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Synovus Financial Corporation (SNV - Analyst Report) reported its second-quarter 2013 net income of 3 cents per share, in line with the Zacks Consensus Estimate. However, results outpaced the prior-quarter earnings by a penny.

Decline in non-interest expenses and a marked improvement in credit quality were the tailwinds for the quarter. Moreover, the company’s capital ratios depict its strong position. Further, higher top line and rise in deposits and loans added fuel to the fire.

Net income available to common shareholders came in at $30.7 million compared with $14.8 million in the last quarter. Notably, reported quarter and prior-quarter results included income tax expense of $27.4 million and $17.0 million, respectively.

Concurrent with the earnings release, Synovus announced its plan of redeeming 967,870 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A, issued to the U.S. Treasury through the Capital Purchase Program initiated under the Troubled Asset Relief Program (TARP), for a total purchase price of $967.87 million. This step depicts Synovus’ sustainable profitability and strong position.

However, after the payment of TARP dues, the U.S. Treasury would remain the holder of warrants to purchase 15.5 million shares of Synovus common stock at an exercise price of $9.36 per share.

Performance in Detail

Total revenue rose 0.5% to $296.6 million from $295.1 million in the preceding quarter. The rise resulted from higher interest as well as non-interest income. Moreover, results surpassed the Zacks Consensus Estimate of $273.0 million.

Net interest income surged 1.1% sequentially to $202 million, primarily due to higher interest income. However, net interest margin was 3.39%, down 4 basis points sequentially, due to a fall in the yield on earning assets of 7 basis points, partially offset by 3 basis points decline in the effective cost of funds.

Non-interest income ascended 0.6% to $65.1 million in the quarter from $64.7 million in the prior quarter. The rise was primarily due to elevated fiduciary and asset management fees, higher investment securities gains and a rise in mortgage banking income and bankcard fees. These increases were partially mitigated by lower brokerage revenues and reduced service charges on deposit accounts.

Total non-interest expenses declined 0.6% sequentially to $181.2 million. The dip was mainly due to lower salaries and other personnel expenses, reduced restructuring charges along with decreased foreclosed real estate expenses. These decreases were mostly offset by higher other operating expenses and elevated professional fees.

Credit Quality

For Synovus, credit quality significantly improved during the reported quarter. Net charge-offs were $30.0 million, substantially down from $57.3 million in the prior quarter. Moreover, the annualized net charge-off ratio was 0.61%, down from 1.18% in the prior quarter.

Non-performing loan inflows were $66.9 million, down 20% from $83.9 million in the first-quarter of 2013. Additionally, non-performing loans, excluding loans held for sale, were $483.5 million as of Jun 30, 2013, down 5.8% from the prior quarter. The non-performing loan ratio was 2.47%, down from 2.65% as of Mar 31, 2013.

Total non-performing assets were $635.2 million, down 6.3% sequentially. The non-performing asset ratio was 3.21% compared with 3.47% in the prior quarter. Total delinquencies (consisting of loans 30 or more days past due and still accruing) were 0.41% of total loans, down from 0.46% as of Mar 31, 2013.

Capital Position

Synovus exhibited a strong capital position. As of Jun 30, 2013, Tier 1 capital ratio and Tier 1 common equity ratio were 13.49% and 8.97%, respectively compared with 13.50% and 8.93% in the prior quarter.

Tier 1 leverage ratio improved to 11.33% from 11.27% in the prior quarter. Total risk-based capital ratio and tangible common equity ratio were 16.00% and 9.71%, respectively, as of Jun 30, 2013, compared with 16.45% and 9.89% as of Mar 31, 2013.

Total deposits, as of Jun 30, 2013, were $20.7 billion, up 0.5% from $20.6 billion in the prior quarter. The increase reflected a rise in Negotiable Order of Withdrawal (NOW) account balances as well as higher non-interest bearing demand deposits.

Core deposits at the end of the quarter were $19.4 billion, up 1% from the prior quarter. Core deposits, excluding time deposits stood at $16.0 billion, up 1.9% from $15.7 billion in the last quarter. Total loans grew $240.4 million sequentially or 5% annualized to $19.6 billion.

Other Developments

In May 2013, Synovus acquired approximately $54 million in deposits – including all uninsured deposits – of Valdosta, Ga.-based failed Sunrise Bank from the Federal Deposit Insurance Corporation (FDIC). Sunrise Bank, which operated through branches at Valdosta, Atlanta, and Jeffersonville in Ga., was a subsidiary of Capitol Bancorp, Ltd. .

Our Viewpoint

We believe Synovus has emerged from a recovery phase, driven by lower non-performing assets and improving operating efficiencies. Moreover, repayment of Troubled Asset Relief Program (TARP) dues depicts sustainable earnings in the upcoming quarters. However, regulatory issues, low interest environment and significant exposure to residential real estate markets remain matters of concern.

Shares of Synovus currently carry a Zacks Rank #3 (Hold). Some Southeast banks that are worth considering include Home Bancshares, Inc. (Conway, AR) (HOMB - Snapshot Report) and WesBanco Inc. (WSBC - Snapshot Report). Both stocks carry a Zacks Rank #1 (Strong Buy).

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