Note: FLASH REPORT; more details to come, changes are highlighted. Except where noted, and highlighted, no other sections of this report have been updated.
Reason for Report: FLASH UPDATE: 2Q13Earnings
Previous Edition: 1Q13 Earnings Update, May 10, 2013
Flash Update (earnings update to follow)
On Jul 18, 2013, Synovus Financial Corp.declared its 2Q13 earnings results. The company reported net income of $0.03 per share, in line with the Zacks Consensus Estimate. However, results outpaced the prior-quarter earnings by $0.01.
Decline in non-interest expenses and a marked improvement in credit quality were the tailwinds for the quarter. Moreover, the company’s capital ratios depict its strong position. Further, higher top line and rise in deposits and loans added fuel to the fire.
Net income available to common shareholders came in at $30.7 million compared with $14.8 million in the last quarter. Notably, reported quarter and prior-quarter results included income tax expense of $27.4 million and $17.0 million, respectively.
Concurrent with the earnings release, Synovus announced its plan of redeeming 967,870 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A, issued to the U.S. Treasury through the Capital Purchase Program initiated under the Troubled Asset Relief Program (TARP), for a total purchase price of $967.87 million. This step depicts Synovus’ sustainable profitability and strong position.
However, after the payment of TARP dues, the U.S. Treasury would remain the holder of warrants to purchase 15.5 million shares of Synovus common stock at an exercise price of $9.36 per share.
Performance in Detail
Total revenue rose 0.5% to $296.6 million from $295.1 million in the preceding quarter. The rise resulted from higher interest as well as non-interest income. Moreover, results surpassed the Zacks Consensus Estimate of $273.0 million.
Net interest income surged 1.1% sequentially to $202 million, primarily due to higher interest income. However, net interest margin was 3.39%, down 4 basis points sequentially, due to a fall in the yield on earning assets of 7 basis points, partially offset by 3 basis points decline in the effective cost of funds.
Non-interest income ascended 0.6% to $65.1 million in the quarter from $64.7 million in the prior quarter. The rise was primarily due to elevated fiduciary and asset management fees, higher investment securities gains and a rise in mortgage banking income and bankcard fees. These increases were partially mitigated by lower brokerage revenues and reduced service charges on deposit accounts.
Total non-interest expenses declined 0.6% sequentially to $181.2 million. The dip was mainly due to lower salaries and other personnel expenses, reduced restructuring charges along with decreased foreclosed real estate expenses. These decreases were mostly offset by higher other operating expenses and elevated professional fees.
Credit Quality
For Synovus, credit quality significantly improved during the reported quarter. Net charge-offs were $30.0 million, substantially down from $57.3 million in the prior quarter. Moreover, the annualized net charge-off ratio was 0.61%, down from 1.18% in the prior quarter.
Non-performing loan inflows were $66.9 million, down 20% from $83.9 million in the first-quarter of 2013. Additionally, non-performing loans, excluding loans held for sale, were $483.5 million as of Jun 30, 2013, down 5.8% from the prior quarter. The non-performing loan ratio was 2.47%, down from 2.65% as of Mar 31, 2013.
Total non-performing assets were $635.2 million, down 6.3% sequentially. The non-performing asset ratio was 3.21% compared with 3.47% in the prior quarter. Total delinquencies (consisting of loans 30 or more days past due and still accruing) were 0.41% of total loans, down from 0.46% as of Mar 31, 2013.
Capital Position
Synovus exhibited a strong capital position. As of Jun 30, 2013, Tier 1 capital ratio and Tier 1 common equity ratio were 13.49% and 8.97%, respectively compared with 13.50% and 8.93% in the prior quarter.
Tier 1 leverage ratio improved to 11.33% from 11.27% in the prior quarter. Total risk-based capital ratio and tangible common equity ratio were 16.00% and 9.71%, respectively, as of Jun 30, 2013, compared with 16.45% and 9.89% as of Mar 31, 2013.
Total deposits, as of Jun 30, 2013, were $20.7 billion, up 0.5% from $20.6 billion in the prior quarter. The increase reflected a rise in Negotiable Order of Withdrawal (NOW) account balances as well as higher non-interest bearing demand deposits.
Core deposits at the end of the quarter were $19.4 billion, up 1% from the prior quarter. Core deposits, excluding time deposits stood at $16.0 billion, up 1.9% from $15.7 billion in the last quarter. Total loans grew $240.4 million sequentially or 5% annualized to $19.6 billion.
MORE DETAILS WILL COME IN THE IMMINENT EDITIONS OF ZACKS RD REPORTS ON SNV.
Portfolio Manager Executive Summary[Note: Only highlighted material has been changed.]
Synovus Financial Corp. is a financial services holding company that has a unique decentralized customer delivery model providing high class customer service. Further, the company positions itself in the high-growth Southeast markets.
Trend of Broker Opinions: Broker sentiment on the stock remains skewed toward a neutral stance, with 50.0% of the firms in the Digest group rating the stock neutral,31.2% rating it positiveand the remaining 18.8%rendering negative ratings. Target prices provided by the firms range from a low of $2.00 to a high of $3.00 per share. The average price came in at $2.82, implying a return of 3.3%.
Chief Investment Considerations:
- Efficiency and growth initiatives
- Continuous cost savings and credit improvement
- Downsizing ofbalance sheet by divesting problematic assets
- Taking action to return to sustainable profitability
- Ability to return capital to its shareholders
- Weak economic recovery
- Troubled Asset Relief Program (TARP)repayment still awaited
Neutral or equivalent outlook (8 firms or 50.0%): According to these firms, problematic assets remain at dangerously high levels. While management continues to aggressively dispose off such assets, Synovus' hugedeliberation in commercial loans, including construction and income producing property loans, together with a weak economy implythat credit costs will likely remain high over the next several quarters or could be volatile based on asset disposition levels. Further, these firms expect the TARP repayment to take place in 3Q13, subsequent to the deferred tax asset (DTA) recovery. According to these firms, the weak tangible common equity ratio and the possibility of a dilutive equity offering in order to repay the TARP money are primary concerns. While the company’s expense reduction initiatives are expected to be a profitability driver and lower credit costs would facilitate additional reserve releases in the backdrop of a sluggish revenue environment, firms believe that Synovus will struggle to earn its cost of capital in the near term. While the company anticipates growing loans, especially in its corporate banking unit, overall loan growth will not be enough to mitigate the pressure on the company’s NIM and enable it to grow net-interest income. Thus, the topline will likely remain volatile in the near term. Moreover the company does not expect to go forward with any strategic acquisitions till the TARP money is repaid.
Positive or equivalent outlook (5 firms or 31.2%): Thesefirmsshow increasing optimism about Synovus,based on its quarterly results, return to sustainable profitability, driven by continued credit improvement, cost savings, expense reduction and DDA (Demand Deposit Account) growth. Accordingly, these firms remain confident about management’s goal to sustain profitability in the upcoming quarters.
Negative or equivalent outlook (3 firms or 18.8%): Though Synovus reached its target of returning to profitability, thesefirmsseek more clarity overthe mode of repayment of TARP funds for shares to move significantly high, and have therefore maintained a negative stance. Further, due to rearrangement of the loan portfolio and the present Return on Tangible Equity (ROTE), these firms expect growth to remain muted.
May 10, 2013
Overview[Note: Only highlighted material has been changed.]
Founded in 1888 and based in Columbus, Ga., Synovus Financial Corp. is a diverse financial services company with over $27.0 billion in assets. Synovus conducts its banking operations through Synovus Bank. It provides commercial and retail banking, as well as investment services to customers through 400 ATMs, and 280 Synovus offices in Ga., Ala., S. C., Fla., and Tenn.
Synovus has traditionally focused on a strategy that includes expanding and diversifying its franchise in terms of revenues, profitability and asset size while maintaining a community and relationship-based approach to banking. This strategy has encompassed both organic growth and acquisitions of complementary banks and financial services businesses. During the 1990s and through 2006, Synovus' growth resulted largely from acquisitions of smaller community banks.
Synovus focuses on its position in high-growth Southeastern markets and the commitment to being an efficient workplace to ensure the delivery of desired results to its customers.
As of Mar 31, 2013, Synovus had $26.2 billion in assets, $19.0 billion in net loans, $20.6 billion in total deposits and $3.6 billion as shareholders’ equity.
The company’s website is
The analysts’ key positive and negative investment considerations are outlined below.
Key Positive Arguments / Key Negative ArgumentsFundamentals
- Expenses to remain well-controlled, leading to positive operating leverage
- Focus on retail banking initiative, and acceleration of commercial and industrial customer growth
- Strong loan and deposit growth to continue
- Strong and progressive management team
- Margin compression expected
- Slow rate of credit improvement
- Competitive operating environment
- Flattening yield curve
- Substantial slowdown in residential and mortgage lending
Note: Synovus operates on a calendar year basis.
May 10, 2013
Long-Term Growth [Note: Only highlighted material has been changed.]
The primary goals of retail banking are to bolster core deposit growth rates, contribute more fee income, and diversify the loan portfolio. As part of this initiative, the company plans to broaden its existing relationships with cross sales and expansion of specialty products such as corporate cash management, asset-based loans, and capital markets products. Synovus will also continue to focus on growing its deposits, improving quality and mix, maintaining a strong margin, and redefining its processes to improve efficiency. Going forward, we believe Synovus’will have scope for commercial and industrial customer growth.
However, on a long-term basis, Synovus’ growth and profitability are likely to remain under pressure, as a result of change in the loan portfolio mix as well as present return on tangible equity (ROTE) levels.
May 10, 2013
Target Price/Valuation [Note: Only highlighted material has been changed.]
Provided below is the summary of ratings and valuation as per the Zacks Research Digest:
Rating DistributionPositive / 31.2%↑
Neutral / 50.0%↓
Negative / 18.8%↑
Average Target Price / $2.82↑
Maximum Upside from Current Price / 9.9%
Minimum Upside from Current Price / -26.7%
Upside from Current Price / 3.3%
Digest High / $3.00
Digest Low / $2.00
No. of Analysts with target price/Total / 15↑/16↓
Risks to the valuation include adverse earnings impact from poor credit quality, a negative impact from persistent low interest rates, significant slowdown in residential mortgage lending, increased competitive pressures, regional or national economic downturn,and the potential for incremental capital needs.
Recent Events [Note: Only highlighted material has been changed.]
On Apr 23, 2013,Synovus Financial declared its 1Q13 results. Earnings came in at $0.02 per share, in line with the Zacks Consensus Estimate. However, results significantly plummeted from earnings of $0.78 per share in the prior quarter.
A decrease in non-interest expenses and a marked improvement in credit quality were the tailwinds for the quarter. Moreover, the company’s capital ratios indicated its strong position. However, these positives were offset by a lower top line and a fall in deposits and loans of the company.
Net income available to common shareholders came in at $14.8 million compared with $709.3 million in the last quarter. Notably, prior-quarter results include an income tax benefit of approximately $800.0 million from the recapture of all of the deferred tax asset valuation allowance.
Revenue[Note: Only highlighted material has been changed.]
Total revenue was recorded at$295.1 million in 1Q13,down 7.8% from $320.1million in4Q12and 14.9% from $346.8million in 1Q12.
In 1Q13, pre-tax, pre-credit costs income was $100.7 million,down 6.8% from $108.0 million in 4Q12and by 9.0%from $110.6 million in 1Q12.
Net interest income (NII) was $199.8 million, down 3.7% from $207.4million in 4Q12. The sequential decline primarily stemmed from two fewer days in the quarter.Moreover, NII fell 9.6% from $221.0 million in 1Q12.
Net interest margin (NIM) was 3.43%, down 2 basis points(bps) quarter over quarter (q/q). The q/q decrease was due to afall in the yield on earning assets of 4 bps partially mitigated by a decrease in the effective cost of funds of 2 bps. Moreover, NIM fell 12 bps year over year (y/y).
Non-interest income came in at $64.7million, down 19.2% from $80.1million in 4Q12. Theq/qfall was primarily due to lower bankcard fees, a decrease in mortgage banking income, lower service charges on deposit accounts, partially offset by increased fiduciary and asset management fees and higher brokerage revenues. Moreover, income dipped 23.1% from $84.1 million in 1Q12.
Outlook
TARP repaymentis expected to take place subsequent to the DTA recovery as per management’s expectations. TARP payment islikely to take placein 3Q13. Further, management anticipates net interest margin to remain under pressure in the coming quarters. Notably, in 2Q13, NIM is expected to fall moderately compared to the prior quarter.
The mortgage banking revenues are expected to remain at 1Q13 levels in each of the remaining quarters in 2013.
Some firms echo thoughts similar to that of management regarding DTA recovery and TARP payment. In addition to this, the firms expect TARP repayment to be made by issuance of either common equity, preference or debt capital.
Further,firms expect NIM topersistentlyfall in the near term primarily due to low interest rate environment, pricing stress on loan yieldsand a probable debt issuance,partially offset by loan growth. They also expectnet interest income and pre-tax, pre provision earnings to be under pressure in thecoming quarters. Moreover, firms echo management’s sentiments regarding mortgage banking revenues.
Margins[Note: Only highlighted material has been changed.]
Total non-interest expenses dropped 14.5% sequentially and 10.3% y/yto $182.3 million in 1Q13. Core expenses were $163.8 million, down 4.4% sequentially. The sequential fall in core expenses were primarily due to reduced salaries and other personnel expenses,as well as lower professional fees. Further, non-interest expenses were down 6.1% y/y.
Total credit costsfell substantially from $185.8 millionin4Q12and from $90.9 millionin1Q12 to $49.3 million in 1Q13.
Outlook
With respect to the previously announced efficiency initiatives, Synovus successfully reduced its core expenses by $25.1 million and $95.0 million in 2012 and 2011, respectively. This reflects the impact of efficiency initiatives implemented during the previous 2 years. New expense savings initiatives of approximately $30.0 million have also been identified and will be executed throughout 2013. The company is set to achieve the target. These expense savings will however be offset by strategic investments.
Management expects expenses to remain stable in 2Q13 on a sequential basis, and fall in 2H13.
Management also expects other real estate owned (OREO) expenses to remain in the range of $10.0– 15.0 million in 1H13 and trend downwards in 2H13, based on improvement in asset quality. Moreover, credit related costs are expected to decrease.
Some firms expect credit related expenses to consistently reduce, cost control to improve and loan growth to remain positive this year. Further some firms expect a decreasein total operating expensesdue to the expense-saving initiatives which however, might get mitigated by continuous investment in other areas of business.
Earnings per Share[Note: Only highlighted material has been changed.]
In 1Q13, the company reported net incomeavailable to common shareholdersof $14.8 million versus net income of $709.3 million in 4Q12 and net income of $21.4 million in 1Q12. EPSin1Q13 was $0.02per sharecompared with $0.78in4Q12and $0.02 in 1Q12.
Notably, 4Q12 results included an income tax benefit of approximately $800.0 million from the recapture of all of the deferred tax asset valuation allowance.
Outlook
Some firms increased their 2013 and 2014 EPS estimatesbased on better-than-expected 1Q13 results, lower credit costs as well as expectation for lower expenses.
However, some firms lowered their 2013 and 2014 EPS estimates based on the probable issuance of preferred stock to facilitate TARP repayment.
Balance Sheet/Capital Structure/Other [Note: Only highlighted material has been changed.]
As of Mar 31, 2013, total deposits were $20.6 billion, down 2.4% from 4Q12. The q/qfall was primarily due to decreases in non-interest bearing demand deposits and NOW account balances. Total deposits also reduced 24.0% y/y from $27.1 billion.
Total core deposits were $19.2 billion in 1Q13, down from $20.0 billion in 4Q12 and $20.7 billion in 1Q12.
Core deposits, excluding time deposits, were $15.7 billion in 1Q13, down from $16.4 billion in 4Q12 and $16.4 billion in 1Q12.
The effective cost of core deposits (including non-interest bearing deposits) was 30bps in 1Q13, unchanged from 4Q12 but down from 47bps in 1Q12.
Total loans, net of deferred fees and costswere $19.4 billion, as of Mar 31, 2013, down 0.9% from $19.5 billion as of Dec 31, 2012 and 2.4% from 19.8 billion as of Mar 31, 2012.
Net loans came in at $19.0 billion as of Mar 31, 2013, down from $19.2 billion as of Dec 31, 2012 and $19.3 billion as of Mar 31, 2012.
Net loansdecline was $51.6 million for 1Q13 compared to net loan growth of $345.4 million in 4Q12. Net loan growth or decline excludes the impact of transfers to loans held for sale, charge-offs, and foreclosures.
Total Assetswere $26.2 billion as of Mar 31, 2013, down from $26.8 billion as of Dec 31, 2012 and $27.1 billion as of Mar 31, 2012.
Outlook
Management believes that the balance sheet growth has bottomed but expects loan growth in 2Q13, due to the corporate loan segment and anticipates it to continue throughout 2013. The company expects portions ofGa., Fla., S.C., and Tenn. to be the main drivers for loan growth.
Some of the firms expect corporate loan growth to continue in the upcoming quarters.
Asset Quality
In 1Q13, distressed asset sales were approximately $61.0 million, down substantially from $545.0 million in 4Q12 and$135.0 million in 1Q12.