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On Jul 3, 2013, we have upgraded our recommendation on Synovus Financial Corporation (SNV - Analyst Report) to Neutral from Underperform, based on the company’s prudent expense management, strong capital ratios and improved credit quality. However, the company reported first-quarter 2013 net income in line with the Zacks Consensus Estimate. Lower top line and declining deposits and loans were the headwinds.

Why Upgrade?

In the current competitive banking environment, Synovus continues to reduce operating costs, implement strategies to broaden its loan portfolio and increase non-interest income. Since 2010, the company has ushered strategic initiatives to reduce expenses and streamline its processes. Notably, the expense reduction measure has led to a non-interest expense fall of 10.5% in 2011 and 9.7% in 2012 and 14.6% sequential fall in first-quarter 2013.

Synovus is well positioned from a balance sheet perspective. As of Mar 31, 2013, its capital ratios were at a well-capitalized level. Notably, about $687 million of net deferred tax assets (DTAs) continue to be excluded from regulatory capital as of Mar 31, 2013. The prohibited DTAs are expected to decrease over time, and thereby create additional regulatory capital in the future.

Despite the macro pressure, Synovus’ credit quality continues to normalize. Credit metrics have been gradually improving since 2009 through first-quarter 2013. Further, we are impressed with the overall improvement in delinquencies and net charge-offs. This is expected to continue, thereby boosting future earnings.

However, the ongoing low interest rate environment has kept Synovus’ total revenue under pressure. Interest rates have remained within the range of 0%–0.25% since 2009. Moreover, total loans decreased to $19.5 billion over the course of 5 years from $27.9 billion in 2008. The decline in loans and lower realized yields on investment securities are expected to keep net interest income under pressure in the upcoming quarters.

For Synovus, over the last 60 days, the Zacks Consensus Estimate for 2013 and 2014 remained stable at 11 cents and 17 cents per share, respectively. Hence, Synovus currently carries a Zacks Rank #3 (Hold).

Other Stocks to Consider

Some well performing Southeast banks include First M&F Corporation , Home Bancshares, Inc. (Conway, AR) (HOMB - Snapshot Report) and Farmers Capital Bank Corporation (FFKT - Snapshot Report). All of these stocks carry a Zacks Rank #1 (Strong Buy).

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