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Synovus Financial Corporation (SNV - Analyst Report) reported third-quarter 2013 earnings per share of 4 cents, which were in line with the Zacks Consensus Estimate and outpaced the prior-year quarter earnings by 2 cents.

Lower non-interest expenses and a significant improvement in credit quality were the tailwinds for the quarter. The company’s capital ratios were also strong. However, decline in the top line due to lower net interest as well as non-interest income was a negative.

Net income available to common shareholders came in at $37.2 million, rising from $16.0 million in the year-ago quarter. Notably, the quarterly results included income tax expense of $27.8 million compared with a benefit of $0.2 million in the prior-year quarter.

Performance in Detail

Total revenue fell 7.9% to $297.43 million from $320.909 million in the year-ago quarter. The decline was due to decrease in interest as well as non-interest income. However, reported revenues surpassed the Zacks Consensus Estimate of $273.0 million.

Net interest income fell 3.9% year over year to $204.0 million, primarily due to lower interest income. Additionally, owing to persistent pressure, net interest margin contracted 11 basis points year over year to 3.40%.

Non-interest income fell 13.2% year over year to $63.6 million. The decline was primarily due to fall in both mortgage banking income and gains from investment securities.

Total non-interest expenses declined 2.2% year over year to $181.2 million. The decrease was mainly due to absence of Visa indemnification charges, decline in losses on other loans held for sale and lower restructuring charges. These were partially offset by increase in professional fees expenses, other expenses and third-party services expenses.  

Credit Quality

Synovus’ credit quality significantly improved in the reported quarter. Net charge-offs were $23.0 million, substantially down by 76.1% year over year. Moreover, the annualized net charge-off ratio was 0.47%, down from 1.97% in the prior quarter.

Nonperforming loan inflows were $47.4 million, down 58.7% from $114.8 million in the third quarter of 2012. Additionally, nonperforming loans, excluding loans held for sale, were $450.9 million as of Sep 30, 2013, down 35.6% from the prior-year quarter. The nonperforming loan ratio was 2.29%, down from 3.55% as of Sep 30, 2012.

Total nonperforming assets were $586.9 million, down 34.7% year over year. The nonperforming asset ratio was 2.96% compared with 4.51% in the prior-year quarter. Total delinquencies (consisting of loans 30 or more days past due and still accruing) were 0.40% of total loans, down from 0.55% as of Sep 30, 2012.

Capital Position

Synovus had a strong capital position in the quarter. As of Sep 30, 2013, Tier 1 capital ratio and Tier 1 common equity ratio were 10.55% and 9.93% respectively, compared with 13.23% and 8.73% in the prior-year quarter.

Tier 1 leverage ratio declined to 8.96% from 10.97% in the prior-year quarter. Total risk-based capital ratio and tangible common equity ratio were 13.04% and 10.61%, respectively, as of Sep 30, 2013, compared with 16.16% and 7.35% as of Sep 30, 2012.

Total deposits, as of Sep 30, 2013, were $21.0 billion, up 0.6% from the prior-year quarter.  Core deposits at the quarter-end were $19.7 billion, down 1% from the year-ago quarter. Core deposits, excluding time deposits were $16.1 billion, down 0.6% year over year. Total loans remained stable at $19.7 billion.

Other Developments

In July, Synovus repaid the bailout money taken from the government during the financial crisis. The company repurchased $968 million of its Series A Preferred Stock, which were issued to the U.S. Department of the Treasury as part of the company’s participation in the Troubled Asset Relief Program (TARP).

Over two-thirds of Synovus’ repayment was financed through internally available funds, which included dividend worth $680 million from Synovus Bank, the company’s wholly-owned subsidiary. Further, balance funds were derived from the recent $185 million common stock offering and $130 million preferred stock offering.

The U.S. Treasury still holds warrants to buy common stock in Synovus with an expiry date in 2018. The Treasury has the right to buy 15.5 million shares of Synovus’ common stock for $9.36 per share.

Our Viewpoint

In our opinion, Synovus has commendably recovered from the financial crunch that had grappled it, thanks to lower non-performing assets and improving operating efficiencies. Moreover, the bank’s repayment of Troubled Asset Relief Program (TARP) dues will likely drive higher earnings in the coming quarters. However, stringent regulations, the prevalent low interest environment and significant exposure to residential real estate markets remain matters of concern.

Synovus currently carries a Zacks Rank #3 (Hold). Better-performing Southeast banks include American National Bankshares Inc. (AMNB - Snapshot Report), SY Bancorp Inc. (SYBT - Snapshot Report) and Simmons First National Corporation (SFNC - Snapshot Report). All of these have a Zacks Rank #1 (Strong Buy).
 

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