Synovus’ EPS Meets, Rev Dips (FBNC) (IBKC) (PNFP) (SNV)

Including an income tax benefit of roughly $800 million from the recapture of substantially all of the deferred tax asset valuation allowance, net income available to common shareholders came in at $712.8 million. This compared favorably with net income of $16.0 million in the last quarter or 2 cents per share recorded in the last quarter.

For 2012, the company reported a net loss of 3 cents, in line with the Zacks Consensus Estimate. However, this compares favorably with a loss of 15 cents in 2011.

The company’s performance was buoyed by strong capital ratios and improved non-interest income. Yet, lower revenue and elevated expenses were the downsides.

Performance in Detail

Total revenue declined marginally to $320.1 million from $320.9 million in the preceding quarter. The decrease resulted from lower interest income, partly offset by higher non-interest income. However, revenue surpassed the Zacks Consensus Estimate of $280.0 million.

For the year 2012, Synovus recorded total revenue of $1.3 billion, down from $1.5 billion in 2011. However, it surpassed the Zacks Consensus Estimate of $1.1 billion.

Net interest income decreased 2.3% to $207.5 million from $212.3 million in the prior quarter, primarily due to lower interest income.

Moreover, net interest margin was 3.45%, down 6 basis points (bps) sequentially, due to a decline in the yield on earning assets of ten basis points, partially offset by a 4 basis-point decline in the effective cost of funds.

Non-interest income climbed 9.4% to $80.1 million in the quarter from $73.2 million in the prior quarter. The rise was primarily due to higher bankcard fees, higher investment securities gains, higher brokerage revenue, elevated other fee income along with an increase in fair value of private equity investments. These positives were partially offset by a drop in mortgage banking income and other non-interest income.

Total non-interest expenses jumped 11.4% sequentially to $213.3 million. The rise was mainly due to higher salaries and other personnel expenses along with elevated foreclosed real estate expenses.

Credit Quality

For Synovus, credit quality remained mixed during the reported quarter. Net charge-offs were $193.5 million, substantially up from $96.5 million in the prior quarter. Moreover, the annualized net charge-off ratio was 3.94%, up from 1.97% in the prior quarter.

Non-performing loan inflows were $262.7 million, up substantially from $114.8 million in the third quarter of 2012. Additionally, non-performing loans, excluding loans held for sale, were $543.3 million as of Dec 31, 2012, down 22.4% from the prior quarter. The non-performing loan ratio was 2.78%, down from 3.55% as of Sep 30, 2012.

Total non-performing assets were $703.1 million, down 21.8% sequentially. The non-performing asset ratio was 3.57% compared with 4.51% in the prior quarter. Total delinquencies (consisting of loans 30 or more days past due and still accruing) were 0.54% of total loans, down from 0.55% as of Sep 30, 2012.

Balance Sheet

Total deposits, as of Dec 31, 2012, were $21.1 billion, up 1.0% from $20.8 billion in the prior quarter. The increase reflected a hike in Negotiable Order of Withdrawal (NOW) account balances as well as non-interest bearing demand deposits.

Core deposits, at the end of the quarter were $20.0 billion, up $37.4 million from the prior quarter. Core deposits, excluding time deposits, increased $225.2 million compared to the previous quarter.

The effective cost of core deposits (includes non-interest bearing deposits) continued to decline, with an effective cost of 30 basis points for the fourth quarter of 2012, down from 34 basis points for the previous quarter.

Total reported loans inched down 1.0% to $19.2 billion, attributable to distressed loan sales of roughly $475 million.

Capital Position

As of Dec 31, 2012, Tier 1 capital ratio and Tier 1 common equity ratio were 13.24% and 8.72%, respectively, compared with prior quarter’s ratios of 13.23% and 8.73%. Moreover, Tier 1 leverage ratio improved to 11.00% from 10.97% in the prior quarter.

Our Viewpoint

We believe that Synovus is in a recovery phase, driven by lower non-performing assets and improving operating efficiencies, which should make the company profitable in the upcoming quarters. Furthermore, the company’s planned expense-saving initiatives will act as a positive catalyst. However, repayment of funds, generated through Troubled Asset Relief Program (TARP), is unlikely to take place in the near term.

Shares of Synovus currently retain a Zacks Rank #3 (Hold). However, other South-east banks, which are worth considering, include First Bancorp (FBNC), Pinnacle Financial Partners Inc. (PNFP), IberiaBank Corp. (IBKC) – each carrying a Zacks Rank #1 (Strong Buy).