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Regional banks seem to be back on track as they successfully come to terms with the issue that has been haunting them since 2006 -- credit quality. We have seen many small banks thriving in choppy waters in the recent past. While some have reached calmer seas, a small few are still standing on thin ice. Synovus Financial (NYSE: SNV ) , from what I see, lies somewhere in between.
Synovus Financial, a financial services company and the holding company of Synovus Bank, has been disappointing investors with uninterrupted losses. But with the wide-ranging improving credit trend witnessed across the banking industry, Synovus has been showing some strength. Let us put it through the wringer to see if it can put an end to Synovus' woes.
The company reported its first-quarter loss of $93.7 million, making it its 11th straight quarter of net losses. But there are still many things that will make you optimistic about it.
First, this loss was an improvement of 48% from the preceding quarter. In fact, Synovus' losses have shown a declining trend over the last seven of those loss-making quarters, dropping by a considerable 84% from the second quarter of 2009. Second, there were restructuring charges of $24.3 million in the current quarter. Credit costs for the quarter declined to $177 million, compared with $282 million in the last quarter. This, in fact, is the lowest since the second quarter of 2008. Net charge-offs also reduced by $218 million from the last quarter of 2010.
In my discussion on the trends in banks' first-quarter results, the most noticeable and widespread trend observed in banks' first-quarter results was a sharp decline in provisions for loan losses (PLL).
Many regional banks such as BankAtlantic Bancorp (NYSE: BBX ) , Flagstar Bancorp (NYSE: FBC ) , and Hudson City Bancorp (Nasdaq: HCBK ) benefited from a significant improvement in their PLLs. Synovus has now joined the cluster, declining both sequentially and year on year.
PLL was down 43.8% from the preceding quarter and 58.4% from the corresponding quarter of 2010. Lower funding costs resulted in the net interest margin growing by 15 basis points to 3.52%. But Synovus' pre-credit costs increased slightly by $4.8 million while interest income decreased by $15.7 million, triggered by a drop in mortgage revenues, NSF fees, and brokerage revenue.
The Foolish bottom line
The fact that Synovus is feeling confident about reducing the shield to cover bad loans gives a sense of assurance. Given the improving overall credit trend, the company might be able to put itself in a profitable position within a quarter or two. While the huge bailout amount it owes the government still remains a cause for concern, Synovus' performance suggests a movement toward long-term stability.
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