Synovus Trims Losses but Lags Ests - Analyst Blog

Synovus Financial Corp.(SNV) reported fourth quarter 2010 loss of 23 cents per share, a significant improvement from the loss of 58 cents per share reported in the prior-year quarter and 25 cents in the prior quarter. However, the quarter's earnings missed the Zacks Consensus Estimate of a loss of 19 cents.

Net loss decreased to $180.0 million from $282.8 million in the prior-year quarter and $195.8 million in the prior quarter. The recovery is attributable to improved credit trends with a significant decline in credit costs and stable core performance.

For fiscal 2010, Synovus reported loss per share of $1.24, significantly down from $3.99 per share reported in the prior year. However, loss surpassed the Zacks Consensus Estimate of a loss of $1.26 per share. Net loss was $848.2 million compared with $1,488.7 million in the prior year.

Performance in Detail

In the fourth quarter of 2010, net interest income decreased 5.4% to $242.0 million from $255.8 million in the year-ago period and also declined 1.4% from $245.5 million in the prior quarter, due to lower loan balances. Net interest margin was 3.37%, up from 3.25% reported in the prior-year quarter and 3.33% in the prior quarter driven by a decrease in the effective cost of funds.

For fiscal 2010, net interest income was $986.3 million, down 2.4% year over year. Net interest margin was 3.36% compared with 3.19% in the prior year.

Synovus' interest expenses also decreased 11.6% sequentially and 32.4% year over year to $71.6 million in the quarter. For full-year 2010, interest expenses were $334.2 million, down 33.0% year over year.

Non-interest income plummeted 41.6% to $79.9 million in the quarter from $136.8 million in the year-ago period. The decline was attributable to a fall in fee income, fiduciary and asset management fees, service charges on deposit accounts and other non-interest income, partially offset by an upswing in mortgage banking income, bankcard income brokerage and investment banking income.

Non-interest income also edged down 2.3% sequentially, mainly due to lower earnings on private equity investments and NSF fees, partly offset by strong growth in brokerage revenue. For fiscal 2010, non-interest income was $305.3 million, down a substantial 25.6% year over year.

Total revenue decreased 18.0% to $321.9 million from $392.6 million in the year-ago period and 1.6% sequentially from $327.3 million in the prior quarter. However, revenue surpassed the Zacks Consensus Estimate of $320.0 million. For fiscal 2010, total revenue was $1,291.6 million, down 9.0% year over year, and was also below the Zacks Consensus Estimate of $1,314.0 million.

In the fourth quarter of 2010, total non-interest expenses decreased 8.2% year over year to $229.0 million. The decline was primarily attributable to lower foreclosed real estate expense and FDIC insurance and other regulatory fees, partially offset by higher salaries and other personnel expense, professional fees, data processing expense, net occupancy and equipment expense and other operating expenses. For fiscal 2010, total non-interest expenses fell 17.3% year over year.

Total credit costs decreased 6.3% to $282.0 million in the quarter from $301.0 million in the previous quarter.

Capital Position

As of December 31, 2010, Tier 1 capital ratio, Tier 1 common equity ratio and tangible common equity/tangible assets ratio decreased to 12.8%, 8.6% and 6.7% from 13.1%, 9.1% and 7.3% in the third quarter of 2010.

At the end of the reported quarter, total nonperforming assets were down 18.0% sequentially and 30% year over year to $1.3 billion, impacted by lower inflows. However, net charge-offs increased to $385 million in the quarter from $237 million in the prior quarter, affected by an increase in transfers to loans held-for-sale.

Dispositions of problem loans were $573 million in the quarter compared with $172 million in the third quarter of 2010.

Performance by Peers

Synovus' closest competitor, SunTrust (STI), reported fourth quarter earnings of 23 cents per share, substantially ahead of the Zacks Consensus Estimate of 10 cents. This represents SunTrust's second straight quarter of profit after incurring significant losses since mid-2008. Results for the quarter primarily benefited from a rise in top line along with continuous declines in provision for credit losses and a strong capital position. However, higher non-interest expenses were the downside.

Another peer, Regions Financial Corp. (RF) finally entered the profit region in the fourth quarter of 2010, significantly surpassing the Zacks Consensus Estimate loss of 13 cents. The company reported a net income of 3 cents per share. Results were significantly impacted by the continued de-risking of the balance sheet, improved core business performance and the high disposition of non-performing assets. Also, the company's improved non-interest income, high pre-tax pre-provision net revenue and net margin expansion attributed to favorable funding mix and deposit pricing, have led to impressive results. However, these increases were partly offset by augmented non-interest expenses.

Our Take

We believe Synovus is in a recovery phase, reflected by lower nonperforming assets and improving operating efficiencies, which should make the company profitable in the upcoming quarters. Further, the asset disposition activity will act as a positive catalyst for the company.

Synovus currently retains its Zacks #3 Rank, which translates to a short-term ‘Hold' rating. Considering the fundamentals, we are maintaining a ‘Neutral' recommendation on the stock.

 
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