Synovus Financial (SNV) took a victory lap Tuesday — but it will have to keep the celebration brief.
The Columbus, Ga., company had good news to share about the fourth quarter after years of elevated credit costs and takeover speculation. It reported earnings of $712.8 million, up from $12.8 million a year earlier, after recapturing roughly $800 million of the value of a deferred tax asset.
The quarter, which also included the sale of distressed assets and hints of loan growth, was a "milestone" for the $27 billion-asset company, Chairman and Chief Executive Kessel Stelling said in a conference call with analysts.
However, more challenges lie ahead. Synovus needs to focus on improving its core profitability and repaying the roughly $968 million it owes the Troubled Asset Relief Program.
"It's definitely a positive that you had the DTA recapture — that's a real plus," says Christopher Marinac, an analyst at FIG Partners. "The key is transitioning immediately to core results and core profitability."
Synovus' shares were trading at $2.66 late Tuesday, down about 2% from Friday's close. Roughly 34.3 million shares changed hands, up from normal daily volume of about 8.6 million.
The boost from the DTA increased Synovus' tangible book value and some of its capital ratios, executives said. Its tangible book value per common share increased by 89 cents from the third quarter to $2.96 in the fourth quarter. However, once some convertible preferred shares issued in September 2009 are included, the company's tangible book value is closer to $2.80, Marinac says.
Synovus' tangible common equity ratio increased 232 basis points, to 9.67%, from the previous quarter, but its Tier 1 risk-based capital ratio rose just one basis point. Executives stressed that only a portion of the DTA allowance could be counted toward regulatory capital at Dec. 31 and that over time more could be added.
Pre-tax, pre-credit-cost income declined slightly from the previous quarter and a year earlier. Net interest income fell roughly 2%, to $207.5 million, from the third quarter while its net interest margin also declined seven basis points, to 3.45%, from a year earlier. Credit costs were also up significantly, totaling $186 million, more than double from a year earlier. Stelling mainly attributed this increase to $157 million in charges tied to distressed asset sales in the quarter.
A bulk sale of $530 million of problem assets in December helped Synovus' main banking unit drive down its classified assets as a percentage of Tier 1 capital and allowance for loan losses below its target of 50%. This was seen as an important step toward seeking regulatory approval for the banking unit to pay dividends to the holding company. This number stands at 38%, compared with 62.5% a year earlier.
The pace of loan sales will slow to between $50 million to $75 million a quarter, executives said during the call.
Executives also said they have identified and started implementing roughly $30 million in cost cuts, which will continue through 2013.
Synovus already has a stronger efficiency ratio compared with some other banks in its markets once credit costs are excluded, Marinac says. Seeing the company's profitability once credit costs and other related expenses, such as for consultants and attorney fees, are lowered will be crucial, he adds.
Stelling also touted Synovus' loan growth in the quarter, especially in its commercial and industrial portfolio. The company has worked to move away from commercial real estate loans and into a more diverse C&I portfolio.
"Although the DTA, the net earnings and the bulk sale may grab the headlines, a big story for us internally was the increased net loan growth," Stelling said during the call.
Total loans at Dec. 31 were $19.5 billion, down almost 4% from the third quarter and 3% from a year earlier. However, the figure was hurt by the loan sales. Excluding the effects of loans held for sale, chargeoffs and foreclosures, the company reported sequential quarter net loan growth of roughly $345 million.
Commercial and industrial loans totaled $9.1 billion, up almost 3% from the third quarter and about 2% from a year earlier.
Synovus is looking to exit Tarp before the dividends it pays the Treasury Department are set to increase in December. It also needs to repay its Tarp funds before it can begin returning value to shareholders through share repurchases or dividends, Marinac says.
Stelling reiterated that Synovus is likely to repay its Tarp funds by the end of the year through a combination of cash at the parent company, dividends from the bank to the parent company and by issuing debt or equity.
It is also unlikely right now that Synovus is facing pressure to sell itself, Marinac says.
"There is no reason to sell unless they are posting disappointing profitability, and we haven't seen how it will perform yet," says Marinac, who notes the company has done well in repairing its credit and controlling expenses. "The company controls its own destiny and banks tend to be sold not bought."