Synovus Financial: Switching Preferred Shares On Better Yield Opportunity

Core Viewpoint - Synovus Financial is navigating a challenging high interest rate environment, with a focus on preferred shares as a potential investment opportunity despite risks associated with loan performance and commercial real estate exposure [9][5]. Group 1: Financial Performance - In the second quarter, Synovus Financial's yield on assets increased while borrowing yield remained flat, leading to a rise in interest income and a reversal in the decline of net interest income for the first time since the fourth quarter of 2022 [20][21]. - The bank's net interest income rose, alongside improvements in net interest spread and net interest margin, despite a decline in loans by 0.5% and a larger drop in deposits by 0.75% [21][20]. - The allowance for credit losses (ACL) ratio has increased to nearly 1.2% of gross loans, although it still lags behind the industry average, indicating potential risks if loan performance deteriorates [5][24]. Group 2: Preferred Shares - The Series E preferred shares are expected to reset this summer, and despite a lower yield compared to Series D, a switch to Series E is recommended due to the bank's strategy of reallocating securities to strengthen earnings [9][7]. - Both Series D and Series E preferred shares are trading slightly over par, presenting a slight call risk, but the premiums can be covered by one quarter's worth of dividends [28][29]. - As interest rates decline, the likelihood of these preferred shares being called will increase, particularly for Series E shares with yields above 8% [29][28]. Group 3: Commercial Real Estate Exposure - Synovus Financial has a significant concentration of commercial real estate (CRE) loans, which now account for over 27% of the total loan portfolio, raising concerns about potential defaults [24][25]. - The multifamily loans within the CRE portfolio have not faced significant issues, but there are concerns regarding the performance of office and hotel loans, which are struggling post-pandemic [25][24].