Synovus Financial Corp. ( SNV - Analyst Report ) reported second-quarter 2012 net income of 3 cents per share, beating the Zacks Consensus Estimate by a penny. Moreover, the quarter’s results marked a significant improvement from the loss of 7 cents per share reported in the year-ago quarter.

The robust performance was buoyed by improved credit trends with a significant decline in credit costs along with continued expense control. Yet, lower revenue aided by reduced net interest income was a dampener.

Net income was $24.8 million against a net loss of $53.5 million in the prior-year quarter.

Performance in Detail

Total revenue dropped 7.2% to $330.3 million from $355.9 million in the year-ago period. The decrease mainly resulted from lower interest income. However, revenue surpassed the Zacks Consensus Estimate of $286.0 million.

Net interest income decreased 7.6% to $213.4 million from $231.0 million in the year-ago period, primarily due to lower interest income. Net interest margin was 3.48%, down 3 basis points (bps) year over year.

However, non-interest income increased 12.7% to $76.5 million in the quarter from $67.8 million in the year-ago period, boosted by increased mortgage revenue and higher other non-interest revenue. These increases were partially offset by lower bankcard fees and reduced service charges on deposit accounts.

Total non-interest expenses dropped 6.4% year over year to $208.3 million. The drop in expenses was mainly due to lower FDIC insurance and other regulatory fees, reduced foreclosed real estate expenses, decreased net occupancy and equipment expense coupled with low restructuring charges. Yet, these decreases were partially offset by higher salaries and other personnel expenses. Total credit costs substantially dropped 55.5% to $70.3 million from $157.9 million in the prior-year quarter.

Credit Quality

For Synovus, credit quality improved significantly during the quarter. Net charge-offs were $98.7 million, down 41.0% from $167.2 million in the prior-year quarter. Moreover, the annualized net charge-off ratio was 1.99%, down from 3.22% in the prior-year comparable quarter.

Non-performing loan inflows were $124.3 million, reflecting a 46.2% plunge from $231.1 million in the comparable quarter last year. Additionally, non-performing loans, excluding loans held for sale, were $755.2 million as of June 30, 2012, down 14.7% from the prior-year quarter. The non-performing loan ratio was 3.84%, down from 4.32% as of June 30, 2011.

As of June 30, 2012, total non-performing assets were $961.4 million, down 21.1% year over year. The non-performing asset ratio was 4.83% compared with 5.85% in the year-ago quarter. Total delinquencies (consisting of loans 30 or more days past due and still accruing) were 0.47% of total loans, down from 0.97% as of June 30, 2011.

Capital Position

As of June 30, 2012, Tier 1 capital ratio and Tier 1 common equity ratio decreased to 13.36% and 8.81%, respectively, compared with prior-year quarter’s ratios of 12.84% and 8.41%, respectively. Moreover, Tier 1 leverage ratio improved to 10.66% from 9.70% in the prior-year quarter.

Total deposits were $21.6 billion, down from $22.9 billion in the prior-year quarter, mainly due to planned reductions in national market brokered deposits and time deposits. However, total core deposits increased 1% year over year to $20.4 billion.

The effective cost of core deposits continued to decline, with an effective cost of 41 basis points, down from 67 basis points in the prior-year quarter.

Our Viewpoint

We believe Synovus is in a recovery phase, driven by lower non-performing assets 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. However, repayment of funds generated through Troubled Asset Relief Program (TARP) is still not visible in the near term.

Shares of Synovus currently retain a Zacks #3 Rank, which translates to a short-term Hold rating.

Among its peers, Monarch Financial Holdings, Inc. ( MNRK - Snapshot Report ) is expected to release its second-quarter earnings on August 3, 2012.