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Synovus Financial Corp.’s (SNV - Analyst Report) first-quarter 2012 earnings came in at 2 cents per share, a penny above the Zacks Consensus Estimate. This compared favorably with the prior quarter earnings of 1 cent. Also, it significantly improved from the prior-year quarter’s loss of 12 cents.

The sequential improvement in results at Synovus was driven by an enhanced top line and lower operating expenses. Moreover, improved credit quality, reduced credit costs as well as sturdy capital ratios were the positives for the company.

In the reported quarter, net income available to common shareholders was $21.4 million compared with $12.8 million in the previous quarter and a net loss of $93.7 million in the year-ago quarter.

Behind the Headlines

Total revenue reported in the quarter under review was $305.1 million up 1.5% from $300.6 million as of December 31, 2011 and 1.2% from $301.6 million as of March 31, 2011. The sequential increase was mainly due to higher non-interest income partly offset by lower net-interest income.

Net interest income at Synovus was $221.0 million, down 2.7% from $227.2 million in the previous quarter and 6.9% from $237.4 million in the year-ago quarter. Net interest margin was 3.55%, up 3 basis points (bps) both sequentially and year over year, driven by a decrease in the effective cost of funds.

Synovus’ interest expenses slipped 9.7% sequentially and 31.6% year over year to $41.7 million in the reported quarter.

Non-interest income came in at $84.1 million, climbed 14.5% from $73.5 million in the prior quarter and 31.1% from $64.2 million in the prior-year quarter. The sequential surge was primarily caused by gains in investment securities along with higher mortgage and bankcard revenues, partially mitigated by lower service charges as well as fiduciary and asset management fees.

Total non-interest expenses at Synovus declined 7.3% sequentially and 15.3% year-over-year to $203.1 million. The substantial dip was attributable to lower salaries and personnel expenses, net occupancy and equipment expense along with lesser Visa indemnification charges, partly offset by higher Federal Deposit Insurance Corporation (FDIC) insurance and other regulatory fees.

Total credit costs were $90.9 million, falling 0.44% from $90.5 million in the last quarter and 48.7% from $177.1 million in the prior-year quarter.

Credit Quality

For Synovus, credit quality improved remarkably during the quarter. Net charge-offs were $94.7 million in the quarter, down 16.5% from $113.5 million in the prior-quarter and 43.2% from $166.9 million in the prior-year quarter. Moreover, the annualized netcharge-off ratio was 1.90%, dropping from 2.26% in the previous quarter and from 3.12% in the year-ago quarter.

In the quarter, Synovus’ non-performing loan inflows were $139.6 million, down 26.2% sequentially from $189.2 million and 54.5% year-over-year from $306.5 million.

Additionally, potential problem commercial loans declined for the six successive quarters to $685.5 million, dipping 12.1% sequentially and 46.6% on a year-over-year basis.

As of March 31, 2012, Synovus’ total non-performing assets were $1.06 billion, down 5.5% from $1.11 billion in the previous quarter and 17.2% from $1.28 billion in the year-ago quarter. The non-performing asset ratio was 5.26% as against 5.50% in the prior-quarter and 5.97% in the prior- year quarter.

Capital Position

As of March 31, 2012, Synovus’ Tier 1 capital ratio ,Tier 1 common equity ratio and Tier 1 leverage ratio increased to 13.19%, 8.67% and 10.41%, respectively, compared with prior quarter’s ratios of 12.94%, 8.49% and 10.08%, respectively. Tangible common equity ratio remained constant at 6.81% compared with the previous quarter.

Balance sheet

Synovus’ total deposits for the quarter under review were $22.1 billion, down 1.2% sequentially and 4.6% year-over-year. The sequential decline was mainly due to planned reductions in national market brokered deposits and time deposits.

However, total core deposits were $20.7 billion, up 0.5% sequentially and 2.5% year- over-year. The sequential increases were driven by higher demand deposits and money market funds partly offset by lower time deposits.

The effective cost of core deposits persistently decreased, with an effective cost of 47 basis points for the quarter, compared with 53 basis points in the prior-quarter and 72 basis points in the prior-year quarter.

Our Take

We believe Synovus is in a recovery phase, driven by lower non-performing assets and improved operating efficiencies, which should make the company more profitable in the long-run. Furthermore disciplined expenses management 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. However, one of its peers Monarch Financial Holdings, Inc. (MNRK - Snapshot Report) retains Zacks# 1 Rank, which translates to a Strong Buy rating.

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