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SYNOVUS FINANCIAL CORP - Quarter Report: 2018 June (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________
 
FORM 10-Q
 
______________________________
Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2018
Commission file number 1-10312
 
______________________________
financialappendix930a45.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 D
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
 
 
 
August 6, 2018

Common Stock, $1.00 Par Value
 
 
 
117,348,421




Table of Contents

Table of Contents
 
 
 
 
 
Page
Financial Information
 
 
 
Index of Defined Terms
 
Item 1.
Financial Statements (Unaudited)
 
 
 
Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017
 
 
Consolidated Statements of Income for the Six and Three Months Ended June 30, 2018 and 2017
 
 
Consolidated Statements of Comprehensive Income for the Six and Three Months Ended June 30, 2018 and 2017
 
 
Consolidated Statements of Changes in Shareholders' Equity for the Six Months Ended June 30, 2018 and 2017
 
 
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2018 and 2017
 
 
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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



Table of Contents



SYNOVUS FINANCIAL CORP.
INDEX OF DEFINED TERMS
ALCO – Synovus' Asset Liability Management Committee
AOCI - Accumulated other comprehensive income
ASC – Accounting Standards Codification
ASU – Accounting Standards Update
ATM – Automatic teller machine
Basel III – The third Basel Accord developed by the Basel Committee on Banking Supervision to strengthen existing regulatory capital requirements
BOLI – Bank-owned life insurance
BOV – Broker’s opinion of value
bp(s) – Basis point(s)
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 World's Foremost Bank ("WFB") and then immediately thereafter sold WFB’s credit card assets and certain related liabilities to Capital One Bank (USA), National Association.  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 Incorporated 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
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
FCB - FCB Financial Holdings, Inc.
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 (interest rates, credit, etc.), 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
Federal Tax Reform – Enactment of H.R. 1, formerly known as the Tax Cuts and Jobs Act, on December 22, 2017, legislation in which a number of changes were made under the Internal Revenue Code, including a reduction of the corporate income tax rate, significant limitations on the deductibility of interest, allowance of the expensing of capital expenditures, limitation on

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deductibility of FDIC insurance premiums, and limitation of the deductibility of certain performance-based compensation, among others
FFIEC – Federal Financial Institutions Examination Council
FHLB – Federal Home Loan Bank
FICO – Fair Isaac Corporation
FTE – Fully taxable-equivalent
GA DBF – Georgia Department of Banking and Finance
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"
GSE – Government sponsored enterprise
HELOC – Home equity line of credit
LTV – Loan-to-collateral value ratio
Merger Agreement – Agreement and Plan of Merger by and among Synovus, FCB and Azalea Merger Sub Corp. dated as of July 23, 2018
Merger – The proposed merger of Azalea Merger Sub Corp. with and into FCB pursuant to the terms and conditions of the Merger Agreement, with FCB continuing as the surviving entity. Immediately thereafter, FCB will merge with and into Synovus, with Synovus continuing as the surviving entity
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
ORE – Other real estate
OTC– Over-the-counter
OTTI – Other-than-temporary impairment
Parent Company – Synovus Financial Corp.
SBA – Small Business Administration
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
Series D Preferred Stock – Synovus' Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series D, $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' 2017 Form 10-K – Synovus' Annual Report on Form 10-K for the year ended December 31, 2017
Synovus Mortgage – Synovus Mortgage Corp., a wholly-owned subsidiary of Synovus Bank
Synovus Securities – Synovus Securities, Inc., a wholly-owned subsidiary of Synovus

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Synovus Trust – Synovus Trust Company, N.A., a wholly-owned subsidiary of Synovus Bank
TDR – Troubled debt restructuring (as defined in ASC 310-40)
the 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 A shares – Class A shares of common stock issued by Visa are publicly traded shares which are not subject to restrictions on sale
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. Class B shares will be convertible into Visa Class A shares using a then current conversion ratio upon the lifting of restrictions with respect to sale of Visa Class B shares
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

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PART I. FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
SYNOVUS FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except share and per share data)
June 30, 2018
 
December 31, 2017
ASSETS
 
 
 
Cash and due from banks
$
404,080

 
$
397,848

Interest bearing funds with Federal Reserve Bank
613,082

 
460,928

Interest earning deposits with banks
33,754

 
26,311

Federal funds sold and securities purchased under resale agreements
40,872

 
47,846

     Total cash, cash equivalents, restricted cash, and restricted cash equivalents(1)
1,091,788

 
932,933

Mortgage loans held for sale, at fair value
53,673

 
48,024

Investment securities available for sale, at fair value
3,929,962

 
3,987,069

Loans, net of deferred fees and costs
25,134,056

 
24,787,464

Allowance for loan losses
(251,725
)
 
(249,268
)
Loans, net
24,882,331

 
24,538,196

Cash surrender value of bank-owned life insurance
547,261

 
540,958

Premises and equipment, net
428,633

 
426,813

Goodwill
57,315

 
57,315

Other intangible assets
10,458

 
11,254

Deferred tax asset, net
182,983

 
165,788

Other assets
555,901

 
513,487

Total assets
$
31,740,305

 
$
31,221,837

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
Liabilities
 
 
 
Deposits:
 
 
 
Non-interest bearing deposits
$
7,630,491

 
$
7,686,339

Interest bearing deposits, excluding brokered deposits
16,961,187

 
16,500,436

Brokered deposits
1,851,010

 
1,961,125

Total deposits
26,442,688

 
26,147,900

Federal funds purchased and securities sold under repurchase agreements
207,580

 
161,190

Long-term debt
1,656,647

 
1,706,138

Other liabilities
265,696

 
245,043

Total liabilities
28,572,611

 
28,260,271

Shareholders' Equity
 
 
 
Series D Preferred Stock – no par value. Authorized 100,000,000 shares; 8,000,000 shares issued and outstanding at June 30, 2018
195,138

 

Series C Preferred Stock - no par value. 5,200,000 shares outstanding at June 30, 2018 and December 31, 2017
125,980

 
125,980

Common stock - $1.00 par value. Authorized 342,857,143 shares; 143,077,973 issued at June 30, 2018 and 142,677,449 issued at December 31, 2017; 117,841,369 outstanding at June 30, 2018 and 118,897,295 outstanding at December 31, 2017
143,078

 
142,678

Additional paid-in capital
3,045,014

 
3,043,129

Treasury stock, at cost – 25,236,604 shares at June 30, 2018 and 23,780,154 shares at December 31, 2017
(916,484
)
 
(839,674
)
Accumulated other comprehensive loss
(125,720
)
 
(54,754
)
Retained earnings
700,688

 
544,207

Total shareholders’ equity
3,167,694

 
2,961,566

Total liabilities and shareholders' equity
$
31,740,305

 
$
31,221,837

 
 
 
 
See accompanying notes to unaudited interim consolidated financial statements.
(1) See "Note 1 - Significant Accounting Policies" of this Report for information on Synovus' change in presentation of cash and cash equivalents.

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SYNOVUS FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
 
Six Months Ended June 30,
 
Three Months Ended June 30,
(in thousands, except per share data)
2018
 
2017
 
2018
 
2017
Interest income:
 
 
 
 
 
 
 
      Loans, including fees
$
585,396

 
$
511,319

 
$
300,056

 
$
261,971

      Investment securities available for sale
47,812

 
40,099

 
23,884

 
20,266

      Trading account assets
220

 
49

 
166

 
21

      Mortgage loans held for sale
936

 
972

 
557

 
505

      Federal Reserve Bank balances
4,568

 
2,515

 
2,818

 
1,304

      Other earning assets
4,036

 
2,957

 
2,353

 
1,443

Total interest income
642,968

 
557,911

 
329,834

 
285,510

Interest expense:
 
 
 
 
 
 
 
Deposits
58,975

 
35,075

 
32,600

 
18,118

Federal funds purchased and securities sold under repurchase agreements
310

 
84

 
203

 
45

Long-term debt
24,822

 
31,728

 
12,454

 
16,250

Total interest expense
84,107

 
66,887

 
45,257

 
34,413

Net interest income
558,861

 
491,024

 
284,577

 
251,097

Provision for loan losses
24,566

 
18,934

 
11,790

 
10,260

Net interest income after provision for loan losses
534,295

 
472,090

 
272,787

 
240,837

Non-interest income:
 
 
 
 
 
 
 
Service charges on deposit accounts
39,938

 
40,370

 
19,999

 
20,252

Fiduciary and asset management fees
27,419

 
24,676

 
13,983

 
12,524

Card fees
21,032

 
19,885

 
10,833

 
10,041

Brokerage revenue
17,596

 
14,436

 
8,900

 
7,210

Mortgage banking income
9,887

 
11,548

 
4,839

 
5,784

Income from bank-owned life insurance
7,949

 
6,328

 
3,733

 
3,272

Investment securities (losses) gains, net
(1,296
)
 
7,667

 
(1,296
)
 
(1
)
Decrease in fair value of private equity investments, net
(3,093
)
 
(3,166
)
 
(37
)
 
(1,352
)
Other fee income
9,877

 
11,033

 
5,259

 
6,164

Other non-interest income
11,124

 
7,762

 
7,174

 
4,807

Total non-interest income
140,433

 
140,539

 
73,387

 
68,701

Non-interest expense:
 
 
 
 
 
 
 
Salaries and other personnel expense
225,583

 
212,404

 
111,863

 
105,213

Net occupancy and equipment expense
64,134

 
59,264

 
32,654

 
29,933

Third-party processing expense
29,012

 
26,223

 
15,067

 
13,620

FDIC insurance and other regulatory fees
13,335

 
13,645

 
6,543

 
6,875

Professional fees
11,789

 
12,907

 
6,284

 
7,551

Advertising expense
10,312

 
11,258

 
5,220

 
5,346

Valuation adjustment to Visa derivative
2,328

 

 
2,328

 

Foreclosed real estate expense, net
749

 
3,582

 
(107
)
 
1,448

Earnout liability adjustment

 
1,707

 

 
1,707

Restructuring charges, net
(212
)
 
6,524

 
103

 
13

Other operating expenses
42,204

 
41,619

 
24,102

 
20,041

Total non-interest expense
399,234

 
389,133

 
204,057

 
191,747

Income before income taxes
275,494

 
223,496

 
142,117

 
117,791

Income tax expense
61,146

 
75,635

 
30,936

 
41,788

Net income
214,348

 
147,861

 
111,181

 
76,003

Dividends on preferred stock
5,119

 
5,119

 
2,559

 
2,559

Net income available to common shareholders
$
209,229

 
$
142,742

 
$
108,622

 
$
73,444

Net income per common share, basic
$
1.77

 
$
1.17

 
$
0.92

 
$
0.60

Net income per common share, diluted
1.75

 
1.16

 
0.91

 
0.60

Weighted average common shares outstanding, basic
118,531

 
122,251

 
118,397

 
122,203

Weighted average common shares outstanding, diluted
119,229

 
123,043

 
119,139

 
123,027

 
 
 
 
 
 
 
 
See accompanying notes to unaudited interim consolidated financial statements.

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

 
Six Months Ended June 30,
 
2018
 
2017
(in thousands)
Before-tax Amount
 
Tax (Expense) Benefit
 
Net of Tax Amount
 
Before-tax Amount
 
Tax (Expense) Benefit
 
Net of Tax Amount
Net income
$
275,494

 
$
(61,146
)
 
$
214,348

 
$
223,496

 
$
(75,635
)
 
$
147,861

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

 

 

 
130

 
(50
)
 
80

Net unrealized (losses) gains on investment securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
Reclassification adjustment for net losses (gains) realized in net income
1,296

 
(336
)
 
960

 
(7,667
)
 
2,952

 
(4,715
)
Net unrealized (losses) gains arising during the period
(86,921
)
 
22,512

 
(64,409
)
 
20,250

 
(7,797
)
 
12,453

Net unrealized (losses) gains
(85,625
)
 
22,176

 
(63,449
)
 
12,583

 
(4,845
)
 
7,738

Post-retirement unfunded health benefit:
 
 
 
 
 
 
 
 
 
 
 
Reclassification adjustment for gains realized in net income
(68
)
 
22

 
(46
)
 
(40
)
 
16

 
(24
)
Net unrealized (realized) gains
(68
)
 
22

 
(46
)
 
(40
)
 
16

 
(24
)
Other comprehensive (loss) income
$
(85,693
)
 
$
22,198

 
$
(63,495
)
 
$
12,673

 
$
(4,879
)
 
$
7,794

Comprehensive income
 
 
 
 
$
150,853

 
 
 
 
 
$
155,655

 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30,
 
2018
 
2017
(in thousands)
Before-tax Amount
 
Tax (Expense) Benefit
 
Net of Tax Amount
 
Before-tax Amount
 
Tax (Expense) Benefit
 
Net of Tax Amount
Net income
$
142,117

 
$
(30,936
)
 
$
111,181

 
$
117,791

 
$
(41,788
)
 
$
76,003

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

 

 

 
65

 
(25
)
 
40

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


 


 
 
 
 
 
 
 
 
Reclassification adjustment for net losses realized in net income
1,296

 
(336
)
 
960

 
1

 

 
1

Net unrealized (losses) gains arising during the period
(25,476
)
 
6,598

 
(18,878
)
 
11,150

 
(4,293
)
 
6,857

Net unrealized (losses) gains
(24,180
)
 
6,262

 
(17,918
)
 
11,151

 
(4,293
)
 
6,858

Post-retirement unfunded health benefit:
 
 


 
 
 
 
 
 
 
 
Reclassification adjustment for gains realized in net income
(34
)
 
9

 
(25
)
 
(20
)
 
8

 
(12
)
Net unrealized (realized) gains
(34
)
 
9

 
(25
)
 
(20
)
 
8

 
(12
)
Other comprehensive (loss) income
$
(24,214
)
 
$
6,271

 
$
(17,943
)
 
$
11,196

 
$
(4,310
)
 
$
6,886

Comprehensive income
 
 
 
 
$
93,238

 
 
 
 
 
$
82,889

 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to unaudited interim consolidated financial statements.




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SYNOVUS FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(unaudited)
(in thousands, except per share data)
Series D Preferred Stock
 
Series C Preferred Stock
 
Common
Stock
 
Additional
Paid-in
Capital
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained Earnings
 
Total
Balance at December 31, 2016
$

 
$
125,980

 
$
142,026

 
$
3,028,405

 
$
(664,595
)
 
$
(55,659
)
 
$
351,767

 
$
2,927,924

Net income

 

 

 

 

 

 
147,861

 
147,861

Other comprehensive income, net of income taxes

 

 

 

 

 
7,794

 

 
7,794

Cash dividends declared on common stock - $0.30 per share

 

 

 

 

 

 
(36,696
)
 
(36,696
)
Cash dividends paid on Series C Preferred Stock

 

 

 

 

 

 
(5,119
)
 
(5,119
)
Repurchases of common stock

 

 

 

 
(45,349
)
 

 

 
(45,349
)
Restricted share unit activity

 

 
330

 
(7,850
)
 

 

 
(290
)
 
(7,810
)
Stock options exercised

 

 
143

 
2,361

 

 

 

 
2,504

Share-based compensation expense

 

 

 
6,838

 

 

 

 
6,838

Balance at June 30, 2017
$

 
$
125,980

 
$
142,499

 
$
3,029,754

 
$
(709,944
)
 
$
(47,865
)
 
$
457,523

 
$
2,997,947

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
$

 
$
125,980

 
$
142,678

 
$
3,043,129

 
$
(839,674
)
 
$
(54,754
)
 
$
544,207

 
$
2,961,566

Cumulative effect adjustment from adoption of ASU 2014-09

 

 

 

 

 

 
(685
)
 
(685
)
Reclassification from adoption of ASU 2018-02

 

 

 

 

 
(7,588
)
 
7,588

 

Cumulative effect adjustment from adoption of ASU 2016-01

 

 

 

 

 
117

 
(117
)
 

Net income

 

 

 

 

 

 
214,348

 
214,348

Other comprehensive loss, net of income taxes

 

 

 

 

 
(63,495
)
 

 
(63,495
)
Cash dividends declared on common stock - $0.50 per share

 

 

 

 

 

 
(59,185
)
 
(59,185
)
Cash dividends paid on Series C Preferred Stock

 

 

 

 

 

 
(5,119
)
 
(5,119
)
Issuance of Series D Preferred Stock, net of issuance costs
195,138

 

 

 

 

 

 

 
195,138

Repurchases of common stock

 

 

 

 
(76,810
)
 

 

 
(76,810
)
Restricted share unit activity

 

 
289

 
(8,220
)
 

 

 
(349
)
 
(8,280
)
Stock options exercised

 

 
111

 
1,785

 

 

 

 
1,896

Share-based compensation expense

 

 

 
8,320

 

 

 

 
8,320

Balance at June 30, 2018
$
195,138

 
$
125,980

 
$
143,078

 
$
3,045,014

 
$
(916,484
)
 
$
(125,720
)
 
$
700,688

 
$
3,167,694

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to unaudited interim consolidated financial statements.



4

Table of Contents

SYNOVUS FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
Six Months Ended June 30,
(in thousands)
2018
 
2017
Operating Activities
 
 
 
Net income
$
214,348

 
$
147,861

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan losses
24,566

 
18,934

Depreciation, amortization, and accretion, net
28,661

 
29,334

Deferred income tax expense
5,222

 
70,484

Originations of mortgage loans held for sale
(286,070
)
 
(325,094
)
Proceeds from sales of mortgage loans held for sale
287,175

 
323,861

Gain on sales of mortgage loans held for sale, net
(6,198
)
 
(7,049
)
Increase in other assets
(52,294
)
 
(4,124
)
Increase (decrease) in other liabilities
8,292

 
(9,667
)
Investment securities losses (gains), net
1,296

 
(7,667
)
Share-based compensation expense
8,320

 
6,838

Net cash provided by operating activities
233,318

 
243,711

 
 
 
 
Investing Activities
 
 
 
Proceeds from maturities and principal collections of investment securities available for sale
294,152

 
313,902

Proceeds from sales of investment securities available for sale
35,066

 
338,381

Purchases of investment securities available for sale
(367,458
)
 
(748,754
)
Proceeds from sales of loans
13,954

 
10,747

Proceeds from sales of other real estate
4,631

 
5,492

Net increase in loans
(382,086
)
 
(612,309
)
Purchases of bank-owned life insurance policies, net of settlements
1,783

 
(73,110
)
Net increase in premises and equipment
(26,780
)
 
(15,386
)
Proceeds from sales of other assets held for sale
2,106

 
3,158

Net cash used in investing activities
(424,632
)
 
(777,879
)
 
 
 
 
Financing Activities
 
 
 
Net (decrease) increase in demand and savings deposits
(39,614
)
 
367,450

Net increase in certificates of deposit
334,130

 
202,927

Net increase (decrease) in federal funds purchased and securities sold under repurchase agreements
46,390

 
(9,320
)
Repayments and redemption of long-term debt
(2,330,052
)
 
(1,128,591
)
Proceeds from issuance of long-term debt
2,280,000

 
1,075,000

Dividends paid to common shareholders
(47,510
)
 
(18,349
)
Dividends paid to preferred shareholders
(5,119
)
 
(5,119
)
Proceeds from issuance of Series D Preferred Stock
195,138

 

Stock options exercised
1,896

 
2,504

Repurchase of common stock
(76,810
)
 
(45,349
)
Taxes paid related to net share settlement of equity awards
(8,280
)
 
(7,810
)
Net cash provided by financing activities
350,169

 
433,343

Increase/(decrease) in cash and cash equivalents including restricted cash
158,855

 
(100,825
)
Cash, cash equivalents, restricted cash, and restricted cash equivalents at beginning of period(1)
932,933

 
999,045

Cash, cash equivalents, restricted cash, and restricted cash equivalents at end of period(1)
$
1,091,788

 
$
898,220

 
 
 
 
Supplemental Cash Flow Information
 
 
 
Cash paid during the period for:
 
 
 
Income tax payments, net
$
38,619

 
$
8,768

Interest paid
80,884

 
67,007

Non-cash Activities
 
 
 
Premises and equipment transferred to other assets held for sale
785

 

Other assets held for sale transferred to premises and equipment

 
4,450

Loans foreclosed and transferred to other real estate
7,561

 
5,516

Loans transferred to other loans held for sale at fair value
5,233

 
10,584

   ASU 2014-09 cumulative effect adjustment to opening balance of retained earnings
(685
)
 

   Equity investment securities available for sale transferred to other assets at fair value
3,162

 

   Dividends declared on common stock during the period but paid after period-end
29,510

 
18,349

 
 
 
 
See accompanying notes to unaudited interim consolidated financial statements.
(1) See "Note 1 - Significant Accounting Policies" of this Report for information on Synovus' change in presentation of cash and cash equivalents.

5


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 250 branches and 334 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' 2017 Form 10-K.
In connection with the adoption of ASU 2016-18, Statement of Cash Flows-Restricted Cash, Synovus changed its presentation of cash and cash equivalents, effective January 1, 2018, to include cash and due from banks as well as interest bearing funds with the Federal Reserve Bank, interest earning deposits with banks, and federal funds sold and securities purchased under resale agreements, which are inclusive of any restricted cash and restricted cash equivalents. Prior to 2018, cash and cash equivalents only included cash and due from banks. Prior periods have been revised to maintain comparability. Excluding the aforementioned presentation change, there have been no significant changes to the accounting policies as disclosed in Synovus' 2017 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, interest bearing funds with the Federal Reserve Bank, interest earning deposits with banks, federal funds sold and securities purchased under resale agreements, and is inclusive of any restricted cash and restricted cash equivalents. Restricted cash and restricted cash equivalents primarily relate to cash held on deposit with the Federal Reserve to meet reserve requirements as well as cash posted as collateral for derivatives in a liability position. At June 30, 2018 and December 31, 2017, interest bearing funds with the Federal Reserve Bank included $35.7 million and $8.6 million, respectively, on deposit to meet Federal Reserve Bank requirements. Interest earning deposits with banks include $2.7 million and $5.9 million at June 30, 2018 and December 31, 2017, respectively, which are pledged as collateral in connection with certain letters of credit. Federal funds sold include $30.6 million and $43.8 million at June 30, 2018 and December 31, 2017, respectively, which are pledged to collateralize certain derivative financial instruments. Federal funds sold and securities purchased under resale agreements generally mature in one day.
Income Taxes
On December 22, 2017, Federal Tax Reform was enacted into law. The new legislation included a decrease in the corporate federal income tax rate from 35% to 21% effective January 1, 2018. Under ASC 740, the effects of the changes in tax rates and laws are recognized in the period in which the new legislation is enacted. Therefore, Synovus was required to remeasure its deferred tax assets and liabilities and record the adjustment to income tax expense effective December 22, 2017. In December 2017, the SEC issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which allowed companies to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. Since Federal Tax Reform was enacted late in 2017, management expects that certain deferred tax assets and liabilities will continue to be evaluated in the context of Federal Tax Reform through the date of the filing of our 2017 federal income tax return, and may change as a result of evolving management interpretations, elections, and assumptions, as well as new guidance that may be issued by the Internal Revenue Service.   Accordingly, the federal income tax expense of $47.2 million

6


recorded in 2017 relating to the effects from Federal Tax Reform is considered provisional. Management expects to complete its analysis within the measurement period in accordance with SAB 118.  
Recently Adopted Accounting Standards Updates
ASU 2014-09, Revenue from Contracts with Customers (Topic 606) issued by the FASB in May 2014, and all subsequent ASUs that modified 606. ASU 2014-09 implements a common revenue standard that establishes principles for reporting information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts to provide goods or services to customers. 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. Management reviewed its revenue streams and contracts with customers and did not identify material changes to the timing or amount of revenue recognition. Synovus adopted these ASUs on the required effective date of January 1, 2018 utilizing the modified retrospective method of adoption.  The adoption resulted in a cumulative effect adjustment of ($685) thousand to the opening balance of retained earnings.  Beginning January 1, 2018, in connection with the adoption of this standard, Synovus began including merchant discounts and other card-related fees in card fees. For periods prior to January 1, 2018, these amounts were previously presented in other non-interest income and have been reclassified for comparability. See "Part I - Item 1. Financial Statements and Supplementary Data - Note 12 - Non-interest Income" for the required disclosures in accordance with this ASU.
ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. In February 2018, the FASB issued final guidance on reclassification of tax effects stranded in other comprehensive income due to Federal Tax Reform. The guidance provides entities the option to reclassify the tax effects that are stranded in accumulated other comprehensive income, or AOCI, as a result of Federal Tax Reform to retained earnings. The guidance is effective for fiscal years beginning after December 15, 2018; early adoption is permitted. Synovus elected to early adopt ASU 2018-02 as of January 1, 2018 and elected to reclassify the income tax effects of Federal Tax Reform from AOCI to retained earnings. For Synovus, tax effects stranded in AOCI due to Federal Tax Reform totaled $7.6 million at December 31, 2017 and primarily related to unrealized losses on the available-for-sale investment securities portfolio. The reclassification adjustment resulted in an increase to retained earnings as of January 1, 2018 of $7.6 million and a corresponding decrease to AOCI for the same amount.
ASU 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. In January 2016, the FASB issued ASU 2016-01 that included targeted amendments to accounting guidance for recognition, measurement, presentation, and disclosure of financial instruments. ASU 2016-01 requires equity investments (except those accounted for under the equity method of accounting or consolidated) to be measured at fair value with changes in fair value recognized in net income. This ASU requires a cumulative-effect adjustment to retained earnings as of the beginning of the reporting period of adoption to reclassify the cumulative change in fair value of equity securities previously recognized in AOCI. ASU 2016-01 became effective for Synovus on January 1, 2018. The adoption of the guidance resulted in a transfer of investments in mutual funds of $3.2 million, at fair value, from investment securities available for sale to other assets and a $117 thousand cumulative-effect adjustment that decreased retained earnings, with offsetting related adjustments to deferred taxes and AOCI. ASU 2016-01 also emphasizes the existing requirement to use an exit price concept to measure fair value for disclosure purposes in determining the fair value of loans. Determination of the fair value under the exit price method requires judgment because substantially all of the loans within the loan portfolio do not have observable market prices. The adoption of this guidance did not have a significant impact on Synovus' fair value disclosures.
Reclassifications
Prior periods' consolidated financial statements are reclassified whenever necessary to conform to the current periods' presentation.

7



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 World's Foremost Bank, or 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 Incorporated and Capital One, which was recognized into earnings on September 25, 2017 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 provided financing 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 a three to five year period 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 on October 1, 2016. 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. During the three months ended September 30, 2017, Synovus completed the determination of the final allocation of the purchase price with respect to the assets acquired and liabilities assumed.
Under the terms of the merger agreement, the purchase price includes additional annual payments ("Earnout Payments") to Global One's former shareholders over a three to five year period, with amounts based on a percentage of "Global One Earnings," as defined in the merger agreement. The Earnout Payments consist of shares of Synovus common stock as well as a smaller cash consideration component. The first annual Earnout Payment of stock and cash valued at $6.4 million was made during November 2017. The balance of the earnout liability at June 30, 2018 was $11.3 million based on the estimated fair value of the remaining Earnout Payments.
Note 3 - Share Repurchase Program
On January 23, 2018, Synovus announced a share repurchase program of up to $150 million to be completed during 2018. As of June 30, 2018, Synovus had repurchased under this program a total of $76.8 million, or 1.5 million shares of its common stock, at an average price of $52.72 per share.

8

Table of Contents

Note 4 - Investment Securities Available for Sale
The amortized cost, gross unrealized gains and losses, and estimated fair values of investment securities available for sale at June 30, 2018 and December 31, 2017 are summarized below.
 
 
June 30, 2018
(in thousands)
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
 Fair Value
U.S. Treasury securities
 
$
122,800

 
$

 
$
(2,167
)
 
$
120,633

U.S. Government agency securities
 
40,753

 
181

 

 
40,934

Mortgage-backed securities issued by U.S. Government agencies
 
111,406

 
107

 
(3,569
)
 
107,944

Mortgage-backed securities issued by U.S. Government sponsored enterprises
 
2,614,668

 
59

 
(87,882
)
 
2,526,845

Collateralized mortgage obligations issued by U.S. Government agencies or sponsored enterprises
 
1,159,859

 
139

 
(43,550
)
 
1,116,448

State and municipal securities
 
115

 

 

 
115

Corporate debt and other debt securities
 
17,000

 
186

 
(143
)
 
17,043

Total investment securities available for sale
 
$
4,066,601

 
$
672

 
$
(137,311
)
 
$
3,929,962

 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
(in thousands)
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
U.S. Treasury securities
 
$
83,608

 
$

 
$
(934
)
 
$
82,674

U.S. Government agency securities
 
10,771

 
91

 

 
10,862

Mortgage-backed securities issued by U.S. Government agencies
 
121,283

 
519

 
(1,362
)
 
120,440

Mortgage-backed securities issued by U.S. Government sponsored enterprises
 
2,666,818

 
5,059

 
(31,354
)
 
2,640,523

Collateralized mortgage obligations issued by U.S. Government agencies or sponsored enterprises
 
1,135,259

 
144

 
(23,404
)
 
1,111,999

State and municipal securities
 
180

 

 

 
180

Corporate debt and other securities
 
20,320

 
294

 
(223
)
 
20,391

Total investment securities available for sale
 
$
4,038,239

 
$
6,107

 
$
(57,277
)
 
$
3,987,069

 
 
 
 
 
 
 
 
 
At June 30, 2018 and December 31, 2017, investment securities with a carrying value of $1.35 billion and $2.00 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 June 30, 2018 and December 31, 2017 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.

9

Table of Contents

As of June 30, 2018, Synovus had 80 investment securities in a loss position for less than twelve months and 55 investment securities in a loss position for twelve months or longer.
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 June 30, 2018 and December 31, 2017 are presented below.
 
June 30, 2018
 
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
$
72,386

 
$
1,378

 
$
29,255

 
$
789

 
$
101,641

 
$
2,167

Mortgage-backed securities issued by U.S. Government agencies
23,240

 
632

 
67,765

 
2,937

 
91,005

 
3,569

Mortgage-backed securities issued by U.S. Government sponsored enterprises
1,703,526

 
49,197

 
812,767

 
38,685

 
2,516,293

 
87,882

Collateralized mortgage obligations issued by U.S. Government agencies or sponsored enterprises
609,505

 
21,190

 
412,961

 
22,360

 
1,022,466

 
43,550

Corporate debt and other debt securities

 

 
1,857

 
143

 
1,857

 
143

    Total
$
2,408,657

 
$
72,397

 
$
1,324,605

 
$
64,914

 
$
3,733,262

 
$
137,311

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 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
$
34,243

 
$
443

 
$
29,562

 
$
491

 
$
63,805

 
$
934

Mortgage-backed securities issued by U.S. Government agencies
36,810

 
357

 
55,740

 
1,005

 
92,550

 
1,362

Mortgage-backed securities issued by U.S. Government sponsored enterprises
1,271,012

 
10,263

 
929,223

 
21,091

 
2,200,235

 
31,354

Collateralized mortgage obligations issued by U.S. Government agencies or sponsored enterprises
653,781

 
9,497

 
426,237

 
13,907

 
1,080,018

 
23,404

Corporate debt and other securities

 

 
5,097

 
223

 
5,097

 
223

Total
$
1,995,846

 
$
20,560

 
$
1,445,859

 
$
36,717

 
$
3,441,705

 
$
57,277

 
 
 
 
 
 
 
 
 
 
 
 

10

Table of Contents

The amortized cost and fair value by contractual maturity of investment securities available for sale at June 30, 2018 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 June 30, 2018
(in thousands)
Within One
Year
 
1 to 5
Years
 
5 to 10
Years
 
More Than
10 Years
 
Total
Amortized Cost
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
18,993

 
$
103,807

 
$

 
$

 
$
122,800

U.S. Government agency securities
2,330

 
6,437

 
31,986

 

 
40,753

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

 

 
27,725

 
83,681

 
111,406

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

 
1,471

 
615,334

 
1,997,862

 
2,614,668

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

 

 
17,355

 
1,142,504

 
1,159,859

State and municipal securities
115

 

 

 

 
115

Corporate debt and other debt securities

 

 
15,000

 
2,000

 
17,000

Total amortized cost
$
21,439

 
$
111,715

 
$
707,400

 
$
3,226,047

 
$
4,066,601

 
 
 
 
 
 
 
 
 
 
Fair Value
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
18,993

 
$
101,640

 
$

 
$

 
$
120,633

U.S. Government agency securities
2,337

 
6,455

 
32,142

 

 
40,934

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

 

 
27,266

 
80,678

 
107,944

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

 
1,520

 
596,366

 
1,928,958

 
2,526,845

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

 

 
16,855

 
1,099,593

 
1,116,448

State and municipal securities
115

 

 

 

 
115

Corporate debt and other debt securities

 

 
15,186

 
1,857

 
17,043

Total fair value
$
21,446

 
$
109,615

 
$
687,815

 
$
3,111,086

 
$
3,929,962

 
 
 
 
 
 
 
 
 
 
Proceeds from sales, gross gains, and gross losses on sales of securities available for sale for the six and three months ended June 30, 2018 and 2017 are presented below. The specific identification method is used to reclassify gains and losses out of other comprehensive income at the time of sale. On January 1, 2018, Synovus transferred $3.2 million, at fair value, from investment securities available for sale to other assets upon adoption of ASU 2016-01.
 
 
Six Months Ended June 30,
 
Three Months Ended June 30,
(in thousands)
 
2018
 
2017
 
2018
 
2017
Proceeds from sales of investment securities available for sale
 
$
35,066

 
$
338,381

 
$
35,066

 
$
55,752

Gross realized gains on sales
 

 
7,942

 

 
239

Gross realized losses on sales
 
(1,296
)
 
(275
)
 
(1,296
)
 
(240
)
Investment securities (losses) gains, net
 
$
(1,296
)
 
$
7,667

 
$
(1,296
)
 
$
(1
)
 
 
 
 
 
 
 
 
 

11

Table of Contents

Note 5 - Restructuring Charges
For the six and three months ended June 30, 2018 and 2017, total restructuring charges consist of the following components:
 
Six Months Ended June 30,
 
Three Months Ended June 30,
(in thousands)
2018
 
2017
 
2018
 
2017
Severance charges
$

 
$
6,453

 
$

 
$

Other charges, net
(212
)
 
71

 
103

 
13

Total restructuring charges, net
$
(212
)
 
$
6,524

 
$
103

 
$
13

 
 
 
 
 
 
 
 
For the six months ended June 30, 2018, Synovus recorded net lease termination accrual reversals of $377 thousand related to branches closed in prior years offset somewhat by other property related charges of $165 thousand. During the six months ended June 30, 2017, Synovus recorded severance charges of $6.5 million including $6.2 million for termination benefits incurred in conjunction with a voluntary early retirement program offered to Synovus employees during the first quarter of 2017.
The following tables present aggregate activity within the accrual for restructuring charges for the six and three months ended June 30, 2018 and 2017:
(in thousands)
Severance Charges
 
Lease Termination Charges
 
Total
Balance at December 31, 2017
$
336

 
$
3,276

 
$
3,612

Accruals for lease terminations

 
(377
)
 
(377
)
Payments
(336
)
 
(1,031
)
 
(1,367
)
Balance at June 30, 2018
$

 
$
1,868

 
$
1,868

 
 
 
 
 
 
Balance at April 1, 2018

 
2,506

 
2,506

Payments

 
(638
)
 
(638
)
Balance at June 30, 2018
$

 
$
1,868

 
$
1,868

 
 
 
 
 
 
(in thousands)
Severance Charges
 
Lease Termination Charges
 
Total
Balance at December 31, 2016
$
81

 
$
3,968

 
$
4,049

Accrual for voluntary and involuntary termination benefits
6,453

 

 
6,453

Payments
(2,803
)
 
(438
)
 
(3,241
)
Balance at June 30, 2017
$
3,731

 
$
3,530

 
$
7,261

 
 
 
 
 
 
Balance at April 1, 2017
6,315

 
3,689

 
10,004

Payments
(2,584
)
 
(159
)
 
(2,743
)
Balance at June 30, 2017
$
3,731

 
$
3,530

 
$
7,261

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

12

Table of Contents

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 June 30, 2018 and December 31, 2017.
Current, Accruing Past Due, and Non-accrual Loans
 
 
June 30, 2018
 
(in thousands)
Current
 
Accruing 30-89 Days Past Due
 
Accruing 90 Days or Greater Past Due
 
Total Accruing Past Due
 
Non-accrual
 
Total
 
Commercial, financial and agricultural
$
7,170,877

 
$
18,425

 
$
547

 
$
18,972

 
$
81,231

 
$
7,271,080

 
Owner-occupied
4,994,038

 
4,180

 
98

 
4,278

 
6,076

 
5,004,392

 
Total commercial and industrial
12,164,915

 
22,605

 
645

 
23,250

 
87,307

 
12,275,472

 
Investment properties
5,505,409

 
1,838

 
611

 
2,449

 
1,738

 
5,509,596

 
1-4 family properties
715,154

 
2,309

 

 
2,309

 
3,247

 
720,710

 
Land and development
407,639

 
1,602

 

 
1,602

 
4,624

 
413,865

 
Total commercial real estate
6,628,202

 
5,749

 
611

 
6,360

 
9,609

 
6,644,171

 
Home equity lines
1,430,778

 
8,450

 
362

 
8,812

 
14,265

 
1,453,855

 
Consumer mortgages
2,741,064

 
4,805

 
244

 
5,049

 
4,822

 
2,750,935

 
Credit cards
235,406

 
1,793

 
1,225

 
3,018

 

 
238,424

 
Other consumer loans
1,783,466

 
8,990

 
135

 
9,125

 
1,325

 
1,793,916

 
Total consumer
6,190,714

 
24,038

 
1,966

 
26,004

 
20,412

 
6,237,130

 
Total loans
$
24,983,831

 
$
52,392

 
$
3,222

 
$
55,614

 
$
117,328

 
$
25,156,773

(1 
) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
(in thousands)
Current
 
Accruing 30-89 Days Past Due
 
Accruing 90 Days or Greater Past Due
 
Total Accruing Past Due
 
Non-accrual
 
Total
 
Commercial, financial and agricultural
$
7,097,127

 
$
11,214

 
$
1,016

 
$
12,230

 
$
70,130

 
$
7,179,487

 
Owner-occupied
4,830,150

 
6,880

 
479

 
7,359

 
6,654

 
4,844,163

 
Total commercial and industrial
11,927,277

 
18,094

 
1,495

 
19,589

 
76,784

 
12,023,650

 
Investment properties
5,663,665

 
2,506

 
90

 
2,596

 
3,804

 
5,670,065

 
1-4 family properties
775,023

 
3,545

 
202

 
3,747

 
2,849

 
781,619

 
Land and development
476,131

 
1,609

 
67

 
1,676

 
5,797

 
483,604

 
Total commercial real estate
6,914,819

 
7,660

 
359

 
8,019

 
12,450

 
6,935,288

 
Home equity lines
1,490,808

 
5,629

 
335

 
5,964

 
17,455

 
1,514,227

 
Consumer mortgages
2,622,061

 
3,971

 
268

 
4,239

 
7,203

 
2,633,503

 
Credit cards
229,015

 
1,930

 
1,731

 
3,661

 

 
232,676

 
Other consumer loans
1,461,223

 
10,333

 
226

 
10,559

 
1,669

 
1,473,451

 
Total consumer
5,803,107

 
21,863

 
2,560

 
24,423

 
26,327

 
5,853,857

 
Total loans
$
24,645,203

 
$
47,617

 
$
4,414

 
$
52,031

 
$
115,561

 
$
24,812,795

(2 
) 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Total before net deferred fees and costs of $22.7 million.
(2) Total before net deferred fees and costs of $25.3 million.






13

Table of Contents


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 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.

14

Table of Contents

Loan Portfolio Credit Exposure by Risk Grade
 
 
June 30, 2018
 
(in thousands)
Pass
 
Special
Mention
 
Substandard(1)
 
Doubtful(2)
 
Loss
 
Total
 
Commercial, financial and agricultural
$
6,996,081

 
$
107,251

 
$
164,581

 
$
3,167

 
$

 
$
7,271,080

 
Owner-occupied
4,873,936

 
63,373

 
67,010

 
73

 

 
5,004,392

 
Total commercial and industrial
11,870,017

 
170,624

 
231,591

 
3,240

 

 
12,275,472

 
Investment properties
5,422,727

 
51,279

 
35,590

 

 

 
5,509,596

 
1-4 family properties
698,532

 
9,245

 
12,933

 

 

 
720,710

 
Land and development
369,071

 
29,612

 
12,053

 
3,129

 

 
413,865

 
Total commercial real estate
6,490,330

 
90,136

 
60,576

 
3,129

 

 
6,644,171

 
Home equity lines
1,435,724

 

 
16,599

 
175

 
1,357

(3) 
1,453,855

 
Consumer mortgages
2,743,245

 

 
7,588

 
102

 

(3) 
2,750,935

 
Credit cards
237,198

 

 
447

 

 
779

(4) 
238,424

 
Other consumer loans
1,792,568

 

 
1,087

 
257

 
4

(3) 
1,793,916

 
Total consumer
6,208,735

 

 
25,721

 
534

 
2,140

 
6,237,130

 
Total loans
$
24,569,082

 
$
260,760

 
$
317,888

 
$
6,903

 
$
2,140

 
$
25,156,773

(5 
) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
(in thousands)
Pass
 
Special
Mention
 
Substandard(1)
 
Doubtful(2)
 
Loss
 
Total
 
Commercial, financial and agricultural
$6,929,506
 
$115,912
 
$132,818
 
$1,251
 
$

 
$7,179,487
 
Owner-occupied
4,713,877

 
50,140

 
80,073

 
73

 

 
4,844,163

 
Total commercial and industrial
11,643,383

 
166,052

 
212,891

 
1,324

 

 
12,023,650

 
Investment properties
5,586,792

 
64,628

 
18,645

 

 

 
5,670,065

 
1-4 family properties
745,299

 
19,419

 
16,901

 

 

 
781,619

 
Land and development
431,759

 
33,766

 
14,950

 
3,129

 

 
483,604

 
Total commercial real estate
6,763,850

 
117,813

 
50,496

 
3,129

 


6,935,288

 
Home equity lines
1,491,105

 

 
21,079

 
285

 
1,758

(3) 
1,514,227

 
Consumer mortgages
2,622,499

 

 
10,607

 
291

 
106

(3) 
2,633,503

 
Credit cards
230,945

 

 
399

 

 
1,332

(4) 
232,676

 
Other consumer loans
1,470,944

 

 
2,168

 
329

 
10

(3) 
1,473,451

 
Total consumer
5,815,493

 

 
34,253

 
905

 
3,206

 
5,853,857

 
Total loans
$
24,222,726

 
$
283,865

 
$
297,640

 
$
5,358

 
$
3,206

 
$
24,812,795

(6 
) 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Includes $209.6 million and $190.6 million of Substandard accruing loans at June 30, 2018 and December 31, 2017, 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 $22.7 million.
(6) Total before net deferred fees and costs of $25.3 million.

15

Table of Contents

The following table details the changes in the allowance for loan losses by loan segment for the six and three months ended June 30, 2018 and 2017.
Allowance for Loan Losses and Recorded Investment in Loans

 
As Of and For The Six Months Ended June 30, 2018
(in thousands)
Commercial & Industrial
 
Commercial Real Estate
 
Consumer
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
Beginning balance
$
126,803

 
$
74,998

 
$
47,467

 
$
249,268

Charge-offs
(23,786
)
 
(2,446
)
 
(9,894
)
 
(36,126
)
Recoveries
3,995

 
6,964

 
3,058

 
14,017

Provision for loan losses
23,323

 
(4,311
)
 
5,554

 
24,566

Ending balance(1)
$
130,335

 
$
75,205

 
$
46,185


$
251,725

Ending balance: individually evaluated for impairment
$
9,474

 
$
4,687

 
$
771

 
$
14,932

Ending balance: collectively evaluated for impairment
$
120,861

 
$
70,518

 
$
45,414

 
$
236,793

Loans:
 
 
 
 
 
 
 
Ending balance: total loans(1)(2)
$
12,275,472

 
$
6,644,171

 
$
6,237,130

 
$
25,156,773

Ending balance: individually evaluated for impairment    
$
107,544

 
$
53,805

 
$
27,676

 
$
189,025

Ending balance: collectively evaluated for impairment
$
12,167,928

 
$
6,590,366

 
$
6,209,454

 
$
24,967,748

 
 
 
 
 
 
 
 
 
As Of and For The Six Months Ended June 30, 2017
(in thousands)
Commercial & Industrial
 
Commercial Real Estate
 
Consumer
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
Beginning balance
$
125,778

 
$
81,816

 
$
44,164

 
$
251,758

Charge-offs
(19,535
)
 
(3,207
)
 
(9,656
)
 
(32,398
)
Recoveries
3,282

 
3,648

 
2,871

 
9,801

Provision for loan losses
13,912

 
(4,730
)
 
9,752

 
18,934

Ending balance(1)
$
123,437

 
$
77,527

 
$
47,131

 
$
248,095

Ending balance: individually evaluated for impairment
$
7,226

 
$
4,386

 
$
1,038

 
$
12,650

Ending balance: collectively evaluated for impairment
$
116,211

 
$
73,141

 
$
46,093

 
$
235,445

Loans:
 
 
 
 
 
 
 
Ending balance: total loans(1)(3)
$
11,742,945

 
$
7,422,234

 
$
5,291,371

 
$
24,456,550

Ending balance: individually evaluated for impairment
$
122,889

 
$
73,638

 
$
31,688

 
$
228,215

Ending balance: collectively evaluated for impairment
$
11,620,056

 
$
7,348,596

 
$
5,259,683

 
$
24,228,335

 
 
 
 
 
 
 
 
(1) As of and for the six months ended June 30, 2018 and 2017, 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 $22.7 million.
(3) Total before net deferred fees and costs of $26.0 million.

16

Table of Contents


Allowance for Loan Losses and Recorded Investment in Loans

 
As Of and For The Three Months Ended June 30, 2018
(in thousands)
Commercial & Industrial
 
Commercial Real Estate
 
Consumer
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
Beginning balance
$
134,745

 
$
73,991

 
$
49,028

 
$
257,764

Charge-offs
(15,770
)
 
(523
)
 
(5,211
)
 
(21,504
)
Recoveries
1,635

 
480

 
1,560

 
3,675

Provision for loan losses
9,725

 
1,257

 
808

 
11,790

Ending balance(1)
$
130,335

 
$
75,205

 
$
46,185

 
$
251,725

Ending balance: individually evaluated for impairment
$
9,474

 
$
4,687

 
$
771

 
$
14,932

Ending balance: collectively evaluated for impairment
$
120,861

 
$
70,518

 
$
45,414

 
$
236,793

Loans:
 
 
 
 
 
 
 
Ending balance: total loans(1)(2)
$
12,275,472

 
$
6,644,171

 
$
6,237,130

 
$
25,156,773

Ending balance: individually evaluated for impairment    
$
107,544

 
$
53,805

 
$
27,676

 
$
189,025

Ending balance: collectively evaluated for impairment
$
12,167,928

 
$
6,590,366

 
$
6,209,454

 
$
24,967,748

 
 
 
 
 
 
 
 
 
As Of and For The Three Months Ended June 30, 2017
(in thousands)
Commercial & Industrial
 
Commercial Real Estate
 
Consumer
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
Beginning balance
$
127,096

 
$
78,314

 
$
48,104

 
$
253,514

Charge-offs
(12,642
)
 
(1,299
)
 
(5,722
)
 
(19,663
)
Recoveries
1,458

 
759

 
1,767

 
3,984

Provision for loan losses
7,525

 
(247
)
 
2,982

 
10,260

Ending balance(1)
$
123,437

 
$
77,527

 
$
47,131

 
$
248,095

Ending balance: individually evaluated for impairment
$
7,226

 
$
4,386

 
$
1,038

 
$
12,650

Ending balance: collectively evaluated for impairment
$
116,211

 
$
73,141

 
$
46,093

 
$
235,445

Loans:
 
 
 
 
 
 
 
Ending balance: total loans(1)(3)
$
11,742,945

 
$
7,422,234

 
$
5,291,371

 
$
24,456,550

Ending balance: individually evaluated for impairment
$
122,889

 
$
73,638

 
$
31,688

 
$
228,215

Ending balance: collectively evaluated for impairment
$
11,620,056

 
$
7,348,596

 
$
5,259,683

 
$
24,228,335

 
 
 
 
 
 
 
 
(1) As of and for the three months ended June 30, 2018 and 2017, 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 $22.7 million.
(3) Total before net deferred fees and costs of $26.0 million.
















17

Table of Contents


The tables below summarize impaired loans (including accruing TDRs) as of June 30, 2018 and December 31, 2017.
Impaired Loans (including accruing TDRs)
 
June 30, 2018
 
Six Months Ended June 30, 2018
 
Three Months Ended June 30, 2018
(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
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
$
21,549

 
$
32,458

 
$

 
$
11,129

 
$

 
$
13,575

 
$

Owner-occupied

 

 

 

 

 

 

Total commercial and industrial
21,549

 
32,458

 

 
11,129

 

 
13,575

 

Investment properties

 

 

 

 

 

 

1-4 family properties

 

 

 

 

 

 

Land and development

 

 

 
19

 

 

 

Total commercial real estate

 

 

 
19

 

 

 

Home equity lines

 

 

 
1,423

 

 
724

 

Consumer mortgages
62

 
87

 

 
1,330

 

 
1,780

 

Credit cards

 

 

 

 

 

 

Other consumer loans

 

 

 

 

 

 

Total consumer
62

 
87

 

 
2,753

 

 
2,504

 

Total impaired loans with no
related allowance recorded
$
21,611

 
$
32,545

 
$

 
$
13,901

 
$

 
$
16,079


$

With allowance recorded
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
$
45,171

 
$
45,385

 
$
6,813

 
$
62,564

 
$
428

 
$
57,930

 
$
155

Owner-occupied
40,824

 
40,884

 
2,660

 
38,073

 
730

 
38,432

 
373

Total commercial and industrial
85,995

 
86,269

 
9,473

 
100,637

 
1,158

 
96,362

 
528

Investment properties
24,218

 
24,218

 
1,659

 
23,604

 
418

 
24,439

 
220

1-4 family properties
10,458

 
10,458

 
309

 
11,466

 
442

 
11,217

 
226

Land and development
19,129

 
20,869

 
2,720

 
18,280

 
150

 
18,428

 
74

Total commercial real estate
53,805

 
55,545

 
4,688

 
53,350

 
1,010

 
54,084

 
520

Home equity lines
3,915

 
3,915

 
174

 
3,822

 
76

 
3,262

 
30

Consumer mortgages
18,767

 
18,767

 
350

 
19,283

 
394

 
19,459

 
199

Credit cards

 

 

 

 

 
4,985

 

Other consumer loans
4,932

 
4,938

 
248

 
5,188

 
143

 

 
72

Total consumer
27,614

 
27,620


772

 
28,293

 
613

 
27,706

 
301

Total impaired loans with
allowance recorded
$
167,414

 
$
169,434

 
$
14,933

 
$
182,280

 
$
2,781

 
$
178,152

 
$
1,349

Total impaired loans
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
$
66,720

 
$
77,843

 
$
6,813

 
$
73,693

 
$
428

 
$
71,505

 
$
155

Owner-occupied
40,824

 
40,884

 
2,660

 
38,073

 
730

 
38,432

 
373

Total commercial and industrial
107,544

 
118,727

 
9,473

 
111,766

 
1,158

 
109,937

 
528

Investment properties
24,218

 
24,218


1,659

 
23,604

 
418


24,439

 
220

1-4 family properties
10,458

 
10,458


309

 
11,466

 
442


11,217

 
226

Land and development
19,129

 
20,869


2,720

 
18,299

 
150


18,428

 
74

Total commercial real estate
53,805

 
55,545


4,688

 
53,369

 
1,010


54,084

 
520

Home equity lines
3,915

 
3,915


174

 
5,245

 
76


3,986

 
30

Consumer mortgages
18,829

 
18,854


350

 
20,613

 
394


21,239

 
199

Credit cards

 



 

 


4,985

 

Other consumer loans
4,932

 
4,938


248

 
5,188

 
143



 
72

Total consumer
27,676

 
27,707


772

 
31,046

 
613


30,210

 
301

Total impaired loans
$
189,025

 
$
201,979


$
14,933

 
$
196,181

 
$
2,781


$
194,231

 
$
1,349

 
 
 
 
 
 
 
 
 
 
 
 
 
 

18

Table of Contents

Impaired Loans (including accruing TDRs)
 
December 31, 2017
 
Year Ended December 31, 2017
(in thousands)
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
 
Average Recorded Investment
 
Interest Income Recognized
With no related allowance recorded
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
$
8,220

 
$
9,576

 
$

 
$
21,686

 
$

Owner-occupied

 

 

 
6,665

 

Total commercial and industrial
8,220

 
9,576

 

 
28,351

 

Investment properties

 

 

 
123

 

1-4 family properties

 

 

 
323

 

Land and development
56

 
1,740

 

 
1,816

 

Total commercial real estate
56

 
1,740

 

 
2,262

 

Home equity lines
2,746

 
2,943

 

 
1,205

 

Consumer mortgages

 

 

 
496

 

Credit cards

 

 

 

 

Other consumer loans

 

 

 

 

Total consumer
2,746

 
2,943

 

 
1,701

 

Total impaired loans with no
related allowance recorded
$
11,022

 
$
14,259

 
$

 
$
32,314

 
$

With allowance recorded
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
$
65,715

 
$
65,851

 
$
7,406

 
$
50,468

 
$
1,610

Owner-occupied
37,399

 
37,441

 
2,109

 
40,498

 
1,382

Total commercial and industrial
103,114

 
103,292

 
9,515

 
90,966

 
2,992

Investment properties
23,364

 
23,364

 
1,100

 
28,749

 
1,144

1-4 family properties
15,056

 
15,056

 
504

 
16,257

 
925

Land and development
18,420

 
18,476

 
2,636

 
23,338

 
404

Total commercial real estate
56,840

 
56,896

 
4,240

 
68,344

 
2,473

Home equity lines
5,096

 
5,096

 
114

 
7,476

 
334

Consumer mortgages
18,668

 
18,668

 
569

 
19,144

 
896

Credit cards

 

 

 

 

Other consumer loans
5,546

 
5,546

 
470

 
4,765

 
266

Total consumer
29,310

 
29,310

 
1,153

 
31,385

 
1,496

Total impaired loans with
allowance recorded
$
189,264

 
$
189,498

 
$
14,908

 
$
190,695

 
$
6,961

Total impaired loans
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
$
73,935

 
$
75,427

 
$
7,406

 
$
72,154

 
$
1,610

Owner-occupied
37,399
 
37,441
 
2,109
 
47,163
 
1,382
Total commercial and industrial
111,334
 
112,868
 
9,515
 
119,317
 
2,992
Investment properties
23,364
 
23,364
 
1,100
 
28,872
 
1,144
1-4 family properties
15,056

 
15,056

 
504

 
16,580

 
925

Land and development
18,476

 
20,216

 
2,636

 
25,154

 
404

Total commercial real estate
56,896

 
58,636

 
4,240

 
70,606

 
2,473

Home equity lines
7,842

 
8,039

 
114

 
8,681

 
334

Consumer mortgages
18,668

 
18,668

 
569

 
19,640

 
896

Credit cards

 

 

 

 

Other consumer loans
5,546

 
5,546

 
470

 
4,765

 
266

Total consumer
32,056

 
32,253

 
1,153

 
33,086

 
1,496

Total impaired loans
$
200,286

 
$
203,757

 
$
14,908

 
$
223,009

 
$
6,961

 
 
 
 
 
 
 
 
 
 

19

Table of Contents

The average recorded investment in impaired loans was $233.8 million and $232.5 million respectively for the six and three months ended June 30, 2017. Excluding accruing TDRs, there was no interest income recognized for the investment in impaired loans for the six and three months ended June 30, 2017. Interest income recognized for accruing TDRs was $3.5 million and $1.8 million respectively for the six and three months ended June 30, 2017. At June 30, 2018 and December 31, 2017, impaired loans of $63.7 million and $49.0 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.
The following tables represent, by concession type, the post-modification balance for loans modified or renewed during the six and three months ended June 30, 2018 and 2017 that were reported as accruing or non-accruing TDRs.
TDRs by Concession Type
 
 
 
Six Months Ended June 30, 2018
 
(in thousands, except contract data)
Number of Contracts
 
Principal Forgiveness
 
Below Market Interest Rate
 
Term Extensions and/or Other Concessions
 
Total
 
Commercial, financial and agricultural
14

 
$

 
$

 
$
1,565

 
$
1,565

 
Owner-occupied
6

 

 
4,799

 
684

 
5,483

 
Total commercial and industrial
20

 

 
4,799

 
2,249

 
7,048

 
Investment properties
3

 

 
6,011

 
2,215

 
8,226

 
1-4 family properties
7

 

 
965

 
492

 
1,457

 
Land and development
3

 

 

 
1,786

 
1,786

 
Total commercial real estate
13

 

 
6,976

 
4,493

 
11,469

 
Home equity lines
3

 

 
172

 
148

 
320

 
Consumer mortgages
14

 

 
4,695

 
87

 
4,782

 
Credit cards

 

 

 

 

 
Other consumer loans
31

 

 
925

 
821

 
1,746

 
Total consumer
48

 

 
5,792

 
1,056

 
6,848

 
Total TDRs
81

 
$

 
$
17,567

 
$
7,798

 
$
25,365

(1 
) 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2018
 
(in thousands, except contract data)
Number of Contracts
 
Principal Forgiveness
 
Below Market Interest Rate
 
Term Extensions and/or Other Concessions
 
Total
 
Commercial, financial and agricultural
5

 
$

 
$

 
$
576

 
$
576

 
Owner-occupied
4

 

 
2,094

 
592

 
2,686

 
Total commercial and industrial
9

 

 
2,094

 
1,168

 
3,262

 
Investment properties
2

 

 
6,011

 
256

 
6,267

 
1-4 family properties
1

 

 

 
492

 
492

 
Land and development
3

 

 

 
1,786

 
1,786

 
Total commercial real estate
6

 

 
6,011

 
2,534

 
8,545

 
Home equity lines
3

 

 
172

 
148

 
320

 
Consumer mortgages
7

 

 
2,963

 
87

 
3,050

 
Credit cards

 

 

 

 

 
Other consumer loans
17

 

 
388

 
313

 
701

 
Total consumer
27

 

 
3,523

 
548

 
4,071

 
Total TDRs
42

 
$

 
$
11,628

 
$
4,250

 
$
15,878

(1 
) 
 
 
 
 
 
 
 
 
 
 
 
(1) No net charge-offs were recorded during the six and three months ended June 30, 2018 upon restructuring of these loans.

20

Table of Contents

TDRs by Concession Type
 
 
 
Six Months Ended June 30, 2017
 
(in thousands, except contract data)
Number of Contracts
 
Principal Forgiveness
 
Below Market Interest Rate
 
Term Extensions and/or Other Concessions
 
Total
 
Commercial, financial and agricultural
28

 
$

 
$
5,760

 
$
6,279

 
$
12,039

 
Owner-occupied
1

 

 

 
22

 
22

 
Total commercial and industrial
29

 

 
5,760

 
6,301

 
12,061

 
Investment properties

 

 

 

 

 
1-4 family properties
16

 

 
2,089

 
513

 
2,602

 
Land and development
1

 

 

 
135

 
135

 
Total commercial real estate
17

 

 
2,089

 
648

 
2,737

 
Home equity lines

 

 

 

 

 
Consumer mortgages
1

 

 

 
9

 
9

 
Credit cards

 

 

 

 

 
Other consumer loans
8

 

 

 
570

 
570

 
Total consumer
9

 

 

 
579

 
579

 
Total TDRs
55

 
$

 
$
7,849

 
$
7,528

 
$
15,377

(2 
) 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2017
 
(in thousands, except contract data)
Number of Contracts
 
Principal Forgiveness
 
Below Market Interest Rate
 
Term Extensions and/or Other Concessions
 
Total
 
Commercial, financial and agricultural
10

 
$

 
$
1,895

 
$
740

 
$
2,635

 
Owner-occupied
1

 

 

 
22

 
22

 
Total commercial and industrial
11

 

 
1,895

 
762

 
2,657

 
Investment properties

 

 

 

 

 
1-4 family properties
8

 

 
478

 
196

 
674

 
Land and development
1

 

 

 
135

 
135

 
Total commercial real estate
9

 

 
478

 
331

 
809

 
Home equity lines

 

 

 

 

 
Consumer mortgages
1

 

 

 
9

 
9

 
Credit cards

 

 

 

 

 
Other consumer loans
5

 

 

 
295

 
295

 
Total consumer
6

 

 

 
304

 
304

 
Total TDRs
26

 
$

 
$
2,373

 
$
1,397

 
$
3,770

(2 
) 
 
 
 
 
 
 
 
 
 
 
 
(2) No net charge-offs were recorded during the six and three months ended June 30, 2017 upon restructuring of these loans.

For both the six and three months ended June 30, 2018 there were eight defaults with a recorded investment of $10.5 million 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 three defaults for both the six and three months ended June 30, 2017 with a recorded investment of $292 thousand.
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 June 30, 2018, the allowance for loan losses allocated to accruing TDRs totaling $125.3 million was $6.5 million compared to accruing TDRs of $151.3 million with an allocated allowance for loan losses of $8.7 million at December 31, 2017. 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.

21

Table of Contents

Note 7 - Other Comprehensive Income (Loss)
The following tables illustrate activity within the balances in accumulated other comprehensive income (loss) by component for the six and three months ended June 30, 2018 and 2017.
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, 2017
$
(12,137
)
 
$
(43,470
)
 
$
853

 
$
(54,754
)
Other comprehensive income (loss) before reclassifications

 
(64,409
)
 

 
(64,409
)
Amounts reclassified from accumulated other comprehensive income (loss)

 
960

 
(46
)
 
914

Net current period other comprehensive loss

 
(63,449
)
 
(46
)
 
(63,495
)
Reclassification from adoption of ASU 2018-02

 
(7,763
)
 
175

 
(7,588
)
Cumulative-effect adjustment from adoption of ASU 2016-01

 
117

 

 
117

Balance as of June 30, 2018
$
(12,137
)
 
$
(114,565
)
 
$
982

 
$
(125,720
)
 
 
 
 
 
 
 
 
Balance as of April 1, 2018
$
(12,137
)
 
$
(96,647
)
 
$
1,007

 
$
(107,777
)
Other comprehensive income (loss) before reclassifications

 
(18,878
)
 

 
(18,878
)
Amounts reclassified from accumulated other comprehensive income (loss)

 
960

 
(25
)
 
935

Net current period other comprehensive income

 
(17,918
)
 
(25
)
 
(17,943
)
Balance as of June 30, 2018
$
(12,137
)
 
$
(114,565
)
 
$
982

 
$
(125,720
)
 
 
 
 
 
 
 
 

(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

 
12,453

 

 
12,453

Amounts reclassified from accumulated other comprehensive income (loss)
80

 
(4,715
)
 
(24
)
 
(4,659
)
Net current period other comprehensive income
80

 
7,738

 
(24
)
 
7,794

Balance as of June 30, 2017
$
(12,137
)
 
$
(36,586
)
 
$
858

 
$
(47,865
)
 
 
 
 
 
 
 
 
Balance as of April 1, 2017
$
(12,177
)
 
$
(43,444
)
 
$
870

 
$
(54,751
)
Other comprehensive income before reclassifications

 
6,857

 

 
6,857

Amounts reclassified from accumulated other comprehensive income (loss)
40

 
1

 
(12
)
 
29

Net current period other comprehensive income (loss)
40

 
6,858

 
(12
)
 
6,886

Balance as of June 30, 2017
$
(12,137
)
 
$
(36,586
)
 
$
858

 
(47,865
)
 
 
 
 
 
 
 
 

22

Table of Contents

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 net unrealized 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 instruments and available for sale securities as a single portfolio. As of June 30, 2018, the ending 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 the 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 Six Months Ended June 30,
 
 
 
 
2018
 
2017
 
 
Net unrealized gains (losses) on cash flow hedges:
 
 
 
 
 
 
  Amortization of deferred losses
 
$

 
$
(130
)
 
Interest expense
 
 

 
50

 
Income tax (expense) benefit
 
 
$

 
$
(80
)
 
Reclassifications, net of income taxes
 
 
 
 
 
 
 
Net unrealized gains on investment securities available for sale:
 
 
 
 
 
 
  Realized (losses) gains on sale of securities
 
$
(1,296
)
 
$
7,667

 
Investment securities gains, net
 
 
336

 
(2,952
)
 
Income tax (expense) benefit
 
 
$
(960
)
 
$
4,715

 
Reclassifications, net of income taxes
Post-retirement unfunded health benefit:
 
 
 
 
 
 
  Amortization of actuarial gains
 
$
68

 
$
40

 
Salaries and other personnel expense
 
 
(22
)
 
(16
)
 
Income tax (expense) benefit
 
 
$
46

 
$
24

 
Reclassifications, net of income taxes
 
 
 
 
 
 
 

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 June 30,
 
 
 
 
2018
 
2017
 
 
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 losses on sale of securities
 
$
(1,296
)
 
$
(1
)
 
Investment securities gains, net
 
 
336

 

 
Income tax (expense) benefit
 
 
$
(960
)
 
$
(1
)
 
Reclassifications, net of income taxes
Post-retirement unfunded health benefit:
 
 
 
 
 
 
  Amortization of actuarial gains
 
$
34

 
$
20

 
Salaries and other personnel expense
 
 
(9
)
 
(8
)
 
Income tax (expense) benefit
 
 
$
25

 
$
12

 
Reclassifications, net of income taxes
 
 
 
 
 
 
 

23

Table of Contents

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 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 GSEs and agencies, obligations of states and municipalities, collateralized mortgage obligations issued by GSEs, 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 loans held for sale, other real estate, certain corporate securities, private equity investments, GGL/SBA loan servicing assets, and the earnout liability.

See "Part II - Item 8. Financial Statements and Supplementary Data - Note 15 - Fair Value Accounting" to the consolidated financial statements of Synovus' 2017 Form 10-K for a description of valuation methodologies for assets and liabilities measured at fair value on a recurring and non-recurring basis.

24

Table of Contents

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 June 30, 2018 and December 31, 2017, according to the valuation hierarchy included in ASC 820-10. For debt securities, class was determined based on the nature and risks of the investments. Synovus did not have any transfers between levels during the six and three months ended June 30, 2018 and year ended December 31, 2017.
 
June 30, 2018
(in thousands)
Level 1
 
Level 2
 
Level 3
 
Total Assets and Liabilities at Fair Value
Assets
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
U.S. Government agency securities
$

 
$
17,164

 
$

 
$
17,164

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

 
577

 

 
577

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

 
409

 

 
409

State and municipal securities

 
2,495

 

 
2,495

Other investments
906

 

 

 
906

Total trading securities
$
906

 
$
20,645

 
$

 
$
21,551

Mortgage loans held for sale

 
53,673

 

 
53,673

Investment securities available for sale:
 
 
 
 
 
 
 
U.S. Treasury securities
120,633

 

 

 
120,633

U.S. Government agency securities

 
40,934

 

 
40,934

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

 
107,944

 

 
107,944

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

 
2,526,845

 

 
2,526,845

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

 
1,116,448

 

 
1,116,448

State and municipal securities

 
115

 

 
115

 Corporate debt and other debt securities(1)    

 
15,186

 
1,857

 
17,043

Total investment securities available for sale
$
120,633

 
$
3,807,472

 
$
1,857

 
$
3,929,962

Private equity investments

 

 
12,678

 
12,678

Mutual funds
3,124

 

 

 
3,124

Mutual funds held in rabbi trusts
13,638

 

 

 
13,638

GGL/SBA loans servicing asset

 

 
4,186

 
4,186

Derivative assets:
 
 
 
 
 
 
 
Interest rate contracts

 
10,034

 

 
10,034

Mortgage derivatives(2)

 
1,302

 

 
1,302

Total derivative assets
$

 
$
11,336

 
$

 
$
11,336

Liabilities
 
 
 
 
 
 
 
Trading account liabilities

 
12,328

 

 
12,328

Earnout liability(3)

 

 
11,348

 
11,348

Derivative liabilities:
 
 
 
 
 
 
 
Interest rate contracts

 
19,303

 

 
19,303

Mortgage derivatives(2)

 
248

 

 
248

Visa derivative

 

 
5,943

 
5,943

Total derivative liabilities
$

 
$
19,551

 
$
5,943

 
$
25,494

 
 
 
 
 
 
 
 

25

Table of Contents

 
December 31, 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 agencies
$

 
$
3,002

 
$

 
$
3,002

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

 
296

 

 
296

 Other investments
522

 

 

 
522

Total trading securities
$
522

 
$
3,298

 
$

 
$
3,820

Mortgage loans held for sale

 
48,024

 

 
48,024

 
 
 
 
 
 
 
 
Investment securities available for sale:
 
 
 
 
 
 
 
     U.S. Treasury securities
82,674

 

 

 
82,674

U.S. Government agency securities

 
10,862

 

 
10,862

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

 
120,440

 

 
120,440

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

 
2,640,523

 

 
2,640,523

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

 
1,111,999

 

 
1,111,999

State and municipal securities

 
180

 

 
180

 Corporate debt and other securities(1)    
3,162

 
15,294

 
1,935

 
20,391

Total investment securities available for sale
$
85,836

 
$
3,899,298

 
$
1,935

 
$
3,987,069

Private equity investments

 

 
15,771

 
15,771

Mutual funds held in rabbi trusts
14,140

 

 

 
14,140

GGL/SBA loan servicing asset

 

 
4,101

 
4,101

Derivative assets:
 
 
 
 
 
 
 
Interest rate contracts

 
10,786

 

 
10,786

Mortgage derivatives(2)

 
936

 

 
936

Total derivative assets
$

 
$
11,722

 
$

 
$
11,722

Liabilities
 
 
 
 
 
 
 
Trading account liabilities

 
1,000

 

 
1,000

Earnout liability(3) 

 

 
11,348

 
11,348

Derivative liabilities:
 
 
 
 
 
 
 
Interest rate contracts

 
12,638

 

 
12,638

Mortgage derivatives(2)

 
129

 

 
129

Visa derivative

 

 
4,330

 
4,330

Total derivative liabilities
$

 
$
12,767

 
$
4,330

 
$
17,097

 
 
 
 
 
 
 
 
(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.

26

Table of Contents

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 Six Months Ended June 30,
 
For the Three Months Ended June 30,
(in thousands)
2018
 
2017
 
2018
 
2017
Mortgage loans held for sale
$
155

 
$
954

 
$
40

 
$
(249
)
 
 
 
 
 
 
 
 
Mortgage Loans Held for Sale
 
(in thousands)
As of June 30, 2018
 
As of December 31, 2017
Fair value
$
53,673

 
$
48,024

Unpaid principal balance
52,333

 
46,839

Fair value less aggregate unpaid principal balance
$
1,340

 
$
1,185

 
 
 
 

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Table of Contents

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 sheet for the six and three months ended June 30, 2018 and 2017 (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 six and three months ended June 30, 2018 and 2017, Synovus did not have any transfers between levels in the fair value hierarchy. For the six and three months ended June 30, 2018, total net losses included in earnings attributable to the change in unrealized losses relating to assets/liabilities still held at June 30, 2018 was $6.2 million and $2.7 million, respectively. For the six and three months ended June 30, 2017, total net losses included in earnings attributable to the change in unrealized losses relating to assets/liabilities still held at June 30, 2017 was $2.4 million and $2.1 million, respectively.
 
 
 
Six Months Ended June 30, 2018
(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, 2018
$
1,935

 
$
15,771

 
$
(4,330
)
 
$
(11,348
)
 
$
4,101

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

 
(3,093
)
 
(2,328
)
 

 
(734
)
Unrealized losses included in other comprehensive income
(78
)
 

 

 

 

Additions

 

 

 

 
819

Settlements

 

 
715

 

 

Ending balance, June 30, 2018
$
1,857

 
$
12,678

 
$
(5,943
)
 
$
(11,348
)
 
$
4,186

Total net losses for the period included in earnings attributable to the change in unrealized losses relating to assets/liabilities still held at June 30, 2018
$

 
$
(3,093
)
 
$
(2,328
)
 
$

 
$
(734
)
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2018
(in thousands)
Investment Securities Available
for Sale
 
 Private Equity Investments
 
Visa Derivative
 
Earnout
Liability(1) 
 
GGL / SBA
Loans Servicing Asset
Beginning balance, April 1, 2018
$
1,852

 
$
12,715

 
$
(3,974
)
 
$
(11,348
)
 
$
3,971

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

 
(37
)
 
(2,328
)
 

 
(312
)
Unrealized gains included in other comprehensive income
5

 

 

 

 

Additions

 

 

 

 
527

Settlements

 

 
359

 

 

Ending balance, June 30, 2018
$
1,857

 
$
12,678

 
$
(5,943
)
 
$
(11,348
)
 
$
4,186

Total net losses for the period included in earnings attributable to the change in unrealized losses relating to assets/liabilities still held at June 30, 2018
$

 
$
(37
)
 
$
(2,328
)
 
$

 
$
(312
)
 
 
 
 
 
 
 
 
 
 
 


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Table of Contents

 
 
 
 
 
 
 
Six Months Ended June 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, 2017
$
1,796

 
$
25,493

 
$
(5,768
)
 
$
(14,000
)
 
$

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

 
(3,166
)
 

 
(1,707
)
 
(694
)
Unrealized gains (losses) included in other comprehensive income
131

 


 

 

 

Additions

 

 

 

 
539

Sales and settlements

 
(6,629
)
 
715

 

 

Transfer from amortization method to fair value

 

 

 

 
4,452

Measurement period adjustments related to Global One acquisition

 

 

 
1,766

 

Ending balance, June 30, 2017
$
1,927

 
$
15,698

 
$
(5,053
)
 
$
(13,941
)
 
$
4,297

Total net losses for the period included in earnings attributable to the change in unrealized losses relating to assets/liabilities still held at June 30, 2017
$

 
$

 
$

 
$
(1,707
)
 
$
(694
)
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 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, April 1, 2017
$
1,851

 
$
23,679

 
$
(5,412
)
 
$
(11,421
)
 
$
4,178

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

 
(1,352
)
 

 
(1,707
)
 
(376
)
Unrealized gains included in other comprehensive income
76

 

 

 

 

Additions

 

 

 

 
495

Sales and settlements

 
(6,629
)
 
359

 

 

Measurement period adjustments related to Global One acquisition

 

 

 
(813
)
 

Ending balance, June 30, 2017
$
1,927

 
$
15,698

 
$
(5,053
)
 
$
(13,941
)
 
$
4,297

Total net losses for the period included in earnings attributable to the change in unrealized losses relating to assets/liabilities still held at June 30, 2017
$

 
$

 
$

 
$
(1,707
)
 
$
(376
)
 
 
 
 
 
 
 
 
 
 
(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. Prior to 2017, Synovus accounted for the GGL/SBA loans servicing asset using the amortization method.


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Table of Contents

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.
 
 
 
 
June 30, 2018
 
December 31, 2017
 
 
Valuation Technique
Significant Unobservable Input
Level 3
Fair Value
 
Range or Weighted Average
 
Level 3
Fair Value
 
Range or 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
$1,857
 
438 bps
 
$1,935
 
398 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
12,678
 
N/A
 
15,771
 
N/A
 
 
 
 
 
 
 
 
 
 
 
GGL/SBA loans servicing asset
 
Discounted cash flow analysis
Discount rate Prepayment speeds
4,186
 
13.40% 8.64%
 
4,101
 
13.16% 7.50%
 
 
 
 
 
 
 
 
 
 
 
Earnout liability
 
Option pricing methods and Monte Carlo simulation
Financial projections of Global One
11,348
 
N/A
 
11,348
 
N/A
 
 
 
 
 
 
 
 
 
 
 
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
5,943
 
1-3 years
 
4,330
 
1-4 years
 
 
 
 
 
 
 
 
 
 
 


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Table of Contents

Assets Measured at Fair Value on a Non-recurring Basis
Certain assets are recorded at fair value on a non-recurring basis. These assets are not measured at fair value on an ongoing basis. 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 six months ended June 30, 2018 and year ended December 31, 2017.


June 30, 2018
 
December 31, 2017
(in thousands)
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Impaired loans*
$

 
$

 
$
12,820

 
$
12,820

 
$

 
$

 
$
3,603

 
$
3,603

Other loans held for sale

 

 

 

 

 

 
10,197

 
10,197

Other real estate

 

 

 

 

 

 
3,363

 
3,363

Other assets held for sale

 

 
695

 
695

 

 

 
5,334

 
5,334

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
* Collateral-dependent impaired loans that were written down to fair value during the period.
    Other real estate (ORE) properties are included in other assets on the consolidated balance sheet. The carrying value of ORE at June 30, 2018 and December 31, 2017 was $6.3 million and $3.8 million, respectively.
The following table presents fair value adjustments recognized in earnings for the six and three months ended June 30, 2018 and 2017 for assets measured at fair value on a non-recurring basis still held at period-end.
 
Six Months Ended June 30,
 
Three Months Ended June 30,
(in thousands)
2018
 
2017
 
2018
 
2017
Impaired loans*
$
7,548

 
$
5,808

 
$
6,828

 
$
5,776

Other loans held for sale

 
3,519

 

 

Other real estate

 
518

 

 
280

Other assets held for sale
499

 
238

 
499

 

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

    

















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Table of Contents

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.
 
 
 
 
June 30, 2018
 
December 31, 2017
 
 
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% - 68% (38%)
0% - 10% (7%)
 
0%-50% (15%)
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
N/A
N/A
 
5% - 99% (54%)
0% - 10% (2%)
 
 
 
 
 
 
 
Other real estate
 
Third-party appraised value of real estate less estimated selling costs
Discount to appraised value (2)
Estimated selling costs
N/A
N/A
 
0%-85% (35%)
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
27%-43% (42%)
0%-10% (7%)
 
21%-52% (25%)
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.

Fair Value of Financial Instruments
The following table presents the carrying and fair values of financial instruments at June 30, 2018 and December 31, 2017. 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.

 









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Table of Contents

The carrying and estimated fair values of financial instruments, as well as the level within the fair value hierarchy, as of June 30, 2018 and December 31, 2017 are as follows:
 
June 30, 2018
(in thousands)
Carrying Value
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Financial assets
 
 
 
 
 
 
 
 
 
Total cash, cash equivalents, restricted cash, and restricted cash equivalents
$
1,091,788

 
$
1,091,788

 
$
1,091,788

 
$

 
$

Trading account assets
21,551

 
21,551

 
906

 
20,645

 

Mortgage loans held for sale
53,673

 
53,673

 

 
53,673

 

Other loans held for sale
2,733

 
2,733

 

 

 
2,733

Investment securities available for sale
3,929,962

 
3,929,962

 
120,633

 
3,807,472

 
1,857

Private equity investments
12,678

 
12,678

 

 

 
12,678

Mutual funds
3,124

 
3,124

 
3,124

 

 

Mutual funds held in rabbi trusts
13,638

 
13,638

 
13,638

 

 

Loans, net
24,882,331

 
24,732,689

 

 

 
24,732,689

GGL/SBA loans servicing asset
4,186

 
4,186

 

 

 
4,186

Derivative assets
11,336

 
11,336

 

 
11,336

 

 
 
 
 
 
 
 
 
 
 
Financial liabilities

 

 

 

 
 
Trading account liabilities
12,328

 
12,328

 

 
12,328

 

 
 
 
 
 
 
 
 
 
 
Non-interest bearing deposits
7,630,491

 
7,630,491

 

 
7,630,491

 

Non-time interest bearing deposits
13,958,048

 
13,958,048

 

 
13,958,048

 

Time deposits
4,854,149

 
4,826,356

 

 
4,826,356

 

     Total deposits
$
26,442,688

 
$
26,414,895

 
$

 
$
26,414,895

 
$

Federal funds purchased, other short-term borrowings and other short-term liabilities
207,580

 
207,580

 
207,580

 

 

Long-term debt
1,656,647

 
1,658,790

 

 
1,658,790

 

Earnout liabilities
11,348

 
11,348

 

 

 
11,348

Derivative liabilities
25,494

 
25,494

 

 
19,551

 
5,943

 
 
 
 
 
 
 
 
 
 

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Table of Contents

 
December 31, 2017

(in thousands)
Carrying Value
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Financial assets
 
 
 
 
 
 
 
 
 
Total cash, cash equivalents, restricted cash, and restricted cash equivalents
$
932,933

 
$
932,933

 
$
932,933

 
$

 
$

Trading account assets
3,820

 
3,820

 
522

 
3,298

 

Mortgage loans held for sale
48,024

 
48,024

 

 
48,024

 

Other loans for sale
11,356

 
11,356

 

 

 
11,356

Investment securities available for sale
3,987,069

 
3,987,069

 
85,836

 
3,899,298

 
1,935

Private equity investments
15,771

 
15,771

 

 

 
15,771

Mutual funds held in rabbi trusts
14,140

 
14,140

 
14,140

 

 

Loans, net
24,538,196

 
24,507,141

 

 

 
24,507,141

GGL/SBA loans servicing asset
4,101

 
4,101

 

 

 
4,101

Derivative assets
11,722

 
11,722

 

 
11,722

 

 
 
 
 
 
 
 
 
 
 
Financial liabilities
 
 
 
 
 
 
 
 
 
Trading account liabilities
1,000

 
1,000

 

 
1,000

 

 
 
 
 
 
 
 
 
 
 
Non-interest bearing deposits
7,686,339

 
7,686,339

 

 
7,686,339

 

Non-time interest bearing deposits
13,941,814

 
13,941,814

 

 
13,941,814

 

Time deposits
4,519,747

 
4,523,661

 

 
4,523,661

 

     Total deposits
$
26,147,900

 
$
26,151,814

 
$

 
$
26,151,814

 
$

Federal funds purchased, other short-term borrowings and other short-term liabilities
161,190

 
161,190

 
161,190

 

 

Long-term debt
1,706,138

 
1,721,814

 

 
1,721,814

 

Earnout liabilities
11,348

 
11,348

 

 

 
11,348

Derivative liabilities
17,097

 
17,097

 

 
12,767

 
4,330

 
 
 
 
 
 
 
 
 
 
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 June 30, 2018 and December 31, 2017, 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.

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Table of Contents

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 sheet. Fair value changes are recorded as a component of non-interest income. As of June 30, 2018, the notional amount of customer related interest rate derivative financial instruments, including both the customer position and the offsetting position, was $1.67 billion, an increase of $201.4 million compared to December 31, 2017.
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 $5.9 million and $4.3 million at June 30, 2018 and December 31, 2017, 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. During the three months ended June 30, 2018, Synovus recorded a $2.3 million valuation adjustment to the Visa derivative following Visa's announcement on June 26, 2018 that it would deposit $600 million into its litigation escrow account. 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 changes to Synovus' estimate. See "Part II - Item 8. Financial Statements and Supplementary Data - Note 18 - Visa Shares and Related Agreements" of Synovus' 2017 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 June 30, 2018 and December 31, 2017, Synovus had commitments to fund at a locked interest rate, primarily fixed-rate mortgage loans to customers in the amount of $69.7 million and $49.3 million, respectively. Fair value adjustments related to these commitments resulted in a gain of $366 thousand and a loss of $(416) thousand for the six months ended June 30, 2018 and 2017, respectively, which was recorded as a component of mortgage banking income in the consolidated statements of income.
At June 30, 2018 and December 31, 2017, outstanding commitments to sell primarily fixed-rate mortgage loans amounted to $86.0 million and $72.5 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 $(119) thousand and $(1.7) million for the six months ended June 30, 2018 and 2017, 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 June 30, 2018, collateral totaling $30.6 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. At June 30, 2018 and December 31, 2017, Synovus had a variation margin of $8.9 million and $1.5 million, respectively, reducing the derivative asset.

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Table of Contents

The impact of derivative instruments on the Consolidated Balance Sheets at June 30, 2018 and December 31, 2017 is presented below.
 
Fair Value of Derivative Assets
 
Fair Value of Derivative Liabilities

(in thousands)
Location on Consolidated Balance Sheets
 
June 30, 2018
 
December 31, 2017
 
Location on Consolidated Balance Sheets
 
June 30, 2018
 
December 31, 2017
Derivatives not designated
  as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
Other assets
 
$
10,034

 
$
10,786

 
Other liabilities
 
$
19,303

 
$
12,638

Mortgage derivatives
Other assets
 
1,302

 
936

 
Other liabilities
 
248

 
129

Visa derivative
 
 

 

 
Other liabilities
 
5,943

 
4,330

 Total derivatives not
  designated as hedging
  instruments    
 
 
$
11,336

 
$
11,722

 
 
 
$
25,494

 
$
17,097

 
 
 
 
 
 
 
 
 
 
 
 
The pre-tax effect of fair value hedges on the consolidated statements of income for the six and three months ended June 30, 2018 and 2017 is presented below.
 
 
Location of Gain (Loss) Recognized in Income
 
Gain (Loss) Recognized in Income
(in thousands)
 
 
Six Months Ended June 30,
Derivatives not designated as hedging instruments
 
 
2018
 
2017
Interest rate contracts(1)    
 
Other non-interest income
 
$
(9
)
 
$
(1
)
Mortgage derivatives(2)    
 
Mortgage banking income
 
247

 
(2,073
)
Total
 
 
 
$
238

 
$
(2,074
)
 
 
 
 
 
 
 
 
 
Location of Gain (Loss) Recognized in Income
 
Gain (Loss) Recognized in Income
(in thousands)
 
 
Three Months Ended June 30,
Derivatives not designated as hedging instruments
 
 
2018
 
2017
Interest rate contracts(1)    
 
Other non-interest income
 
$
(16
)
 
$

Mortgage derivatives(2)    
 
Mortgage banking income
 
(680
)
 
(289
)
Total
 
 
 
$
(696
)
 
$
(289
)
 
 
 
 
 
 
 
(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.

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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 six and three months ended June 30, 2018 and 2017.

Six Months Ended June 30,
 
Three Months Ended June 30,
(in thousands, except per share data)
2018
 
2017
 
2018
 
2017
Basic Net Income Per Common Share:
 
 
 
 
 
 
 
Net income available to common shareholders
$
209,229

 
$
142,742

 
$
108,622

 
$
73,444

Weighted average common shares outstanding
118,531

 
122,251

 
118,397

 
122,203

Net income per common share, basic
$
1.77

 
$
1.17

 
$
0.92

 
$
0.60

Diluted Net Income Per Common Share:
 
 
 
 
 
 
 
Net income available to common shareholders
$
209,229

 
$
142,742

 
$
108,622

 
$
73,444

Weighted average common shares outstanding
118,531

 
122,251

 
118,397

 
122,203

Potentially dilutive shares from outstanding equity-based awards and Earnout Payments
698

 
792

 
742

 
824

Weighted average diluted common shares
119,229

 
123,043

 
119,139

 
123,027

Net income per common share, diluted
$
1.75

 
$
1.16

 
$
0.91

 
$
0.60

 
 
 
 
 
 
 
 
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 stock 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 June 30, 2018 and 2017, there were 2.2 million potentially dilutive shares related to the Warrant to purchase shares of common stock that were outstanding during 2018 and 2017 but were not included in the computation of diluted net income per common share because the effect would have been anti-dilutive.

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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. 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. At June 30, 2018, Synovus had a total of 4.9 million shares of its authorized but unissued common stock reserved for future grants under the 2013 Omnibus 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. Vesting for grants made in 2018 accelerates upon retirement for plan participants who have reached age 65 and who also have no less than 10 years of service at the date of their election to retire. Market restricted share units and performance share units are granted at a defined target level and are compared annually to required market and performance metrics to determine actual 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 $8.3 million and $4.4 million for the six and three months ended June 30, 2018, respectively, and $6.8 million and $3.5 million for the six and three months ended June 30, 2017, respectively. Accelerated share-based compensation expense associated with the provision in 2018 of a retirement vesting provision was approximately $200 thousand and $30 thousand for the six and three months ended June 30, 2018 for retirement eligible employees.
Stock Options
No stock option grants were made during the six months ended June 30, 2018. At June 30, 2018, there were 655 thousand outstanding stock options to purchase shares of common stock with a weighted average exercise price of $16.92 per share.
Restricted Share Units, Performance Share Units, and Market Restricted Share Units
During the six months ended June 30, 2018, Synovus awarded 234 thousand restricted share units that have a service-based vesting period of three years and awarded 87 thousand performance share units that vest upon service and performance conditions. Synovus also granted 58 thousand market restricted share units during the six months ended June 30, 2018. The weighted average grant-date fair value of the awarded restricted share units, performance share units and market restricted share units was $47.67 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) and return on average tangible common equity (ROATCE) 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) and ROATCE (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 June 30, 2018, including dividend equivalents granted, there were 910 thousand restricted share units, performance share units and market restricted share units outstanding with a weighted average grant-date fair value of $40.82 per share.

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Note 12 - Non-interest Income

The following table reflects revenue disaggregated by revenue type and line of business for the six and three months ended June 30, 2018 and 2017.

Non-interest Income by Line of Business

For the Six Months Ended June 30, 2018
(in thousands)
Total
 
Community Banking
 
Corporate Banking
 
Retail Banking
 
Financial Management Services
 
Other
Service charges on deposit accounts
$
39,938

 
$
11,404

 
$
985

 
$
26,518

 
$

 
$
1,031

Fiduciary and asset management fees
27,419

 

 

 

 
27,419

 

Card fees
21,032

 
420

 

 
20,612

 

 

Brokerage revenue
17,596

 

 

 

 
17,596

 

Insurance revenue
3,092

 

 

 

 
3,092

 

Other fees
1,588

 

 

 
1,033

 

 
555

 
$
110,665

 
$
11,824

 
$
985

 
$
48,163

 
$
48,107

 
$
1,586

 
 
 
 
 
 
 
 
 
 
 
 
Other revenues(1)
29,768

 
5,841

 
3,581

 
3,242

 
11,408

 
5,696

Total non-interest income
$
140,433

 
$
17,665

 
$
4,566

 
$
51,405

 
$
59,515

 
$
7,282

 
 
 
 
 
 
 
 
 
 
 
 

 
For the Six Months Ended June 30, 2017
(in thousands)
Total
 
Community Banking
 
Corporate Banking
 
Retail Banking
 
Financial Management Services
 
Other
Service charges on deposit accounts
$
40,370

 
$
11,415

 
$
887

 
$
26,970

 
$

 
$
1,098

Fiduciary and asset management fees
24,676

 

 

 

 
24,676

 

Card fees
19,885

 
437

 

 
19,448

 

 

Brokerage revenue
14,436

 

 

 

 
14,436

 

Insurance revenue
2,364

 

 

 

 
2,364

 

Other fees
1,590

 

 

 
1,060

 

 
530

 
$
103,321

 
$
11,852

 
$
887

 
$
47,478

 
$
41,476

 
$
1,628

 
 
 
 
 
 
 
 
 
 
 
 
Other revenues(1)
37,218

 
4,641

 
4,376

 
3,183

 
13,413

 
11,605

Total non-interest income
$
140,539

 
$
16,493

 
$
5,263

 
$
50,661

 
$
54,889

 
$
13,233

 
 
 
 
 
 
 
 
 
 
 
 
(1) Other revenues primarily relate to revenues not derived from contracts with customers.

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Non-interest Income by Line of Business

For the Three Months Ended June 30, 2018
(in thousands)
Total
Community Banking
 
Corporate Banking
 
Retail Banking
 
Financial Management Services
 
Other
Service charges on deposit accounts
$
19,999

$
5,724

 
$
453

 
$
13,096

 
$

 
$
726

Fiduciary and asset management fees
13,983


 

 

 
13,983

 

Card fees
10,833

215

 

 
10,618

 

 

Brokerage revenue
8,900


 

 

 
8,900

 

Insurance revenue
1,879


 

 

 
1,879

 

Other fees
756


 

 
474

 

 
282

 
$
56,350

$
5,939

 
$
453

 
$
24,188

 
$
24,762

 
$
1,008

 
 
 
 
 
 
 
 
 
 
 
Other revenues(1)
17,037

3,390

 
1,848

 
1,713

 
5,565

 
4,521

Total non-interest income
$
73,387

$
9,329


$
2,301


$
25,901


$
30,327


$
5,529

 
 
 
 
 
 
 
 
 
 
 
 
For the Three Months Ended June 30, 2017
(in thousands)
Total
Community Banking
 
Corporate Banking
 
Retail Banking
 
Financial Management Services
 
Other
Service charges on deposit accounts
$
20,252

$
5,644

 
$
428

 
$
13,533

 
$

 
$
647

Fiduciary and asset management fees
12,524


 

 

 
12,524

 

Card fees
10,041

218

 

 
9,823

 

 

Brokerage revenue
7,210


 

 

 
7,210

 

Insurance revenue
1,060


 

 

 
1,060

 

Other fees
748


 

 
486

 

 
262

 
$
51,835

$
5,862

 
$
428

 
$
23,842

 
$
20,794

 
$
909

 
 
 
 
 
 
 
 
 
 
 
Other revenues(1)
16,866

2,993

 
2,758

 
1,618

 
6,816

 
2,681

Total non-interest income
$
68,701

$
8,855

 
$
3,186

 
$
25,460

 
$
27,610

 
$
3,590

 
 
 
 
 
 
 
 
 
 
 
(1) Other revenues primarily relate to revenues not derived from contracts with customers.

Following is a discussion of key revenues within the scope of the new revenue guidance:

Service Charges on Deposit Accounts: Revenue from service charges on deposit accounts is earned through cash management, wire transfer, and other deposit-related services, as well as overdraft, non-sufficient funds, account management and other deposit-related fees. Revenue is recognized for these services either over time, corresponding with deposit accounts' monthly cycle, or at a point in time for transaction related services and fees. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers' accounts.

Fiduciary and Asset Management Fees: Fiduciary and asset management fees are primarily comprised of fees earned from the management and administration of trusts and other customer assets. Synovus' performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based upon the month-end market value of the assets under management and the applicable fee rate. Payment is generally received a few days after month-end through a direct charge to customers' accounts. Synovus does not earn performance-based incentives.

Card Fees: Card fees consist primarily of interchange fees from consumer credit and debit cards processed by card association networks, as well as merchant discounts, and other card related services. Interchange rates are generally set by the credit card associations and based on purchase volumes and other factors. Interchange fees and merchant discounts are recognized concurrently with the delivery of service on a daily basis as transactions occur. Payment is typically received immediately or in the following month. Card fees are reported net of certain associated expense items including loyalty program expenses and network expenses.

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Brokerage Revenue: Brokerage revenue consists primarily of commissions. Additionally, brokerage revenue includes advisory fees earned from the management of customer assets. Advisory fees for brokerage services are recognized and collected monthly and are based upon the month-end market value of the assets under management at a rate predetermined in the contract. Transactional revenues are based on the size and number of transactions executed at the client's direction and are generally recognized on the trade date with payment received on the settlement date.

Insurance Revenue: Insurance revenue primarily consists of commissions received on annuity and life product sales. The commissions are recognized as revenue when the customer executes an insurance policy with the insurance carrier. In some cases, Synovus receives payment of trailing commissions each year when the customer pays its annual premium. For the six and three months ended June 30, 2018, Synovus recognized an immaterial amount of insurance trailing commissions related to performance obligations satisfied in prior periods.

Other Fees: Other fees primarily consist of revenues generated from safe deposit box rental fees and lockbox services. Fees are recognized over time, on a monthly basis, as Synovus' performance obligation for services is satisfied. Payment is received upfront for safe deposit box rentals and in the following month for lockbox services.
Contract Balances
A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity's obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. Synovus' non-interest revenue streams are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end market values. Consideration is often received immediately or shortly after Synovus satisfies its performance obligation and revenue is recognized. Synovus does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of June 30, 2018 and December 31, 2017, Synovus did not have any significant contract balances.
Note 13 - 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) may generally be canceled by providing notice to the borrower.

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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 sheet. Additionally, unearned fees relating to letters of credit are recorded within other liabilities on the consolidated balance sheet. These amounts are not material to Synovus' consolidated balance sheet.
Unfunded letters of credit and lending commitments at June 30, 2018 and December 31, 2017 are presented below.
(in thousands)
June 30, 2018
 
December 31, 2017
Letters of credit*
$
179,860

 
$
153,372

Commitments to fund commercial and industrial loans
5,361,671

 
5,090,827

Commitments to fund commercial real estate, construction, and land development loans
1,652,834

 
1,567,583

Commitments under home equity lines of credit
1,179,074

 
1,137,714

Unused credit card lines
743,376

 
779,254

Other loan commitments
365,861

 
351,358

Total unfunded lending commitments and letters of credit
$
9,482,676

 
$
9,080,108

 
 
 
 
* Represent the contractual amount net of risk participations of approximately $70 million and $77 million at June 30, 2018 and December 31, 2017, respectively.

Merchant Services

In accordance with credit and debit card association rules, Synovus sponsors merchant processing servicers that process credit and debit card transactions on behalf of various merchants. In connection with these services, a liability may arise in the event of a billing dispute between the merchant and a cardholder that is ultimately resolved in the cardholder's favor. If the merchant defaults on its obligation to reimburse the cardholder, the cardholder, through its issuing bank, generally has until six months after the date of the transaction to present a chargeback to the merchant processor, which is primarily liable for any losses on covered transactions. However, if the merchant processor fails to meet its obligation to reimburse the cardholder for disputed transactions, then Synovus, as the sponsor, could be held liable for the disputed amount. Synovus mitigates this risk through its contractual arrangements with the merchant processing servicers and the merchants and by withholding future settlements, by retaining cash reserve accounts or by obtaining other security. During the six months ended June 30, 2018 and 2017, the sponsored entities processed and settled $34.35 billion and $30.42 billion, respectively, in total transactions. For the six months ended June 30, 2018 and 2017, Synovus incurred an immaterial amount of losses in connection with these chargebacks. During July 2018, Synovus began to accrue a receivable for chargebacks associated with one merchant processing relationship.

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 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 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 June 30, 2018 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 future event or events 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,

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management currently estimates the aggregate range from our outstanding litigation is from zero to $5 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

Pending Acquisition of FCB Financial Holdings, Inc.

On July 23, 2018, Synovus entered into the Merger Agreement by and among Synovus, FCB and Azalea Merger Sub Corp.  pursuant to which Synovus will acquire FCB in a reverse triangular merger. At the effective time of the Merger, each outstanding share of FCB Class A common stock, par value $0.001 per share, will be converted into the right to receive, without interest, 1.055 shares of Synovus common stock, par value $1.00 per share.  The Merger Agreement has been unanimously approved by both companies’ Board of Directors.  The transaction is subject to customary closing conditions, including approval of Synovus and FCB shareholders and approval of state and federal regulators, and is expected to close by the first quarter of 2019. 

FCB operates 50 full service banking centers through its wholly-owned banking subsidiary, Florida Community Bank.  Following closing, Florida Community Bank will merge with and into Synovus Bank and operate under the Synovus brand.   


Redemption of Series C Preferred Stock

On August 1, 2018, Synovus redeemed all 5,200,000 outstanding shares of Series C Preferred Stock for a cash price of $25.00 per share, without interest, for an aggregate redemption price of $130 million and paid a dividend of $2.6 million on the Series C Preferred Stock. The redemption of the Series C Preferred Stock was funded primarily with proceeds from Synovus' public offering of $200 million of Series D Preferred Stock completed on June 21, 2018. Concurrent with the redemption, Synovus will recognize an extinguishment loss of $4.1 million to net income available to common shareholders. The $4.1 million extinguishment loss will be recognized in a manner similar to the treatment of dividends paid on preferred stock during the three months ending September 30, 2018.

       







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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
impact 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 regulatory initiatives and 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 operating or security systems as a result of cyber attacks or similar acts;

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(12)
 
our ability to identify and address cyber-security risks such as data security breaches, malware, "denial of service" attacks, "ransomware", "hacking" and identity theft, a failure of which could disrupt our business and result in the disclosure of and/or misuse or misappropriation of confidential or proprietary information, disruption or damage of our systems, increased costs, significant losses, 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 Federal Tax Reform could have an adverse impact on our business or our customers, including with respect to demand and pricing for our loan products;
(15)
 
the risk that we could realize losses if we sell non-performing assets and the proceeds we receive are lower than the carrying value of such assets;
(16)
 
the risk that we may be exposed to potential losses in the event of fraud and/or theft, or in the event that a third party vendor or obligor fails to pay amounts due to us under that relationship;
(17)
 
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 or realize anticipated benefits from such transactions;
(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, 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 D Preferred Stock, any repurchases of common stock or any 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 we may be required to take additional charges with respect to our deferred tax assets as a result of Federal Tax Reform in the event our estimates prove inaccurate;
(26)
 
the costs and effects of litigation, investigations, inquiries or similar matters, or adverse facts and developments related thereto;
(27)
 
risks related to the fluctuation in our stock price;
(28)
 
the effects of any damages to our reputation resulting from developments related to any of the items identified above;
(29)
 
the risk that the required shareholder approvals of the Merger with FCB may not be obtained;
(30)
 
the risk that Synovus or FCB may be unable to obtain all of the regulatory approvals required to complete the Merger;

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(31)
 
the risk that the other conditions to closing the Merger with FCB may not be satisfied;
(32)
 
the risk that the length of time necessary to consummate the Merger with FCB may be longer than anticipated for various reasons;
(33)
 
the risk that the businesses of Synovus and FCB will not be integrated successfully or that the integration may take longer than expected;
(34)
 
the risk that the cost savings, synergies, growth, and other benefits from the Merger with FCB may not be fully realized or may take longer to realize than expected;
(35)
 
the risk that management’s time and attention will be diverted to issues associated with the Merger with FCB rather than our ongoing businesses;
(36)
 
the risk that costs associated with the integration of the businesses of Synovus and FCB will be higher than anticipated;
(37)
 
the risk of litigation arising in connection with the Merger and that could cause the transaction to be more costly than expected or delay its completion;
(38)
 
the risk that events could lead to the termination of the Merger Agreement (or otherwise result in payment of termination fee);
(39)
 
the risk of business disruption following the Merger; and
(40)
 
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 "Part I - Item 1A. 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' 2017 Form 10-K and our other periodic filings, including quarterly reports on Form 10-Q and current reports on Form 8-K, that we file from time to time with the SEC. All written or oral forward-looking statements that are made by or are attributable to Synovus are expressly qualified by this cautionary notice. You should not place undue reliance on any forward-looking statements since those statements speak only as of the date on which the statements are made. Synovus undertakes no obligation to update any forward-looking information and statements, whether written or oral, to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of new information or unanticipated events, except as may otherwise be required by law.

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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 250 branches and 334 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 six and three months ended June 30, 2018 and financial condition as of June 30, 2018 and December 31, 2017. 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’ 2017 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 our financial performance.

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Table of Contents

DISCUSSION OF RESULTS OF OPERATIONS
Consolidated Financial Highlights
 
Six Months Ended June 30,
 
Three Months Ended June 30,
(dollars in thousands, except per share data)
2018
 
2017
 
Change
 
2018
 
2017
 
Change
Net interest income
$
558,861

 
$
491,024

 
13.8
 %
 
$
284,577

 
$
251,097

 
13.3
 %
Provision for loan losses
24,566

 
18,934

 
29.7
 
11,790

 
10,260

 
14.9

Non-interest income
140,433

 
140,539

 
(0.1)
 
73,387

 
68,701

 
6.8

Adjusted non-interest income(1)
144,822

 
136,038

 
6.5
 
74,720

 
70,054

 
6.7

Total revenues (2)
700,590

 
623,896

 
12.3
 
359,260

 
319,799

 
12.3

Non-interest expense
399,234

 
389,133

 
2.6
 
204,057

 
191,747

 
6.4

Adjusted non-interest expense(1)
400,561

 
382,048

 
4.8
 
202,734

 
191,442

 
5.9

Income before income taxes
275,494

 
223,496

 
23.3
 
142,117

 
117,791

 
20.7

Net income
214,348

 
147,861

 
45.0
 
111,181

 
76,003

 
46.3

Net income available to common shareholders
209,229

 
142,742

 
46.6
 
108,622

 
73,444

 
47.9

Net income per common share, basic
1.77

 
1.17

 
51.2
 
0.92

 
0.60

 
52.7

Net income per common share, diluted
1.75

 
1.16

 
51.3
 
0.91

 
0.60

 
52.7

Adjusted net income per common share, diluted(1)
1.78

 
1.17

 
52.1
 
0.92

 
0.61

 
52.6

Net interest margin(3)
3.82
%
 
3.46
%
 
36
  bps
 
3.86
%
 
3.51
%
 
35
  bps
Net charge-off ratio(3)
0.18

 
0.19

 
(1
)
 
0.29

 
0.26

 
3

Return on average assets(3)
1.38

 
0.98

 
40

 
1.42

 
1.00

 
42

Adjusted return on average assets(1)(3)
1.40

 
0.99

 
41

 
1.43

 
1.01

 
42

Efficiency ratio
56.97

 
62.31

 
(534
)
 
56.78

 
59.90

 
(312
)
Adjusted efficiency ratio(1)
56.90

 
60.87

 
(397
)
 
56.41

 
59.56

 
(315
)
 
 
 
 
 
 
 
 
 
 
 
 
(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 gains (losses), net.
(3) Annualized
 
June 30, 2018
 
March 31, 2018
 
Sequential Quarter Change
 
June 30, 2017
 
Year-Over-Year Change
(dollars in thousands, except per share data)
Loans, net of deferred fees and costs
$
25,134,056

 
$
24,883,037

 
$
251,019

 
$
24,430,512

 
$
703,544

Total average loans
24,946,307

 
24,852,399

 
93,908

 
24,350,004

 
596,303

Total deposits
26,442,688

 
26,253,507

 
189,181

 
25,218,816

 
1,223,872

Total average deposits
26,268,074

 
25,788,073

 
480,001

 
24,991,708

 
1,276,366

Average core deposits (1)
24,345,157

 
23,836,163

 
508,994

 
23,612,149

 
733,008

 
 
 
 
 
 
 
 
 
 
Non-performing assets ratio
0.50
%
 
0.53
%
 
(3
) bps
 
0.73
%
 
(23
) bps
Non-performing loans ratio
0.47

 
0.48

 
(1
)
 
0.65

 
(18
)
Past due loans over 90 days
0.01

 
0.02

 
(1
)
 
0.02

 
(1
)
 
 
 
 
 
 
 
 
 
 
Common equity Tier 1 capital (transitional)
$
2,838,616

 
$
2,801,073

 
$
37,543

 
$
2,734,983

 
$
103,633

Tier 1 capital
3,156,805

 
2,924,109

 
232,696

 
2,829,340

 
327,465

Total risk-based capital
3,668,904

 
3,442,921

 
225,983

 
3,340,155

 
328,749

Common equity Tier 1 capital ratio (transitional)
10.12
%
 
10.09
%
 
3
  bps
 
10.02
%
 
10
  bps
Tier 1 capital ratio
11.25

 
10.53

 
72

 
10.37

 
88

Total risk-based capital ratio
13.08

 
12.40

 
68

 
12.24

 
84

Total shareholders’ equity to total assets ratio
9.98

 
9.39

 
59

 
9.77

 
21

Tangible common equity ratio(1)
8.77

 
8.79

 
(2
)
 
9.15

 
(38
)
Return on average common equity(2)
15.39

 
14.62

 
77

 
10.34

 
505

Adjusted return on average common equity(1)(2)
15.59

 
14.86

 
73

 
10.49

 
510

Adjusted return on average tangible common equity(1)(2)
15.97

 
15.23

 
74

 
10.75

 
522

 
 
 
 
 
 
 
 
 
 
(1) See “Non-GAAP Financial Measures” in this Report for the applicable reconciliation to the most comparable GAAP measure.
(2) Quarter annualized


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Table of Contents

Results for the Six and Three Months Ended June 30, 2018
Net income available to common shareholders for the first six months of 2018 was $209.2 million, or $1.75 per diluted common share, an increase of 46.6% and 51.3%, respectively, compared to the first six months of 2017. Net income available to common shareholders for the second quarter of 2018 was $108.6 million, or $0.91 per diluted common share, an increase of 47.9% and 52.7%, respectively, compared to the second quarter of 2017. Return on average assets for the six months ended June 30, 2018 was 1.38%, up 40 basis points from the same period of 2017, and return on average assets for the second quarter of 2018 was 1.42%, up 42 basis points from the second quarter of 2017. Results for the first half of 2018 were driven by revenue growth and also reflect the benefit from a lower effective tax rate, due to the reduction of the Federal tax rate.
Total revenues, excluding investment securities losses, for the first half of 2018 were $700.6 million, up 12.3% compared to the same period in 2017. Total revenues, excluding investment securities losses, for the second quarter were $359.3 million, up 12.3% compared to the second quarter a year ago. Net interest income for the first half of 2018 was $558.9 million, an increase of $67.8 million, or 13.8%, compared to $491.0 million for the same period in 2017. The net interest margin was 3.82% for the six months ended June 30, 2018, an increase of 36 basis points from 3.46% for the six months ended June 30, 2017. The yield on earning assets was 4.39%, up 46 basis points compared to the six months ended June 30, 2017 and the effective cost of funds increased 10 basis points to 0.57%. The yield on loans was 4.79%, an increase of 48 basis points from the six months ended June 30, 2017 and the yield on investment securities was 2.34%, an increase of 25 basis points from the six months ended June 30, 2017. On a sequential quarter basis, net interest income increased by $10.3 million and the net interest margin increased by 8 basis points to 3.86%. The yield on earning assets was 4.47%, up 16 basis points from the first quarter of 2018. This increase was driven by an 18 basis point increase in loan yields. The effective cost of funds was 0.61% for the second quarter of 2018, up 8 basis points from the first quarter of 2018. The recent rate increases favorably impacted net interest income and net interest margin for 2018.
Non-interest income for the first six months of 2018 was $140.4 million compared to $140.5 million for the first six months of 2017. Non-interest income for the second quarter of 2018 was $73.4 million, up $4.7 million, or 6.8%, compared to the second quarter of 2017. Adjusted non-interest income, which excludes investment securities gains (losses) and decrease in fair value of private equity investments, was up $8.8 million, or 6.5%, for the first six months of 2018 compared to 2017 and up $4.7 million, or 6.7%, for the second quarter of 2018 compared to the second quarter of 2017. Synovus experienced growth in multiple categories during the first half of 2018 compared to the same time period in 2017 including an increase of $6.6 million, or 16.0%, in combined fiduciary and asset management fees, brokerage, and insurance revenues. See "Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP Financial Measures" of this Report for applicable reconciliation to GAAP measure.
Non-interest expense for the first six months of 2018 increased $10.1 million, or 2.6%, compared to the first six months of 2017 and non-interest expense for the second quarter of 2018 increased $12.3 million, or 6.4%, compared to the second quarter of 2017. The second quarter of 2018 included a $2.3 million expense for a valuation adjustment to the Visa derivative, offset in part by a $1.4 million benefit from a recovery of litigation settlement expense. The first quarter of 2018 included a $2.6 million reduction in litigation contingency accruals and the first quarter of 2017 included $6.5 million in restructuring charges. Adjusted non-interest expense, which excludes valuation adjustment to Visa derivative, restructuring charges, net, amortization of intangibles, and litigation settlement/contingency expense, increased $18.5 million, or 4.8%, for the first half of 2018 compared to the first half of 2017. Strong operating leverage for the first half of 2018 resulted in an efficiency ratio of 56.97%, improved from 62.31% for the first half of 2017. The adjusted efficiency ratio for the first six months of 2018 was 56.90%, down 397 basis points from the same period a year ago. See "Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP Financial Measures" of this Report for applicable reconciliation to GAAP measures.
Credit quality metrics continued to be favorable during the second quarter of 2018 with a reduction in both the non-performing loan ratio and non-performing asset ratio. Non-performing loans were $117.3 million at June 30, 2018, down $2.8 million, or 2.3%, from the prior quarter and down $42.0 million from June 30, 2017. The non-performing loan ratio was 0.47% at June 30, 2018, as compared to 0.48% in the prior quarter and 0.65% a year ago. Total non-performing assets were $126.3 million at June 30, 2018, down $4.8 million, or 3.7%, from the prior quarter and down $52.6 million, or 29.4%, from a year ago. The non-performing assets ratio was 0.50% at June 30, 2018, down 3 basis points from the prior quarter and down 23 basis points from a year ago. Net charge-offs for the six months ended June 30, 2018 were $22.1 million, or 0.18% as a percentage of average loans annualized, compared to $22.6 million, or 0.19%, as a percentage of average loans annualized for the six months ended June 30, 2017. Loans past due over 90 days were 0.01% of total loans at June 30, 2018 as compared to 0.02% at June 30, 2017. For the six months ended June 30, 2018, the provision for loan losses was $24.6 million, an increase of $5.6 million, or 29.7%, compared to the six months ended June 30, 2017. The increase in provision expense for the six months ended June 30, 2018 compared to the six months ended June 30, 2017 is primarily due to loan growth as well as a slightly increased level of charge-offs above reserves. The allowance for loan losses at June 30, 2018 was $251.7 million, or 1.00% of total loans, compared to $249.3 million, or 1.01% of total loans, at December 31, 2017 and $248.1 million, or 1.02% of total loans, at June 30, 2017.

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Table of Contents

At June 30, 2018, total loans were $25.13 billion, an increase of $346.6 million, or 2.8% annualized, and $703.5 million or 2.9%, compared to December 31, 2017 and June 30, 2017, respectively. Year-over-year loan growth was driven by a $532.5 million or 4.5% increase in C&I loans and a $945.8 million or 17.9% increase in consumer loans, with our lending partnerships growing $744.4 million and mortgage loans growing $280.3 million. This growth was partially offset by a $778.1 million or 10.5% decline in CRE loans.
During the second quarter of 2018, total average deposits increased $480.0 million, or 7.5% annualized, compared to the first quarter of 2018, and increased $1.28 billion, or 5.1%, compared to the second quarter of 2017. Average brokered deposits declined $29.0 million compared to the prior quarter. Average core deposits, during the second quarter of 2018, increased $509.0 million, or 8.6% annualized, compared to the prior quarter, and increased $733.0 million, or 3.1%, compared to the second quarter of 2017. During the first quarter of 2018, Synovus obtained FDIC approval to report deposits related to our sweep money market product, offered by Synovus Securities, as a component of core deposits. This product was reported as a brokered deposit through February of 2018. The second quarter average balance in these accounts totaled $310.0 million, and resulted in an increase of $198.0 million in average core deposits for the quarter, due to the reclassification. See “Non-GAAP Financial Measures” in this Report for the applicable reconciliation to the most comparable GAAP measure.
On June 21, 2018, Synovus completed a public offering of $200 million of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series D. The offering generated net proceeds of $195 million, which were largely used to fund the redemption of all of the outstanding shares of Series C Preferred Stock on August 1, 2018 for an aggregate redemption price of $130 million.
On January 23, 2018, Synovus announced a share repurchase program of up to $150 million to be completed during 2018. As of June 30, 2018, Synovus had repurchased under this program a total of $76.8 million, or 1.5 million shares of its common stock, at an average price of $52.72 per share. Additionally, during the first quarter of 2018, Synovus increased the quarterly common stock dividend by 67% to $0.25 per share effective with the quarterly dividend declared during the first quarter of 2018. Total shareholders’ equity was $3.17 billion at June 30, 2018 and $3.0 billion at December 31, 2017. Return on average common equity annualized for the second quarter of 2018 was 15.39%, an increase of 505 basis points from the same period in 2017. Adjusted return on average common equity annualized for the second quarter of 2018 was 15.59%, an improvement of 510 basis points from the same period in 2017. Adjusted return on average tangible common equity annualized for the second quarter of 2018 was 15.97%, an increase of 522 basis points from the same period in 2017. See Non-GAAP Financial Measures" in this Report for applicable reconciliation to the most comparable GAAP measures.
2018 Expectations
For the full year 2018 as compared to the full year 2017, management expectations are noted below:
Average loan growth of 4% to 6%
Average total deposits growth of 4% to 6%
Net interest income growth of 11% to 13%
Adjusted non-interest income(1) growth of 4% to 6%
Total non-interest expense growth of 0% to 3%
Effective income tax rate of 23% to 24%
Net charge-off ratio of 15 to 25 bps
Common share repurchases of up to $150 million
(1) See Non-GAAP Financial Measures" in this Report for applicable reconciliation to the most comparable GAAP measure.

Changes in Financial Condition
During the six months ended June 30, 2018, total assets increased $518.5 million from $31.22 billion at December 31, 2017 to $31.74 billion. The principal components of this increase were an increase in loans, net of deferred fees and costs, of $346.6 million and an increase in interest bearing funds with the Federal Reserve of $152.2 million. An increase of $294.8 million in deposits and Synovus' $200 million preferred stock issuance completed on June 21, 2018 provided the funding source for the growth in assets.

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Table of Contents

Loans
The following table compares the composition of the loan portfolio at June 30, 2018, December 31, 2017, and June 30, 2017.
(dollars in thousands)
June 30, 2018
 
December 31, 2017
 
June 30, 2018 vs.
December 31, 2017 % Change(1)
 
June 30, 2017
 
June 30, 2018 vs.
June 30, 2017
% Change
Commercial, financial and agricultural
$
7,271,080

 
$
7,179,487

 
2.6
 %
 
$
6,993,817

 
4.0
 %
Owner-occupied
5,004,392

 
4,844,163

 
6.7

 
4,749,128

 
5.4

Total commercial and industrial
12,275,472

 
12,023,650

 
4.2

 
11,742,945

 
4.5

Investment properties
5,509,596

 
5,670,065

 
(5.7
)
 
6,035,664

 
(8.7
)%
1-4 family properties
720,710

 
781,619

 
(15.7
)
 
836,826

 
(13.9
)
Land and development
413,865

 
483,604

 
(29.1
)
 
549,744

 
(24.7
)
Total commercial real estate
6,644,171

 
6,935,288

 
(8.5
)
 
7,422,234

 
(10.5
)
Home equity lines
1,453,855

 
1,514,227

 
(8.0
)
 
1,563,167

 
(7.0
)
Consumer mortgages
2,750,935

 
2,633,503

 
9.0

 
2,470,665

 
11.3

Credit cards
238,424

 
232,676

 
5.0

 
225,900

 
5.5

Other consumer loans
1,793,916

 
1,473,451

 
43.9

 
1,031,639

 
73.9

Total consumer
6,237,130

 
5,853,857

 
13.2

 
5,291,371

 
17.9

Total loans
25,156,773

 
24,812,795

 
2.8

 
24,456,550

 
2.9

Deferred fees and costs, net
(22,717
)
 
(25,331
)
 
(20.8
)
 
(26,038
)
 
(12.8
)
Total loans, net of deferred fees and costs
$
25,134,056

 
$
24,787,464

 
2.8
 %
 
$
24,430,512

 
2.9
 %
 
 
 
 
 
 
 
 
 
 
(1) Percentage changes are annualized
At June 30, 2018, total loans were $25.13 billion, an increase of $346.6 million, or 2.8% annualized, and $703.5 million or 2.9%, compared to December 31, 2017 and June 30, 2017, respectively. Year-over-year loan growth was driven by a $532.5 million or 4.5% increase in C&I loans and a $945.8 million or 17.9% increase in consumer loans, with our lending partnerships growing $744.4 million and mortgage loans growing $280.3 million. This growth was partially offset by a $778.1 million or 10.5% decline in CRE loans.
Commercial Loans
Total commercial loans (which are comprised of C&I and CRE loans) at June 30, 2018 were $18.92 billion or 75.3% of the total loan portfolio, compared to $18.96 billion, or 76.5%, at December 31, 2017 and $19.17 billion, or 78.4%, at June 30, 2017.
At June 30, 2018 and December 31, 2017, Synovus had 30 and 25, respectively, commercial loan relationships with total commitments of $50 million or more (including amounts funded). The average funded balance of these relationships was approximately $35 million for both June 30, 2018 and December 31, 2017.
Commercial and Industrial Loans
The C&I loan portfolio represents the largest category of Synovus' total loan portfolio. 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 markets 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 June 30, 2018, approximately 93% of Synovus' C&I loans are secured by real estate, business equipment, inventory, and other types of collateral. C&I loans of $12.28 billion, representing 48.8% of the total loan portfolio, grew $251.8 million, or 4.2% annualized, from December 31, 2017 and $532.5 million, or 4.5%, from June 30, 2017. The growth in C&I loans was broad-based, driven by small business, premium finance, and senior housing.

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Table of Contents

Commercial and Industrial Loans by Industry
June 30, 2018
 
December 31, 2017
(dollars in thousands)
Amount
 
%(1)
 
Amount
 
%(1)
Health care and social assistance
$
2,863,586

 
23.3
%
 
$
2,764,907

 
23.0
%
Manufacturing
1,015,076

 
8.3

 
930,751

 
7.7

Retail trade
840,398

 
6.8

 
857,348

 
7.1

Real estate and rental and leasing
828,961

 
6.8

 
851,303

 
7.1

Finance and insurance
782,753

 
6.4

 
780,279

 
6.5

Other services
778,208

 
6.3

 
761,916

 
6.3

Professional, scientific, and technical services
727,213

 
5.9

 
771,809

 
6.4

Wholesale trade
687,157

 
5.6

 
675,741

 
5.6

Real estate other
597,073

 
4.9

 
586,707

 
4.9

Accommodation and food services
586,609

 
4.8

 
562,877

 
4.7

Construction
536,779

 
4.4

 
500,091

 
4.2

Transportation and warehousing
494,487

 
4.0

 
427,608

 
3.6

Other industries
452,432

 
3.7

 
438,312

 
3.6

Agriculture, forestry, fishing, and hunting
322,286

 
2.6

 
349,181

 
2.9

Administration, support, waste management, and remediation
263,902

 
2.1

 
273,189

 
2.3

Educational services
259,170

 
2.1

 
259,367

 
2.2

Information
239,382

 
2.0

 
232,264

 
1.9

Total commercial and industrial loans
$
12,275,472

 
100.0
%
 
$
12,023,650

 
100.0
%
 
 
 
 
 
 
 
 
(1) Loan balance in each category expressed as a percentage of total C&I loans.
At June 30, 2018, $7.27 billion of C&I loans, or 28.9% 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.
At June 30, 2018, $5.00 billion of C&I loans, or 19.9% of the total loan portfolio, represented loans originated for the purpose of financing owner-occupied properties. The financing of owner-occupied facilities is considered a C&I loan even though there is improved real estate as collateral. This treatment is a result of the credit decision process, which focuses on cash flow from operations of the business to repay the debt. The secondary source of repayment on these loans is the underlying real estate. These loans are predominately secured by owner-occupied 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 $6.64 billion, representing 26.4% of the total loan portfolio, decreased $291.1 million, or 8.5% annualized, from December 31, 2017 and decreased $778.1 million, or 10.5%, from June 30, 2017. The $291.1 million decline was driven by a $160.5 million decrease in the Investment Properties portfolio and a $69.7 million decrease in the non-strategic Land and Development portfolio. The decline in CRE is largely the result of the continued higher velocity of pay-off activity across the portfolio.
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 commercial development properties. Total investment properties loans as of June 30, 2018 were $5.51 billion, or 82.9% of the total CRE portfolio and 21.9% of the total loan portfolio, compared to $5.67 billion, or 81.8% of the total CRE portfolio and 22.9% of the total loan portfolio at December 31, 2017, a decrease of $160.5 million, or 5.7% annualized primarily due to a decline in office buildings and multi-family properties. Synovus' investment properties portfolio is well diversified by property type, geography (primarily within Synovus' primary market areas of Georgia, Alabama, South Carolina, Florida, and Tennessee), 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

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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 June 30, 2018, 1-4 family properties loans totaled $720.7 million, or 10.8% of the total CRE portfolio and 2.9% of the total loan portfolio, compared to $781.6 million, or 11.3% of the total CRE portfolio and 3.2% of the total loan portfolio at December 31, 2017.
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 LTV of the collateral and the capacity of the guarantor(s). Total land and development loans were $413.9 million at June 30, 2018, or 1.6% of the total loan portfolio, a decline of $69.7 million, or 29.1% annualized, from December 31, 2017. 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 June 30, 2018 totaled $6.24 billion, representing 24.8% of the total loan portfolio compared to $5.85 billion, or 23.6% of the total loan portfolio at December 31, 2017, and $5.29 billion, or 21.7% of the total loan portfolio at June 30, 2017. Consumer loans increased $383.3 million, or 13.2% annualized, from December 31, 2017 and $945.8 million, or 17.9%, from June 30, 2017. Consumer mortgages grew $117.4 million or 9.0% annualized, from December 31, 2017, and $280.3 million, or 11.3%, from June 30, 2017 given solid production in the private wealth management and physician categories as well as the continued addition of mortgage loan originators. HELOCs decreased $60.4 million or 8.0% from December 31, 2017. Credit card loans totaled $238.4 million at June 30, 2018, including $67.8 million of commercial credit card loans.
Other consumer loans increased $320.5 million, or 43.9% annualized, from December 31, 2017, and $762.3 million, or 73.9%, from June 30, 2017 primarily 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 June 30, 2018, these partnerships had combined balances of $1.4 billion, or 5.7% of the total loan portfolio.
Consumer loans, including those through our lending partnerships, 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 December 31, 2017. Revolving lines of credit were 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.
As of the most recent FICO score refresh on March 31, 2018, weighted-average FICO scores within the residential real estate portfolio were 774 for HELOCs and 785 for consumer mortgages. HELOC utilization rates (total amount outstanding as a percentage of total available lines) were 53.7% and 55.6% at June 30, 2018 and December 31, 2017, respectively. Additionally, we maintained loan-to-value ratios based upon prudent guidelines to ensure consistency with Synovus' overall risk philosophy. At June 30, 2018, 35% of home equity line balances were secured by a first lien, and 65% 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

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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 develop or offer specific sub-prime, alt-A, no documentation or stated income residential real estate loan products. Synovus estimates that, as of June 30, 2018, it had $83.7 million of higher-risk consumer loans (1.3% of the consumer portfolio and 0.3% of the total loan portfolio) compared to $100.7 million as of June 30, 2017. Included in these amounts as of June 30, 2018 and 2017 are approximately $9 million and $12 million, respectively, of accruing TDRs.
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)
June 30, 2018
 
%(1)
 
March 31, 2018
 
%(1)
 
December 31, 2017
 
%(1)
 
June 30, 2017
 
%(1)
 
Non-interest bearing demand deposits
$
7,539,451

 
28.7
%
 
$
7,391,696

 
28.7
%
 
$
7,621,147

 
29.0
%
 
$
7,298,845

 
29.2
%
 
Interest bearing demand deposits
5,001,825

 
19.0

 
5,032,000

 
19.5

 
4,976,239

 
18.9

 
4,837,053

 
19.4

 
Money market accounts, excluding brokered deposits
7,791,107

 
29.7

 
7,561,554

 
29.3

 
7,514,992

 
28.6

 
7,427,562

 
29.7

 
Savings deposits
829,800

 
3.2

 
811,588

 
3.1

 
804,853

 
3.0

 
805,019

 
3.2

 
Time deposits, excluding brokered deposits
3,182,974

 
12.1

 
3,039,325

 
11.8

 
3,170,445

 
12.1

 
3,243,670

 
13.0

 
Brokered deposits
1,922,917

 
7.3

 
1,951,910

 
7.6

 
2,198,333

 
8.4

 
1,379,559

 
5.5

 
Total average deposits
$
26,268,074

 
100.0
%
 
$
25,788,073

 
100.0
%
 
$
26,286,009

 
100.0
%
 
$
24,991,708

 
100.0
%
 
Average core deposits (2)    
$
24,345,157

 
92.7
%
 
$
23,836,163

 
92.4
%
 
$
24,087,676

 
91.6
%
 
$
23,612,149

 
94.5
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(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 second quarter of 2018, total average deposits increased $480.0 million, or 7.5% annualized, compared to the first quarter of 2018, and increased $1.28 billion, or 5.1%, compared to the second quarter of 2017. Average brokered deposits declined $29.0 million compared to the prior quarter. Average core deposits, during the second quarter of 2018, increased $509.0 million, or 8.6% annualized, compared to the prior quarter, and increased $733.0 million, or 3.1%, compared to the second quarter of 2017. During the first quarter of 2018, Synovus obtained FDIC approval to report deposits related to our sweep money market product, offered by Synovus Securities, as a component of core deposits. This product was reported as a brokered deposit through February of 2018. The second quarter average balance in these accounts totaled $310.0 million, and resulted in an increase of $198.0 million in average core deposits for the quarter, due to the reclassification. 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 28.7% for both the three months ended June 30, 2018 and three months ended March 31, 2018 and 29.2% for the three months ended June 30, 2017.
Average time deposits of $100,000 and greater for the three months ended June 30, 2018, March 31, 2018, and June 30, 2017 were $3.68 billion, $3.42 billion, and $2.86 billion, respectively, and included average brokered time deposits of $1.66 billion, $1.53 billion, and $815.5 million, respectively. These larger deposits represented 14.0%, 13.3%, and 11.4% of total average deposits for the three months ended June 30, 2018, March 31, 2018, and June 30, 2017, respectively, and included brokered time deposits which represented 6.3%, 5.9%, and 3.3% of total average deposits for the three months ended June 30, 2018, March 31, 2018, and June 30, 2017, respectively.
During the second quarter of 2018, total average brokered deposits represented 7.3% of total average deposits compared to 7.6% and 5.5% of total average deposits the previous quarter and the second quarter a year ago, respectively.

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Non-interest Income
Non-interest income for the first six months of 2018 was $140.4 million compared to $140.5 million for the first six months of 2017. Non-interest income for the second quarter of 2018 was $73.4 million, up $4.7 million, or 6.8%, compared to the second quarter of 2017. Adjusted non-interest income, which excludes investment securities gains (losses) and decrease in fair value of private equity investments, was up $8.8 million, or 6.5%, for the first six months of 2018 compared to 2017 and up $4.7 million, or 6.7%, for the second quarter of 2018 compared to the second quarter of 2017. Synovus experienced growth in multiple categories during the first half of 2018 compared to the same time period in 2017 including an increase of $6.6 million, or 16.0%, in combined fiduciary and asset management fees, brokerage, and insurance revenues. See "Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP Financial Measures" of this Report for applicable reconciliation to GAAP measure.
The following table shows the principal components of non-interest income.
Non-interest income
Six Months Ended June 30,
 
Three Months Ended June 30,
(in thousands)
2018
 
2017
 
% Change
 
2018
 
2017
 
% Change
Service charges on deposit accounts
$
39,938

 
$
40,370

 
(1.1
)%
 
$
19,999

 
$
20,252

 
(1.2
)%
Fiduciary and asset management fees
27,419

 
24,676

 
11.1

 
13,983

 
12,524

 
11.6

Card fees
21,032

 
19,885

 
5.8

 
10,833

 
10,041

 
7.9

Brokerage revenue
17,596

 
14,436

 
21.9

 
8,900

 
7,210

 
23.4

Mortgage banking income
9,887

 
11,548

 
(14.4
)
 
4,839

 
5,784

 
(16.3
)
Income from bank-owned life insurance
7,949

 
6,328

 
25.6

 
3,733

 
3,272

 
14.1

Investment securities (losses) gains, net
(1,296
)
 
7,667

 
nm

 
(1,296
)
 
(1
)
 
nm

Decrease in fair value of private equity investments, net
(3,093
)
 
(3,166
)
 
nm

 
(37
)
 
(1,352
)
 
nm

Other fee income
9,877

 
11,033

 
(10.5
)
 
5,259

 
6,164

 
(14.7
)
Other non-interest income
11,124

 
7,762

 
43.3

 
7,174

 
4,807

 
49.2

Total non-interest income
$
140,433

 
$
140,539

 
(0.1
)%
 
$
73,387

 
$
68,701

 
6.8
 %
 
 
 
 
 
 
 
 
 
 
 
 
Principal Components of Non-interest Income
Service charges on deposit accounts for the six and three months ended June 30, 2018 were down $432 thousand, or 1.1%, and down $253 thousand, or 1.2%, respectively, compared to the six and three months ended June 30, 2017. Service charges on deposit accounts consist of NSF fees, account analysis fees, and all other service charges. NSF fees for the six and three months ended June 30, 2018 were down $267 thousand, or 1.5%, and $241 thousand, or 2.7%, respectively, compared to the six and three months ended June 30, 2017. Account analysis fees for the six and three months ended June 30, 2018 were up $171 thousand, or 1.4%, and $284 thousand, or 4.6%, respectively, compared to the six and three months ended June 30, 2017. All other service charges on deposit accounts, which consist primarily of monthly fees on retail demand deposit and saving accounts, for the six and three months ended June 30, 2018 were down $336 thousand, or 3.3%, and $297 thousand, or 5.8%, compared to the same periods in 2017.
Fiduciary and asset management fees are derived from providing estate administration, personal trust, corporate trust, corporate bond, investment management, and financial planning services. Fiduciary and asset management fees increased $2.7 million, or 11.1%, and $1.5 million, or 11.6%, for the six and three months ended June 30, 2018, respectively, compared to the six and three months ended June 30, 2017. The increase was driven by growth in assets under management. Total assets under management (including brokerage assets under management) increased by 16% year-over-year to approximately $14.4 billion, due to overall market conditions, increased productivity as well as the addition of new talent.
Card fees totaled $21.0 million and $10.8 million for the six and three months ended June 30, 2018, respectively, compared to $19.9 million and $10.0 million for the same periods in 2017. Card fees consist primarily of credit card interchange fees, debit card interchange fees, and merchant discounts. Card fees are reported net of certain associated expense items including customer loyalty program expenses and network expenses.
Brokerage revenue was $17.6 million and $8.9 million for the six and three months ended June 30, 2018, respectively, up $3.2 million, or 21.9%, and up $1.7 million, or 23.4%, compared to the six and three months ended June 30, 2017, respectively. The increase in 2018 from 2017 was largely driven by growth in brokerage assets under management due primarily to new talent additions. Brokerage revenue consists primarily of brokerage commissions. Additionally, brokerage revenue includes advisory fees earned from the management of customer assets.

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Mortgage banking income decreased $1.7 million, or 14.4%, and $945 thousand, or 16.3%, compared to the six and three months ended June 30, 2017, respectively, reflecting softer production volume in a rising interest rate environment.
Income from bank-owned life insurance increased $1.6 million, or 25.6%, and $461 thousand, or 14.1%, compared to the six and three months ended June 30, 2017, respectively, due to additional investments in bank-owned life insurance policies during the first quarter of 2017, increases in the cash surrender value of these policies, and death benefits.
Investment securities losses of $1.3 million for the six and three months ended June 30, 2018 included a loss of $1.3 million from a strategic sale to improve portfolio performance. Investment securities gains, net of $7.7 million for the six months ended June 30, 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 during the first quarter of 2017.
Private equity investments consist of an equity method investment in a venture capital fund. The net loss of $3.1 million for the first half of 2018 consisted mostly of net unrealized losses on certain investments within the fund. The net loss of $3.2 million during the first half of 2017 consisted mostly of realized losses on sales of investments within the fund.
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 lower by $1.2 million, or 10.5%, and $905 thousand, or 14.7%, compared to the six and three months ended June 30, 2017, respectively, due primarily to higher customer swap dealer fees and syndication arranger fees in 2017.
The main components of other non-interest income are income from insurance commissions, gains from sales of GGL/SBA loans, and other miscellaneous items. Other non-interest income was up $3.4 million, or 43.3%, and $2.4 million, or 49.2%, compared to the six and three months ended June 30, 2017, respectively, due primarily to higher insurance commissions, higher gains on sales of GGL/SBA loans, and miscellaneous items.
Non-interest Expense
Non-interest expense for the first six months of 2018 increased $10.1 million, or 2.6%, compared to the first six months of 2017 and non-interest expense for the second quarter of 2018 increased $12.3 million, or 6.4%, compared to the second quarter of 2017. The second quarter of 2018 included a $2.3 million expense for a valuation adjustment to the Visa derivative offset in part by a $1.4 million benefit from a recovery of litigation settlement expense. The first quarter of 2018 included a $2.6 million reduction in litigation contingency accruals and the first quarter of 2017 included $6.5 million in restructuring charges. Adjusted non-interest expense, which excludes valuation adjustment to Visa derivative, restructuring charges, net, amortization of intangibles, and litigation settlement/contingency expense increased $18.5 million, or 4.8%, for the first half of 2018 compared to the first half of 2017. Strong operating leverage for the first half of 2018 resulted in an efficiency ratio of 56.97%, improved from 62.31% for the first half of 2017. The adjusted efficiency ratio for the first six months of 2018 was 56.90%, down 397 basis points from the same period a year ago. See "Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP Financial Measures" of this Report for applicable reconciliation to GAAP measures.
The following table summarizes the components of non-interest expense.
Non-interest Expense

 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
Three Months Ended June 30,
(in thousands)
2018
 
2017
 
% Change
 
2018
 
2017
 
% Change
Salaries and other personnel expense
$
225,583

 
$
212,404

 
6.2
 %
 
$
111,863

 
$
105,213

 
6.3
 %
Net occupancy and equipment expense
64,134

 
59,264

 
8.2

 
32,654

 
29,933

 
9.1

Third-party processing expense
29,012

 
26,223

 
10.6

 
15,067

 
13,620

 
10.6

FDIC insurance and other regulatory fees
13,335

 
13,645

 
(2.3
)
 
6,543

 
6,875

 
(4.8
)
Professional fees
11,789

 
12,907

 
(8.7
)
 
6,284

 
7,551

 
(16.8
)
Advertising expense
10,312

 
11,258

 
(8.4
)
 
5,220

 
5,346

 
(2.4
)
Valuation adjustment to Visa derivative
2,328

 

 
nm

 
2,328

 

 
nm

Foreclosed real estate expense, net
749

 
3,582

 
(79.1
)
 
(107
)
 
1,448

 
(107.4
)
Earnout liability adjustment

 
1,707

 
nm

 

 
1,707

 
nm

Restructuring charges, net
(212
)
 
6,524

 
nm

 
103

 
13

 
nm

Other operating expenses
42,204

 
41,619

 
1.4

 
24,102

 
20,041

 
20.3

Total non-interest expense
$
399,234

 
$
389,133

 
2.6
 %
 
$
204,057

 
$
191,747

 
6.4
 %
 
 
 
 
 
 
 
 
 
 
 
 
Salaries and other personnel expenses increased $13.2 million, or 6.2%, and $6.7 million, or 6.3%, for the six and three months ended June 30, 2018, respectively, compared to the same periods in 2017, primarily due to talent additions and higher incentive compensation expense.
Net occupancy and equipment expense increased $4.9 million, or 8.2%, and $2.7 million, or 9.1%, during the six and three months ended June 30, 2018, respectively, compared to the same periods in 2017 driven primarily by costs associated with growth in technology investments. 
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 $2.8 million, or 10.6%, and $1.4 million, or 10.6%, during the six and three months ended June 30, 2018, respectively, compared to the same periods in 2017. The increase is primarily due to an increase of $2.5 million and $1.1 million for the six and three months ended June 30, 2018, respectively, compared to the same periods in 2017, from servicing fees associated with loan growth from Synovus' two consumer-based lending partnerships.
During the three months ended June 30, 2018, Synovus recorded a $2.3 million valuation adjustment to the Visa derivative following Visa's announcement on June 26, 2018 that it would deposit $600 million into its litigation escrow account.
For the six months ended June 30, 2018, Synovus recorded net lease termination accrual reversals of $377 thousand related to branches closed in prior years offset somewhat by other property related charges of $165 thousand. During the six months ended June 30, 2017, Synovus recorded severance charges of $6.5 million including $6.2 million for termination benefits incurred in conjunction with a voluntary early retirement program offered to Synovus employees during the first quarter of 2017.
Other operating expenses for the six and three months ended June 30, 2018 included a benefit of $4.0 million and $1.4 million, respectively, from recoveries and reductions in litigation contingency accruals. Other operating expenses for the six and three months ended June 30, 2017 included a $2.4 million gain from the settlement of a contingent receivable.
Income Tax Expense
Income tax expense was $61.1 million and $30.9 million for the six and three months ended June 30, 2018, respectively, representing an effective tax rate of 22.2% and 21.8% for the respective periods. Income tax expense was $75.6 million and $41.8 million for the six and three months ended June 30, 2017, respectively, representing an effective tax rate of 33.8% and 35.5% for the respective periods. The effective tax rate is lower for the six and three months ended June 30, 2018 due to Federal Tax Reform that reduced the federal statutory rate from 35% to 21% for tax years beginning after December 31, 2017.
The effective tax rate is affected by many factors including, but not limited to, the level of pre-tax income, bank-owned life insurance, tax-exempt interest and nondeductible expenses. In addition, the effective tax rate is affected by items that may occur in any given period but are not consistent from period-to-period, such as tax benefits related to share-based compensation, jurisdiction statutory tax rate changes, valuation allowance changes and changes to unrecognized tax benefits. Accordingly, the comparability of the effective tax rate between periods may be impacted.

The effective income tax rate for the six months ended June 30, 2018 included a net discrete income tax benefit of $2.8 million predominantly resulting from tax benefits associated with the exercise and vesting of employee equity awards.

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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 six months of 2018.
The table below includes selected credit quality metrics.
Credit Quality Metrics
 
(dollars in thousands)
June 30, 2018
 
December 31, 2017
 
June 30, 2017
Non-performing loans    
$
117,328

 
$
115,561

 
$
159,317

Impaired loans held for sale(1)
2,733

 
11,278

 
127

Other real estate
6,288

 
3,758

 
19,476

 Non-performing assets    
$
126,349

 
$
130,597

 
$
178,920

Non-performing loans as a % of total loans
0.47
%
 
0.47

 
0.65

Non-performing assets as a % of total loans, other loans held for sale, and ORE
0.50

 
0.53

 
0.73

Loans 90 days past due and still accruing
$
3,222

 
4,414

 
4,550

As a % of total loans
0.01
%
 
0.02

 
0.02

Total past due loans and still accruing
$
55,614

 
52,031

 
66,788

As a % of total loans
0.22
%
 
0.21

 
0.27

Net charge-offs, quarter
$
17,829

 
8,979

 
15,679

Net charge-offs/average loans, quarter
0.29
%
 
0.15

 
0.26

Net charge-offs, year-to-date
$
22,109

 
69,675

 
22,597

Net charge-offs/average loans, year-to-date
0.18
%
 
0.29

 
0.19

Provision for loan losses, quarter
$
11,790

 
8,564

 
10,260

Provision for loan losses, year-to-date
24,566

 
67,185

 
18,934

Allowance for loan losses
251,725

 
249,268

 
248,095

Allowance for loan losses as a % of total loans
1.00
%
 
1.01

 
1.02

 
 
 
 
 
 
(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 $126.3 million at June 30, 2018, a $4.2 million, or 3.3%, decrease from $130.6 million at December 31, 2017 and a $52.6 million, or 29.4%, decrease from $178.9 million at June 30, 2017. The year-over-year decline in non-performing assets was driven by the continued resolution of problem assets, including accelerated dispositions in conjunction with the balance sheet restructuring actions in the third quarter of 2017. Total non-performing assets as a percentage of total loans, other loans held for sale, and other real estate were 0.50% at June 30, 2018 compared to 0.53% at December 31, 2017 and 0.73% at June 30, 2017.
Troubled Debt Restructurings
Accruing TDRs were $125.3 million at June 30, 2018, compared to $151.3 million at December 31, 2017 and $167.4 million at June 30, 2017. Accruing TDRs declined $26.0 million, or 17.2%, from December 31, 2017 and $42.1 million, or 25.1%, from a year ago primarily due to continued decline in TDR inflows, fewer loans qualifying for removal of TDR designation upon subsequent renewal, refinance, or modification, and pay-offs.
At June 30, 2018, the allowance for loan losses allocated to these accruing TDRs was $6.5 million compared to $8.7 million at December 31, 2017 and $8.5 million at June 30, 2017. Accruing TDRs are considered performing because they are performing in accordance with the restructured terms. At June 30, 2018 and December 31, 2017, 97% 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 at low levels. There were eight defaults for the six months ended June 30, 2018 and three defaults for the six months ended June 30, 2017.

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Accruing TDRs by Risk Grade
June 30, 2018
 
December 31, 2017
 
June 30, 2017
(dollars in thousands)
Amount
 
%
 
Amount
 
%
 
Amount
 
%
Pass
$
57,013

 
45.5
%
 
$
57,136

 
37.8
%
 
$
69,943

 
41.8
%
Special Mention
19,799

 
15.8

 
15,879

 
10.5

 
20,550

 
12.3

Substandard accruing
48,498

 
38.7

 
78,256

 
51.7

 
76,902

 
45.9

  Total accruing TDRs
$
125,310

 
100.0
%
 
$
151,271

 
100.0
%
 
$
167,395

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
Accruing TDRs Aging by Portfolio Class
 
June 30, 2018
(in thousands)
Current
 
30-89 Days Past Due
 
90+ Days Past Due
 
Total
 
Commercial, financial and agricultural
$
11,302

 
$
817

 
$

 
$
12,119

 
Owner-occupied
36,388

 
62

 

 
36,450

 
Total commercial and industrial
47,690

 
879

 

 
48,569

 
Investment properties
24,218

 

 

 
24,218

 
1-4 family properties
10,347

 
111

 

 
10,458

 
Land and development
15,281

 
589

 

 
15,870

 
Total commercial real estate
49,846

 
700

 

 
50,546

 
Home equity lines
1,312

 
1,108

 
333

 
2,753

 
Consumer mortgages
18,572

 
195

 

 
18,767

 
Credit cards

 

 

 

 
Other consumer loans
4,630

 
45

 

 
4,675

 
Total consumer
24,514

 
1,348

 
333

 
26,195

 
Total accruing TDRs
$
122,050


$
2,927

 
$
333


$
125,310

 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
(in thousands)
Current
 
30-89 Days Past Due
 
90+ Days Past Due
 
Total
 
Commercial, financial and agricultural
$
33,789

 
$
1,161

 
$
44

 
$
34,994

 
Owner-occupied
35,554

 

 

 
35,554

 
Total commercial and industrial
69,343

 
1,161

 
44

 
70,548

 
Investment properties
21,398

 

 

 
21,398

 
1-4 family properties
14,865

 
191

 

 
15,056

 
Land and development
14,835

 
381

 

 
15,216

 
Total commercial real estate
51,098

 
572

 

 
51,670

 
Home equity lines
5,096

 

 

 
5,096

 
Consumer mortgages
18,588

 
80

 

 
18,668

 
Credit cards

 

 

 

 
Other consumer loans
5,097

 
192

 

 
5,289

 
Total consumer
28,781

 
272

 

 
29,053

 
Total accruing TDRs
$
149,222

 
$
2,005

 
$
44

 
$
151,271

 
 
 
 
 
 
 
 
 
 
Non-accruing TDRs were $30.4 million at June 30, 2018 compared to $11.7 million at December 31, 2017. 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

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classified as Substandard since these loans are disclosed separately. Potential problem commercial loans were $153.5 million at June 30, 2018 compared to $103.3 million and $149.2 million at December 31, 2017 and June 30, 2017, 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 six months ended June 30, 2018 were $22.1 million, or 0.18% as a percentage of average loans annualized, compared to $22.6 million, or 0.19%, as a percentage of average loans annualized for the six months ended June 30, 2017.
Provision for Loan Losses and Allowance for Loan Losses
For the six months ended June 30, 2018, the provision for loan losses was $24.6 million, an increase of $5.6 million, or 29.7%, compared to the six months ended June 30, 2017. The increase in provision expense for the six months ended June 30, 2018 compared to the six months ended June 30, 2017 is primarily due to loan growth as well as a slightly increased level of charge-offs above reserves.
The allowance for loan losses at June 30, 2018 was $251.7 million, or 1.00% of total loans, compared to $249.3 million, or 1.01% of total loans, at December 31, 2017 and $248.1 million, or 1.02% of total loans, at June 30, 2017.
Capital Resources
Synovus and Synovus Bank are required to comply with capital adequacy standards established by their primary federal regulator, the Federal Reserve. Synovus and Synovus Bank measure capital adequacy using the standardized approach to the Basel III Final Rule. Synovus has always placed great emphasis on maintaining a solid capital base and continues to satisfy applicable regulatory capital requirements.
At June 30, 2018, Synovus and Synovus Bank's capital levels remained strong and 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)    
June 30, 2018
 
December 31, 2017
Common equity Tier 1 capital (transitional)
 
 
 
Synovus Financial Corp.
$
2,838,616

 
$
2,763,168

Synovus Bank
3,285,713

 
3,155,163

Tier 1 capital
 
 
 
Synovus Financial Corp.
3,156,805

 
2,872,001

Synovus Bank
3,285,713

 
3,155,163

Total risk-based capital
 
 
 
Synovus Financial Corp.
3,668,904

 
3,383,081

Synovus Bank
3,537,812

 
3,406,243

Common equity Tier 1 capital ratio (transitional)
 
 
 
Synovus Financial Corp.
10.12
%
 
9.99
%
Synovus Bank
11.72

 
11.43

Tier 1 capital ratio
 
 
 
Synovus Financial Corp.
11.25

 
10.38

Synovus Bank
11.72

 
11.43

Total risk-based capital to risk-weighted assets ratio
 
 
 
Synovus Financial Corp.
13.08

 
12.23

Synovus Bank
12.61

 
12.33

Leverage ratio
 
 
 
Synovus Financial Corp.
10.03

 
9.19

Synovus Bank
10.45

 
10.12

Tangible common equity to tangible assets ratio (1)
 
 
 
Synovus Financial Corp.
8.77

 
8.79

 
 
 
 
(1) See " Non-GAAP Financial Measures" in this Report for the applicable reconciliation to the most comparable GAAP measure.

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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 agency to meet and maintain a specific capital level for any capital measure.
On June 21, 2018, Synovus completed a public offering of $200 million of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series D. The offering generated net proceeds of $195 million, which were largely used to fund the redemption of all of the outstanding shares of Series C Preferred Stock on August 1, 2018 for an aggregate redemption price of $130 million.
On January 23, 2018, Synovus announced a share repurchase program of up to $150 million to be completed during 2018. As of June 30, 2018, Synovus had repurchased under this program a total of $76.8 million, or 1.5 million shares of its common stock, at an average price of $52.72 per share. As of June 30, 2018 and August 6, 2018, the remaining authorization under this program was $73.2 million and $44.6 million, respectively.
As of June 30, 2018, total disallowed deferred tax assets were $63.6 million or 0.23% of risk-weighted assets, compared to $70.4 million, or 0.25% of risk-weighted assets, at December 31, 2017. Disallowed deferred tax assets for CET1 were $50.9 million at June 30, 2018 compared to $56.3 million at December 31, 2017. See "Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Income Taxes" in Synovus' 2017 Form 10-K for more information on Synovus' net deferred tax asset.
At June 30, 2018, Synovus' CET1 ratio was 10.12% under the Basel III transitional provisions, and the estimated fully phased-in CET1 ratio was 10.06%, both of which are well in excess of regulatory requirements including the capital conservation buffer. On November 21, 2017, federal banking regulators adopted a final rule to extend the regulatory capital transition for certain items applicable during 2017 to future periods for banking organizations (such as Synovus) that are not subject to the advanced approaches capital rule. This reduced the capital impact to Synovus in 2018 from the fully phased-in implementation of Basel III that was originally required. 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 analyses and earnings projections, that Synovus' capital position is adequate to meet current and future regulatory minimum capital requirements.
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 2018, Synovus increased the quarterly common stock dividend by 67% to $0.25 per share effective with the quarterly dividend declared during the first quarter of 2018.
Synovus' ability to pay dividends on its capital stock, consisting of the common stock and the 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. During the six months ended June 30, 2018, Synovus Bank paid upstream cash dividends to Synovus totaling $110.0 million. For the year ended December 31, 2017, Synovus Bank and non-bank subsidiaries made upstream cash distributions to the Parent Company totaling $451.0 million including cash dividends of $283.2 million.
    Synovus declared dividends of $0.50 and $0.30 per common share for the six months ended June 30, 2018 and six months ended June 30, 2017, respectively. In addition to dividends paid on its common stock, Synovus paid dividends of $5.1 million on its Series C Preferred Stock during both the six months ended June 30, 2018 and 2017.
On June 21, 2018, Synovus completed a public offering of $200 million of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series D. The offering generated net proceeds of $195 million, which were largely used to fund the redemption of all of the outstanding shares of Series C Preferred Stock on August 1, 2018 for an aggregate redemption price of $130 million.
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 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 local markets 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 June 30, 2018, based on currently pledged collateral, Synovus Bank had access to incremental funding of $1.26 billion, subject to FHLB credit policies, through utilization of FHLB advances.

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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 six months ended June 30, 2018, Synovus Bank paid upstream cash dividends to Synovus totaling $110.0 million. For the year ended December 31, 2017, Synovus Bank and non-bank subsidiaries made upstream cash distributions to the Parent Company totaling $451.0 million including cash dividends of $283.2 million. 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 without the approval of the GA DBF.
On June 21, 2018, Synovus completed a public offering of $200 million of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series D. The offering generated net proceeds of $195 million, which were largely used to fund the redemption of all of the outstanding shares of Series C Preferred Stock on August 1, 2018 for an aggregate redemption price of $130 million.
On November 1, 2017, Synovus issued $300.0 million aggregate principal amount of 3.125% senior notes maturing in 2022 in a public offering with aggregate proceeds of $296.9 million, net of discount and debt issuance costs. On November 9, 2017, Synovus redeemed all of the $300.0 million aggregate principal amount of its 7.875% senior notes due 2019 at a "make whole" premium. 2017 results included a loss of $23.2 million related to early extinguishment of these notes. Additionally, during 2017, Synovus paid off the remaining balance of $278.6 million of its subordinated notes at their maturity date of June 15, 2017.
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' 2017 Form 10-K. Furthermore, Synovus may, from time to time, take advantage of attractive market opportunities to refinance its existing debt, redeem its preferred stock, which is redeemable beginning on August 1, 2018, or strengthen its liquidity or capital position.
Earning Assets and Sources of Funds
Average total assets for the six months ended June 30, 2018 increased $838.0 million or 2.7%, to $31.37 billion as compared to $30.54 billion for the first six months of 2017. Average earning assets increased $968.6 million, or 3.4%, in the first six months of 2018 compared to the same period in 2017 and represented 94.3% of average total assets at June 30, 2018, as compared to 93.7% at June 30, 2017. The increase in average earning assets resulted from a $708.9 million increase in average loans, net, and a $242.8 million increase in average taxable investment securities. Average interest bearing liabilities increased $632.9 million, or 3.1%, to $20.76 billion for the first six months of 2018 compared to the same period in 2017. The increase in average interest bearing liabilities was driven by a $672.8 million increase in average time deposits and a $206.0 million increase in average interest bearing demand deposits. These increases were partially offset by a $238.2 million decrease in average long-term debt. Average non-interest bearing demand deposits increased $229.1 million, or 3.2%, to $7.47 billion for the first six months of 2018 compared to the same period in 2017.
Net interest income for the six months ended June 30, 2018 was $558.9 million, an increase of $67.8 million, or 13.8%, compared to $491.0 million for the six months ended June 30, 2017.
The net interest margin was 3.82% for the six months ended June 30, 2018, an increase of 36 basis points from 3.46% for the six months ended June 30, 2017. The yield on earning assets was 4.39%, up 46 basis points compared to the six months ended June 30, 2017 and the effective cost of funds increased 10 basis points to 0.57%. The yield on loans was 4.79%, an increase of 48 basis points from the six months ended June 30, 2017 and the yield on investment securities was 2.34%, an increase of 25 basis points from the six months ended June 30, 2017.
On a sequential quarter basis, net interest income increased by $10.3 million and the net interest margin increased by 8 basis points to 3.86%. The increase in net interest income was driven by an $81.3 million increase in average loans, net. The increase in net interest income for the quarter was also driven by margin expansion. Additionally, the rate increases in March and June favorably impacted net interest income and the net interest margin for the three months ended June 30, 2018 compared to the previous quarter. The yield on earning assets was 4.47%, up 16 basis points from the first quarter of 2018. This increase was driven by an 18 basis point increase in loan yields. The effective cost of funds was 0.61% for the second quarter of 2018, up 8 basis points from the first quarter of 2018.

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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
2018
 
2017
(dollars in thousands) (yields and rates annualized)
Second Quarter
 
First
Quarter
 
Fourth Quarter
 
Third Quarter
 
Second Quarter
Interest Earning Assets:
 
 
 
 
 
 
 
 
 
Taxable investment securities (1)
$
4,077,564

 
4,097,162

 
3,937,278

 
3,786,436

 
3,844,688

Yield
2.34
%
 
2.34

 
2.29

 
2.11

 
2.11

Tax-exempt investment securities(1)(3)
$
115

 
140

 
180

 
259

 
340

Yield (taxable equivalent) (3)
6.87
%
 
6.57

 
7.97

 
7.86

 
6.87

Trading account assets(4)
$
23,772

 
8,167

 
7,360

 
7,823

 
3,667

Yield
2.79
%
 
2.66

 
2.78

 
2.09

 
2.28

Commercial loans(2)(3)
$
18,857,271

 
18,963,515

 
18,935,774

 
19,059,936

 
19,137,733

Yield
4.85
%
 
4.64

 
4.49

 
4.41

 
4.27

Consumer loans(2)
$
6,092,899

 
5,899,015

 
5,704,629

 
5,440,765

 
5,215,258

Yield
4.76
%
 
4.71

 
4.54

 
4.55

 
4.49

Allowance for loan losses
$
(257,966
)
 
(251,635
)
 
(252,319
)
 
(249,248
)
 
(251,219
)
    Loans, net (2)
$
24,692,204

 
24,610,895

 
24,388,084

 
24,251,453

 
24,101,772

Yield
4.88
%
 
4.70

 
4.55

 
4.49

 
4.36

Mortgage loans held for sale
$
50,366

 
38,360

 
45,353

 
52,177

 
52,224

Yield
4.42
%
 
3.95

 
3.96

 
3.88

 
3.87

Other earning assets (5)
$
724,537

 
516,575

 
922,296

 
543,556

 
561,503

Yield
1.77
%
 
1.48

 
1.31

 
1.23

 
1.00

Federal Home Loan Bank and Federal Reserve Bank Stock(4)
$
165,845

 
177,381

 
159,455

 
175,263

 
177,323

Yield
4.63
%
 
3.39

 
4.03

 
3.50

 
2.99

Total interest earning assets
$
29,734,403

 
29,448,680

 
29,460,006

 
28,816,967

 
28,741,517

Yield
4.47
%
 
4.31

 
4.15

 
4.11

 
3.99

Interest Bearing Liabilities:
 
 
 
 
 
 
 
 
 
Interest bearing demand deposits
$
5,001,826

 
5,032,000

 
4,976,239

 
4,868,372

 
4,837,053

Rate
0.35
%
 
0.31

 
0.28

 
0.27

 
0.23

Money Market accounts, excluding brokered deposits
$
7,791,107

 
7,561,554

 
7,514,992

 
7,528,036

 
7,427,562

Rate
0.55
%
 
0.43

 
0.36

 
0.34

 
0.32

Savings deposits
$
829,800

 
811,587

 
804,853

 
803,184

 
805,019

Rate
0.03
%
 
0.03

 
0.03

 
0.03

 
0.04

Time deposits under $100,000
$
1,161,890

 
1,143,780

 
1,166,413

 
1,183,582

 
1,202,746

Rate
0.82
%
 
0.71

 
0.70

 
0.68

 
0.67

Time deposits over $100,000
$
2,021,084

 
1,895,545

 
2,004,031

 
2,067,347

 
2,040,924

Rate
1.22
%
 
1.02

 
0.99

 
0.97

 
0.94

Non-maturing brokered deposits
$
262,976

 
424,118

 
546,413

 
547,466

 
564,043

Rate
1.94
%
 
1.14

 
0.81

 
0.73

 
0.54

Brokered time deposits
$
1,659,941

 
1,527,793

 
1,651,920

 
983,423

 
815,515

Rate
1.85
%
 
1.75

 
1.63

 
1.16

 
0.94

   Total interest bearing deposits
$
18,728,624

 
18,396,377

 
18,664,861

 
17,981,410

 
17,692,862

Rate
0.70
%
 
0.58

 
0.54

 
0.46

 
0.41

Federal funds purchased and securities sold under repurchase agreements
$
210,679

 
202,226

 
184,369

 
191,585

 
183,400

Rate
0.38
%
 
0.21

 
0.15

 
0.08

 
0.10

Long-term debt
$
1,852,094

 
2,127,994

 
1,713,982

 
1,985,175

 
2,270,452

Rate
2.66
%
 
2.32

 
2.67

 
2.81

 
2.83

Total interest bearing liabilities
$
20,791,397

 
20,726,597

 
20,563,212

 
20,158,170

 
20,146,714

Rate
0.87
%
 
0.76

 
0.72

 
0.69

 
0.68

Non-interest bearing demand deposits
$
7,539,451

 
7,391,695

 
7,621,147

 
7,305,508

 
7,298,845

Effective cost of funds
0.61
%
 
0.53

 
0.50

 
0.48

 
0.48

Net interest margin
3.86
%
 
3.78

 
3.65

 
3.63

 
3.51

Taxable equivalent adjustment (3)
$
120

 
116

 
234

 
283

 
298

 
 
 
 
 
 
 
 
 
 
(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 21% beginning in 2018, and 35% for prior years, 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.
(5) Includes interest bearing funds with Federal Reserve Bank, interest earning deposits with banks, and federal funds sold and securities purchased under resale agreements.

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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 six months ended June 30, 2018 and 2017, 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
 
Six Months Ended June 30,
 
2018 Compared to 2017
 
Average Balances
 
Interest
 
Annualized Yield/Rate
 
Change due to
 
Increase (Decrease)
(dollars in thousands)
2018
 
2017
 
2018
 
2017
 
2018
 
2017
 
Volume
 
Rate
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Taxable investment securities
$
4,087,309

 
$
3,843,131

 
$
47,812

 
$
40,069

 
2.34
%
 
2.09
%
 
$
2,531

 
$
5,212

 
$
7,743

Tax-exempt investment securities(2)
128

 
1,528

 
4

 
45

 
6.71

 
5.95

 
(41
)
 

 
(41
)
Total investment securities
4,087,437

 
3,844,659

 
47,816

 
40,114

 
2.34

 
2.09

 
2,490

 
5,212

 
7,702

Trading account assets
16,012

 
5,047

 
220

 
49

 
2.75

 
1.93

 
105

 
66

 
171

Taxable loans, net(1)
24,854,408

 
24,122,851

 
584,543

 
510,222

 
4.74

 
4.27

 
15,490

 
58,831

 
74,321

Tax-exempt loans, net(1)(2)
52,184

 
72,553

 
1,120

 
1,688

 
4.33

 
4.69

 
(474
)
 
(94
)
 
(568
)
Allowance for loan losses
(254,818
)
 
(252,565
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans, net
24,651,774

 
23,942,839

 
585,663

 
511,910

 
4.79

 
4.31

 
15,016

 
58,737

 
73,753

Mortgage loans held for sale
44,396

 
49,405

 
936

 
972

 
4.22

 
3.93

 
(98
)
 
62

 
(36
)
Other earning assets(3)
621,131

 
607,656

 
5,147

 
2,684

 
1.65

 
0.88

 
59

 
2,404

 
2,463

Federal Home Loan Bank and Federal Reserve Bank stock
171,581

 
174,101

 
3,422

 
2,788

 
3.99

 
3.20

 
(40
)
 
674

 
634

  Total interest earning assets
29,592,331

 
28,623,707

 
643,204

 
558,517

 
4.39

 
3.93

 
17,532

 
67,155

 
84,687

Cash and due from banks
387,472

 
396,305

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Premises and equipment, net
427,291

 
414,810

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other real estate
3,709

 
21,723

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other assets(4)
964,141

 
1,080,397

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
$
31,374,944

 
$
30,536,942

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand deposits
$
5,016,830

 
$
4,810,836

 
$
8,151

 
$
5,001

 
0.33
%
 
0.21
%
 
$
215

 
$
2,935

 
$
3,150

Money market accounts
8,020,066

 
8,017,785

 
21,192

 
12,857

 
0.53

 
0.32

 
3

 
8,332

 
8,335

Savings deposits
820,744

 
857,050

 
118

 
329

 
0.03

 
0.08

 
(14
)
 
(197
)
 
(211
)
Time deposits
4,705,778

 
4,032,971

 
29,514

 
16,887

 
1.26

 
0.84

 
2,803

 
9,824

 
12,627

Federal funds purchased and securities sold under repurchase agreements
206,476

 
180,145

 
310

 
84

 
0.30

 
0.09

 
12

 
214

 
226

Long-term debt
1,989,282

 
2,227,501

 
24,822

 
31,728

 
2.48

 
2.83

 
(3,343
)
 
(3,563
)
 
(6,906
)
Total interest-bearing liabilities
20,759,176

 
20,126,288

 
84,107

 
66,886

 
0.81

 
0.67

 
(324
)
 
17,545

 
17,221

Non-interest bearing deposits
7,465,982

 
7,236,840

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other liabilities
201,790

 
214,381

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shareholders' equity
2,947,996

 
2,959,433

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities and equity
$
31,374,944

 
$
30,536,942

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate spread:
 
 
 
 
 
 
 
 
3.58
%
 
3.26
%
 
 
 
 
 
 
Net interest income - FTE/margin(5)
 
 
 
 
$
559,097

 
$
491,631

 
3.82
%
 
3.46
%
 
$
17,856

 
$
49,610

 
$
67,466

Taxable equivalent adjustment
 
 
 
 
236

 
607

 
 
 
 
 
 
 
 
 
 
  Net interest income, actual
 
 
 
 
$
558,861

 
$
491,024

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Average loans are shown net of unearned income. Non-performing loans are included. Interest income includes fees as follows: 2018 - $15.5 million, 2017 - $15.7 million.
(2) Reflects taxable-equivalent adjustments, using the statutory federal income tax rate (21% in 2018 and 35% in 2017), in adjusting interest on tax-exempt loans and investment securities
to a taxable-equivalent basis.
(3) Includes interest bearing funds with Federal Reserve Bank, interest earning deposits with banks, and federal funds sold and securities purchased under resale agreements.
(4) Includes average net unrealized gains (losses) on investment securities available for sale of $(115.1) million and $(41.2) million for the six months ended June 30, 2018 and
2017, respectively.
(5) The net interest margin is calculated by dividing annualized net interest income - FTE by average total interest earnings assets.

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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. Assumptions utilized in the model are updated on an ongoing basis and are reviewed and approved by ALCO and the Risk Committee of the Board of Directors.
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 1.75% to 2.00% and the current prime rate of 5.00%. Synovus has modeled the impact of a gradual increase in short-term rates of 100 and 200 basis points and a gradual decline of 100 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 June 30, 2018, with comparable information for December 31, 2017.
 
 
 
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)
 
June 30, 2018
 
December 31, 2017
 
+200
 
3.0%
 
3.6%
 
+100
 
1.4%
 
1.9%
 
Flat
 
—%
 
—%
 
-100
 
-3.7%
 
-4.7%
 
 
 
 
 
 
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 June 30, 2018
Change in Short-term Interest Rates (in basis points)
 
Base Scenario
 
15% Increase in Average Repricing Beta
+200
 
3.0%
 
1.4%
+100
 
1.4%
 
0.7%
 
 
 
 
 
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. This EVE modeling allows Synovus to capture longer-term repricing risk and options risk embedded in the balance sheet. 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 1.6% and by 1.5%, assuming an immediate and sustained increase in interest rates of 100 and 200 basis points, respectively. Assuming an immediate 100 basis point decline in rates, EVE is projected to decrease by 14.7%. These metrics reflect a relatively stable long term interest rate risk position as compared to December 31, 2017.

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Estimated Change in EVE
Immediate Change in Interest Rates (in basis points)
 
June 30, 2018
 
December 31, 2017
+200
 
1.5%
 
-0.2%
+100
 
1.6%
 
1.6%
-100
 
-14.7%
 
-16.9%
 
 
 
 
 
ADDITIONAL DISCLOSURES
Recently Issued Accounting Standards
Several accounting standards will be effective in fiscal year 2019 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 2017-04, Intangibles-Goodwill and Other, Simplifying the Test for Goodwill Impairment
ASU 2016-13, Financial Instruments-Credit Losses (CECL)
ASU 2016-02, Leases
The ASUs with the most significant impact on Synovus are ASU 2016-13, Financial Instruments-Credit Losses (CECL), effective in 2020 and ASU 2016-02, Leases, effective in 2019.
ASU 2016-13, Financial Instruments--Credit Losses (CECL). In June 2016, the FASB issued the new guidance related to credit losses. The new guidance replaces the existing incurred loss impairment guidance with an 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 will record a cumulative effect adjustment to retained earnings as of the beginning of the reporting period of adoption.  

Synovus has begun its implementation efforts which are led by a cross-functional steering committee.  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 impact on its financial statements and regulatory capital ratios.  Additionally, the extent of the expected 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 2016-02, Leases. In February 2016, the FASB issued ASU 2016-02, 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, including operating leases, with a lease term greater than 12 months. From a lessor perspective, the accounting model is largely unchanged, though the new standard does include certain targeted improvements to align, where necessary, lessor accounting with the lessee accounting model and the revenue recognition guidance in ASC Topic 606 (those related to evaluating when profit can be recognized). For Synovus, the impact of this ASU will primarily relate to its accounting and reporting of leases as a lessee. The new ASU will be effective for Synovus beginning January 1, 2019. Synovus will adopt this ASU retrospectively, at the beginning of the period of adoption, through a cumulative-effect adjustment to retained earnings. 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 $230 million of future minimum lease commitments as disclosed in Note 7 of Synovus' 2017 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.

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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' 2017 Form 10-K should be reviewed for a greater understanding of how we record and report our financial performance. In connection with the adoption of ASU 2016-18, Statement of Cash Flows-Restricted Cash, Synovus changed its presentation of cash and cash equivalents, effective January 1, 2018, to include cash and due from banks as well as interest bearing funds with the Federal Reserve Bank, interest earning deposits with banks, and federal funds sold and securities purchased under resale agreements, which are inclusive of any restricted cash and restricted cash equivalents. Prior to 2018, cash and cash equivalents only included cash and due from banks. Prior periods have been revised to maintain comparability. Excluding the aforementioned presentation change, there have been no significant changes to the accounting policies, estimates and assumptions, or the judgments affecting the application of these estimates and assumptions from those disclosed in Synovus' 2017 Form 10-K.






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Non-GAAP Financial Measures
The measures entitled adjusted non-interest income; adjusted non-interest expense; adjusted efficiency ratio; adjusted net income per common share, diluted; adjusted return on average assets; adjusted return on average common equity; adjusted return on average tangible common equity; average core deposits; tangible common equity 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; efficiency ratio; net income per common share, diluted; return on average assets; return on average common equity; 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 non-interest income is a measure used by management to evaluate non-interest income exclusive of net investment securities gains/losses and changes in fair value of private equity investments, net. 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 management believes are not indicative of ongoing operations and impact period-to-period comparisons. 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. Average core deposits is a measure used by management to evaluate organic growth of deposits and the quality of deposits as a funding source. The tangible common equity 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.

    
Reconciliation of Non-GAAP Financial Measures

Six Months Ended
 
Three Months Ended
(in thousands, except per share data)
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
Adjusted non-interest income
 
 
 
 
 
 
 
Total non-interest income
$
140,433

 
$
140,539

 
$
73,387

 
$
68,701

Add/subtract: Investment securities losses (gains), net
1,296

 
(7,667
)
 
1,296

 
1

Add: Decrease in fair value of private equity investments, net
3,093

 
3,166

 
37

 
1,352

     Adjusted non-interest income
$
144,822

 
$
136,038

 
$
74,720

 
$
70,054

 
 
 
 
 
 
 
 
Adjusted non-interest expense
 
 
 
 
 
 
 
Total non-interest expense
$
399,234

 
$
389,133

 
$
204,057

 
$
191,747

Subtract: Merger-related expense

 
(86
)
 

 

Add: Litigation settlement/contingency expense
4,026

 

 
1,400

 

Add/subtract: Restructuring charges, net
212

 
(6,524
)
 
(103
)
 
(13
)
Subtract: Amortization of intangibles
(583
)
 
(475
)
 
(292
)
 
(292
)
Subtract: Valuation adjustment to Visa derivative
(2,328
)
 

 
(2,328
)
 

 Adjusted non-interest expense
$
400,561

 
$
382,048

 
$
202,734

 
$
191,442

 
 
 
 
 
 
 
 




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Reconciliation of Non-GAAP Financial Measures, continued

Six Months Ended
 
Three Months Ended
(in thousands, except per share data)
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
Adjusted efficiency ratio
 
 
 
 
 
 
 
Adjusted non-interest expense
$
400,561

 
$
382,048

 
$
202,734

 
$
191,442

 
 
 
 
 
 
 
 
Net interest income
558,861

 
491,024

 
284,577

 
251,097

Add: Tax equivalent adjustment
236

 
607

 
120

 
298

Add: Total non-interest income
140,433

 
140,539

 
73,387

 
68,701

Add/subtract: Investment securities losses (gains), net
1,296

 
(7,667
)
 
1,296

 
1

Total FTE revenues
$
700,826

 
$
624,503

 
$
359,380

 
$
320,097

Add: Decrease in fair value of private equity investments, net
3,093

 
3,166

 
37

 
1,352

Adjusted total revenues
$
703,919

 
$
627,669

 
$
359,417

 
$
321,449

Efficiency ratio
56.97
%
 
62.31
%
 
56.78
%
 
59.90
%
      Adjusted efficiency ratio
56.90

 
60.87

 
56.41

 
59.56

 
 
 
 
 
 
 
 
Adjusted net income per common share, diluted
 
 
 
 
 
 
 
Net income available to common shareholders
$
209,229

 
$
142,742

 
$
108,622

 
$
73,444

Add/subtract: Income tax expense related to effects of State Tax Reform
717

 

 
(608
)
 

Add: Merger-related expense

 
86

 

 

Subtract: Litigation settlement/contingency expense
(4,026
)
 

 
(1,400
)
 

Subtract/add: Restructuring charges, net
(212
)
 
6,524

 
103

 
13

Add: Amortization of intangibles
583

 
475

 
292

 
292

Add: Valuation adjustment to Visa derivative
2,328

 

 
2,328

 

Add/subtract: Investment securities losses (gains), net
1,296

 
(7,667
)
 
1,296

 
1

Add: Decrease in fair value of private equity investments, net
3,093

 
3,166

 
37

 
1,352

Subtract: Tax effect of adjustments
(719
)
 
(963
)
 
(624
)
 
(613
)
Adjusted net income available to common shareholders
$
212,289

 
$
144,363

 
$
110,046

 
$
74,489

Weighted average common shares outstanding, diluted
119,229

 
123,304

 
119,139

 
123,027

Adjusted net income per common share, diluted
$
1.78

 
$
1.17

 
$
0.92

 
$
0.61

 
 
 
 
 
 
 
 
Adjusted return on average assets (annualized)
 
 
 
 
 
 
 
Net income
$
214,348

 
$
147,861

 
$
111,181

 
$
76,003

Add/subtract: Income tax expense related to effects of State Tax Reform
717

 

 
(608
)
 

Add: Merger-related expense

 
86

 

 

Add: Litigation settlement/contingency expense
(4,026
)
 

 
(1,400
)
 

Subtract/add: Restructuring charges, net
(212
)
 
6,524

 
103

 
13

Add: Amortization of intangibles
583

 
475

 
292

 
292

Add: Valuation adjustment to Visa derivative
2,328

 

 
2,328

 

Add/subtract: Investment securities losses (gains), net
1,296

 
(7,667
)
 
1,296

 
1

Add: Decrease in fair value of private equity investments, net
3,093

 
3,166

 
37

 
1,352

Subtract: Tax effect of adjustments
(719
)
 
(963
)
 
(624
)
 
(613
)
Adjusted net income
$
217,408

 
$
149,482

 
$
112,605

 
$
77,048

Net income annualized
$
432,249

 
$
298,173

 
$
445,946

 
$
304,847

Adjusted net income annualized
$
438,419

 
$
301,442

 
$
451,657

 
$
309,039

Total average assets
$
31,374,944

 
$
30,536,942

 
$
31,502,758

 
$
30,630,748

Return on average assets
1.38
%
 
0.98
%
 
1.42
%
 
1.00
%
Adjusted return on average assets (annualized)
1.40

 
0.99

 
1.43

 
1.01

 
 
 
 
 
 
 
 




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Table of Contents

Reconciliation of Non-GAAP Financial Measures, continued
Three Months Ended
(dollars in thousands)
June 30, 2018
 
March 31, 2018
 
June 30, 2017
Adjusted return on average common equity and adjusted return on average tangible common equity (annualized)
 
 
 
 
 
Net income available to common shareholders
$
108,622

 
$
100,607

 
$
73,444

Subtract/add: Income Tax expense related to effects of State Tax Reform
(608
)
 
1,325

 

Subtract: Litigation settlement/contingency expense
(1,400
)
 
(2,626
)
 

Add/subtract: Restructuring charges, net
103

 
(315
)
 
13

Add: Amortization of intangibles
292

 
292

 
292

Add: Valuation adjustment to Visa derivative
2,328

 

 

Add: Investment securities losses, net
1,296

 

 
1

Add: Decrease in fair value of private equity investments, net
37

 
3,056

 
1,352

Subtract: Tax effect of adjustments
(624
)
 
(96
)
 
(613
)
Adjusted net income available to common shareholders
$
110,046

 
$
102,243

 
$
74,489

Net income annualized
$
441,393

 
$
414,652

 
$
298,775

 
 
 
 
 
 
Total average shareholders' equity less preferred stock
$
2,831,368

 
$
2,790,648

 
$
2,849,069

Subtract: Goodwill
(57,315
)
 
(57,315
)
 
(57,018
)
Subtract: Other intangible assets, net
(10,555
)
 
(10,915
)
 
(11,966
)
Total average tangible shareholders' equity less preferred stock
$
2,763,498

 
$
2,722,418

 
$
2,780,085

Return on average common equity (annualized)
15.39
%

14.62
%

10.34
%
Adjusted return on average common equity (annualized)
15.59

 
14.86

 
10.49

Adjusted return on average tangible common equity (annualized)
15.97

 
15.23

 
10.75

 
 
 
 
 
 


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Table of Contents

Reconciliation of Non-GAAP Financial Measures, continued

 
 
 
 
 
 
 
(dollars in thousands)
June 30, 2018
 
March 31, 2018
 
December 31, 2018
 
June 30, 2017
Average core deposits
 
 
 
 
 
 
 
Average total deposits
$
26,268,074

 
$
25,788,073

 
$
26,286,009

 
$
24,991,708

Subtract: Average brokered deposits
(1,922,917
)
 
(1,951,910
)
 
(2,198,333
)
 
(1,379,559
)
Average core deposits
$
24,345,157

 
$
23,836,163

 
$
24,087,676

 
$
23,612,149

 
 
 
 
 
 
 
 
Tangible common equity ratio
 
 
 
 
 
 
 
Total assets
$
31,740,305

 
$
31,501,028

 
$
31,221,837

 
$
30,687,966

Subtract: Goodwill
(57,315
)
 
(57,315
)
 
(57,315
)
 
(57,092
)
Subtract: Other intangible assets, net
(10,458
)
 
(10,750
)
 
(11,254
)
 
(11,843
)
Tangible assets
$
31,672,532

 
$
31,432,963

 
$
31,153,268

 
$
30,619,031

Total shareholders' equity
$
3,167,694

 
$
2,956,495

 
$
2,961,566

 
$
2,997,947

Subtract: Goodwill
(57,315
)
 
(57,315
)
 
(57,315
)
 
(57,092
)
Subtract: Other intangible assets, net
(10,458
)
 
(10,750
)
 
(11,254
)
 
(11,843
)
Subtract: Preferred Stock, no par value
(321,118
)
 
(125,980
)
 
(125,980
)
 
(125,980
)
Tangible common equity
$
2,778,803

 
$
2,762,450

 
$
2,767,017

 
$
2,803,032

Total shareholders' equity to total assets ratio
9.98
%
 
9.39
%
 
9.49
%
 
9.77
%
     Tangible common equity ratio
8.77

 
8.79

 
8.88

 
9.15

 
 
 
 
 
 
 
 
Common equity Tier 1 (CET1) ratio (fully phased-in)
 
 
 
 
 
 
 
Common equity Tier 1 (CET1)
$
2,838,616

 
 
 
 
 
 
Subtract: Adjustment related to capital components
(3,599
)
 
 
 
 
 
 
CET1 (fully phased-in)
$
2,835,017

 
 
 
 
 


Total risk-weighted assets
$
28,056,193

 
 
 
 
 
 
Total risk-weighted assets (fully phased-in)
$
28,182,637

 
 
 
 
 
 
Common equity Tier 1 (CET1) ratio
10.12
%
 
 
 
 
 


     Common equity Tier 1 (CET1) ratio (fully phased-in)
10.06

 
 
 
 
 


 
 
 
 
 
 
 
 


 
Current expectation- increase (decrease) vs. 2017
(dollars in thousands)
2017
 
$
 
%
2018 Expectation for adjusted non-interest income growth
 
 
 
 
 
Total non-interest income, as reported
$
345,327

 
$285 million-$290 million
 
(16%)-(18%)
Subtract: Cabela's Transaction Fee
(75,000
)
 
 
 
 
Add: Investment securities losses, net
289

 
 
 
 
Add: decrease in fair value of private equity investments, net
3,093

 
 
 
 
Adjusted non-interest income
$
273,709

 
$285 million-$290 million
 
4%-6%
 
 
 
 
 
 


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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 June 30, 2018, 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 June 30, 2018 that have materially affected, or are reasonably likely to materially affect, Synovus' internal control over financial reporting.


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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 - Commitments and Contingencies" 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’ 2017 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.
As a result of Synovus entering into the Merger Agreement with FCB, certain risk factors, as provided below, have been identified in addition to those previously reported in Synovus’ 2017 10-K. These risks and the other risks associated with the proposed Merger will be more fully discussed in the joint proxy statement/prospectus that will be included in the registration statement on Form S-4 that Synovus will file with the SEC in connection with the Merger. We urge you to read the registration statement on Form S-4 once it becomes available because it will contain important information about the Merger, including relevant risk factors.

The consummation of the Merger is contingent upon the satisfaction of a number of conditions, including shareholder and regulatory approvals, that are outside of our or FCB’s control and that we and FCB may be unable to satisfy or obtain or which may delay the consummation of the Merger or result in the imposition of conditions that could reduce the anticipated benefits from the Merger or cause the parties to abandon the Merger.

Consummation of the Merger is contingent upon the satisfaction of a number of conditions, some of which are beyond our and FCB’s control, including, among others: (i) the adoption of the Merger Agreement by the holders of FCB’s class A common stock, (ii) the approval of the issuance of shares of our common stock to be issued to the FCB stockholders in the Merger by our shareholders, (iii) the authorization for listing on the New York Stock Exchange of the shares our common stock to be issued to the FCB stockholders in the Merger, (iv) the effectiveness of the registration statement registering our common stock to be issued to FCB stockholders in the Merger, (v) the absence of any order, injunction or other legal restraint preventing the completion of the Merger or making the consummation of the Merger illegal and (vi) the receipt of required regulatory approvals, including the approval of the Board of Governors of the Federal Reserve System and the Georgia Department of Banking and Finance. Furthermore, each party’s obligation to complete the Merger is also subject to certain additional customary conditions, including (i) subject to certain exceptions, the accuracy of the representations and warranties of the other party, generally subject to a material adverse effect qualification, (ii) performance in all material respects by the other party of its obligations under the Merger Agreement and (iii) receipt by such party of an opinion from its counsel to the effect that the Merger will qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended.

These conditions to the closing of the Merger may not be fulfilled in a timely manner or at all, and, accordingly, the Merger may not be completed. In addition, the parties can mutually decide to terminate the Merger Agreement at any time, before or after receipt of the requisite approvals by our shareholders or FCB's stockholders, or we or FCB may elect to terminate the Merger Agreement in certain other circumstances.


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In addition, we and FCB may be subject to lawsuits challenging the Merger, and adverse rulings in these lawsuits may delay or prevent the Merger from being completed or require us or FCB to incur significant costs to defend or settle these lawsuits. Any delay in completing the Merger could cause us not to realize, or to be delayed in realizing, some or all of the benefits that we expect it to achieve if the Merger is successfully completed within its expected time frame.

We may fail to realize all of the anticipated benefits of the Merger, or those benefits may take longer to realize than expected. We may also encounter significant difficulties in integrating FCB.
Our ability to realize the anticipated benefits of the Merger will depend, to a large extent, on our ability to successfully integrate the acquired businesses. The integration and combination of the acquired businesses is a complex, costly and time-consuming process. As a result, we will be required to devote significant management attention and resources to integrating their business practices and operations with ours. The integration process may disrupt our business and the business of FCB and, if implemented ineffectively, could limit the full realization of the anticipated benefits of the acquisition. The failure to meet the challenges involved in integrating the acquired businesses and to realize the anticipated benefits of the Merger could cause an interruption of, or a loss of momentum in, our business activities or those of FCB and could adversely impact our business, financial condition and results of operations. In addition, the overall integration of the businesses may result in material unanticipated problems, expenses, liabilities, loss of customers and diversion of our management’s and employees’ attention. The challenges of combining the operations of the companies include, among others:
difficulties in achieving anticipated cost savings, synergies, business opportunities and growth prospects from the acquisition;
difficulties in the integration of operations and systems;
difficulties in the assimilation of employees;
difficulties in managing the expanded operations of a larger and more complex company;
challenges in keeping existing customers and obtaining new customers;
challenges in attracting and retaining key personnel, including personnel that are considered key to the future success of FCB’s businesses; and
challenges in keeping key business relationships in place.
Many of these factors will be outside of our control and any one of them could result in increased costs and liabilities, decreases in the amount of expected income and diversion of management’s time and energy, which could have a material adverse effect on our business, financial condition and results of operations.
In addition, even if the operations of FCB are integrated successfully with our business, the full benefits of the transaction may not be realized, including the synergies, cost savings, growth opportunities or earnings accretion that are expected. These benefits may not be achieved within the anticipated time frame, or at all, and additional unanticipated costs may be incurred in the integration of the businesses. Furthermore, FCB may have unknown or contingent liabilities that we would assume in the acquisition and that were not discovered during the course of our due diligence. These liabilities could include exposure to unexpected asset quality problems, compliance and regulatory violations, key employee and client retention problems and other problems that could result in significant costs to us.
All of these factors could cause dilution to our earnings per share, decrease or delay the expected accretive effect of the transaction, negatively impact the price of our common stock, or have a material adverse effect on our business, financial condition and results of operations.

Failure to complete the Merger could negatively impact our stock price and the future business and financial results.

Completion of the Merger is not assured. If the Merger is not completed, our ongoing business and financial results may be adversely affected and we will be subject to several risks, including the following:

the price of our common stock may decline to the extent that current market prices reflect a market assumption that the Merger will be completed;
having to pay significant costs relating to the Merger without receiving the benefits of the Merger, including, in certain circumstances, a termination fee of $93.5 million;
negative reactions from customers, shareholders, market analysts, employees and future acquisition partners;
the possible loss of employees necessary to operate our business;
we will have been subject to certain restrictions on the conduct of our business, which may have prevented us from making certain acquisitions or dispositions or pursuing certain business opportunities while the Merger was pending; and

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the diversion of the focus of our management to the Merger instead of on pursuing other opportunities that could have been beneficial to us and our business.

If the Merger is not completed, we cannot assure our shareholders that these risks will not materialize and will not materially adversely affect our business, financial results, and stock price. Additionally, if the Merger is not completed, we will not recognize the anticipated benefits of the Merger, yet will still incur significant expenses.

While the Merger is pending, we will be subject to business uncertainties and contractual restrictions that could adversely affect our business and operations.

Uncertainty about the effect of the Merger on employees, customers and other persons with whom we or FCB have a business relationship may have an adverse effect on our business, operations and stock price. In connection with the pendency of the acquisition, existing customers of FCB could decide to no longer do business with FCB, reducing the anticipated benefits of the Merger. Synovus is also subject to certain restrictions on the conduct of its business while the Merger is pending. As a result, certain other projects may be delayed or ceased and business decisions could be deferred. Employee retention at FCB, and also at Synovus, may be challenging during the pendency of the Merger, as certain employees may experience uncertainty about their future roles with the combined company. If key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with Synovus, FCB or the combined company, the benefits of the Merger could be materially diminished.

In addition, shareholders and market analysts could also have a negative perception of the Merger, which could cause a material reduction in our stock price and could also result in (i) our not achieving the requisite vote to approve the issuance of our shares in the Merger and/or (ii) FCB not achieving the requisite vote to adopt the Merger Agreement.

The Merger may not be accretive and may cause dilution of our adjusted earnings per share following the Merger, which may negatively affect the market price of our common stock.

We currently anticipate that the Merger will be accretive to shareholders of the combined company on an earnings per share basis in 2020. This expectation is based on preliminary estimates, which may materially change. We could also encounter additional transaction and integration-related costs or other factors resulting in the failure to realize all of the benefits anticipated in the Merger. All of these factors could cause dilution of our adjusted earnings per share or decrease or delay the expected accretive effect of the Merger and cause a decrease in the market value of our common stock.

We are expected to incur substantial expenses related to the Merger and our integration with FCB.

Both Synovus and FCB will incur substantial expenses in connection with the Merger and our integration with FCB. There are a large number of processes, policies, procedures, operations, technologies, and systems that must be integrated. While we have assumed that a certain level of expenses would be incurred, there are many factors beyond our control that could affect the total amount or the timing of the integration expenses. Moreover, many of the expenses that will be incurred are, by their nature, difficult to estimate accurately. These expenses could, particularly in the near term, exceed the savings that we expect to achieve from the elimination of duplicative expenses and the realization of economies of scale and cost savings. These integration expenses likely will result in us taking significant charges against earnings following the completion of the Merger, and the amount and timing of such charges are uncertain at present.

Our future results will suffer if we do not effectively manage our expanded operations following the Merger.

Following the Merger, the size of our business will increase significantly beyond its current size. Our future success depends, in part, upon our ability to manage this expanded business, which will pose substantial challenges for our management, including challenges related to the management and monitoring of new operations and associated increased costs and complexity. There can be no assurances we will be successful or that we will realize the expected operating efficiencies, cost savings and other benefits currently anticipated from the Merger.

Current Synovus shareholders may have a reduced ownership and voting interest in the combined company after the Merger.

Synovus expects to issue or reserve for issuance approximately 52 million shares of Synovus common stock to FCB stockholders in connection with the Merger (including shares of Synovus common stock to be issued in connection with outstanding FCB equity awards). Upon completion of the Merger, each Synovus shareholder will remain a shareholder of Synovus with a percentage ownership of the combined company that may be smaller than the shareholder's percentage of Synovus prior to the transaction, depending upon such shareholder's current ownership of Synovus shares. As a result of these potentially reduced ownership

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percentages, Synovus shareholders may have less voting power in the combined company than they now have with respect to Synovus.

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 $150 million share repurchase program that will expire at the end of 2018. This program was announced on January 23, 2018. The table below sets forth information regarding repurchases of our common stock during the second quarter of 2018.
Share Repurchases
(in thousands, except per share data)
 
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
April 2018
 
22

 
$
52.98

 
22

 
$
122,112

May 2018
 
479

 
53.63

 
479

 
96,408

June 2018
 
421

 
55.14

 
421

 
73,220

Total
 
922

 
$
54.30

 
922

 

 
 
 
 
 
 
 
 
 
(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 second quarter of 2018 were purchased through open market transactions, including under plans complying with Rule 10b5-1 under the Exchange Act.
ITEM 3. – DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. – MINE SAFETY DISCLOSURES
None.
ITEM 5. – OTHER INFORMATION
None.

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ITEM 6. – EXHIBITS  
 
 
 
Exhibit
Number
 
Description
 
 
2.1

 
 
 
 
3.1

 
 
 
 
3.2

 
 
 
 
3.3

 
 
 
 
3.4

 
 
 
 
3.5

 
 
 
 
3.6

 
 
 
12.1

 
 
 
 
31.1

 
 
 
 
31.2

 
 
 
 
32

 
 
 
 
101

 
Interactive Data File
 
 
 

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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.
 
 
 
August 8, 2018
By:
 
/s/ Kevin S. Blair
Date
 
 
Kevin S. Blair
 
 
 
Executive Vice President and Chief Financial Officer
 
 
 
(Duly Authorized Officer and Principal Financial Officer)


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