Why Did Synovus (SNV) Stock Fall Despite Q3 Earnings Beat?
Zacks Investment Research | Oct 18, 2017 01:04AM ET
Driven by top-line strength, Synovus Financial Corporation (NYSE:SNV) recorded a positive earnings surprise of 1.6% in third-quarter 2017. Adjusted earnings of 65 cents per share beat the Zacks Consensus Estimate by a penny. Also, the reported figure came in 25% higher than the prior-year quarter tally.
Higher revenues backed by strong loans & deposits balances drove organic growth. Notably, lower efficiency ratio was a tailwind. Moreover, positive impact of rising rates was witnessed.
However, escalating expenses and provisions remain a concern for investors which led a 1.7% fall in share price post third-quarter results.
Including the Cabela’s transaction fee and other non-recurring items, net income available to common shareholders came in at $95.4 million or 78 cents per share compared with $62.7 million or 51 cents per share recorded in the prior-year quarter.
Top-Line Strength Reflected, Expenses Flare Up
Total adjusted revenues in the third quarter were $331.3 million, up 12.4% year over year. In addition, the top line came in line with the Zacks Consensus Estimate.
Net interest income increased 16.2% year over year to $262.6 million. Further, net interest margin expanded 36 basis points (bps) year over year to 3.63%.
Non-interest income increased significantly on a year-over-year basis to $135.4 million, including Cabela’s transaction fee and higher brokerage revenues, partially offset by investment securities losses and lower mortgage banking income. Adjusted non-interest income was $68.4 million, almost stable year over year.
On the other hand, total non-interest expenses were $205.6 million, up 10.6% year over year, while adjusted non-interest expenses came in at $194.1 million, up 5.5% from the prior-year quarter. Notably, increase in almost all components of expenses led to the rise, partially offset by lower advertising expenses.
Adjusted efficiency ratio came in at 58.59%, as compared with 62.41% in the year-earlier quarter. A decline in ratio indicates improvement in profitability.
Total deposits came in at $26.2 billion, up 8.3% year over year. Total net loans climbed 5.2% year over year to $24.2 billion.
Credit Quality: A Concern?
Credit quality metrics for Synovus was a mixed bag in the quarter.
Net charge-offs climbed 22.1% year over year to $38.1 million. The annualized net charge-off ratio was 0.62%, up 50 bps from the year-earlier quarter. Provision for loan losses jumped significantly year over year to $39.7 million.
Non-performing loans were up 34% year over year to $97.8 million. The non-performing loan ratio came in at 0.40%, contracting 24 bps year over year.
Additionally, total non-performing assets amounted to $138.6 million, underlining a decline of 22.6% year over year. The non-performing asset ratio contracted 20 bps year over year to 0.57%.
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Capital Position: A Mixed Bag
Tier 1 capital ratio and total risk based capital ratio were 10.41% and 12.28%, respectively, compared with 10.05% and 12.04% as of Sep 30, 2016.
Also, as of Sep 30, 2017, Common Equity Tier 1 Ratio (fully phased-in) was 9.87% compared with 9.48% in the year-ago quarter. Tier 1 Leverage ratio was 9.34% compared with 8.98% in the comparable period last year.
Capital Deployment Update
During the reported quarter, the company repurchased common stock worth $90.6 million.
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 and provisions raise concerns, lower efficiency ratio indicates optimism.
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