Synovus posts loss on securities sale, but bolsters fee income

Synovus Financial in Columbus, Georgia, posted a second quarter loss after accounting for a substantial securities sale. But the bank said that its core earnings improved, supported by fee income growth and lower credit costs.

The $60 billion-asset bank sold $257 million of bonds at a discount during the quarter, causing the loss but also generating proceeds that Synovus is redeploying into higher-yielding investments and loans.

Synovus said that the mix shift has already added support to its net interest margin. Its margin increased by 16 basis points from the prior quarter to 3.20%, and the bank expects continued expansion in the second half of the year.

The bank's second-quarter adjusted non-interest revenue of $127.2 million was up 9% sequentially. Its net charge-offs to average loans ratio decreased to 0.36% from 0.41%. And its provision expenses for credit losses declined 51% from the first quarter to $26 million.

"Our core second quarter results reflect a significant increase in earnings driven by margin expansion, strong fee income generation and reduced credit costs," Chairman and CEO Kevin Blair told analysts Thursday.

Synovus reported a quarterly loss of $14.7 million, or 16 cents per share. That compared with net income of $124.1 million, or 78 cents, in the first quarter.

However, stripping out the securities sale and smaller one-time items, the bank reported adjusted net income of $178.7 million, or $1.16 per share, up from $125.2 million, or 79 cents, in the previous quarter. FactSet's polling of analysts had produced a median expectation of adjusted per-share earnings of 95 cents.

D.A. Davidson analyst Gary Tenner said Synovus' asset quality improvement was "a source of sequentially positive news," and that the jump in fee income, bolstered by the bank's capital markets operations, was a notable "upside."

Synovus Chief Financial Officer Jamie Gregory said during a call with analysts that the company had realized about half of the benefit from the securities sale in the second quarter, "and we'll experience the other half here in the third quarter. And so that's a tailwind to the margin. … We expect margin expansion in the third quarter. We expect margin expansion again in the fourth quarter, and we expect to end the year at or approaching a 3.30% margin."

He also said the bank anticipates a Federal Reserve interest rate cut in December.

Loan growth proved difficult for Synovus during the second quarter, as it did in the previous three-month period.

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The bank's loans declined by $216.5 million from the first quarter to $43.1 billion — due to loan paydowns and strategic pullbacks in non-relationship syndicated lending and third-party consumer lending. However, new loan production is mounting, the bank said, and it expects to grow its overall portfolio in the second half of this year. For the full year, Synovus projected that total loans will finish between flat and up 2%.

"Growth should be supported by continued success in middle market, corporate and investment banking and specialty lines," Blair said on the call.

The bank expects its core deposits to grow within a 2% to 4% range for the year, as the adverse impacts of high rates on funding costs level off, Blair said.

Core deposits for the second quarter were down $67.6 million from the prior quarter to $44.8 billion. Total deposit costs increased one basis point from the first quarter to 2.68%.