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Synovus Financial Corp. (SNV - Analyst Report) reported fourth-quarter 2011 net income attributable to common shareholders of 1 cent per share, outperforming the break-even Zacks Consensus Estimate. Though the quarter’s results marked a significant improvement from the loss of 23 cents per share reported in the year-ago quarter, it missed the prior quarter’s earnings by a penny.

The robust performance was attributable to improved credit trends with a significant decline in credit costs along with continued implementation of efficiency initiatives. Quarterly results included net investment securities gains of $10.3 million coupled with a $5.9 million charge related to Synovus’ indemnification of the Visa Inc. (V - Analyst Report) liability.

In fourth quarter of 2011, net income was $12.8 million compared with a net loss of $180.0 million in the prior-year quarter and net income of $15.7 million in the prior quarter. For full year, net loss was $118.7 million or 15 cents per share, significantly down from a loss of $848.2 million or $1.24 per share in the prior year. However, the Zacks Consensus Estimate was a loss of 17 cents per share.

Performance in Detail

Total revenue dropped 23.5% to $246.1 million from $321.9 million in the year-ago period and 32.0% sequentially from $362.0 million in the prior quarter. The decrease mainly resulted from lower non-interest income. Moreover, revenue was also below the Zacks Consensus Estimate of $298.0 million.

For full year, total revenue was $1.26 billion, down 2.3% from $1.29 billion in the year-ago period. However, revenue surpassed the Zacks Consensus Estimate of $1.22 billion.

Net interest income decreased 6.1% to $227.2 million from $242.0 million in the year-ago period and plummeted 0.6% from $228.6 million in the prior quarter, due to lower earnings asset yields. Net interest margin was 3.52%, up 15 basis points (bps) year over year and 5 bps sequentially, driven by a decrease in the effective cost of funds.

Synovus’ interest expenses slipped 35.5% year over year and 13.7% sequentially to $46.1 million in the reported quarter.

Non-interest income edged down 8.0% to $73.5 million in the quarter from $79.9 million in the year-ago period. The decline was attributable to a fall in fiduciary and asset management fees, lower service charges on deposit accounts and decreased brokerage, mortgage and bankcard fees.

Moreover, non-interest income declined 44.9% on a sequential basis, mainly due to decreased investment securities gains.

Total non-interest expenses dropped 4.3% year over year and 1.6% sequentially to $219.1 million. The drop in expenses was mainly due to lower FDIC insurance and other regulatory fees, lower salaries and other personnel expense, data processing expense, net occupancy and equipment expense.

Total credit costs dropped 36.5% to $90.5 million in the quarter from $142.5 million in the previous quarter. As of December 31, 2011, total headcount was reduced to 5,224 from 6,109, down 14.5% year over year.

Credit Quality

For Synovus, credit quality improved significantly during the quarter. Net charge-offs were $113.5 million in the quarter, down 18.0% from $138.3 million in the prior quarter and 70.5% from $385.2 million in the prior year. Moreover, the annualized net charge-off ratio was 2.26%, down from 2.72% in the previous quarter and from 6.93% in the prior-year comparable quarter.

In the quarter, new non-performing loan inflows were $189.2 million, down 14.8% sequentially from $222.0 million and down 35.8% year over year from $294.9 million.

Additionally, potential problem commercial loans declined for the fifth consecutive quarter to $779.6 million, down 17.2% sequentially and 58.3% from the peak of $1.87 billion in the third quarter of 2010.

As of December 31, 2011, total non-performing assets were $1.12 billion, down $47.0 million sequentially and $162.9 million year over year. The non-performing asset ratio was 5.50% compared with 5.71% in the previous quarter and 5.83% in the year-ago quarter.

Capital Position

As of December 31, 2011, Tier 1 capital ratio and Tier 1 common equity ratio decreased to 12.94% and 8.49%, respectively, compared with prior quarter’s ratios of 12.97% and 8.50%, respectively. However, Tier 1 leverage ratio improved to 10.08% from 9.87% in the prior quarter.

Total deposits were $22.4 billion, down $697.7 million from the prior quarter, mainly due to planned reductions in national market brokered deposits and time deposits. Moreover, total core deposits decreased $323.2 million sequentially to $20.6 billion, driven by a fall in time deposits.

The effective cost of core deposits continued to decline, with an effective cost of 53 basis points for the quarter, compared with 62 basis points in the prior quarter and 82 basis points in the prior-year quarter.

Our Take

We believe Synovus is in a recovery phase, driven by lower non-performingassets and improving operating efficiencies, which should make the company more profitable in the upcoming quarters. Furthermore, the company’s planned expenses savings will act as a positive catalyst for Synovus. However, repayment of funds generated through Troubled Asset Relief Program (TARP) is still not visible in the near term.

Synovus currently retains its Zacks #3 Rank, which translates to a short-term ‘Hold’ rating.

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