovus, like many other financial institutions, has been the target of numerous legal actions and other proceedings asserting claims for damages and related relief for losses. These actions include claims and counterclaims asserted by individual borrowers related to their loans and allegations of violations of state and federal laws and regulations relating to banking practices, including putative class action matters. In addition to actual damages, if Synovus does

40


not prevail in asserted legal actions, credit-related litigation could result in additional write-downs or charge-offs of loans, which could adversely affect Synovus' results of operations during the period in which the write-down or charge-off were to occur.
Synovus carefully examines and considers each legal matter, and, in those situations where Synovus determines that a particular legal matter presents loss contingencies that are both probable and reasonably estimable, Synovus establishes an appropriate accrual. An event is considered to be probable if the future event is likely to occur. While the final outcome of any legal proceeding is inherently uncertain, based on the information currently available, advice of counsel and available insurance coverage, management believes that the amounts accrued with respect to legal matters as of September 30, 2017 are adequate. The actual costs of resolving legal claims may be higher or lower than the amounts accrued.
In addition, where Synovus determines that there is a reasonable possibility of a loss in respect of legal matters, Synovus considers whether it is able to estimate the total reasonably possible loss or range of loss. An event is “reasonably possible” if “the chance of the future event or events occurring is more than remote but less than likely.” An event is “remote” if “the chance of the event or future event occurring is more than slight but less than reasonably possible." In many situations, Synovus may be unable to estimate reasonably possible losses due to the preliminary nature of the legal matters, as well as a variety of other factors and uncertainties. For those legal matters where Synovus is able to estimate a range of reasonably possible losses, management currently estimates the aggregate range from our outstanding litigation is from zero to $10 million in excess of the amounts accrued, if any, related to those matters. This estimated aggregate range is based upon information currently available to Synovus, and the actual losses could prove to be lower or higher. As there are further developments in these legal matters, Synovus will reassess these matters, and the estimated range of reasonably possible losses may change as a result of this assessment. Based on Synovus' current knowledge and advice of counsel, management presently does not believe that the liabilities arising from these legal matters will have a material adverse effect on Synovus' consolidated financial condition, results of operations or cash flows. However, it is possible that the ultimate resolution of these legal matters could have a material adverse effect on Synovus' results of operations for any particular period.
Synovus intends to vigorously pursue all available defenses to these legal matters, but will also consider other alternatives, including settlement, in situations where there is an opportunity to resolve such legal matters on terms that Synovus considers to be favorable, including in light of the continued expense and distraction of defending such legal matters. Synovus maintains insurance coverage, which may be available to cover legal fees, or potential losses that might be incurred in connection with such legal matters. The above-noted estimated range of reasonably possible losses does not take into consideration insurance coverage which may or may not be available for the respective legal matters.
Note 14 - Subsequent Events

On September 25, 2017, Synovus issued a notice of redemption to redeem all of the $300.0 million aggregate principal amount of its outstanding 7.875% senior notes due 2019 on November 9, 2017 at a “make whole” premium, plus accrued but unpaid interest on the 2019 notes to the redemption date.  The results for the three months ending December 31, 2017 will include a pre-tax loss of approximately $24 million related to early extinguishment of these notes. 

On November 1, 2017, Synovus completed a public offering of $300.0 million of 3.125% senior notes due 2022. Proceeds from this offering will be used, in part, to fund the redemption of the 2019 notes. 

41


ITEM 2. – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In this Report, the words “Synovus,” “the Company,” “we,” “us,” and “our” refer to Synovus Financial Corp. together with Synovus Bank and Synovus' other wholly-owned subsidiaries, except where the context requires otherwise.
FORWARD-LOOKING STATEMENTS
Certain statements made or incorporated by reference in this Report which are not statements of historical fact including those under "Management's Discussion and Analysis of Financial Condition and Results of Operations," and elsewhere in this Report, constitute forward-looking statements within the meaning of, and subject to the protections of, Section 27A of the Securities Act, and Section 21E of the Exchange Act. Forward-looking statements include statements with respect to Synovus' beliefs, plans, objectives, goals, targets, expectations, anticipations, assumptions, estimates, intentions and future performance and involve known and unknown risks, many of which are beyond Synovus' control and which may cause Synovus' actual results, performance or achievements or the commercial banking industry or economy generally, to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements.
All statements other than statements of historical fact are forward-looking statements. You can identify these forward-looking statements through Synovus' use of words such as “believes,” “anticipates,” “expects,” “may,” “will,” “assumes,” “predicts,” “could,” “should,” “would,” “intends,” “targets,” “estimates,” “projects,” “plans,” “potential” and other similar words and expressions of the future or otherwise regarding the outlook for Synovus' future business and financial performance and/or the performance of the commercial banking industry and economy in general. Forward-looking statements are based on the current beliefs and expectations of Synovus' management and are subject to significant risks and uncertainties. Actual results may differ materially from those contemplated by such forward-looking statements. A number of factors could cause actual results to differ materially from those contemplated by the forward-looking statements in this document. Many of these factors are beyond Synovus' ability to control or predict. These factors include, but are not limited to:
(1)
 
the risk that competition in the financial services industry may adversely affect our future earnings and growth;
(2)
 
the risk that we may not realize the expected benefits from our efficiency and growth initiatives, which could negatively
affect our future profitability;
(3)
 
the risk that our current and future information technology system enhancements and initiatives may not be successfully implemented, which could negatively impact our operations;
(4)
 
the risk that our enterprise risk management framework may not identify or address risks adequately, which may result in unexpected losses;
(5)
 
the risk that our allowance for loan losses may prove to be inadequate or may be negatively affected by credit risk exposures;
(6)
 
the risk that any future economic downturn could have a material adverse effect on our capital, financial condition, results of operations and future growth;
(7)
 
changes in the interest rate environment, including changes to the federal funds rate, and competition in our primary market area may result in increased funding costs or reduced earning assets yields, thus reducing margins and net interest income;
(8)
 
our ability to attract and retain key employees;
(9)
 
the risk that we may be required to make substantial expenditures to keep pace with the rapid technological changes in the financial services market;
(10)
 
risks related to our reliance on third parties to provide key components of our business infrastructure, including the costs of services and products provided to us by third parties, and risks related to disruptions in service or financial difficulties of a third-party vendor;
(11)
 
risks related to the ability of our operational framework to manage risks associated with our business such as credit risk and operational risk, including third-party vendors and other service providers, which could, among other things, result in a breach of security systems as a result of cyber-attack or similar act;

42


(12)
 
our ability to identify and address cyber-security risks such as data security breaches, malware, 'denial of service' attacks, 'hacking', and identity theft, a failure of which could disrupt our business and result in disclosure of and/or misuse or misappropriation of confidential or proprietary information; disruption or damage to our systems; increased costs; significant loses; or adverse effects to our reputation;
(13)
 
the impact of recent and proposed changes in governmental policy, laws and regulations, including proposed and recently enacted changes in the regulation of banks and financial institutions, or the interpretation or application thereof and the uncertainty of future implementation and enforcement of these regulations;
(14)
 
the risk that we could realize losses if we determine to sell non-performing assets and the proceeds we receive are lower than the carrying value of such assets;
(15)
 
the risk that we may be exposed to potential losses in the event of fraud on cash accounts and/or theft;
(16)
 
the risk that we may not be able to identify suitable acquisition targets or strategic partners as part of our growth strategy and even if we are able to identify suitable acquisition counterparties, we may not be able to complete such transactions on favorable terms, if at all, or successfully integrate acquired bank or nonbank operations into our existing operations;
(17)
 
the risk that we may not be able to realize the anticipated benefits from our balance sheet restructuring actions;
(18)
 
the impact on our financial results, reputation, and business if we are unable to comply with all applicable federal and state regulations or other supervisory actions or directives and any necessary capital initiatives;
(19)
 
the risks that if economic conditions worsen or regulatory capital rules are modified, or the results of mandated “stress testing” do not satisfy certain criteria, we may be required to undertake initiatives to improve our capital position;
(20)
 
changes in the cost and availability of funding due to changes in the deposit market and credit market;
(21)
 
restrictions or limitations on access to funds from historical and alternative sources of liquidity could adversely affect our overall liquidity, which could restrict our ability to make payments on our obligations and our ability to support asset growth and sustain our operations and the operations of Synovus Bank;
(22)
 
our ability to receive dividends from our subsidiaries could affect our liquidity, including our ability to pay dividends or take other capital actions;
(23)
 
risks related to regulatory approval to take certain actions, including any dividends on our common stock or Series C Preferred Stock, any repurchases of common stock or any other issuance or redemption of any other regulatory capital instruments, as well as any applications in respect of expansionary initiatives;
(24)
 
risks related to recent and proposed changes in the mortgage banking industry, including the risk that we may be required to repurchase mortgage loans sold to third parties and the impact of the “ability to pay” and “qualified mortgage” rules on our loan origination process and foreclosure proceedings;
(25)
 
the risk that our current tax position, including the realization of our deferred tax assets in the future, could be subject to comprehensive tax reform;
(26)
 
the risk that we could have an “ownership change” under Section 382 of the Code, which could impair our ability to timely and fully utilize our net operating losses and built-in losses that may exist when such “ownership change” occurs;
(27)
 
the costs and effects of litigation, investigations, inquiries or similar matters, or adverse facts and developments related thereto;
(28)
 
risks related to the fluctuation in our stock price;
(29)
 
the effects of any damages to our reputation resulting from developments related to any of the items identified above; and
(30)
 
other factors and other information contained in this Report and in other reports and filings that we make with the SEC under the Exchange Act, including, without limitation, those found in "Risk Factors" of this Report.
For a discussion of these and other risks that may cause actual results to differ from expectations, refer to “Part I-Item 1A. Risk Factors” and other information contained in Synovus' 2016 Form 10-K and our other periodic filings, including quarterly reports on Form 10-Q and current reports on Form 8-K, that we file from time to time with the SEC. All written or oral forward-looking statements that are made by or are attributable to Synovus are expressly qualified by this cautionary notice. You should

43


not place undue reliance on any forward-looking statements since those statements speak only as of the date on which the statements are made. Synovus undertakes no obligation to update any forward-looking information and statements, whether written or oral, to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of new information or unanticipated events, except as may otherwise be required by law.
INTRODUCTION AND CORPORATE PROFILE
Synovus Financial Corp. is a financial services company and a registered bank holding company headquartered in Columbus, Georgia. Through its wholly-owned subsidiary, Synovus Bank, a Georgia state-chartered bank that is a member of the Federal Reserve System, the company provides commercial and retail banking in addition to a full suite of specialized products and services including private banking, treasury management, wealth management, premium finance and international banking. Synovus also provides mortgage services, financial planning, and investment advisory services through its wholly-owned subsidiaries, Synovus Mortgage, Synovus Trust, and Synovus Securities, as well as its GLOBALT and Creative Financial Group divisions.
Synovus Bank is positioned in some of the highest growth markets in the Southeast, with 249 branches and 328 ATMs in Georgia, Alabama, South Carolina, Florida, and Tennessee.
The following financial review summarizes the significant trends, changes in our business, transactions, and other matters affecting Synovus’ results of operations for the nine and three months ended September 30, 2017 and financial condition as of September 30, 2017 and December 31, 2016. This discussion supplements, and should be read in conjunction with, the unaudited interim consolidated financial statements and notes thereto contained elsewhere in this Report and the consolidated financial statements of Synovus, the notes thereto, and management’s discussion and analysis contained in Synovus’ 2016 Form 10-K.
Management's Discussion and Analysis of Financial Condition and Results of Operations consists of:
Ÿ    Discussion of Results of Operations - Reviews Synovus' financial performance, as well as selected balance sheet items,
items from the statements of income, significant transactions, and certain key ratios that illustrate Synovus' performance.

Ÿ    Credit Quality, Capital Resources and Liquidity - Discusses credit quality, market risk, capital resources, and liquidity,
as well as performance trends. It also includes a discussion of liquidity policies, how Synovus obtains funding, and related
performance.

Ÿ    Additional Disclosures - Discusses additional important matters including critical accounting policies and
non-GAAP financial measures used within this Report.
A reading of each section is important to understand fully the nature of our financial performance.

44


DISCUSSION OF RESULTS OF OPERATIONS
Consolidated Financial Highlights
 
Nine Months Ended September 30,
 
Three Months Ended September 30,
(dollars in thousands, except per share data)
2017
 
2016
 
Change
 
2017
 
2016
 
Change
Net interest income
$
753,597

 
665,650

 
13.2
 %
 
$
262,572

 
226,007

 
16.2
 %
Provision for loan losses
58,620

 
21,741

 
169.6
 
39,686

 
5,671

 
599.8

Non-interest income
275,974

 
199,188

 
38.5
 
135,435

 
68,155

 
98.7

Adjusted non-interest income(1)
204,456

 
199,589

 
2.4
 
68,418

 
68,345

 
0.1

Total revenues (2)
1,030,750

 
865,676

 
19.1
 
406,246

 
294,433

 
38.0

Adjusted total revenues(1)
958,943

 
866,203

 
10.7
 
331,273

 
294,682

 
12.4

Non-interest expense
594,780

 
562,716

 
5.7
 
205,646

 
185,871

 
10.6

Adjusted non-interest expense(1)
576,150

 
545,495

 
5.6
 
194,102

 
183,907

 
5.5

Income before income taxes
376,171

 
280,381

 
34.2
 
152,675

 
102,620

 
48.8

Net income
245,868

 
178,233

 
37.9
 
98,007

 
65,245

 
50.2

Net income available to common shareholders
238,190

 
170,555

 
39.7
 
95,448

 
62,686

 
52.3

Net income per common share, basic
1.96

 
1.36

 
43.4
 
0.79

 
0.51

 
54.8

Net income per common share, diluted
1.94

 
1.36

 
43.2
 
0.78

 
0.51

 
54.5

Adjusted net income per common share, diluted(1)
1.82

 
1.45

 
25.9
 
0.65

 
0.52

 
24.7

Net interest margin(3)
3.52
%
 
3.27
%
 
25
  bps
 
3.63
%
 
3.27

 
36
  bps
Net charge-off ratio(3)
0.33

 
0.12

 
21
  bps
 
0.62

 
0.12

 
50
  bps
Adjusted net charge-off ratio(1)(3)
0.15

 
0.12

 
3
  bps
 
0.06

 
0.12

 
(6
) bps
Return on average assets(3)
1.07

 
0.81

 
26
  bps
 
1.27

 
0.88

 
39
  bps
Adjusted return on average assets(1)(3)
1.01

 
0.87

 
14
  bps
 
1.05

 
0.90

 
15
  bps
Efficiency ratio
57.70

 
65.00

 
(730
) bps
 
50.62

 
63.13

 
(1,251
) bps
Adjusted efficiency ratio(1)
60.08

 
62.98

 
(290
) bps
 
58.59

 
62.41

 
(382
) bps
 
 
 
 
 
 
 
 
 
 
 
 
(1) See “Non-GAAP Financial Measures” in this Report for the applicable reconciliation to the most comparable GAAP measure.
(2) Consists of net interest income and non-interest income excluding investment securities (losses) gains, net.
(3) Annualized
 
September 30, 2017
 
June 30, 2017
 
Sequential Quarter Change
 
September 30, 2016
 
Year-Over-Year Change
 
(dollars in thousands, except per share data)
 
Loans, net of deferred fees and costs
$
24,487,360

 
24,430,512

 
56,848

 
23,262,887

 
1,224,473
 
Total deposits
26,186,228

 
25,218,816

 
967,412

 
24,192,003

 
1,994,225
 
Total average deposits
25,286,919

 
24,991,708

 
295,211

 
24,030,291

 
1,256,628
 
Average core deposits(1)
23,756,030

 
23,612,149

 
143,881

 
22,620,552

 
1,135,478
 
Average core transaction deposits(1)
 
18,603,161

 
18,409,170

 
193,991

 
17,362,060

 
1,241,101
 
 
 
 
 
 
 
 
 
 
 
 
Non-performing assets ratio
0.57
%
 
0.73

 
(16
) bps
 
0.77

 
(20
) bps
 
Non-performing loans ratio
0.40

 
0.65

 
(25
) bps
 
0.64

 
(24
) bps
 
Past due loans over 90 days
0.02

 
0.02

 

 
0.02

 

 
 
 
 
 
 
 
 
 
 
 
 
Common equity Tier 1 capital (transitional)
$
2,749,304

 
2,734,983

 
14,321

 
2,596,233

 
153,071
 
Tier 1 capital
2,849,580

 
2,829,340

 
20,240

 
2,620,379

 
229,201
 
Total risk-based capital
3,362,127

 
3,340,155

 
21,972

 
3,139,465

 
222,662
 
Common equity Tier 1 capital ratio transitional(2)
10.06
%
 
10.02

 
4
  bps
 
9.96

 
10
  bps
 
Tier 1 capital ratio(2)
10.43

 
10.37

 
6
  bps
 
10.05

 
38
  bps
 
Total risk-based capital ratio
12.30

 
12.24

 
6
  bps
 
12.04

 
26
  bps
 
Total shareholders’ equity to total assets ratio
9.47

 
9.77

 
(30
) bps
 
9.78

 
(31
) bps
 
Tangible common equity to tangible assets ratio(1)
8.88

 
9.15

 
(27
) bps
 
9.28

 
(40
) bps
 
Return on average common equity(3)
13.24

 
10.34

 
290
  bps
 
8.89

 
435
  bps
 
Adjusted return on average common equity(1)(3)
 
10.92

 
10.49

 
43
  bps
 
9.08

 
184
  bps
 
Adjusted return on average tangible common equity(1)(3)
11.19

 
10.75

 
44
  bps
 
9.16

 
203
  bps
 
 
 
 
 
 
 
 
 
 
 
 
(1) See “Non-GAAP Financial Measures” in this Report for the applicable reconciliation to the most comparable GAAP measure.
(2) June 30, 2017 ratios for CET1 transitional and Tier 1 capital were reported in error as 10.37% and 10.02%, respectively, on the June 30, 2017 Report.
(3) Annualized


45


Results for the Nine and Three Months Ended September 30, 2017
Third quarter of 2017 results include the Cabela's Transaction Fee, partially offset by certain balance sheet restructuring actions which resulted in pre-tax charges totaling $44.5 million. The fourth quarter of 2017 results will include a pre-tax loss on early extinguishment of debt totaling approximately $24 million due to the previously announced redemption of our 7.875% senior notes due 2019 at a redemption premium on November 9, 2017.
For the nine months ended September 30, 2017, net income available to common shareholders was $238.2 million, or $1.94 per diluted common share, an increase of 39.7% and 43.2%, respectively, compared to the nine months ended September 30, 2016. For the three months ended September 30, 2017, net income available to common shareholders was $95.4 million, or $0.78 per diluted common share, an increase of 52.3% and 54.5%, respectively, compared to the three months ended September 30, 2016. For the three months ended September 30, 2017, adjusted net income per common share, diluted was $0.65, up 24.7% compared to $0.52 for the third quarter of 2016. For the three months ended September 30, 2017, return on average assets was 1.27%, annualized, up 39 basis points from the third quarter of 2016 (adjusted return on average assets was 1.05%, annualized, up 15 basis points from the third quarter of 2016). See "Non-GAAP Financial Measures" in this Report for the applicable reconciliation to the most comparable GAAP measure.
Total revenues of $1.0 billion for the nine months ended September 30, 2017 were up 19.1% compared to the nine months ended September 30, 2016. Adjusted total revenues, which excludes the Cabela's Transaction Fee, net investment securities (losses) gains, net, and decrease in fair value of private equity investments, net, of $958.9 million for the nine months ended September 30, 2017 were up 10.7% compared to the nine months ended September 30, 2016. Total revenues of $406.2 million for the three months ended September 30, 2017 were up 38.0% compared to the three months ended September 30, 2016. Adjusted total revenues of $331.3 million for the three months ended September 30, 2017 were up 12.4% compared to the same time period in 2016 driven by net interest income growth of 16.2% from the prior year. Net interest income was $262.6 million for the three months ended September 30, 2017, up $36.6 million, or 16.2%, compared to the three months ended September 30, 2016. The net interest margin was 3.63% for the three months ended September 30, 2017, an increase of 12 basis points from the second quarter of 2017 and 36 basis points from 3.27% for the third quarter of 2016. The yield on earning assets was 4.11%, up 12 basis points from the second quarter of 2017 and up 40 basis points compared to the third quarter of 2016, and the effective cost of funds was 0.48%, unchanged from second quarter of 2017 and up four basis points from third quarter of 2016. The yield on loans was 4.49%, an increase of 13 basis points sequentially and 35 basis points from the third quarter of 2016. Earning asset yields also benefited from a reduction of the average balance of lower yielding funds held at the Federal Reserve. See "Non-GAAP Financial Measures" in this Report for the applicable reconciliation to the most comparable GAAP measure.
Non-interest income for the nine and three months ended September 30, 2017 was $276.0 million and $135.4 million, respectively, up $76.8 million, or 38.5%, and up $67.3 million, or 98.7%, compared to the nine and three months ended September 30, 2016, respectively. Adjusted non-interest income, which excludes the Cabela's Transaction Fee, net investment securities (losses) gains, net, and decrease in fair value of private equity investments, net was up $4.9 million, or 2.4%, and flat, for the nine and three months ended September 30, 2017, compared to the same periods a year ago, respectively. See "Non-GAAP Financial Measures" in this Report for the applicable reconciliation to the most comparable GAAP measure.
Non-interest expense for the nine and three months ended September 30, 2017 was $594.8 million and $205.6 million, respectively, compared to $562.7 million and $185.9 million for the nine and three months ended September 30, 2016, respectively. Adjusted non-interest expense for the nine and three months ended September 30, 2017, which excludes the third quarter of 2017 balance sheet restructuring actions of impairments on ORE and other properties held for sale, restructuring charges, net, loss on early extinguishment of debt, net, litigation contingency/settlement expense, merger-related expense, fair value adjustment to Visa derivative, amortization of intangibles, and certain earnout liability adjustments, increased $30.7 million, or 5.6%, and $10.2 million, or 5.5%, compared to the same periods in 2016, respectively. Synovus continues to generate positive operating leverage with the year-over-year expense growth primarily driven by strategic investments in talent and technology, higher third-party processing expense relating to third-party lending partnerships servicing fees, the addition of Global One, and expenses associated with Synovus Bank's transition to a single bank operating environment and single brand. Strategic investments in talent and technology accounted for approximately $15 million and $5 million of the increase for the nine and three months ended September 30, 2017, respectively, compared to the same periods in 2016, as Synovus continues to add key talent and invest in technology to enhance the customer experience. Third-party processing expense relating to the servicing fees of third-party lending partnerships increased by $3.4 million and $1.2 million for the nine and three months ended September 30, 2017, respectively, compared to the same periods in 2016, and Global One operating expenses accounted for $3.0 million and $1.2 million of the increase compared to the nine and three months ended September 30, 2016, respectively. Expenses associated with Synovus Bank's transition to a single bank operating environment and single brand resulted in higher expenses of $4.0 million and $1.1 million compared to the nine and three months ended September 30, 2016, respectively. See "Non-GAAP Financial Measures" in this Report for the applicable reconciliation to the most comparable GAAP measure.

46


During the third quarter of 2017, Synovus completed certain balance sheet restructuring actions which included $77.8 million in loans transferred to held-for-sale (consisting primarily of NPLs) that resulted in charge-offs of $34.2 million and provision expense of $27.7 million. Additionally, foreclosed real estate expenses for the quarter included $7.1 million of charges related to discounts to fair value for completed or planned accelerated dispositions. Non-performing loans were $97.8 million at September 30, 2017, down $61.5 million from June 30, 2017 and down $50.3 million from September 30, 2016. The non-performing loan ratio was 0.40% at September 30, 2017, as compared to 0.65% at June 30, 2017 and 0.64% at September 30, 2016. Total non-performing assets were $138.6 million at September 30, 2017, down $40.3 million from June 30, 2017 and down $40.5 million from September 30, 2016. The non-performing assets ratio was 0.57% at September 30, 2017, as compared to 0.73% in the prior quarter, and 0.77% a year ago. Net charge-offs for the nine months ended September 30, 2017 were $60.7 million, or 0.33% as a percentage of average loans annualized, compared to $20.4 million, or 0.12% as a percentage of average loans annualized, for the nine months ended September 30, 2016. Excluding the third quarter of 2017 balance sheet restructuring actions, the adjusted net charge-off ratio for the nine months ended September 30, 2017 was 0.15%. Total delinquencies (consisting of loans 30 or more days past due and still accruing) were 0.35% of total loans at September 30, 2017 as compared to 0.27% at June 30, 2017 and 0.27% at September 30, 2016. The allowance for loan losses at September 30, 2017 was $249.7 million, or 1.02% of total loans, compared to $251.8 million, or 1.06% of total loans, at December 31, 2016 and $253.8 million, or 1.09% of total loans, at September 30, 2016. See "Non-GAAP Financial Measures" in this Report for the applicable reconciliation to the most comparable GAAP measure.
Restructuring charges of $7.0 million were recorded during the nine months ended September 30, 2017 consisting primarily of severance charges of $6.4 million recorded during the first quarter of 2017 associated primarily with termination benefits incurred in conjunction with a voluntary early retirement program offered during the quarter. This program was part of Synovus' ongoing efficiency initiatives. Additionally, during the three months ended September 30, 2017, Synovus recorded restructuring charges of $519 thousand due to additional asset impairment charges of $515 thousand on properties previously identified for disposition. During the nine months ended September 30, 2016, Synovus recorded restructuring charges of $8.2 million consisting primarily of asset impairment charges related to corporate real estate optimization activities and branch closures.
At September 30, 2017, total loans were $24.49 billion, an increase of $631.0 million, or 3.5% annualized, and $1.22 billion or 5.3%, compared to December 31, 2016 and September 30, 2016, respectively. Year-over-year loan growth was driven by a $750.1 million or 15.6% increase in consumer loans and a $718.1 million or 6.5% increase in C&I loans, partially offset by a $245.6 million or 3.3% decline in CRE loans.
During the third quarter of 2017, total average deposits increased $295.2 million, or 4.7% annualized, compared to the second quarter of 2017, and increased $1.26 billion, or 5.2%, compared to the third quarter of 2016. Excluding the acquired WFB brokered time deposits, average deposits for the third quarter of 2017 increased $223.3 million, or 3.5% annualized, compared to the second quarter of 2017. Average core transaction deposits increased $194.0 million, or 4.2% annualized, compared to the prior quarter, and were up $1.24 billion, or 7.1%, compared to the third quarter of 2016. The increase in average deposits for the three months ended September 30, 2017 compared to the three months ended September 30, 2016 was due to growth in average core transaction deposits, which represented 73.6% of average deposits for the third quarter of 2017 compared to 72.3% a year ago. See “Non-GAAP Financial Measures” in this Report for the applicable reconciliation to the most comparable GAAP measure.
During January 2016, Synovus repurchased $124.7 million of its subordinated notes that matured on June 15, 2017 in conjunction with Synovus' cash tender offer that commenced on December 23, 2015 and expired on January 22, 2016. Results for the nine months ended September 30, 2016 included a $4.7 million pre-tax loss relating to this tender offer.
On September 25, 2017, Synovus issued a notice of redemption to redeem all of the $300.0 million aggregate principal amount of its outstanding 7.875% senior notes due 2019 on November 9, 2017 at a “make whole” premium, plus accrued but unpaid interest on the 2019 notes to the redemption date.  The results for the three months ending December 31, 2017 will include a pre-tax loss of approximately $24 million related to early extinguishment of these notes.
During the nine months ended September 30, 2017, Synovus repurchased $135.9 million in common stock under the current share repurchase program, which authorizes repurchases of up to $200 million of the Company's common stock to be executed during 2017. Additionally, during the first quarter of 2017, Synovus increased the quarterly common stock dividend by 25% to $0.15 per share effective with the quarterly dividend declared during the first quarter of 2017. Total shareholders' equity was $3.00 billion at September 30, 2017, compared to $2.93 billion at December 31, 2016, and $2.91 billion at September 30, 2016. Return on average common equity was 13.24%, annualized, for the three months ended September 30, 2017, compared to 10.34%, annualized, for the three months ended June 30, 2017, and 8.89%, annualized, for the three months ended September 30, 2016. Adjusted return on average common equity was 10.92%, annualized, for the three months ended September 30, 2017, compared to 10.49%, annualized, for the three months ended June 30, 2017, and 9.08%, annualized, for the three months ended September 30, 2016. Adjusted return on average tangible common equity was 11.19%, annualized, for the three months ended September 30, 2017, compared to 10.75%, annualized, for the three months ended June 30, 2017, and 9.16%, annualized, for the three months ended September 30, 2016. See "Non-GAAP Financial Measures" in this Report for the applicable reconciliation to the most comparable GAAP measure.

47


2017 Outlook
For 2017, excluding the impact from the Cabela's Transaction Fee and balance sheet restructuring actions recognized during the third quarter of 2017, management currently expects:
Average loan growth of 5% to 7%
Average total deposits growth of 5% to 7%
Net interest income growth of 12% to 14%
Adjusted non-interest income* growth of 2% to 4%
Adjusted total non-interest expense* growth of 2% to 4%
Effective income tax rate of 34% to 35%
Adjusted net charge-off ratio* of 15 to 20 bps
* See “Non-GAAP Financial Measures” in this Report for the applicable reconciliation to the most comparable GAAP measure.
Changes in Financial Condition
During the nine months ended September 30, 2017, total assets increased $1.54 billion from $30.10 billion at December 31, 2016 to $31.64 billion. The principal components of this increase were an increase in loans, net of deferred fees and costs, of $631.0 million and an increase in interest bearing funds with the Federal Reserve of $770.5 million. Additionally, investment securities available for sale, at fair value, increased by $107.2 million, and Synovus increased its investment in BOLI policies by $150.0 million during the nine months ended September 30, 2017. An increase of $1.54 billion in deposits, which includes the $1.10 billion in brokered time deposits acquired from WFB in the Cabela's Transaction, provided the primary funding source for the growth in assets. Long-term debt declined by $278.3 million during the nine months ended September 30, 2017 with Synovus' payoff of $278.6 million of subordinated notes at their maturity date of June 15, 2017. Other liabilities, at September 30, 2017, included $193.3 million accrued for purchases of investment securities available for sale settled during October, 2017.
Loans
The following table compares the composition of the loan portfolio at September 30, 2017, December 31, 2016, and September 30, 2016.
(dollars in thousands)
September 30, 2017
 
December 31, 2016
 
September 30, 2017 vs.
December 31, 2016 % Change(1)
 
September 30, 2016
 
September 30, 2017 vs.
September 30, 2016
% Change
Investment properties
$
5,925,096

 
5,869,261

 
1.3
 %
 
5,898,631

 
0.4
 %
1-4 family properties
794,616

 
887,307

 
(14.0
)
 
921,688

 
(13.8
)
Land and development
507,212

 
616,297

 
(23.7
)
 
652,232

 
(22.2
)
  Total commercial real estate
7,226,924

 
7,372,865

 
(2.6
)
 
7,472,551

 
(3.3
)
Commercial, financial and agricultural
6,961,709

 
6,909,036

 
1.0

 
6,537,656

 
6.5

Owner-occupied
4,765,433

 
4,636,016

 
3.7

 
4,471,365

 
6.6

Total commercial and industrial
11,727,142

 
11,545,052

 
2.1

 
11,009,021

 
6.5

Home equity lines
1,528,889

 
1,617,265

 
(7.3
)
 
1,638,844

 
(6.7
)
Consumer mortgages
2,557,680

 
2,296,604

 
15.2

 
2,243,154

 
14.0

Credit cards
225,725

 
232,413

 
(3.8
)
 
232,309

 
(2.8
)
Other consumer loans
1,245,278

 
818,183

 
69.8

 
693,204

 
79.6

Total consumer
5,557,572

 
4,964,465

 
16.0

 
4,807,511

 
15.6

Total loans
24,511,638

 
23,882,382

 
3.5

 
23,289,083

 
5.2

Deferred fees and costs, net
(24,278
)
 
(25,991
)
 
(8.8
)
 
(26,196
)
 
(7.3
)
Total loans, net of deferred fees and costs
$
24,487,360

 
23,856,391

 
3.5
 %
 
23,262,887

 
5.3
 %
 
 
 
 
 
 
 
 
 
 
(1) Percentage changes are annualized


48


At September 30, 2017, total loans were $24.49 billion, an increase of $631.0 million, or 3.5% annualized, and $1.22 billion or 5.3%, compared to December 31, 2016 and September 30, 2016, respectively. Year-over-year loan growth was driven by a $718.1 million or 6.5% increase in C&I loans and a $750.1 million or 15.6% increase in consumer loans, partially offset by a $245.6 million or 3.3% decline in CRE loans.
Commercial Loans
Total commercial loans (which are comprised of C&I and CRE loans) at September 30, 2017 were $18.95 billion, or 77.4% of the total loan portfolio, compared to $18.92 billion, or 79.3%, at December 31, 2016 and $18.48 billion, or 79.4%, at September 30, 2016.
At September 30, 2017 and December 31, 2016, Synovus had 26 and 29 commercial loan relationships, respectively, with total commitments of $50 million or more (including amounts funded). The average funded balance of these relationships at both September 30, 2017 and December 31, 2016 was approximately $33 million and $34 million, respectively.
Commercial and Industrial Loans
The C&I loan portfolio represents the largest category of Synovus' total loan portfolio and is currently concentrated on small to middle market C&I lending dispersed throughout a diverse group of industries primarily in the Southeast and other selected areas in the United States. The following table shows the composition of the C&I portfolio aggregated by NAICS code. The portfolio is relationship focused and, as a result, Synovus' lenders have in-depth knowledge of the borrowers, most of which have guaranty arrangements. C&I loans are originated through Synovus' local market banking divisions and the Corporate Banking Group to commercial customers primarily to finance capital expenditures, including real property, plant and equipment, or as a source of working capital. In accordance with Synovus' lending policy, each loan undergoes a detailed underwriting process which incorporates uniform underwriting standards and oversight in proportion to the size and complexity of the lending relationship. As of September 30, 2017, approximately 93% of Synovus' C&I loans are secured by real estate, business equipment, inventory, and other types of collateral. C&I loans of $11.73 billion, representing 47.9% of the total loan portfolio, grew $182.0 million, or 2.1% annualized, from December 31, 2016 and $718.1 million, or 6.5%, from September 30, 2016. The year-over-year growth in C&I loans reflects $356.7 million in loans added from the Global One acquisition on October 1, 2016.
Commercial and Industrial Loans by Industry
September 30, 2017
 
December 31, 2016
(dollars in thousands)
Amount
 
%(1)
 
Amount
 
%(1)
Health care and social assistance
$
2,709,369

 
23.1
%
 
$
2,598,438

 
22.5
%
Manufacturing
932,355

 
8.0

 
872,559

 
7.6

Retail trade
844,068

 
7.2

 
876,951

 
7.6

Real estate and rental and leasing
817,497

 
7.0

 
764,296

 
6.6

Other services
785,735

 
6.7

 
816,846

 
7.1

Finance and insurance
733,843

 
6.3

 
764,811

 
6.6

Professional, scientific, and technical services
704,515

 
6.0

 
719,056

 
6.2

Wholesale trade
719,717

 
6.0

 
645,124

 
5.6

Real estate other
582,041

 
5.0

 
561,133

 
4.9

Accommodation and food services
538,749

 
4.6

 
530,232

 
4.6

Construction
455,816

 
3.9

 
465,632

 
4.0

Transportation and warehousing
407,663

 
3.5

 
385,350

 
3.3

Agriculture, forestry, fishing, and hunting
363,640

 
3.1

 
387,589

 
3.4

Administration, support, waste management, and remediation
268,458

 
2.3

 
287,391

 
2.5

Educational services
231,003

 
2.0

 
222,516

 
1.9

Information
212,829

 
1.8

 
240,437

 
2.1

Other industries
419,844

 
3.5

 
406,691

 
3.5

Total commercial and industrial loans
$
11,727,142

 
100.0
%
 
$
11,545,052

 
100.0
%
 
 
 
 
 
 
 
 
(1) Loan balance in each category expressed as a percentage of total C&I loans.
At September 30, 2017, $6.96 billion of C&I loans, or 28.4% of the total loan portfolio, represented loans originated for the purpose of financing commercial, financial, and agricultural business activities. The primary source of repayment on these loans is revenue generated from products or services offered by the business or organization. The secondary source of repayment is the collateral, which consists primarily of equipment, inventory, accounts receivable, time deposits, cash surrender value of life insurance, and other business assets.

49


At September 30, 2017, $4.77 billion of C&I loans, or 19.5% of the total loan portfolio, represented loans originated for the purpose of financing owner-occupied properties. The primary source of repayment on these loans is revenue generated from products or services offered by the business or organization. The secondary source of repayment on these loans is the real estate. These loans are predominately secured by owner-occupied properties and other real estate, and to a lesser extent, other types of collateral.
Commercial Real Estate Loans
Total CRE loans consist of investment properties loans, 1-4 family properties loans, as well as land and development loans. These loans are subject to the same uniform lending policies referenced above. CRE loans of $7.23 billion, representing 29.5% of the total loan portfolio, decreased $145.9 million, or 2.6% annualized, from December 31, 2016 and decreased $245.6 million, or 3.3%, from September 30, 2016. The decline from a year ago was driven by strategic reductions in 1-4 family properties and land and development loans and a $15.7 million reduction from sales and transfers to held for sale during the third quarter of 2017.  This decline was partially offset by growth in investment properties.
Investment Properties Loans
Investment properties loans consist of construction and mortgage loans for income producing properties and are primarily made to finance multi-family properties, hotels, office buildings, shopping centers, warehouses, and other investment property. Total investment properties loans as of September 30, 2017 were $5.93 billion, or 82.0% of the total CRE portfolio and 24.2% of the total loan portfolio, compared to $5.87 billion, or 79.6% of the total CRE portfolio and 24.6% of the total loan portfolio at December 31, 2016, an increase of $55.8 million, or 1.3% annualized. The net growth since year-end reflects an $84.0 million or 15.0% annualized growth in hotel loans, a $68.2 million or 5.8% annualized growth rate in multi-family loans, partially offset by a $124.0 million or 17.2% annualized decline in the shopping center portfolio. Synovus' investment properties portfolio is well diversified by property type, geography (primarily within Synovus' primary market areas of Georgia, Alabama, Tennessee, South Carolina, and Florida), and tenants. The investment properties loans are primarily secured by the property being financed by the loans; however, these loans may also be secured by real estate or other assets beyond the property being financed.
1-4 Family Properties Loans
1-4 family properties loans include construction loans to homebuilders and commercial mortgage loans to real estate investors and are almost always secured by the underlying property being financed by such loans. These properties are primarily located in the markets served by Synovus. Construction loans are generally interest-only loans and typically have maturities of three years or less, and commercial mortgage loans generally have maturities of three to five years, with amortization periods of up to fifteen to twenty years. At September 30, 2017, 1-4 family properties loans totaled $794.6 million, or 11.0% of the total CRE portfolio and 3.2% of the total loan portfolio, compared to $887.3 million, or 12.0% of the total CRE portfolio and 3.7% of the total loan portfolio at December 31, 2016.
Land and Development Loans
Land and development loans include commercial and residential development as well as land acquisition loans and are secured by land held for future development, typically in excess of one year. These loans have short-term maturities and are typically unamortized. Properties securing these loans are substantially within the Synovus footprint, and loan terms generally include personal guarantees from the principals. Loans in this portfolio are underwritten based on the loan to value of the collateral and the capacity of the guarantor(s). Total land and development loans were $507.2 million at September 30, 2017, or 2.1% of the total loan portfolio, a decline of $109.1 million, or 23.7% annualized, from December 31, 2016. Synovus continues to strategically reduce its exposure to these types of loans.
Consumer Loans
The consumer loan portfolio consists of a wide variety of loan products offered through Synovus' banking network as well as third-party lending partnerships, including first and second residential mortgages, home equity lines, credit card loans, home improvement loans, student loans, and other consumer loans. The majority of Synovus' consumer loans are consumer mortgages and home equity lines secured by first and second liens on residential real estate primarily located in the markets served by Synovus.
Consumer loans at September 30, 2017 totaled $5.56 billion, representing 22.6% of the total loan portfolio compared to $4.96 billion, or 20.7% of the total loan portfolio at December 31, 2016, and $4.81 billion, or 20.6% of the total loan portfolio at September 30, 2016. Consumer loans increased $593.1 million, or 16.0% annualized, from December 31, 2016 and $750.1 million, or 15.6%, from September 30, 2016. Consumer mortgages grew $261.1 million or 15.2% annualized, from December 31, 2016, and $314.5 million, or 14.0%, from September 30, 2016 primarily due to continued recruiting of mortgage loan originators in strategic markets throughout the footprint as well as enhanced origination efforts, which also create additional cross-selling opportunities for other products. Credit card loans totaled $225.7 million at September 30, 2017, including $59.1 million of commercial credit card loans. The commercial credit card loans relate to Synovus' commercial customers who utilize corporate credit cards for various business activities. Other consumer loans increased $427.1 million, or 69.8% annualized, from December

50


31, 2016, and $552.1 million, or 79.6%, from September 30, 2016 due to two consumer-based lending partnerships. One lending partnership, which began in the third quarter of 2015, is a program that provides merchants and contractors nationwide with the ability to offer term financing to their customers for major purchases and home improvement projects. The other lending partnership, which began in the second quarter of 2016, primarily provides qualified borrowers the ability to refinance student loan debt. As of September 30, 2017, these partnerships had combined balances of $915.2 million, or 3.7% of the total loan portfolio.
Consumer loans are subject to uniform lending policies and consist primarily of loans with strong borrower credit scores. Synovus makes consumer lending decisions based upon a number of key credit risk determinants including FICO scores as well as loan-to-value and debt-to-income ratios. Risk levels 1-6 (descending) are assigned to consumer loans based upon a risk score matrix. At least annually, the consumer loan portfolio data is sent to a consumer credit reporting agency for a refresh of customers' credit scores so that management can evaluate ongoing consistency or negative migration in the quality of the portfolio, which impacts the allowance for loan losses. The most recent credit score refresh was completed as of June 30, 2017. Revolving lines of credit are regularly reviewed for any material change in financial circumstances, and when appropriate, the line of credit may be suspended for further advances. FICO scores within the residential real estate portfolio have generally remained stable over the last several years.
At June 30, 2017, weighted-average FICO scores within the residential real estate portfolio were 761 for HELOCs and 770 for consumer mortgages. Conservative debt-to-income ratios (average HELOC debt to income ratio of loans originated) were maintained in both the third quarter and second quarter of 2017 at 32.3%. HELOC utilization rates (total amount outstanding as a percentage of total available lines) were 55.9% and 58.3% at September 30, 2017 and December 31, 2016, respectively. Additionally, we maintained loan-to-value ratios based upon prudent guidelines to ensure consistency with Synovus' overall risk philosophy. At September 30, 2017, 36% of home equity line balances were secured by a first lien, and 64% were secured by a second lien. Apart from credit card loans and unsecured loans, Synovus does not originate loans with LTV ratios greater than 100% at origination except for infrequent situations provided that certain underwriting requirements are met. Additionally, at origination, loan maturities are determined based on the borrower's ability to repay (cash flow or earning power that represents the primary source of repayment) and the collateralization of the loan, including the economic life of the asset being pledged. Collateral securing these loans provides a secondary source of repayment in that the collateral may be liquidated. Synovus determines the need for collateral on a case-by-case basis. Factors considered include the purpose of the loan, current and prospective credit-worthiness of the customer, terms of the loan, and economic conditions.
Higher-risk consumer loans as defined by the FDIC are consumer loans (excluding consumer loans defined as nontraditional mortgage loans) where, as of the origination date or, if the loan has been refinanced, as of the refinance date, the probability of default within two years is greater than 20%, as determined using a defined historical stress period. These loans are not a part of Synovus' consumer lending strategy, and Synovus does not currently offer specific higher-risk consumer loans, alt-A, no documentation or stated income residential real estate loan products. Synovus estimates that, as of September 30, 2017, it had $87.0 million of higher-risk consumer loans (1.6% of the consumer portfolio and 0.4% of the total loan portfolio) compared to $105.3 million as of September 30, 2016. Included in these amounts as of September 30, 2017 and 2016 are approximately $11 million and $12 million, respectively, of accruing TDRs.

51


Deposits
Deposits provide the most significant funding source for interest earning assets. The following table shows the relative composition of average deposits for the time periods indicated.
Composition of Average Deposits
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
September 30, 2017
 
%(1)
 
June 30, 2017
 
%(1)
 
December 31, 2016
 
%(1)
 
September 30, 2016
 
%(1)
Non-interest bearing demand deposits
$
7,305,508

 
28.9
%
 
7,298,845

 
29.2
 
7,280,033

 
29.5
 
$
7,042,908

 
29.3
Interest bearing demand deposits
4,868,372

 
19.3

 
4,837,053

 
19.4
 
4,488,135

 
18.2
 
4,274,117

 
17.8
Money market accounts, excluding brokered deposits
7,528,036

 
29.8

 
7,427,562

 
29.7
 
7,359,067

 
29.8
 
7,227,030

 
30.1
Savings deposits
803,185

 
3.2

 
805,019

 
3.2
 
908,725

 
3.7
 
797,961

 
3.3
Time deposits, excluding brokered deposits
3,250,929

 
12.9

 
3,243,670

 
13.0
 
3,244,373

 
13.2
 
3,278,536

 
13.6
Brokered deposits
1,530,889

 
6.1

 
1,379,559

 
5.5
 
1,380,932

 
5.6
 
1,409,739

 
5.9
Total average deposits
$
25,286,919

 
100.0

 
24,991,708

 
100.0
 
24,661,265

 
100.0
 
$
24,030,291

 
100.0
Average core deposits(2)    
23,756,030

 
93.9

 
23,612,149

 
94.5
 
23,280,334

 
94.4
 
22,620,552

 
94.1
Average core transaction deposits (2)    
$
18,603,161

 
73.6

 
18,409,170

 
73.7
 
17,776,147

 
72.1
 
$
17,362,060

 
72.3
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Deposits balance in each category expressed as percentage of total deposits.
(2) See “Non-GAAP Financial Measures” in this Report for the applicable reconciliation to the most comparable GAAP measure.
During the third quarter of 2017, total average deposits increased $295.2 million, or 4.7% annualized, compared to the second quarter of 2017, and increased $1.26 billion, or 5.2%, compared to the third quarter of 2016. Excluding the acquired WFB brokered time deposits, average deposits for the third quarter of 2017 increased $223.3 million, or 3.5% annualized, compared to the second quarter of 2017. Average core transaction deposits increased $194.0 million, or 4.2% annualized, compared to the prior quarter, and were up $1.24 billion, or 7.1%, compared to the third quarter of 2016. The increase in average deposits for the three months ended September 30, 2017 compared to the three months ended September 30, 2016 was due to growth in average core transaction deposits, which represented 73.6% of average deposits for the third quarter of 2017 compared to 72.3% a year ago. See “Non-GAAP Financial Measures” in this Report for the applicable reconciliation to the most comparable GAAP measure.
Average non-interest bearing demand deposits as a percentage of total average deposits were 28.9% for the three months ended September 30, 2017, compared to 29.2% for the three months ended June 30, 2017 and 29.3% for the three months ended September 30, 2016.
Average time deposits of $100,000 and greater for the three months ended September 30, 2017, June 30, 2017, and September 30, 2016 were $3.05 billion, $2.86 billion, and $2.81 billion, respectively, and included average brokered time deposits of $983.4 million, $815.5 million, and $775.1 million, respectively. These larger deposits represented 12.1%, 11.4%, and 11.7% of total average deposits for the three months ended September 30, 2017, June 30, 2017, and September 30, 2016, respectively, and included brokered time deposits which represented 3.9%, 3.3%, and 3.2% of total average deposits for the three months ended September 30, 2017, June 30, 2017, and September 30, 2016, respectively. Brokered time deposits acquired from WFB in the Cabela's Transaction increased average brokered time deposits by $71.9 million for the three months ended September 30, 2017.
During May 2016, Synovus launched a bank deposit sweep product, which resulted in the addition of approximately $293 million in deposits from existing customers of Synovus Securities.   These customers previously had their cash balances invested in mutual funds with an unaffiliated institution. The total aggregate balance of these accounts was approximately $326.2 million as of September 30, 2017
During the third quarter of 2017, total average brokered deposits represented 6.1% of total average deposits compared to 5.5% and 5.9% of total average deposits the previous quarter and the third quarter a year ago, respectively.

52


Non-interest Income
Non-interest income for the nine and three months ended September 30, 2017 was $276.0 million and $135.4 million, respectively, up $76.8 million, or 38.5%, and up $67.3 million, or 98.7%, compared to the nine and three months ended September 30, 2016, respectively. Adjusted non-interest income, which excludes the Cabela's Transaction Fee, net investment securities (losses) gains, net, and decrease in fair value of private equity investments, net was up $4.9 million, or 2.4%, and flat, for the nine and three months ended September 30, 2017, compared to the same periods a year ago, respectively. See "Non-GAAP Financial Measures" in this Report for the applicable reconciliation to the most comparable GAAP measure.
The following table shows the principal components of non-interest income.
Non-interest Income

Nine Months Ended September 30,
 
Three Months Ended September 30,
(in thousands)
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
Service charges on deposit accounts
$
59,848

 
60,772

 
(1.5
)%
 
$
20,255

 
20,822

 
(2.7
)%
Fiduciary and asset management fees
37,290

 
34,691

 
7.5

 
12,615

 
11,837

 
6.6

Brokerage revenue
21,947

 
20,019

 
9.6

 
7,511

 
6,199

 
21.2

Mortgage banking income
17,151

 
18,755

 
(8.6
)
 
5,603

 
7,329

 
(23.6
)
Bankcard fees
24,339

 
24,988

 
(2.6
)
 
7,901

 
8,269

 
(4.5
)
Cabela's Transaction Fee
75,000

 

 
nm

 
75,000

 

 
nm

Investment securities (losses) gains, net
(289
)
 
126

 
nm

 
(7,956
)
 
59

 
nm

Decrease in fair value of private equity investments, net
(3,193
)
 
(527
)
 
nm

 
(27
)
 
(249
)
 
nm

Other fee income
16,127

 
15,255

 
5.7

 
5,094

 
5,171

 
(1.5
)
Other non-interest income
27,754

 
25,109

 
10.5

 
9,439

 
8,718

 
8.3

Total non-interest income
$
275,974

 
199,188

 
38.5
 %
 
$
135,435

 
68,155

 
98.7
 %
 
 
 
 
 
 
 
 
 
 
 
 
Principal Components of Non-interest Income
Service charges on deposit accounts for the nine and three months ended September 30, 2017 were down $924 thousand, or 1.5%, and down $567 thousand, or 2.7%, respectively, compared to the nine and three months ended September 30, 2016. Service charges on deposit accounts consist of NSF fees, account analysis fees, and all other service charges. NSF fees were $27.4 million and $9.4 million for the nine and three months ended September 30, 2017, respectively, down $647 thousand, or 2.3%, and $236 thousand, or 2.4%, compared to the nine and three months ended September 30, 2016, respectively. The decline in NSF fees from prior year is primarily due to lower Regulation E opt-in rates on new accounts as well as lower incident levels given higher average deposit balances. Account analysis fees were $18.6 million and $6.3 million for the nine and three months ended September 30, 2017, respectively, up $382 thousand, or 2.1%, and up $122 thousand, or 2.0%, compared to the nine and three months ended September 30, 2016, respectively. All other service charges on deposit accounts, which consist primarily of monthly fees on retail demand deposit and saving accounts, for the nine and three months ended September 30, 2017 were $13.9 million and $4.5 million, down $659 thousand, or 4.5%, and $452 thousand, or 9.2%, compared to the same periods in 2016. The decline in all other service charges is largely due to a one-time impact during 2017 from account level conversions required for Synovus Bank's transition to a single bank operating environment.
Fiduciary and asset management fees are derived from providing estate administration, employee benefit plan administration, personal trust, corporate trust, corporate bond, investment management, and financial planning services. Fiduciary and asset management fees increased $2.6 million, or 7.5%, and $778 thousand, or 6.6%, for the nine and three months ended September 30, 2017, respectively, compared to the nine and three months ended September 30, 2016. The year-over-year increase is driven by growth in total assets under management, which ended the quarter at $13.0 billion, an increase of 14.8% from September 30, 2016, from higher equity markets as well as increased banker productivity, as Synovus continues to benefit from new talent additions.
Brokerage revenue, which consists primarily of brokerage commissions, was $21.9 million and $7.5 million for the nine and three months ended September 30, 2017, respectively, up $1.9 million, or 9.6%, and up $1.3 million, or 21.2%, compared to the nine and three months ended September 30, 2016, respectively. The increase for 2017 compared to 2016 is largely driven by growth in brokerage assets under management, which ended the quarter at $2.25 billion, an increase of 22.3% from September 30, 2016, as well as increased banker productivity, as Synovus continues to benefit from new talent additions.


53


Mortgage banking income was $17.2 million and $5.6 million for the nine and three months ended September 30, 2017, respectively, compared to $18.8 million and $7.3 million for the same periods in 2016. During the third quarter of 2017, mortgage production excluding portfolio loan production decreased 1.9% sequentially and declined 14.3% from the same time period in 2016, reflecting a decline in refinancing volume. Total mortgage production for the first nine months of 2017 was $978.7 million. Mortgage production excluding portfolio loan production for the nine months ended September 30, 2017 was $491.3 million, down 5.2% from the same time period of 2016.
Bankcard fees totaled $24.3 million and $7.9 million for the nine and three months ended September 30, 2017, respectively, compared to $25.0 million and $8.3 million for the same periods in 2016. Bankcard fees consist primarily of credit card interchange fees and debit card interchange fees. Debit card interchange fees were $12.9 million, up $109 thousand, or 0.9%, and $4.3 million, up $4 thousand, or 0.1%, for the nine and three months ended September 30, 2017, respectively, compared to the same periods in 2016. Credit card interchange fees were $16.6 million, down $254 thousand, or 1.5%, and $5.5 million, down $147 thousand, or 2.6%, for the nine and three months ended September 30, 2017, respectively, compared to the same periods in 2016.
On September 25, 2017, Synovus Bank completed the Cabela's Transaction and received the Cabela's Transaction Fee.
Investment securities (losses) gains, net, were ($289) thousand and ($8.0) million, for the nine and three months ended September 30, 2017, respectively. During the third quarter of 2017, as part of its balance sheet restructuring actions, Synovus repositioned the available for sale securities portfolio and recorded a net loss of ($8.0) million. The first quarter of 2017 included a $3.4 million gain on the sale of an equity position and a $4.3 million gain from the repositioning of the investment securities portfolio.
Other fee income includes fees for letters of credit and unused lines of credit, safe deposit box fees, access fees for automated teller machine use, customer swap dealer fees, and other service charges. Other fee income was higher by $871 thousand, or 5.7%, for the nine months ended September 30, 2017, compared to the same period in 2016 driven by higher customer swap dealer fees and syndication arranger fees.
The main components of other non-interest income are income from BOLI policies, insurance commissions, gains from sales of GGL/SBA loans, card sponsorship fees, and other miscellaneous items. The increase of $2.6 million, or 10.5%, and $721 thousand, or 8.3%, during the nine and three months ended September 30, 2017, respectively, compared to the same periods in 2016, was due primarily to growth in BOLI revenues and gains on sales of GGL/SBA loans. BOLI revenues grew $2.2 million and $726 thousand during the nine and three months ended September 30, 2017, respectively, driven by additional investments in BOLI policies. Gains from the sale of GGL/SBA loans were up $1.1 million compared to 2016 on a year-to-date basis and lower by $112 thousand for the third quarter of 2017 compared to the third quarter of 2016.
Non-interest Expense
Non-interest expense for the nine and three months ended September 30, 2017 was $594.8 million and $205.6 million, respectively, compared to $562.7 million and $185.9 million for the nine and three months ended September 30, 2016, respectively. Adjusted non-interest expense for the nine and three months ended September 30, 2017, which excludes the third quarter of 2017 balance sheet restructuring actions of impairments on ORE and other properties held for sale, restructuring charges, net, loss on early extinguishment of debt, net, litigation contingency/settlement expense, merger-related expense, fair value adjustment to Visa derivative, amortization of intangibles, and certain earnout liability adjustments, increased $30.7 million, or 5.6%, and $10.2 million, or 5.5%, compared to the same periods in 2016, respectively. Synovus continues to generate positive operating leverage with the year-over-year expense growth primarily driven by strategic investments in talent and technology, higher third-party processing expense relating to third-party lending partnerships servicing fees, the addition of Global One, and expenses associated with Synovus Bank's transition to a single bank operating environment and single brand. Strategic investments in talent and technology accounted for approximately $15 million and $5 million of the increase for the nine and three months ended September 30, 2017, respectively, compared to the same periods in 2016, as Synovus continues to add key talent and invest in technology to enhance the customer experience. Third-party processing expense relating to the servicing fees of third-party lending partnerships increased by $3.4 million and $1.2 million for the nine and three months ended September 30, 2017, respectively, compared to the same periods in 2016, and Global One operating expenses accounted for $3.0 million and $1.2 million of the increase compared to the nine and three months ended September 30, 2016, respectively. Expenses associated with Synovus Bank's transition to a single bank operating environment and single brand resulted in higher expenses of $4.0 million and $1.1 million compared to the nine and three months ended September 30, 2016, respectively. See "Non-GAAP Financial Measures" in this Report for the applicable reconciliation to the most comparable GAAP measure.

54


The following table summarizes the components of non-interest expense for the nine and three months ended September 30, 2017 and 2016.
Non-interest Expense

 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
Three Months Ended September 30,
(in thousands)
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
Salaries and other personnel expense
$
322,079

 
300,364

 
7.2
 %
 
$
109,675

 
101,945

 
7.6
 %
Net occupancy and equipment expense
89,837

 
81,480

 
10.3

 
30,573

 
28,120

 
8.7

Third-party processing expense
39,882

 
34,033

 
17.2

 
13,659

 
11,219

 
21.7

FDIC insurance and other regulatory fees
20,723

 
20,100

 
3.1

 
7,078

 
6,756

 
4.8

Professional fees
20,048

 
19,794

 
1.3

 
7,141

 
6,486

 
10.1

Advertising expense
14,868

 
15,358

 
(3.2
)
 
3,610

 
5,597

 
(35.5
)
Foreclosed real estate expense, net
10,847

 
9,998

 
8.5

 
7,265

 
2,725

 
166.6

Earnout liability adjustment
3,766

 

 
nm

 
2,059

 

 
nm

Merger-related expense
110

 
550

 
(80.0
)
 
23

 
550

 
(95.8
)
Loss on early extinguishment of debt, net

 
4,735

 
nm

 

 

 
nm

Fair value adjustment to Visa derivative

 
1,079

 
nm

 

 
360

 
nm

Restructuring charges, net
7,043

 
8,225

 
(14.4
)
 
519

 
1,243

 
(58.2
)
Other operating expenses
65,577

 
67,000

 
(2.1
)
 
24,044

 
20,870

 
15.2

Total non-interest expense
$
594,780

 
562,716

 
5.7
 %
 
$
205,646

 
185,871

 
10.6
 %
 
 
 
 
 
 
 
 
 
 
 
 
Salaries and other personnel expenses increased $21.7 million, or 7.2%, and $7.7 million, or 7.6%, for the nine and three months ended September 30, 2017, respectively, compared to the same periods in 2016, primarily due to annual merit increases, talent additions, higher self-insurance expense, and Global One.
Net occupancy and equipment expense was up $8.4 million, or 10.3%, and $2.5 million, or 8.7%, for the nine and three months ended September 30, 2017, respectively, compared to the same periods in 2016 as costs associated with growth in technology investments offset efficiencies gained in occupancy and related expenses. Synovus' branch network consists of 249 locations at September 30, 2017 compared to 250 branches a year ago.    
Third-party processing expense includes all third-party core operating system and processing charges as well as third-party servicing charges. Third-party processing expense increased $5.8 million, or 17.2%, and $2.4 million, or 21.7%, for the nine and three months ended September 30, 2017, respectively, compared to the same periods in 2016, driven by an increase of $3.4 million and $1.2 million for the nine and three months ended September 30, 2017, respectively, compared to the same periods in 2016, from servicing fees associated with loan growth from Synovus' two consumer-based lending partnerships.
FDIC insurance and other regulatory fees increased by $623 thousand, or 3.1%, and $322 thousand, or 4.8%, for the nine and three months ended September 30, 2017, compared to the same periods in 2016. On March 15, 2016, the FDIC approved a final rule to increase the DIF to the statutorily required minimum level of 1.35%. Congress, in the Dodd-Frank Act, increased the minimum for the DIF reserve ratio, the ratio of the amount in the fund to insured deposits, from 1.15% percent to 1.35% and required that the ratio reach that level by September 30, 2020. Further, the Dodd-Frank Act also made banks with $10 billion or more in total assets responsible for the increase from 1.15% to 1.35%. Under a rule adopted by the FDIC in 2011, regular assessment rates for all banks would decline when the reserve ratio reached 1.15%, which occurred during the second quarter of 2016. Banks with total assets of less than $10 billion have substantially lower assessment rates under the 2011 rule. The final rule imposed on banks with at least $10 billion in assets a surcharge of 4.5 cents per $100 of their assessment base, after making certain adjustments. The FDIC expects the reserve ratio will likely reach 1.35% after approximately two years of payments of the surcharges. The final rule became effective on July 1, 2016 with surcharge assessments beginning July 1, 2016. Synovus' FDIC insurance cost remained relatively flat to prior levels following the surcharge assessment since regular assessment rates declined at the same time the surcharge assessment became effective.
Professional fees for the nine and three months ended September 30, 2017 were up $254 thousand, or 1.3%, and $655 thousand, or 10.1%, respectively, compared to the same periods in 2016, driven by increases in consulting expense primarily related to Synovus Bank's transition to a single bank operating environment.
Foreclosed real estate expense for the nine and three months ended September 30, 2017 included the third quarter of 2017 balance sheet restructuring actions with $7.1 million recorded for discounts to fair value for completed or planned ORE accelerated dispositions. ORE balances declined $17.9 million to $10.6 million at September 30, 2017 compared to prior year.

55


During the nine and three months ended September 30, 2017, Synovus recorded contingent consideration expense of $3.8 million, and $2.1 million, respectively, resulting from updates to the estimated fair value of the Global One earnout liability.   
Merger-related expense consists of professional fees relating to the October 1, 2016 acquisition of Global One. See "Note 2- Acquisitions" in this Report for more information on the acquisition of Global One.
During January 2016, Synovus repurchased $124.7 million of its subordinated notes that matured on June 15, 2017 in conjunction with Synovus' cash tender offer that commenced on December 23, 2015 and expired on January 22, 2016. Results for the nine months ended September 30, 2016 included a $4.7 million pre-tax loss relating to this tender offer. 
On September 25, 2017, Synovus issued a notice of redemption to redeem all of the $300.0 million aggregate principal amount of its outstanding 7.875% senior notes due 2019 on November 9, 2017 at a “make whole” premium, plus accrued but unpaid interest on the 2019 notes to the redemption date.  The results for the three months ending December 31, 2017 will include a pre-tax loss of approximately $24 million related to early extinguishment of these notes.
    Restructuring charges of $7.0 million were recorded during the nine months ended September 30, 2017 consisting primarily of severance charges of $6.4 million recorded during the first quarter of 2017. Severance charges included $6.2 million for termination benefits incurred in conjunction with a voluntary early retirement program offered during the first quarter of 2017. This program was part of Synovus' ongoing efficiency initiatives. For the three months ended September 30, 2017, Synovus recorded restructuring charges of $519 thousand due to additional asset impairment charges of $515 thousand on properties previously identified for disposition. During the nine months ended September 30, 2016, Synovus recorded restructuring charges of $8.2 million with $4.8 million of those charges related to corporate real estate optimization activities and $3.3 million associated with branch closures.
Other operating expenses for the three months ended September 30, 2017 included balance sheet restructuring charges of $1.2 million for asset impairment charges related to accelerated disposition of other properties held for sale while other operating expenses for the three months ended September 30, 2016 were reduced by $1.7 million in gains on sales of properties held for sale. Additionally, the three months ended September 30, 2016 included a $2.4 million gain related to the purchase of an additional interest in an existing NPL at a discount that was subsequently paid in full. Other operating expenses for the nine months ended September 30, 2017 included a $2.4 million gain from the settlement of a contingent receivable during the second quarter of 2017 while the nine months ended September 30, 2016 included litigation settlement expense of $2.5 million recognized primarily during the first quarter of 2016.
The efficiency ratio improved to below 59% during the third quarter of 2017. The adjusted efficiency ratio was 58.59% in the third quarter of 2107 compared to 62.41% in the third quarter of 2016. The calculation of the adjusted efficiency ratio was revised during the first quarter of this year.  ORE expense and other credit costs had been excluded since the financial crisis due to the abnormal level of expenditure.  Given the more normalized level of expense that Synovus is now experiencing, these costs will be included in the calculation hereafter (excluding the third quarter of 2017 balance sheet restructuring actions) and previous quarters have been restated as well. The change in the calculation resulted in a higher adjusted efficiency ratio. See "Non-GAAP Financial Measures" in this Report for the applicable reconciliation to the most comparable GAAP measure.
Income Tax Expense
Income tax expense was $130.3 million and $54.7 million for the nine and three months ended September 30, 2017, respectively, representing an effective tax rate of 34.6% and 35.8% for the respective periods compared to income tax expense of $102.1 million and $37.4 million for the nine and three months ended September 30, 2016, respectively, representing an effective tax rate of 36.4% for both periods.     
The effective tax rate is impacted by discrete items that may occur in any given period but are not consistent from period-to-period such as share-based compensation, valuation allowance changes, and changes to unrecognized tax benefits. The decrease in the effective tax rate in 2017 as compared to 2016 is primarily related to the adoption of ASU 2016-09, as further described below. The effective tax rate for 2017 also reflects a $2.6 million reduction in the deferred tax asset valuation allowance relating to certain tax credits.
    
As disclosed in Note 1, Synovus adopted ASU 2016-09 effective January 1, 2017, which includes a requirement to record all tax effects associated with share-based compensation through the income statement.  These tax effects, which are determined upon the vesting of restricted share units and the exercise of stock options, are treated as discrete items in the period in which they occur.  For the nine and three months ended September 30, 2017, the impact from the adoption of ASU 2016-09 was an income tax benefit of $4.7 million and $211 thousand, respectively. 

56


CREDIT QUALITY, CAPITAL RESOURCES AND LIQUIDITY
Credit Quality
Synovus continuously monitors the quality of its loan portfolio by industry, property type, geography, as well as credit quality metrics and maintains an allowance for loan losses that management believes is sufficient to absorb probable losses inherent in its loan portfolio. Credit quality metrics have remained favorable during the first nine months of 2017. The decline in non-performing assets is driven by the activities described below.
During the three months ended September 30, 2017, Synovus completed certain balance sheet restructuring actions which included the transfer of $77.8 million in loans (consisting primarily of non-performing loans) to held-for-sale.  This action resulted in provision expense of $27.7 million and net charge-offs of $34.2 million due to the actual or planned sale of such loans in an accelerated timeline, which required discounts below fair value.  Additionally, the third quarter results also reflect ORE write-downs totaling $7.1 million consisting of discounts to fair value for completed or planned ORE accelerated dispositions.  
The table below includes selected credit quality metrics.
Credit Quality Metrics
 
(dollars in thousands)
September 30, 2017
 
December 31, 2016
 
September 30, 2016
Non-performing loans    
$
97,838

 
153,378

 
148,155

Impaired loans held for sale(1)
30,197

 

 
2,473

Other real estate
10,551

 
22,308

 
28,438

 Non-performing assets    
$
138,586

 
175,686

 
179,066

Non-performing loans as a % of total loans
0.40
%
 
0.64

 
0.64

Non-performing assets as a % of total loans, other loans held for sale, and ORE
0.57

 
0.74

 
0.77

Loans 90 days past due and still accruing
$
5,685

 
3,135

 
5,358

As a % of total loans
0.02
%
 
0.01

 
0.02

Total past due loans and still accruing
$
84,853

 
65,106

 
61,781

As a % of total loans
0.35
%
 
0.27

 
0.27

Net charge-offs, quarter
$
38,098

 
8,319

 
6,930

Net charge-offs/average loans, quarter
0.62
%
 
0.14

 
0.12

Net charge-offs, year-to-date
$
60,695

 
28,738

 
20,420

Net charge-offs/average loans, year-to-date
0.33
%
 
0.12

 
0.12

Provision for loan losses, quarter
$
39,686

 
6,259

 
5,671

Provision for loan losses, year-to-date
58,620

 
28,000

 
21,741

Allowance for loan losses
249,683

 
251,758

 
253,817

Allowance for loan losses as a % of total loans
1.02
%
 
1.06

 
1.09

 
 
 
 
 
 
(1) Represent only impaired loans that have been specifically identified to be sold. Impaired loans held for sale are carried at the lower of cost or fair value, less costs to sell, based primarily on estimated sales proceeds net of selling costs.
Non-performing Assets
Total NPAs were $138.6 million at September 30, 2017, a $37.1 million, or 21.1%, decrease from $175.7 million at December 31, 2016 and a $40.5 million, or 22.6%, decrease from $179.1 million at September 30, 2016. The year-over-year decline in non-performing assets was driven by the continued resolution of problem assets including accelerated dispositions and transfers to held for sale in conjunction with the balance sheet restructuring actions described above. Total non-performing assets as a percentage of total loans, other loans held for sale, and other real estate were 0.57% at September 30, 2017 compared to 0.74% at December 31, 2016 and 0.77% at September 30, 2016.
Retail Trade Loan Portfolio
As of September 30, 2017, loans in the retail trade industry consisted of $844.1 million of C&I loans and $840.4 million of CRE (investment properties) loans. These portfolios are well-diversified geographically. Based on an analysis of these portfolios as of September 30, 2017, we believe that the majority of these loans do not have exposure to the retail sectors which are most adversely impacted by competition from online retail and big-box retail store closures. As of September 30, 2017, these portfolios had non-performing loans of $4.3 million, 0.01% of loans past due 90 days or more, and 0.13% of loans past due 30 days or more as a percentage of total retail trade loans outstanding.

57


Troubled Debt Restructurings
Accruing TDRs were $166.9 million at September 30, 2017, compared to $195.8 million at December 31, 2016 and $201.9 million at September 30, 2016. Accruing TDRs declined $28.9 million, or 14.7%, from December 31, 2016 and $35.0 million, or 17.3%, from a year ago primarily due to continued decline in TDR inflows, fewer TDRs needing to retain the TDR designation upon subsequent renewal, refinance, or modification, and pay-offs.
At September 30, 2017, the allowance for loan losses allocated to these accruing TDRs was $8.5 million compared to $9.8 million at December 31, 2016 and $11.8 million at September 30, 2016. Accruing TDRs are considered performing because they are performing in accordance with the restructured terms. At September 30, 2017 and December 31, 2016, 94% and 99%, respectively, of accruing TDRs were current. In addition, subsequent defaults on accruing TDRs (defaults defined as the earlier of the TDR being placed on non-accrual status or reaching 90 days past due with respect to principal and/or interest payments within twelve months of the TDR designation) have remained negligible, and consisted of four defaults with a recorded investment of $498 thousand for the nine months ended September 30, 2017 compared to two defaults with a recorded investment of $181 thousand for the nine months ended September 30, 2016.
Accruing TDRs by Risk Grade
September 30, 2017
 
December 31, 2016
 
September 30, 2016
(dollars in thousands)
Amount
 
%
 
Amount
 
%
 
Amount
 
%
Pass
$
65,018

 
39.0
%
 
81,615

 
41.7
 
66,887

 
33.1
Special Mention
17,759

 
10.6

 
29,250

 
14.9
 
37,259

 
18.6
Substandard accruing
84,141

 
50.4

 
84,911

 
43.4
 
97,750

 
48.4
  Total accruing TDRs
$
166,918

 
100.0
%
 
195,776

 
100.0
 
201,896

 
100.0
 
 
 
 
 
 
 
 
 
 
 
 

58


Accruing TDRs Aging by Portfolio Class
 
September 30, 2017
(in thousands)
Current
 
30-89 Days Past Due
 
90+ Days Past Due
 
Total
 
Investment properties
$
27,715

 

 

 
27,715

 
1-4 family properties
15,695

 
46

 

 
15,741

 
Land and development
15,344

 
229

 

 
15,573

 
Total commercial real estate
58,754

 
275

 

 
59,029

 
Commercial, financial and agricultural
36,094

 
7,166

 
58

 
43,318

 
Owner-occupied
34,085

 
1,683

 

 
35,768

 
Total commercial and industrial
70,179

 
8,849

 
58

 
79,086

 
Home equity lines
5,988

 
7

 

 
5,995

 
Consumer mortgages
17,038

 
1,298

 

 
18,336

 
Credit cards

 

 

 

 
Other consumer loans
4,469

 
3

 

 
4,472

 
Total consumer
27,495

 
1,308

 

 
28,803

 
Total accruing TDRs
$
156,428

 
10,432

 
58

 
166,918

 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
(in thousands)
Current
 
30-89 Days Past Due
 
90+ Days Past Due
 
Total
 
Investment properties
$
30,182

 
133

 

 
30,315

 
1-4 family properties
22,694

 

 

 
22,694

 
Land and development
26,015

 
10

 

 
26,025

 
Total commercial real estate
78,891

 
143

 

 
79,034

 
Commercial, financial and agricultural
31,443

 
798

 

 
32,241

 
Owner-occupied
52,333

 

 

 
52,333

 
Total commercial and industrial
83,776

 
798

 

 
84,574

 
Home equity lines
7,526

 
412

 

 
7,938

 
Consumer mortgages
18,518

 
572

 

 
19,090

 
Credit cards

 

 

 

 
Other consumer loans
5,013

 
127

 

 
5,140

 
Total consumer
31,057

 
1,111

 

 
32,168

 
Total accruing TDRs
$
193,724

 
2,052

 

 
195,776

 
 
 
 
 
 
 
 
 
 
Non-accruing TDRs were $9.0 million at September 30, 2017 compared to $11.4 million at December 31, 2016. Non-accruing TDRs generally may be returned to accrual status if there has been a period of performance, consisting usually of at least a six month sustained period of repayment performance in accordance with the terms of the agreement.
Potential Problem Loans
Potential problem loans are defined by management as being certain performing loans with a well-defined weakness where there is known information about possible credit problems of borrowers which causes management to have concerns about the ability of such borrowers to comply with the present repayment terms of such loans. Potential problem commercial loans consist of commercial Substandard accruing loans but exclude loans 90 days past due and still accruing interest and accruing TDRs classified as Substandard since these loans are disclosed separately. Potential problem commercial loans were $125.4 million at September 30, 2017 compared to $162.0 million and $172.5 million at December 31, 2016 and September 30, 2016, respectively. Synovus cannot predict whether these potential problem loans ultimately will become non-performing loans or result in losses.
Net Charge-offs
Net charge-offs for the nine months ended September 30, 2017 were $60.7 million, or 0.33% as a percentage of average loans annualized, compared to $20.4 million, or 0.12%, as a percentage of average loans annualized for the nine months ended September 30, 2016. The $40.3 million increase from 2016 is primarily due to $34.2 million in net charge-offs recorded during the third quarter of 2017 in conjunction with the aforementioned transfers to held for sale completed during the quarter.

59


Provision for Loan Losses and Allowance for Loan Losses
For the nine months ended September 30, 2017, the provision for loan losses was $58.6 million, an increase of $36.9 million, or 169.6%, compared to the nine months ended September 30, 2016 primarily due to $27.7 million incurred in connection with the aforementioned transfers to held for sale completed during the third quarter.
The allowance for loan losses at September 30, 2017 was $249.7 million, or 1.02% of total loans, compared to $251.8 million, or 1.06% of total loans, at December 31, 2016 and $253.8 million, or 1.09% of total loans, at September 30, 2016.  
Capital Resources
Synovus and Synovus Bank are required to comply with capital adequacy standards established by their primary federal regulator, the Federal Reserve. Synovus has always placed great emphasis on maintaining a solid capital base and continues to satisfy applicable regulatory capital requirements.
At September 30, 2017, Synovus and Synovus Bank's capital levels each exceeded well-capitalized requirements currently in effect. The following table presents certain ratios used to measure Synovus and Synovus Bank's capitalization.
Capital Ratios
 
 
 
(dollars in thousands)    
September 30, 2017
 
December 31, 2016
Common equity Tier 1 capital (transitional)
 
 
 
Synovus Financial Corp.
$
2,749,304

 
2,654,287
Synovus Bank
3,164,640

 
3,187,583
Tier 1 capital
 
 
 
Synovus Financial Corp.
2,849,580

 
2,685,880
Synovus Bank
3,164,640

 
3,187,583
Total risk-based capital
 
 
 
Synovus Financial Corp.
3,362,127

 
3,201,268

Synovus Bank
3,417,187

 
3,441,563

Common equity Tier 1 capital ratio (transitional)
 
 
 
Synovus Financial Corp.
10.06
%
 
9.96

Synovus Bank
11.59

 
11.97

Tier 1 capital ratio
 
 
 
Synovus Financial Corp.
10.43

 
10.07

Synovus Bank
11.59

 
11.97

Total risk-based capital to risk-weighted assets ratio
 
 
 
Synovus Financial Corp.
12.30

 
12.01

Synovus Bank
12.52

 
12.93

Leverage ratio
 
 
 
Synovus Financial Corp.
9.34

 
8.99

Synovus Bank
10.40

 
10.68

Tangible common equity to tangible assets ratio (1)
 
 
 
Synovus Financial Corp.
8.88

 
9.09

 
 
 
 
(1) See " Non-GAAP Financial Measures" in this Report for the applicable reconciliation to the most comparable GAAP measure.
The Basel III capital rules became effective January 1, 2015, for Synovus and Synovus Bank, subject to a transition period for several aspects, including the capital conservation buffer and certain regulatory capital adjustments and deductions, as described below. Under the Basel III capital rules, the minimum capital requirements for Synovus and Synovus Bank include a common equity Tier 1 (CET1) ratio of 4.5%; Tier 1 capital ratio of 6%; total capital ratio of 8%; and leverage ratio of 4%. When fully phased-in on January 1, 2019, the Basel III capital rules include a capital conservation buffer of 2.5% that is added on top of each of the minimum risk-based capital ratios. The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and will be phased-in over a three-year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019). As a financial holding company, Synovus and its subsidiary bank, Synovus Bank, are required to maintain capital levels required for a well-capitalized institution as defined by federal banking regulations. Under the Basel III capital rules, Synovus and Synovus Bank are well-capitalized if each has a CET1 ratio of 6.5% or greater, a Tier 1 risk-based capital ratio of 8% or greater, a total risk-based capital ratio of 10% or greater, a leverage ratio of 5% or greater, and are not subject to any written agreement, order, capital directive, or prompt corrective action directive from a federal and/or state banking regulatory

60


agency to meet and maintain a specific capital level for any capital measure.
During the nine months ended September 30, 2017, Synovus repurchased $135.9 million in common stock under the current share repurchase program which was authorized during the fourth quarter of 2016 by Synovus' Board of Directors. The current share repurchase program authorized share repurchases of up to $200 million of the Company's common stock to be executed during 2017. As of September 30, 2017 and November 2, 2017, the remaining authorization under this program was $64.1 million and $56.6 million, respectively.
As of September 30, 2017, total disallowed deferred tax assets were $112.7 million or 0.41% of risk-weighted assets compared to $218.3 million or 0.82% of risk-weighted assets at December 31, 2016. Disallowed deferred tax assets for CET1 were $90.2 million at September 30, 2017 compared to $131.0 million at December 31, 2016, due to a three-year phase-in of the total disallowed deferred tax asset for the CET1 capital measure. Basel III revised the deferred tax asset limitation criteria effective January 1, 2015 and now includes the component of deferred tax assets arising from temporary timing differences in regulatory capital up to certain levels of CET1. Thus, the disallowed portion of deferred tax assets is comprised of net operating loss carryforwards and tax credit carryforwards. Synovus' deferred tax asset is projected to continue to decline, thus creating additional regulatory capital in future periods. See "Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Income Taxes" in Synovus' 2016 Form 10-K for more information on Synovus' net deferred tax asset.
Synovus' CET1 ratio was 10.06% at September 30, 2017 under Basel III transitional provisions and the estimated fully phased-in CET1 ratio, as of September 30, 2017, was 9.88%, both of which are well in excess of regulatory requirements. See "Non-GAAP Financial Measures" in this Report for the applicable reconciliation to the most comparable GAAP measure.
Management currently believes, based on internal capital analysis and earnings projections, that Synovus' capital position is adequate to meet current and future regulatory minimum capital requirements. Synovus' 2017 DFAST results show that capital ratios remain above regulatory minimums throughout the forecast period in the severely adverse scenario. Synovus expects to announce its 2018 capital plan in January of 2018.
Dividends
Synovus has historically paid a quarterly cash dividend to the holders of its common stock. Management and the Board of Directors closely monitor current and projected capital levels, liquidity (including dividends from subsidiaries), financial markets and other economic trends, as well as regulatory requirements regarding the payment of dividends. During the first quarter of 2017, Synovus increased the quarterly common stock dividend by 25% to $0.15 per share effective with the quarterly dividend declared during the first quarter of 2017.
Synovus' ability to pay dividends on its capital stock, consisting of the common stock and the Series C Preferred Stock, is primarily dependent upon dividends and distributions that it receives from its bank and non-banking subsidiaries, which are restricted by various regulations administered by federal and state bank regulatory authorities, as further discussed below in the section titled "Liquidity." During the nine months ended September 30, 2017, Synovus Bank made upstream cash distributions to Synovus totaling $350.0 million including cash dividends of $215.2 million. Additionally, during the nine months ended September 30, 2017, Synovus Securities made upstream cash distributions to Synovus of $10.0 million. For the year ended December 31, 2016, Synovus Bank paid upstream cash dividends to Synovus totaling $325.0 million with $260.0 million paid during the first nine months of 2016.
    Synovus declared dividends of $0.45 and $0.36 per common share for the nine months ended September 30, 2017 and 2016, respectively. In addition to dividends paid on its common stock, Synovus paid dividends of $7.7 million on its Series C Preferred Stock during both the nine months ended September 30, 2017 and 2016.
Liquidity
Liquidity represents the extent to which Synovus has readily available sources of funding needed to meet the needs of depositors, borrowers and creditors, to support asset growth, and to otherwise sustain operations of Synovus and its subsidiaries, at a reasonable cost, on a timely basis, and without adverse consequences. ALCO monitors Synovus' economic, competitive, and regulatory environment and is responsible for measuring, monitoring, and reporting on liquidity and funding risk, interest rate risk, and market risk and has the authority to establish policies relative to these risks. ALCO, operating under liquidity and funding policies approved by the Board of Directors, actively analyzes contractual and anticipated cash flows in order to properly manage Synovus’ liquidity position.
Contractual and anticipated cash flows are analyzed under normal and stressed conditions to determine forward looking liquidity needs and sources. Synovus analyzes liquidity needs under various scenarios of market conditions and operating performance. This analysis includes stress testing and measures expected sources and uses of funds under each scenario. Emphasis

61


is placed on maintaining numerous sources of current and potential liquidity to allow Synovus to meet its obligations to depositors, borrowers, and creditors on a timely basis.
Liquidity is generated primarily through maturities and repayments of loans by customers, maturities and sales of investment securities, deposit growth, and access to sources of funds other than deposits. Management continuously monitors and maintains appropriate levels of liquidity so as to provide adequate funding sources to manage customer deposit withdrawals, loan requests, and funding maturities. Liquidity is also enhanced by the acquisition of new deposits. Each of the banking divisions monitors deposit flows and evaluates local market conditions in an effort to retain and grow deposits.
Synovus Bank also generates liquidity through the national deposit markets through the issuance of brokered certificates of deposit and money market accounts. Synovus Bank accesses these funds from a broad geographic base to diversify its sources of funding and liquidity. On September 25, 2017, Synovus Bank completed the Cabela's Transaction and thereby retained WFB’s $1.10 billion brokered time deposit portfolio with a weighted average remaining maturity of approximately 2.53 years and a weighted average rate of 1.83 percent.
Synovus Bank has the capacity to access funding through its membership in the FHLB System. At September 30, 2017, based on currently pledged collateral, Synovus Bank had access to incremental funding of $667 million, subject to FHLB credit policies, through utilization of FHLB advances.
In addition to bank level liquidity management, Synovus must manage liquidity at the parent company level for various operating needs including the servicing of debt, the payment of dividends on our common stock and preferred stock, share repurchases, payment of general corporate expenses and potential capital infusions into subsidiaries. The primary source of liquidity for Synovus consists of dividends from Synovus Bank, which is governed by certain rules and regulations of the GA DBF and the Federal Reserve Bank. During the nine months ended September 30, 2017, Synovus Bank made upstream cash distributions to Synovus totaling $350.0 million including cash dividends of $215.2 million. Additionally, during the nine months ended September 30, 2017, Synovus Securities made upstream cash distributions to Synovus of $10.0 million. For the year ended December 31, 2016, Synovus Bank paid upstream cash dividends to Synovus totaling $325.0 million with $260.0 million paid during the first nine months of 2016.
Synovus' ability to receive dividends from Synovus Bank in future periods will depend on a number of factors, including, without limitation, Synovus Bank's future profits, asset quality, liquidity and overall condition. In addition, GA DBF rules and related statutes contain limitations on payments of dividends by Synovus Bank without the approval of the GA DBF. During the second quarter, Synovus paid off the remaining balance of $278.6 million of its subordinated notes at their maturity date of June 15, 2017. On September 25, 2017, Synovus issued a notice of redemption to redeem all of the $300.0 million aggregate principal amount of its outstanding 7.875% senior notes due 2019 on November 9, 2017 at a “make whole” premium, plus accrued but unpaid interest on the 2019 notes to the redemption date.  The results for the three months ending December 31, 2017 will include a pre-tax loss of approximately $24 million related to early extinguishment of these notes. On November 1, 2017, Synovus completed a public offering of $300.0 million of 3.125% senior notes due 2022. Proceeds from this offering will be used, in part, to fund the redemption of the 2019 notes. 
Synovus presently believes that the sources of liquidity discussed above, including existing liquid funds on hand, are sufficient to meet its anticipated funding needs. However, if economic conditions were to significantly deteriorate, regulatory capital requirements for Synovus or Synovus Bank increase as the result of regulatory directives or otherwise, or Synovus believes it is prudent to enhance current liquidity levels, then Synovus may seek additional liquidity from external sources. See "Part I – Item 1A. Risk Factors - Changes in the cost and availability of funding due to changes in the deposit market and credit market may adversely affect our capital resources, liquidity and financial results." of Synovus' 2016 Form 10-K.
Earning Assets and Sources of Funds
Average total assets for the nine months ended September 30, 2017 increased $1.35 billion, or 4.6%, to $30.58 billion as compared to $29.24 billion for the first nine months of 2016. Average earning assets increased $1.43 billion, or 5.2%, in the first nine months of 2017 compared to the same period in 2016 and represented 93.8% of average total assets at September 30, 2017, as compared to 93.2% at September 30, 2016. The increase in average earning assets resulted from a $1.41 billion increase in average loans, net, and a $284.6 million increase in average taxable investment securities. These increases were partially offset by a $309.4 million decrease in average interest bearing funds held at the Federal Reserve Bank. Average interest bearing liabilities increased $981.4 million, or 5.1%, to $20.14 billion for the first nine months of 2017 compared to the same period in 2016. The increase in average interest bearing liabilities was driven by a $594.7 million increase in average interest bearing demand deposits and a $434.1 million increase in average money market deposit accounts. Average non-interest bearing demand deposits increased $331.1 million, or 4.8%, to $7.26 billion for the first nine months of 2017 compared to the same period in 2016.
Net interest income for the nine months ended September 30, 2017 was $753.6 million, an increase of $87.9 million, or 13.2%, compared to $665.7 million for the nine months ended September 30, 2016.

62


The net interest margin was 3.52% for the nine months ended September 30, 2017, an increase of 25 basis points from 3.27% for the nine months ended September 30, 2016. The yield on earning assets was 3.99%, up 27 basis points compared to the first nine months of 2016 and the effective cost of funds increased 2 basis points to 0.47%. The yield on loans was 4.37%, an increase of 23 basis points from the nine months ended September 30, 2016 and the yield on investment securities was 2.10%, an increase of 22 basis points from the nine months ended September 30, 2016. Earning asset yields also benefited from a reduction of the average balance of lower yielding funds held at the Federal Reserve.
On a sequential quarter basis, net interest income increased by $11.5 million and the net interest margin increased by 12 basis points to 3.63%. The increase in net interest income was driven by a $75.5 million increase in average earning assets with a $149.7 million increase in average loans, net. This increase in loans was partially offset by a $58.3 million decrease in average taxable investment securities. The increase in net interest income for the quarter was also driven by margin expansion. The yield on earning assets was 4.11%, up 12 basis points from the second quarter of 2017. This increase was driven by a 13 basis point increase in loan yields. The effective cost of funds was 0.48% for the third quarter 2017, unchanged from the second quarter of 2017.

63



Quarterly yields earned on average interest-earning assets and rates paid on average interest-bearing liabilities for the five most recent quarters are presented below.
Average Balances, Interest, and Yields
2017
 
2016
(dollars in thousands) (yields and rates annualized)
Third Quarter
 
Second Quarter
 
First Quarter
 
Fourth Quarter
 
Third Quarter
Interest Earning Assets:
 
 
 
 
 
 
 
 
 
Taxable investment securities (1)
$
3,786,436

 
3,844,688

 
3,841,556

 
3,643,510

 
3,544,933

Yield
2.11
%
 
2.11
%
 
2.06
%
 
1.92

 
1.83

Tax-exempt investment securities(1)(3)
$
259

 
340

 
2,730

 
2,824

 
2,943

Yield (taxable equivalent) (3)
7.86
%
 
6.87

 
5.81

 
5.82

 
5.96

Trading account assets
$
7,823

 
3,667

 
6,443

 
6,799

 
5,493

Yield
2.09
%
 
2.28

 
1.72

 
2.63

 
0.93

Commercial loans(2)(3)
$
19,059,936

 
19,137,733

 
19,043,384

 
18,812,659

 
18,419,484

Yield
4.41
%
 
4.27

 
4.16

 
4.05

 
4.03

Consumer loans(2)
$
5,440,765

 
5,215,258

 
4,992,683

 
4,911,149

 
4,720,082

Yield
4.55
%
 
4.49

 
4.40

 
4.27

 
4.30

Allowance for loan losses
$
(249,248
)
 
(251,219
)
 
(253,927
)
 
(253,713
)
 
(255,675
)
    Loans, net (2)
$
24,251,453

 
24,101,772

 
23,782,140

 
23,470,095

 
22,883,891

Yield
4.49
%
 
4.36

 
4.25

 
4.14

 
4.14

Mortgage loans held for sale
$
52,177

 
52,224

 
46,554

 
77,652

 
87,524

Yield
3.88
%
 
3.87

 
4.01

 
3.51

 
3.32

Federal funds sold, due from Federal Reserve Bank, and other short-term investments
$
543,556

 
561,503

 
654,322

 
982,355

 
998,565

Yield
1.23
%
 
1.00

 
0.77

 
0.49

 
0.48

Federal Home Loan Bank and Federal Reserve Bank Stock(4)
$
175,263

 
177,323

 
170,844

 
121,079

 
70,570

Yield
3.50
%
 
2.99
%
 
3.42

 
3.75

 
4.99

Total interest earning assets
$
28,816,967

 
28,741,517

 
28,504,589

 
28,304,314

 
27,593,919

Yield
4.11
%
 
3.99

 
3.88

 
3.73

 
3.71

Interest Bearing Liabilities:
 
 
 
 
 
 
 
 
 
Interest bearing demand deposits
$
4,868,372

 
4,837,053

 
4,784,329

 
4,488,135

 
4,274,117

Rate
0.27
%
 
0.23

 
0.19

 
0.16

 
0.16

Money Market accounts, excluding brokered deposits
$
7,528,036

 
7,427,562

 
$
7,424,627

 
7,359,067

 
7,227,030

Rate
0.34
%
 
0.32

 
0.31

 
0.29

 
0.29

Savings deposits
$
803,184

 
805,019

 
909,660

 
908,725

 
797,961

Rate
0.03
%
 
0.04

 
0.11

 
0.12

 
0.07

Time deposits under $100,000
$
1,183,582

 
1,202,746

 
1,215,593

 
1,229,809

 
1,248,294

Rate
0.68
%
 
0.67

 
0.64

 
0.64

 
0.64

Time deposits over $100,000
$
2,067,347

 
2,040,924

 
2,029,713

 
2,014,564

 
2,030,242

Rate
0.97
%
 
0.94
%
 
0.92

 
0.90

 
0.88

Non-maturing brokered deposits
$
547,466

 
564,043

 
619,627

 
638,779

 
634,596

Rate
0.73
%
 
0.54

 
0.41

 
0.31

 
0.29

Brokered time deposits
$
983,423

 
815,515

 
761,159

 
742,153

 
775,143

Rate
1.16
%
 
0.94

 
0.92

 
0.90

 
0.88

   Total interest bearing deposits
$
17,981,410

 
17,692,862

 
17,744,708

 
17,381,232

 
16,987,383

Rate
0.46
%
 
0.41

 
0.39

 
0.37

 
0.37

Federal funds purchased and securities sold under repurchase agreements
$
191,585

 
183,400

 
176,854

 
219,429

 
247,378

Rate
0.08
%
 
0.10

 
0.09

 
0.08

 
0.09

Long-term debt
$
1,985,175

 
2,270,452

 
2,184,072

 
2,190,716

 
2,114,193

Rate
2.81
%
 
2.83

 
2.83

 
2.65

 
2.71

Total interest bearing liabilities
$
20,158,170

 
20,146,714

 
20,105,634

 
19,791,377

 
19,348,954


64


Rate
0.69
%
 
0.68

 
0.65

 
0.62

 
0.63

Non-interest bearing demand deposits
$
7,305,508

 
7,298,845

 
7,174,146

 
7,280,033

 
$
7,042,908

Effective cost of funds
0.48
%
 
0.48

 
0.46

 
0.44

 
0.44

Net interest margin
3.63
%
 
3.51

 
3.42

 
3.29

 
3.27

Taxable equivalent adjustment (3)
$
283

 
298

 
309

 
322

 
$
330

 
 
 
 
 
 
 
 
 
 
(1) Excludes net unrealized gains (losses).
(2) Average loans are shown net of deferred fees and costs. Non-performing loans are included.
(3) Reflects taxable-equivalent adjustments, using the statutory federal income tax rate of 35%, in adjusting interest on tax-exempt loans and investment securities to a taxable-equivalent basis.
(4) Included as a component of Other Assets on the balance sheet.

65


Net Interest Income and Rate/Volume Analysis
The following tables set forth the major components of net interest income and the related annualized yields and rates for the nine months ended September 30, 2017 and 2016, as well as the variances between the periods caused by changes in interest rates versus changes in volume.
Net Interest Income and Rate/Volume Analysis
 
Nine Months Ended September 30,
 
2017 Compared to 2016
 
Average Balances
 
Interest
 
Annualized Yield/Rate
 
Change due to
 
Increase (Decrease)
(dollars in thousands)
2017
 
2016
 
2017
 
2016
 
2017
 
2016
 
Volume
 
Rate
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Taxable investment securities
$
3,824,025

 
3,537,060

 
$
60,079

 
49,820

 
2.09
%
 
1.88

 
$
4,035

 
6,224

 
$
10,259

Tax-exempt investment securities(2)
1,101

 
3,506

 
51

 
162

 
6.13

 
6.16

 
(111
)
 

 
(111
)
Total investment securities
3,825,126

 
3,540,566

 
60,130

 
49,982

 
2.10

 
1.88

 
3,924

 
6,224

 
10,148

Trading account assets
5,983

 
4,840

 
90

 
46

 
1.99

 
1.28

 
11

 
33

 
44

Taxable loans, net(1)
24,227,567

 
22,812,346

 
783,546

 
698,657

 
4.32

 
4.09

 
43,293

 
41,596

 
84,889

Tax-exempt loans, net(1)(2)
70,721

 
74,691

 
2,492

 
2,591

 
4.71

 
4.63

 
(138
)
 
39

 
(99
)
Allowance for loan losses
(251,448
)
 
(254,960
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans, net
24,046,840

 
22,632,077

 
786,038

 
701,248

 
4.37

 
4.14

 
43,155

 
41,635

 
84,790

Mortgage loans held for sale
50,339

 
74,494

 
1,478

 
1,966

 
3.91

 
3.52

 
(636
)
 
148

 
(488
)
Federal funds sold, due from Federal Reserve Bank, and other short-term investments
586,055

 
930,954

 
4,396

 
3,343

 
0.99

 
0.48

 
(1,212
)
 
2,265

 
1,053

Federal Home Loan Bank and Federal Reserve Bank stock
174,493

 
76,252

 
4,321

 
2,649

 
3.30

 
4.63

 
3,402

 
(1,730
)
 
1,672

  Total interest earning assets
$
28,688,836

 
27,259,183

 
$
856,453

 
759,234

 
3.99
%
 
3.72

 
$
48,644

 
48,575

 
$
97,219

Cash and due from banks
391,829

 
400,222

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Premises and equipment, net
416,835

 
434,889

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other real estate
20,246

 
39,282

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other assets(3)
1,066,863

 
1,103,504

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
$
30,584,609

 
29,237,080

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand deposits
$
4,830,226

 
4,235,529

 
$
8,366

 
5,420

 
0.23
%
 
0.17
%
 
$
756

 
2,190

 
$
2,946

Money market accounts
8,037,235

 
7,603,136

 
20,268

 
17,620

 
0.34

 
0.31

 
1,007

 
1,641

 
2,648

Savings deposits
838,898

 
755,608

 
394

 
366

 
0.06

 
0.06

 
37

 
(9
)
 
28

Time deposits
4,100,836

 
4,094,525

 
26,846

 
24,666

 
0.88

 
0.80

 
37

 
2,143

 
2,180

Federal funds purchased and securities sold under repurchase agreements
184,000

 
215,641

 
125

 
154

 
0.09

 
0.09

 
(21
)
 
(8
)
 
(29
)
Long-term debt
2,145,838

 
2,251,235

 
45,967

 
44,394

 
2.82

 
2.59

 
(2,073
)
 
3,646

 
1,573

Total interest-bearing liabilities
$
20,137,033

 
19,155,674

 
$
101,966

 
92,620

 
0.68

 
0.64

 
$
(257
)
 
9,603

 
$
9,346

Non-interest bearing deposits
7,259,981

 
6,928,906

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other liabilities
219,388

 
203,989

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shareholders' equity
2,968,207

 
2,948,511

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities and equity
$
30,584,609

 
29,237,080

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate spread:
 
 
 
 
 
 
 
 
3.31

 
3.08

 
 
 
 
 
 
Net interest income - FTE/margin(4)
 
 
 
 
754,487

 
666,614

 
3.52
%
 
3.27

 
$
48,901

 
38,972

 
$
87,873

Taxable equivalent adjustment
 
 
 
 
890

 
964

 
 
 
 
 
 
 
 
 
 
  Net interest income, actual
 
 
 
 
$
753,597

 
665,650

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Average loans are shown net of unearned income. Non-performing loans are included. Interest income includes fees as follows: 2017 - $23.4 million, 2016 - $23.4 million.
(2) Reflects taxable-equivalent adjustments, using the statutory federal income tax rate of 35%, in adjusting interest on tax-exempt loans and investment securities to a taxable-
equivalent basis.
(3) Includes average net unrealized gains (losses) on investment securities available for sale of $(34.7) million and $35.7 million for the nine months ended September 30, 2017 and
2016, respectively.
(4) The net interest margin is calculated by dividing annualized net interest income - FTE by average total interest earnings assets.

66


Market Risk Analysis
Interest rate risk is the primary market risk to which Synovus is potentially exposed. Synovus measures its sensitivity to changes in market interest rates through the use of a simulation model. Synovus uses this simulation model to determine a baseline net interest income forecast and the sensitivity of this forecast to changes in interest rates. These simulations include all of Synovus’ earning assets and liabilities. Forecasted balance sheet changes, primarily reflecting loan and deposit growth forecasts, are included in the periods modeled. Anticipated deposit mix changes in each interest rate scenario are also included in the periods modeled.
Synovus has modeled its baseline net interest income forecast assuming a flat interest rate environment with the federal funds rate at the Federal Reserve’s current targeted range of 1.00% to 1.25% and the current prime rate of 4.25%. Synovus has modeled the impact of a gradual increase in short-term rates of 100 and 200 basis points and a decline of 25 basis points to determine the sensitivity of net interest income for the next twelve months. Synovus continues to maintain a modestly asset sensitive position which would be expected to benefit net interest income in a rising interest rate environment and reduce net interest income in a declining interest rate environment. The following table represents the estimated sensitivity of net interest income to these changes in short-term interest rates at September 30, 2017, with comparable information for December 31, 2016.
 
 
 
Estimated % Change in Net Interest Income as Compared to Unchanged Rates (for the next twelve months)
 
 
Change in Short-term Interest Rates (in basis points)
 
September 30, 2017
 
December 31, 2016
 
+200
 
4.9%
 
4.6%
 
+100
 
2.9%
 
2.2%
 
Flat
 
—%
 
—%
 
-25
 
-1.5%
 
-2.3%
 
 
 
 
 
 
Several factors could serve to diminish or eliminate this asset sensitivity in a rising rate environment. These factors include a higher than projected level of deposit customer migration to higher cost deposits, such as certificates of deposit, which would increase total interest expense and serve to reduce the realized level of asset sensitivity. Another factor which could impact the realized interest rate sensitivity is the repricing behavior of interest bearing non-maturity deposits. Assumptions for repricing are expressed as a beta relative to the change in the prime rate. For instance, a 50% beta would correspond to a deposit rate that would increase 0.5% for every 1% increase in the prime rate. Projected betas for interest bearing non-maturity deposit repricing are a key component of determining the Company's interest rate risk positioning. Projected betas are based on historical analysis, current product features, and deposit mix. These projected betas reflect an assumption that realized betas will increase as short-term rates increase. Should realized betas be higher than projections, the expected benefit from higher interest rates would be diminished. The following table presents an example of the potential impact of an increase in repricing betas on Synovus' realized interest rate sensitivity position.
 
 
As of September 30, 2017
Change in Short-term Interest Rates (in basis points)
 
Base Scenario
 
15% Increase in Average Repricing Beta
+200
 
4.9%
 
3.1%
+100
 
2.9%
 
2.1%
 
 
 
 
 
The net interest income simulation model is the primary tool utilized to evaluate potential interest rate risks over a shorter term time horizon. Synovus also evaluates potential longer term interest rate risk through modeling and evaluation of EVE. Simulation modeling is utilized to measure the economic value of equity and its sensitivity to immediate changes in interest rates. These simulations value only the current balance sheet and do not incorporate growth assumptions used in the net interest income simulation. The economic value of equity is the net fair value of assets, liabilities, and off-balance sheet financial instruments derived from the present value of future cash flows discounted at current market interest rates. From this baseline valuation, Synovus evaluates changes in the value of each of these items in various interest rate scenarios to determine the net impact on the economic value of equity. Key assumptions utilized in the model, namely loan prepayments, investment security prepayments, deposit repricing betas, and non-maturity deposit duration have a significant impact on the results of the EVE simulations. As illustrated in the table below, the EVE model indicates that, compared with a valuation assuming stable rates, EVE is projected to increase by 2.6% and by 1.2%, assuming an immediate and sustained increase in interest rates of 100 and 200 basis points, respectively. Assuming an immediate 25 basis point decline in rates, EVE is projected to decrease by 3.2%. These metrics reflect a slight moderation in long term asset sensitivity as compared to December 31, 2016. This moderation is primarily due to an increase in the duration of the investment portfolio and a slight increase in loan duration.

67


 
 
Estimated Change in EVE
Immediate Change in Interest Rates (in basis points)
 
September 30, 2017
 
December 31, 2016
+200
 
1.2%
 
2.8%
+100
 
2.6%
 
3.2%
-25
 
-3.2%
 
-3.3%
 
 
 
 
 
ADDITIONAL DISCLOSURES
Recently Issued Accounting Standards
Several accounting standards will be effective in fiscal year 2018 or later. Synovus is currently evaluating the requirements of these new ASUs to determine the impact on the consolidated financial statements:
ASU 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities
ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs: Premium Amortization on Purchased Callable Debt Securities
ASU 2017-05, Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets, Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets
ASU 2017-04, Intangibles-Goodwill and Other, Simplifying the Test for Goodwill Impairment
ASU 2017-01, Business Combinations-Clarifying the Definition of a Business
ASU 2016-18, Statement of Cash Flows-Restricted Cash
ASU 2016-15, Statement of Cash Flows-Classification of Certain Cash Receipts and Cash Payments
ASU 2016-13, Financial Instruments-Credit Losses (CECL)
ASU 2016-02, Leases
ASU 2016-01, Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities
ASU 2014-09, Revenue from Contracts with Customers (Topic 606) and subsequent related Updates
The ASUs with the most significant impact on Synovus are ASU 2016-13, Financial Instruments-Credit Losses (CECL), effective in 2020, followed by the ASU 2014-09, Revenue from Contracts with Customers, effective in 2018, and ASU 2016-02, Leases, effective in 2019.

ASU 2016-13, Financial Instruments-Credit Losses (CECL). In June 2016, the FASB issued new accounting guidance related to credit losses. The new guidance replaces the existing incurred loss impairment guidance with a single expected credit loss methodology. The new guidance will require management’s estimate of credit losses over the full remaining expected life of loans and other financial instruments. For Synovus, the standard will apply to loans, unfunded loan commitments, and debt securities available for sale. The standard is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years.  Early adoption is permitted on January 1, 2019.  Upon adoption, Synovus expects to record a cumulative effect adjustment to retained earnings as of the beginning of the reporting period of adoption.  
Synovus' implementation efforts, which are led by a cross-functional steering committee, are in process. To date, the focus of the committee has been on assessing the data, calculations, and disclosures required by the standard as well as working through the project plan to address these requirements and provide for the implementation of the new standard. Management expects that the allowance for loan losses will be higher under the new standard; however, management is still in the process of determining the magnitude of the increase and the impact on its financial statements and regulatory capital ratios. Additionally, the extent of the increase on the allowance for loan losses will depend upon the composition of the loan portfolio upon adoption of the standard, as well as economic conditions and forecasts at that time. 

ASU 2014-09, Revenue from Contracts with Customers (Topic 606) and subsequent related Updates. In May 2014, the FASB issued new accounting guidance for recognizing revenue from contracts with customers, which is effective on January 1, 2018. ASU 2014-09 and subsequent related updates establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The standard is intended to increase comparability across industries. The core principle of the revenue model is that a company will recognize revenue when it transfers control of goods or services to customers at an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services. The scope of the guidance explicitly excludes net interest income as well as many other revenues from financial assets.
Synovus will adopt the new revenue recognition guidance in the first quarter of 2018 using the modified retrospective method with a cumulative-effect adjustment to opening retained earnings. Synovus has substantially completed its assessment of revenue

68


contracts. Based on this review, management has not identified material changes to the timing or amount of revenue recognition. In connection with the adoption of this standard, Synovus will provide new footnote disclosures beginning in the first quarter of 2018 Form 10-Q consisting of expanded disaggregated non-interest income disclosures. Synovus does not expect the new standard to have a material impact on its consolidated financial position, results of operations, or disclosures.

ASU 2016-02, Leases. In February 2016, the FASB issued its new standard on lease accounting. ASU 2016-02 introduces a lessee model that brings most leases on the balance sheet. Under the new standard, all lessees will recognize a right-of-use asset and a lease liability for all leases, including operating leases, with a lease term greater than 12 months. From a lessor perspective, the accounting model is largely unchanged. For Synovus, the impact of this ASU will predominately relate to its accounting and reporting of leases as a lessee. The new ASU will be effective for Synovus beginning January 1, 2019. A modified retrospective approach is required at adoption which requires all prior periods presented in the financial statements to be restated with a cumulative effect adjustment to retained earnings as of the beginning of the earliest period presented. The standard also requires additional disclosures regarding leasing arrangements.
Synovus is currently evaluating the potential financial statement impact from the implementation of this standard by reviewing its existing lease contracts and other contracts that may include embedded leases. Synovus currently expects to recognize lease liabilities and corresponding right-of-use assets (at their present value) related to substantially all of the $282 million of future minimum lease commitments as disclosed in Note 8 of Synovus' 2016 Form 10-K. However, the population of contracts requiring balance sheet recognition and their initial measurement continues to be under evaluation.
See "Note 1 - Significant Accounting Policies" in this Report for a discussion of recently adopted accounting standards updates.
Critical Accounting Policies
The accounting and financial reporting policies of Synovus are in accordance with GAAP and conform to the accounting and reporting guidelines prescribed by bank regulatory authorities. Synovus has identified certain of its accounting policies as “critical accounting policies,” consisting of those related to the allowance for loan losses and determination of the fair value of financial instruments. In determining which accounting policies are critical in nature, Synovus has identified the policies that require significant judgment or involve complex estimates. It is management's practice to discuss critical accounting policies with the Board of Directors' Audit Committee, including the development, selection, implementation and disclosure of the critical accounting policies. The application of these policies has a significant impact on Synovus’ unaudited interim consolidated financial statements. Synovus’ financial results could differ significantly if different judgments or estimates are used in the application of these policies. All accounting policies described in "Part II - Item 8. Financial Statements and Supplementary Data - Note 1 - Summary of Significant Accounting Policies" in Synovus' 2016 Form 10-K should be reviewed for a greater understanding of how we record and report our financial performance. During the nine months ended September 30, 2017, there have been no significant changes to Synovus’ critical accounting policies, estimates and assumptions, or the judgments affecting the application of these estimates and assumptions from those disclosed in Synovus' 2016 Form 10-K.

69


Non-GAAP Financial Measures
The measures entitled adjusted non-interest income; adjusted non-interest expense; adjusted total revenues; adjusted efficiency ratio; adjusted net income per common share, diluted; adjusted return on average assets; adjusted net charge-off ratio; adjusted return on average common equity; adjusted return on average tangible common equity; average total deposit growth excluding WFB deposits; average core deposits; average core transaction deposits; tangible common equity to tangible assets ratio; and common equity Tier 1 (CET1) ratio (fully phased-in); are not measures recognized under GAAP and therefore are considered non-GAAP financial measures. The most comparable GAAP measures to these measures are total non-interest income; total non-interest expense; total revenues; efficiency ratio; net income per common share, diluted; return on average assets; net charge-off ratio; return on average common equity; average deposit growth; total average deposits; the ratio of total shareholders' equity to total assets; and the CET1 ratio; respectively.
Management believes that these non-GAAP financial measures provide meaningful additional information about Synovus to assist management and investors in evaluating Synovus’ operating results, financial strength, the performance of its business, and the strength of its capital position. However, these non-GAAP financial measures have inherent limitations as analytical tools and should not be considered in isolation or as a substitute for analyses of operating results or capital position as reported under GAAP. The non-GAAP financial measures should be considered as additional views of the way our financial measures are affected by significant items and other factors, and since they are not required to be uniformly applied, they may not be comparable to other similarly titled measures at other companies. Adjusted total revenues and adjusted non-interest income are measures used by management to evaluate total revenue and non-interest income exclusive of net investment securities gains/losses, changes in fair value of private equity investments, net, and the Cabela's Transaction Fee. Adjusted non-interest expense and the adjusted efficiency ratio are measures utilized by management to measure the success of expense management initiatives focused on reducing recurring controllable operating costs. Adjusted net income per common share, diluted, adjusted return on average assets, and adjusted return on average common equity are measurements used by management to evaluate operating results exclusive of items that are not indicative of ongoing operations and impact period-to-period comparisons. Average total deposit growth excluding WFB deposits, average core deposits, and average core transaction deposits are measures used by management to evaluate organic growth of deposits and the quality of deposits as a funding source. Adjusted net charge-off ratio is a measure used by management to evaluate charge-offs exclusive of charge-offs on loans transferred to held-for-sale. The adjusted return on average tangible common equity is a measure used by management to compare Synovus' performance with other financial institutions because it calculates the return available to common shareholders without the impact of intangible assets and their related amortization, thereby allowing management to evaluate the performance of the business consistently. The tangible common equity to tangible assets ratio and common equity Tier 1 (CET1) ratio (fully phased-in) are used by management and bank regulators to assess the strength of our capital position. The computations of these measures are set forth in the tables below.    

70


Reconciliation of Non-GAAP Financial Measures

Nine Months Ended
 
Three Months Ended
 
Year Ended
(in thousands, except per share data)
September 30, 2017
 
September 30, 2016
 
September 30, 2017
 
September 30, 2016
 
December 31, 2016
Adjusted non-interest income
 
 
 
 
 
 
 
 
 
Total non-interest income
$
275,974

 
199,188

 
135,435

 
68,155

 
273,194

Subtract: Cabela's Transaction Fee
(75,000
)
 

 
(75,000
)
 

 

Add/subtract: Investment securities (losses) gains, net
289

 
(126
)
 
7,956

 
(59
)
 
(6,011
)
Add: Decrease in fair value of private equity investments, net
3,193

 
527

 
27

 
249

 
1,026

     Adjusted non-interest income
$
204,456

 
199,589

 
68,418

 
68,345

 
268,209

 
 
 
 
 
 
 
 
 
 
Adjusted non-interest expense
 
 
 
 
 
 
 
 
 
Total non-interest expense
$
594,780

 
562,716

 
205,646

 
185,871

 
 
Subtract: Discounts to fair value for completed or planned ORE accelerated dispositions
(7,082
)
 

 
(7,082
)
 

 
 
Subtract: Asset impairment charges related to accelerated disposition of corporate real estate and other properties
(1,168
)
 

 
(1,168
)
 

 
 
Subtract: Earnout liability adjustments
(2,059
)
 

 
(2,059
)
 

 
 
Subtract: Restructuring charges, net
(7,043
)
 
(8,225
)
 
(519
)
 
(1,243
)
 
 
Subtract: Fair value adjustment to Visa derivative

 
(1,079
)
 

 
(360
)
 
 
Subtract: Litigation contingency/settlement expenses
(401
)
 
(2,511
)
 
(401
)
 
189

 
 
Subtract: Loss on early extinguishment of debt, net

 
(4,735
)
 

 

 
 
Subtract: Amortization of intangibles
(767
)
 
(121
)
 
(292
)
 

 
 
Subtract: Merger-related expense
(110
)
 
(550
)
 
(23
)
 
(550
)
 
 
 Adjusted non-interest expense
$
576,150

 
545,495

 
194,102

 
183,907

 
 
 
 
 
 
 
 
 
 
 
 

71


Reconciliation of Non-GAAP Financial Measures, continued

Nine Months Ended
 
Three Months Ended
(in thousands, except per share data)
September 30, 2017
 
September 30, 2016
 
September 30, 2017
 
September 30, 2016
Adjusted efficiency ratio
 
 
 
 
 
 
 
Adjusted non-interest expense
$
576,150

 
545,495

 
194,102

 
183,907

Net interest income
753,597

 
665,650

 
262,572

 
226,007

Add: Tax equivalent adjustment
890

 
964

 
283

 
330

Add: Total non-interest income
275,974

 
199,188

 
135,435

 
68,155

Add/Subtract: Investment securities (losses) gains, net
289

 
(126
)
 
7,956

 
(59
)
Total FTE revenues
1,030,750

 
865,676

 
406,246

 
294,433

Subtract: Cabela's Transaction Fee
(75,000
)
 

 
(75,000
)
 

Add: Decrease in fair value of private equity investments, net
3,193

 
527

 
27

 
249

Adjusted total revenues
$
958,943

 
866,203

 
331,273

 
294,682

Efficiency ratio
57.70
%
 
65.00

 
50.62

 
63.13

      Adjusted efficiency ratio
60.08

 
62.98

 
58.59

 
62.41

 
 
 
 
 
 
 
 
Adjusted net income per common share, diluted
 
 
 
 
 
 
 
Net income available to common shareholders
$
238,190

 
170,555

 
95,448

 
62,686

Add:Earnout liability adjustments
2,059

 

 
2,059

 

Add: Merger-related expense
110

 
550

 
23

 
550

Add: Fair value adjustment to VISA derivative

 
1,079

 

 
360

Add/subtract: Litigation contingency/recovery
401

 
2,511

 
401

 
(189
)
Add: Restructuring charges
7,043

 
8,225

 
519

 
1,243

Add: Amortization of intangibles
767

 
121

 
292

 

Add: Loss on early extinguishment of debt, net

 
4,735

 

 

Add: Provision expense on loans transferred to held-for-sale
27,710

 

 
27,710

 

Add: Discounts to fair value for completed or planned ORE accelerated dispositions
7,082

 

 
7,082

 

Add: Asset impairment charges related to accelerated disposition of corporate real estate and other properties
1,168

 

 
1,168

 

Add/subtract: Investment securities (losses) gains, net
289

 
(126
)
 
7,956

 
(59
)
Add: Decrease in fair value of private equity investments, net
3,193

 
527

 
27

 
249

Subtract: Cabela's Transaction Fee
(75,000
)
 

 
(75,000
)
 

Add/subtract: Tax effect of adjustments
10,078

 
(6,520
)
 
11,034

 
(797
)
Adjusted net income
$
223,090

 
181,657

 
78,719

 
64,043

Weighted average common shares outstanding
122,628

 
125,712

 
121,814

 
123,604

Adjusted net income per common share, diluted
$
1.82

 
1.45

 
0.65

 
0.52

 
 
 
 
 
 
 
 


72


Reconciliation of Non-GAAP Financial Measures, continued

Nine Months Ended
 
Three Months Ended
 
(dollars in thousands)
September 30, 2017
 
September 30, 2016
 
September 30, 2017
 
September 30, 2016
 
 
 
 
 
 
 
 
 
 
Adjusted return on average assets (annualized)
 
 

 

 

 
Net income
$
245,868

 
178,233

 
98,007

 
65,245

 
Add: Earnout liability adjustments
2,059

 

 
2,059

 

 
Add: Merger-related expense
110

 
550

 
23

 
550

 
Add: Fair value adjustment to VISA derivative

 
1,079

 

 
360

 
Add/subtract: Litigation contingency/recovery
401

 
2,511

 
401

 
(189
)
 
Add: Restructuring charges
7,043

 
8,225

 
519

 
1,243

 
Add: Amortization of intangibles
767

 
121

 
292

 

 
Add: Loss on early extinguishment of debt, net

 
4,735

 

 

 
Add: Provision expense on loans transferred to held-for-sale
27,710

 

 
27,710

 

 
Add: Discounts to fair value for completed or planned ORE accelerated dispositions
7,082

 

 
7,082

 

 
Add: Asset impairment charges related to accelerated disposition of corporate real estate and other properties
1,168

 

 
1,168

 

 
Add/subtract: Investment securities (losses) gains, net
289

 
(126
)
 
7,956

 
(59
)
 
Add: Decrease in fair value of private equity investments, net
3,193

 
527

 
27

 
249

 
Subtract: Cabela's Transaction Fee
(75,000
)
 

 
(75,000
)
 

 
Add/subtract: Tax effect of adjustments
10,078

 
(6,520
)
 
11,034

 
(797
)
 
Adjusted net income
$
230,768

 
189,335

 
81,278

 
66,602

 
Net income annualized
308,536


252,907

 
322,462

 
264,960

 
Total average assets
$
30,584,607

 
29,237,109

 
30,678,388

 
29,528,435

 
Adjusted return on average assets (annualized)
1.01
%
 
0.87

 
1.05

 
0.90

 
 
 
 
 
 
 
 
 
 
Adjusted net charge-off ratio (annualized)
 
 
 
 
 
 
 
 
Net charge-offs
$
60,695

 
 
 
38,099

 
 
 
Charge-offs on loans transferred to held-for-sale during 3Q17
(34,235
)
 
 
 
(34,235
)
 
 
 
Net-charges-offs excluding charge-offs on loans transferred to held-for-sale
$
26,460

 
 
 
3,864

 
 
 
Net charge-offs excluding charge-offs on loans transferred to held-for-sale annualized
35,377

 
 
 
15,330

 
 
 
Average loan balances
$
24,297,002

 
 
 
24,499,923

 
 
 
Net charge-off ratio, as reported (annualized)
0.33
%
 
 
 
0.62

 
 
 
Adjusted net charge-off ratio, excluding 3Q17 transfers to held-for-sale (annualized)
0.15
%
 
 
 
0.06

 
 
 
 
 
 
 
 
 
 
 
 
 
Outlook 2017 (Yr)
Adjusted net charge-off ratio excluding balance sheet restructuring actions
 
 
Net charge-off ratio
29-34 b.p.s
 
Subtract: Net charge-off ratio related to loans transferred to held-for-sale
14 b.p.s
 
Net charge-off ratio, excluding transfers to held-for-sale
15-20 b.p.s
 





73




Reconciliation of Non-GAAP Financial Measures, continued
Three Months Ended
(dollars in thousands)
September 30, 2017
 
June 30, 2017
 
December 31, 2016
 
September 30, 2016
 
Adjusted return on average common equity (annualized)
 
 
 
 
 
 
 
 
Net income available to common shareholders
$
95,448

 
73,444

 
65,990

 
62,686

 
Add:Earnout liability adjustments
2,059

 

 

 

 
Add: Merger-related expense
23

 

 
1,086

 
550

 
Add: Fair value adjustment to VISA derivative

 

 
4,716

 
360

 
Add/subtract: Litigation contingency/recovery
401

 

 

 
(189
)
 
Add: Restructuring charges
519

 
13

 
42

 
1,243

 
Add: Amortization of intangibles
292

 
292

 
400

 

 
Add: Provision expense on loans transferred to held-for-sale
27,710

 

 

 

 
Add: Discounts to fair value for completed or planned ORE accelerated dispositions
7,082

 

 

 

 
Add: Asset impairment charges related to accelerated disposition of corporate real estate and other properties
1,168

 

 

 

 
Add/subtract: Investment securities (losses) gains, net
7,956

 
1

 
(5,885
)
 
(59
)
 
Add: Decrease in fair value of private equity investments, net
27

 
1,352

 
499

 
249

 
Subtract: Cabela's Transaction Fee
(75,000
)
 

 

 

 
Add/subtract: Tax effect of adjustments
11,034

 
(613
)
 
(318
)
 
(797
)
 
Adjusted net income
$
78,719

 
74,489

 
66,530

 
64,043

 
Net income annualized
$
312,309

 
298,775

 
264,674

 
254,780

 
 
 
 
 
 
 
 
 
 
Total average shareholders' equity less preferred stock
$
2,859,491

 
2,849,069

 
2,786,707

 
2,806,533

 
Subtract: Goodwill
(57,167
)
 
(57,018
)
 
(55,144
)
 
(24,431
)
 
Subtract: Other intangible assets, net
(11,648
)
 
(11,965
)
 
(233
)
 
(226
)
 
Total average tangible shareholders' equity less preferred stock
$
2,790,676

 
2,780,086

 
2,731,330

 
2,781,876

 
Adjusted return on average common equity (annualized)
10.92
%
 
10.49

 
9.50

 
9.08

 
Adjusted return on average tangible common equity (annualized)
11.19
%
 
10.75

 
9.69

 
9.16

 
 
 
 
 
 
 
 
 
 
Sequential quarter growth in total average deposits excluding acquired WFB deposits
 
 
 
 
 
 
 
 
3Q17 sequential quarter total average deposits growth, as reported
$
295,210

 
 
 
 
 
 
 
Subtract: Average balance WFB acquired deposits
(71,920
)
 
 
 
 
 
 
 
3Q17 sequential quarter total average deposits growth, as adjusted
$
223,290

 
 
 
 
 
 
 
3Q17 sequential quarter growth, excluding WFB acquired deposits
$
223,290

 
 
 
 
 
 
 
2Q17 total average deposits
$
24,991,708

 
 
 
 
 
 
 
Sequential quarter percent change, as reported, annualized
4.7
%
 
 
 
 
 
 
 
Sequential quarter percent change, as adjusted, annualized
3.5
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


74


Reconciliation of Non-GAAP Financial Measures, continued

 
 
 
(dollars in thousands)
September 30, 2017
 
June 30, 2017
 
December 31, 2016
 
September 30, 2016
 
Average core deposits and average core transaction deposits
 
 
 
 
 
 
 
 
Average total deposits
$
25,286,919

 
24,991,708

 
24,661,265

 
24,030,291

 
Subtract: Average brokered deposits
(1,530,889
)
 
(1,379,559
)
 
(1,380,931
)
 
(1,409,739
)
 
     Average core deposits
23,756,030

 
23,612,149


23,280,334

 
22,620,552

 
Subtract: Average total SCM deposits
(1,991,954
)
 
(2,051,646
)
 
(2,356,567
)
 
(2,105,126
)
 
Subtract: Average time deposits excluding SCM deposits
(3,160,915
)
 
(3,151,333
)
 
(3,147,620
)
 
(3,153,366
)
 
Average core transaction deposits
18,603,161


18,409,170


17,776,147


17,362,060

 
 
 
 
 
 
 
 
 
 
Tangible common equity to tangible assets ratio
 
 
 
 
 
 
 
 
Total assets
$
31,642,123

 
30,687,966

 
30,104,002

 
29,727,096

 
Subtract: Goodwill
(57,315
)
 
(57,092
)
 
(59,678
)
 
(24,431
)
 
Subtract: Other intangible assets, net
(11,548
)
 
(11,843
)
 
(13,223
)
 
(225
)
 
Tangible assets
$
31,573,260

 
30,619,031


30,031,101

 
29,702,440

 
Total shareholders' equity
$
2,997,079

 
2,997,947

 
2,927,924

 
2,906,659

 
Subtract: Goodwill
(57,315
)
 
(57,092
)
 
(59,678
)
 
(24,431
)
 
Subtract: Other intangible assets, net
(11,548
)
 
(11,843
)
 
(13,223
)
 
(225
)
 
Subtract: Series C Preferred Stock, no par value
(125,980
)
 
(125,980
)
 
(125,980
)
 
(125,980
)
 
Tangible common equity
$
2,802,236

 
2,803,032


2,729,043

 
2,756,023

 
Total shareholders' equity to total assets ratio
9.47
%
 
9.77
%

9.73

 
9.78

 
     Tangible common equity to tangible assets ratio
8.88

 
9.15


9.09

 
9.28

 
 
 
 
 
 
 
 
 
 
Common equity Tier 1 (CET1) ratio (fully phased-in)
 
 
 
 
 
 
 
 
Common equity Tier 1 (CET1)
$
2,749,304

 
 
 
 
 
 
 
Subtract: Adjustment related to capital components
(25,704
)
 
 
 
 
 
 
 
CET1 (fully phased-in)
2,723,600

 



 
 
 
 
Total risk-weighted assets
27,329,260

 
 
 
 
 
 
 
Total risk-weighted assets (fully phased-in)
27,554,994

 
 
 
 
 
 
 
Common equity Tier 1 (CET1) ratio
10.06

 



 
 
 
 
     Common equity Tier 1 (CET1) ratio (fully phased-in)
9.88

 



 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



 
Nine Months Ended
 
 
 
(dollars in thousands)
September 30, 2017
 
September 30, 2016
 
Increase
 
Total non-interest expense growth excluding balance sheet restructuring actions
 
 
 
 
 
 
Total non-interest expense, as reported
$
594,780

 
562,716

 
5.7
%
 
Subtract: Discounts to fair value for completed or planned ORE accelerated dispositions
(7,082
)
 

 
 
 
Subtract: Asset impairment charges related to accelerated disposition of corporate real estate and other properties
(1,683
)
 

 
 
 
Total non-interest expense excluding balance sheet restructuring actions
$
586,015

 
562,716

 
4.1
%
 
 
 
 
 
 
 
 


75


Reconciliation of Non-GAAP Financial Measures, continued
Year Ending December 31,
 
 
 
(dollars in thousands)
2017
 
2016
 
Increase
 
Total non-interest expense growth excluding balance sheet restructuring actions
 
 
 
 
 
 
Total non-interest expense, as reported
$804,806 to $819,925

 
755,923

 
6.5%-8.5%
 
Subtract: Discounts to fair value for completed or planned ORE accelerated dispositions
(7,082
)
 

 
 
Subtract: Asset impairment charges related to accelerated disposition of corporate real estate and other properties
(1,683
)
 

 
 
Subtract: Estimated loss on early extinguishment of debt to be recorded in 4Q17
(24,000
)
 

 
 
Total non-interest expense excluding balance sheet restructuring actions
$772,041 to $787,160

 
755,923

 
2.1%-4.1%
 
 
 
 
 
 


 
 
 


76


ITEM 3. – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information presented in the Market Risk Analysis section of the Management's Discussion and Analysis of Financial Condition and Results of Operations is incorporated herein by reference.
ITEM 4. – CONTROLS AND PROCEDURES
In connection with the preparation of this Quarterly Report on Form 10-Q, an evaluation was carried out by Synovus' management, with the participation of Synovus' Chief Executive Officer and Chief Financial Officer, of the effectiveness of Synovus' disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures. Based on that evaluation, Synovus' Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2017, Synovus' disclosure controls and procedures were effective.     
There have been no material changes in Synovus' internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, Synovus' internal control over financial reporting.


77


PART II. – OTHER INFORMATION
ITEM 1. – LEGAL PROCEEDINGS
Synovus and its subsidiaries are subject to various legal proceedings, claims and disputes that arise in the ordinary course of its business. Additionally, in the ordinary course of its business, Synovus and its subsidiaries are subject to regulatory examinations, information gathering requests, inquiries and investigations. Synovus, like many other financial institutions, has been the target of legal actions and other proceedings asserting claims for damages and related relief for losses. These actions include mortgage loan and other loan put-back claims, claims and counterclaims asserted by individual borrowers related to their loans and allegations of violations of state and federal laws and regulations relating to banking practices, including putative class action matters. In addition to actual damages, if Synovus does not prevail in such asserted legal actions, credit-related litigation could result in additional write-downs or charge-offs of assets, which could adversely affect Synovus' results of operations during the period in which the write-down or charge-off were to occur.
Based on Synovus' current knowledge and advice of counsel, management presently does not believe that the liabilities arising from these legal matters will have a material adverse effect on Synovus' consolidated financial condition, results of operations or cash flows. However, it is possible that the ultimate resolution of these legal matters could have a material adverse effect on Synovus' results of operations and financial condition for any particular period. For additional information, see "Note 13 - Legal Proceedings" of this Report, which Note is incorporated herein by this reference.
ITEM 1A. – RISK FACTORS
In addition to the other information set forth in this Report, you should carefully consider the factors discussed in "Part I - Item IA - Risk Factors” of Synovus’ 2016 Form 10-K which could materially affect its business, financial position, results of operations, cash flows, or future results. Please be aware that these risks may change over time and other risks may prove to be important in the future. New risks may emerge at any time, and we cannot predict such risks or estimate the extent to which they may affect our business, financial condition or results of operations, or the trading price of our securities.
There were no material changes during the period covered by this Report to the risk factors previously disclosed in Synovus’ 2016 10-K.
ITEM 2. – UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS
(a) None.
(b) None.
(c) Issuer Purchases of Equity Securities:
Synovus' Board of Directors authorized a $200 million share repurchase program that will expire at the end of 2017. This program was announced on January 17, 2017. The table below sets forth information regarding repurchases of our common stock during the third quarter of 2017.
Share Repurchases
 
Total Number of Shares Repurchased
 
Average Price Paid per Share(1)
 
Total Number
of Shares Repurchased as
Part of
Publicly Announced
Plans or Programs
 
Maximum Approximate
Dollar Value
of Shares
that May Yet Be
Purchased Under the
Plans or Programs
 
 
 
 
 
July 2017
 
175,900

 
$
43.84

 
175,900

 
$
146,962,549

August 2017
 
960,000

 
42.67

 
960,000

 
105,996,984

September 2017
 
984,800

 
42.49

 
984,800

 
64,149,735

Total
 
2,120,700

 
$
42.69

 
2,120,700

 

 
 
 
 
 
 
 
 
 
(1) The average price paid per share is calculated on a trade date basis for all open market transactions and excludes commissions and other transaction expenses.

The foregoing repurchases during the third quarter of 2017 were purchased through open market transactions, including under plans complying with Rule 10b5-1 under the Exchange Act.

78


ITEM 3. – DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. – MINE SAFETY DISCLOSURES
None.
ITEM 5. – OTHER INFORMATION
None.

79


ITEM 6. – EXHIBITS  
 
 
 
Exhibit
Number
 
Description
 
 
3.1

 
 
 
3.2

 
 
 
 
3.3

 
 
 
 
3.4

 
 
 
 
3.5

 
 
 
12.1

 
 
 
 
31.1

 
 
 
 
31.2

 
 
 
 
32

 
 
 
 
101

 
Interactive Data File
 
 
 

80


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
SYNOVUS FINANCIAL CORP.
 
 
 
November 7, 2017
By:
 
/s/ Kevin S. Blair
Date
 
 
Kevin S. Blair
 
 
 
Executive Vice President and Chief Financial Officer
 
 
 
(Duly Authorized Officer and Principal Financial Officer)


81