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Synovus Financial Corporation (SNV) reported its first-quarter 2013 net income of 2 cents per share, in line with the Zacks Consensus Estimate. However, results significantly plummeted from earnings of 78 cents per share in the prior quarter.

Decline in non-interest expenses and marked improvement in credit quality were the tailwinds for the quarter. Moreover, the company’s capital ratios depict its strong position. However, these positives were offset by a lower top line and 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 roughly $800 million from the recapture of substantially all of the deferred tax asset valuation allowance.

Performance in Detail

Total revenue declined 7.8% to $295 million from $320 million in the preceding quarter. The decrease resulted from lower interest as well as reduced non-interest income. However, revenue surpassed the Zacks Consensus Estimate of $274.0 million.

Net interest income decreased 3.4% to $200 million from $207 million in the prior quarter, primarily due to lower interest income. Moreover, net interest margin was 3.43%, down 2 basis points sequentially, due to a fall in the yield on earning assets of 4 basis points, partially offset by a 2 basis-point decline in the effective cost of funds.

Non-interest income fell 18.8% to $65 million in the quarter from $80 million in the prior quarter. The decrease was primarily due to lower bankcard fees, reduced investment securities gain and a drop in mortgage banking income. These negatives were partially offset by higher brokerage revenues and elevated fiduciary and asset management fees.

On the flip side, total non-interest expenses declined 14.6% sequentially to $182 million. The dip was mainly due to lower salaries and other personnel expenses, reduced professional fees along with decreased foreclosed real estate expenses.

Credit Quality

For Synovus, credit quality significantly improved during the reported quarter. Net charge-offs were $57.3 million, substantially down from $193.5 million in the prior quarter. Moreover, the annualized net charge-off ratio was 1.18%, down from 3.94% in the prior quarter.

Non-performing loan inflows were $83.9 million, down significantly from $262.7 million in the fourth quarter of 2012. Additionally, non-performing loans, excluding loans held for sale, were $513.2 million as of Mar 31, 2013, down 5.5% from the prior quarter. The non-performing loan ratio was 2.65%, down from 2.78% as of Dec 31, 2012.

Total non-performing assets were $677.6 million, down 3.6% sequentially. The non-performing asset ratio was 3.47% compared with 3.57% in the prior quarter. Total delinquencies (consisting of loans 30 or more days past due and still accruing) were 0.46% of total loans, down from 0.54% as of Dec 31, 2012.

Capital Position

Synovus exhibited a strong capital position. As of Mar 31, 2013, Tier 1 capital ratio and Tier 1 common equity ratio were 13.50% and 8.93%, respectively, up from 13.24% and 8.72% in the prior quarter.

Moreover, Tier 1 leverage ratio improved to 11.27% from 11.00% in the prior quarter. Total risk-based capital ratio and tangible common equity ratio also increased to 16.45% and 9.89%, respectively, as of Mar 31, 2013, up from 16.18% and 9.66% as of Dec 31, 2012.

Total deposits, as of Mar 31, 2013, were $20.6 billion, down 2.4% from $20.8 billion in the prior quarter. The decrease reflected a fall in Negotiable Order of Withdrawal (NOW) account balances as well as lower non-interest bearing demand deposits.

Core deposits, at the end of the quarter were $19.2 billion, down 4% from the prior quarter. Core deposits, excluding time deposits, decreased $634.6 million compared to the last quarter.

The effective cost of core deposits (includes non-interest bearing deposits) stood at 30 basis points, in line with the fourth quarter of 2012. Total reported loans inched down $173.8 million sequentially to $19.4 billion.

Other Developments

During the quarter, Fitch upgraded its rating outlook on Synovus and its subsidiaries from ‘Negative’ to ‘Positive’. The rating revision came on the back of constantly improving asset quality metrics of the company.

Fitch stated that the credit risk of the company has stabilized and it is persistently looking to trim down the high levels of problem credits in the near term. Further, Fitch believes that the company’s strong capital base is adequate to absorb credit losses in the future. This rating outlook revision depicts the creditworthiness of the company and will instill investors’ confidence.

Our Viewpoint

We believe though Synovus is in a recovery phase, driven by lower non-performing assets and improving operating efficiencies, repayment of Troubled Asset Relief Program (:TARP) dues is unlikely to take place in the near term. Further, regulatory issues, low interest environment and significant exposure to residential real estate markets remain matters of concern.

Shares of Synovus currently carry a Zacks Rank #3 (Hold). However, other South-east banks, which are worth considering, include American National Bankshares Inc. (AMNB), BNC Bancorp (BNCN) and Crescent Financial Bancshares, Inc. (CRFN). All three companies carry a Zacks Rank #1 (Strong Buy).