Why Did Synovus' (SNV) Shares Fall Despite Q2 Earnings Beat?

Driven by top-line strength, Synovus Financial 's SNV second-quarter 2018 results reported a positive earnings surprise of 4.5%. Adjusted earnings of 92 cents per share beat the Zacks Consensus Estimate of 88 cents. Also, the reported figure came in 52.6% higher than the prior-year quarter tally.

Higher revenues backed by strong loans & deposits balances drove organic growth. Notably, lower efficiency ratio and improved credit quality were tailwinds. Moreover, positive impact of rising rates was witnessed.

However, escalating expenses impacted investors' optimism which led shares of Synovus to decline 8.69%, despite an earnings beat.

Including certain non-recurring items, net income available to common shareholders came in at $108.6 million or 91 cents per share compared with $73.4 million or 60 cents per share recorded in the prior-year quarter.

Top Line Robust, Expenses Flare Up

Total adjusted revenues in the second quarter were $359.3 million, up 12.3% year over year. In addition, the top line surpassed the Zacks Consensus Estimate of $356.5 million.

Net interest income increased 13.3% year over year to $284.6 million. Further, net interest margin expanded 35 basis points (bps) year over year to 3.86%.

Non-interest income climbed 6.8% on a year-over-year basis to $73.4 million, including net decreased fair value of private equity investments and investment securities losses. Lower mortgage banking income and other fee income remained on the downside. Adjusted non-interest income was $74.7 million, up 6.7% year over year.

Non-interest expenses were $204.1 million, up 6.4% year over year, including expense for a valuation adjustment to the Visa derivative, partially offset by benefit from recovery of litigation settlement expenses. Adjusted non-interest expenses came in at $202.7 million, up 5.9% from the prior-year quarter. Notably, increase in almost all components of expenses resulted in this upsurge, partially offset by lower advertising expenses, foreclosed real estate expense and professional fees.

Adjusted efficiency ratio came in at 56.41%, as compared with 59.56% reported in the year-earlier quarter. A decline in ratio indicates improvement in profitability.

Total deposits came in at $26.4 billion, up 4.8% year over year. Total net loans climbed 2.9% year over year to $24.9 billion.

Credit Quality: A Mixed Bag

Credit quality was a mixed a bag for Synovus in the quarter.

Non-performing loans were down 26.4% year over year to $117.3 million. The non-performing loan ratio came in at 0.47%, contracting 18 bps year over year.

Additionally, total non-performing assets amounted to $126.3 million, underlining a plunge of 29.4% year over year. The non-performing asset ratio shrunk 23 bps year over year to 0.50%.

However, net charge-offs climbed 13.4% year over year to $17.8 million. The annualized net charge-off ratio was 0.29%, up 3 bps from the year-earlier quarter. Provision for loan losses jumped 14.9% year over year to $11.8 million.

Strong Capital Position

Tier 1 capital ratio and total risk based capital ratio were 11.25% and 13.07%, respectively, compared with 10.37% and 12.24% as of Jun 30, 2017.

Also, as of Jun 30, 2018, Common Equity Tier 1 Ratio (fully phased-in) was 10.05% compared with 9.82% in the year-ago quarter. Tier 1 Leverage ratio was 10.03% compared with 9.30% in the comparable period last year.

Capital Deployment Update

During the quarter under review, the company repurchased common stock worth $50 million.

Other Development

Recently, Synovus entered into a definitive merger agreement with FCB Financial Holdings, Inc.FCB , under which the former will acquire the latter, creating the largest mid-cap bank in the Southeast by deposits. The all-stock deal, valued at $2.9 billion, is anticipated to close by the first quarter of 2019.

Per the terms of the merger agreement, shareholders of FCB will get a fixed ratio of 1.055 shares of Synovus common stock per share. Based on Synovus' closing share price on Jul 23, 2018, the deal is valued at $58.15 per FCB share. On completion, about $40 million in pretax synergies is anticipated to be fully realized by 2020.

Both companies' boards of directors have approved the merger. However, the deal awaits Synovus and FCB Financial Holdings shareholders' approval, along with approval of state and federal bank regulators.

"We look forward to welcoming FCB customers and team members to the Synovus family and are enormously excited about the growth and value-creation opportunities this transaction presents for our combined companies and respective shareholders," said Kessel Stelling, Synovus chairman and CEO. "This acquisition will expand our presence in the high-growth South Florida marketplace while leveraging FCB's market leading reputation, culture, and successful organic growth platform," Stelling further noted.

Our Take

Synovus' results have been quite decent in the quarter. We believe the company's focus on both organic and inorganic growth, together with cost-containment efforts, will pay off and aid bottom-line expansion in subsequent years. Though escalating expenses raise concerns, lower efficiency ratio indicates optimism.

Synovus Financial Corp. Price, Consensus and EPS Surprise

Synovus Financial Corp. Price, Consensus and EPS Surprise | Synovus Financial Corp. Quote

Currently, Synovus carries a Zacks Rank #3 (Hold). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

Performance of Other Banks

People's United Financial Inc. PBCT reported net earnings of 32 cents per share in second-quarter 2018, in line with the Zacks Consensus Estimate. Moreover, the reported figure climbed 33.3% year over year. Results benefited from an improvement in net interest income, and decline in expenses and provisions. Loan balances improved during the quarter.

Riding on higher revenues, Citizens Financial Group CFG delivered a positive earnings surprise of 2.3% in the April-June quarter. Earnings per share of 88 cents topped the Zacks Consensus Estimate of 66 cents. The company experienced continued expansion of margins and loan growth, which aided revenues. Also, higher deposits and lower expenses were some other positives. However, increase in provisions was the main undermining factor.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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