Synovus reports 78-cent quarterly profit as deferred tax asset kicks in

tadams@ledger-enquirer.comJanuary 22, 2013 

Finally triggering an accounting move to save money on its income tax liability — and prepare itself for repayment of Troubled Asset Relief Program funds — Synovus Financial Corp. on Tuesday reported net income of 78 cents per share in the fourth quarter of 2012.

The company, which has its corporate headquarters in downtown Columbus, posted the profit on net income of $712.8 million.

It was the sixth profitable quarter in a row following three straight years of losses.

The fourth-quarter 2012 performance compares to net income of $12.8 million, or one penny per share, in the October-December period of 2011.

Without using what is known as a “deferred tax asset” of roughly $800 million in the quarter, Wall Street analysts who follow the regional bank had been expecting a loss of as much as 9 cents per share.

“Really the fourth quarter was just continued execution of the plan we’ve laid out that we believe well positions us for TARP repayment later this year,” Synovus Chairman and Chief Executive Officer Kessel Stelling told analysts gathered on a conference call following the release of the earnings report. “As we had said previously, the DTA and TARP repayment weren’t necessarily linked, but we did believe that one was important to the other.”

Synovus has been signaling its plans to use the deferred tax asset to offset its federal income tax liability at some point before turning its attention to repayment of the $968 million it essentially borrowed through the U.S. government’s Troubled Asset Relief Program. It owes the most of any bank still in the program, which the government is now trying to wrap up.

Synovus continues to work under behind-the-scenes oversight from federal and state banking regulators — some of whom Stelling noted were on Tuesday’s conference call — to set up the timing and conditions for paying back the funds. The company has said that moment will occur before the end of this year, perhaps as soon as the second quarter, which is April-June.

“The repayment will come from three primary components — parent company cash, dividends from the bank up to the parent with regulatory approval, and the balance of some combination of debt and/or equity,” said Stelling, declining to make more specific projections on the matter.

“I don’t want to box ourselves or (regulators) in on specific timing other than to say we have regular conversations with all of the agencies today, and that will continue with a lot of energy over the coming months,” he said.

Instead, the CEO turned much of the focus Tuesday on the use of the deferred tax asset and his belief that the lingering problem of non-performing loans and assets will improve in the coming quarters. Sustained profitability is the ultimate goal, he said.

Stelling called the triggering of the deferred tax asset a “milestone” and a “huge step” toward the company’s recovery from the string of financial losses that led to two major restructurings and the closing of a number of bank branches across its Southeast footprint, as well as swept about 2,400 employees off the payroll.

One analyst who follows the company, Kevin St. Pierre of Bernstein Research, issued a note following release of the earnings report, declaring in his header, “At Long Last, DTA Recovery.” St. Pierre, who has been consistently bullish on Synovus and its outlook, said he rates the bank to “outperform” with a target price of $3 per share.

The bank’s stock jumped more than 3 percent, from $2.71 per share to $2.82, out of the gate in trading on the New York Stock Exchange. But quickly began to float lower and tread below the previous day’s close of $2.71 per share.

The deferred tax asset was accrued through the mountain of financial losses suffered by Synovus over the last several years. The company has digested a constant stream of loan losses related to the housing market meltdown and the Great Recession, along with soured investments in commercial entities such as Sea Island Co., a luxury Georgia resort that went bankrupt and was sold to private investment firms.

The company noted it dumped a load of “distressed” properties in the fourth quarter, $545 million worth, which included a bulk sale in early December. It took a pre-tax charge, or write-off, of $157 million in the process.

Naturally, the deferred tax asset also boosted full-year earnings for Synovus. It recorded a profit of 85 cents per share on net income of $775 million. That compares to a loss of nearly $119 million, or 15 cents per share, for all of 2011.

“As it relates to timing, this is a big event,” Stelling said. “It’s hot off the press. This now factors into our forward capital planning.”

Synovus has offices throughout the Southeast, in Georgia, Alabama, Florida, South Carolina and Tennessee. Locally, it is the parent company of Columbus Bank and Trust and CB&T of East Alabama.

While Synovus did report an increase of $1.7 million in salaries and personnel expenses, “due primarily to incentive compensation,” Stelling noted core expenses were down by $25 million in 2012 and more than $95 million in 2011.

The firm’s headcount is now just under 5,000 employees, which is 2,400 fewer than the staffing peak in 2007 as the U.S. financial crisis was beginning to unfold. The company’s employee count on Dec. 31 is down by 261 from the year before.

“We have made substantial progress in aligning our operating costs with the current size of our organization,” the CEO said in a statement issued with the report. “… We have identified new expense savings initiatives of approximately $30 million, with the implementation of these initiatives already under way and continuing throughout 2013.”

The bank said the $545 million in distressed asset sales were sharply higher than the $110 million it experienced in the third quarter of 2012. In the fourth quarter of 2011, such sales totaled $147 million.

The inflow of non-performing loans were nearly $262 million in the fourth quarter, significantly higher than in the previous quarter or the same October-December period of 2011.

Still, total non-performing loans were $543 million, down nearly $157 million from the third quarter and nearly $340 million lower than the fourth quarter of 2011, a drop of more than 38 percent.

“Our pace of dispositions will lighten with the bulk sale and the big number we posted in the fourth quarter,” said Synovus Chief Credit Officer Kevin Howard.

Stelling pointed out net loan growth for the company rose sharply in the quarter and for the year, up $345 million and $589 million respectively.

He also noted “positive growth trends” in the firm’s mortgage and investment business.

NAB Research Nancy Bush, on the conference call, queried Synovus about possible “cleanup costs” that might be forthcoming as the company puts the deferred tax asset recovery behind it and moves toward paying back TARP. Specifically, she touched on the recent settlement by Synovus of a shareholder lawsuit dating to 2009.

“Is there anything else that’s going to be coming down the pike here?” Bush asked.

Stelling replied that litigation is a risk that the industry as a whole is dealing with now, but there’s “nothing major” on the horizon that should impact the company.

“It’s just continuing to work through the cycle,” he said. “We hope legal fees come down, and we hope consulting fees come down.”

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