For Synovus, Now's as Good a Time as Any to Be a Laggard

The quarterly loss at Synovus Bancorp — its 11th in a row — reinforces that it is recovering more slowly than its peers.

But given the stagnant revenue growth that even the strongest regionals reported in the first quarter, there is no indication that Synovus has missed out on much.

"Top-line momentum is just not there for anyone right now," said John Pancari, a senior equity research analyst at Evercore Partners. "You could argue in a way that it allows Synovus to continue to address the strain in their existing loan portfolio" because executives don't have to worry about its rivals capitalizing on their lead.

With losses continuing and demand for new loans still slow — "I would not call it robust," Chief Executive Officer Kessel Stelling said — the company instead focused on cost-cutting and credit-loss reductions. The bank will almost certainly have to raise capital to repay the Troubled Asset Relief Program within a year or two, analysts said, but it has enough for its current needs.

"They've got ample capital from that perspective to avoid any capital raise from a defensive standpoint," Pancari said.

The Columbus, Ga., company's quarterly loss of $94 million was a 48% improvement from the fourth quarter and 59% lower than the first quarter of last year. Net interest income increased by 15 basis points to 3.52%, with the improvement coming from a combination of reduced nonperforming assets and cheaper funding.

Though noninterest income fell by $16 million, the decline was outpaced by a $25 million decrease in noninterest expense.

Synovus' credit costs of $177 million were the lowest the company has posted since the third quarter of 2008, in part because of a diminishing gap between the carrying value of the loans on Synovus' balance sheet and their sale prices. And while the company's $307 million of new nonperforming loans exceeded those in the fourth quarter, management argued the bump was expected, temporary and significantly smaller than the $531 million inflow a year earlier. Potential problem loans decreased as well, from $1.43 billion in the fourth quarter to $1.28 billion at the end of the first.

An analyst on a conference call with executives questioned the slow pace of the company's disposal of nonperforming loans; Pancari suggested that it might reflect that Synovus does not feel it needs to rush.

Its proceeds from selling bad loans have improved in recent quarters, and much of Synovus' remaining problem credits involve commercial real estate loans, which present better opportunities for workouts because they are income-producing assets.

"Certainly the secondary markets are the most effective way to work through their remaining credit issues," Pancari said. But "I would not rule out that we could still see additional increases in troubled debt restructurings," Pancari said.

Like even the most robust of its peers, new loans are not there to replace Synovus' runoff. But an upside to its smaller balance sheet was the benefit to Synovus' Tier 1 common ratio, which stood at 8.47% as of March 31.

Having fewer assets "was helpful" for capital, Stelling said, though the company anticipates that it will again increase its risk-weighted assets as it returns to profitability.

"We do project some continued shrinkage in the balance sheet bottoming out in the second half of the year and then beginning a growth trajectory," he said.

Capital should remain a priority, analysts said.

"The main issue with Synovus is on the credit quality front — that its inflows to nonperforming loans are still quite elevated, which could keep net chargeoffs higher for longer," said Craig Siegenthaler, a senior equity analyst for Credit Suisse.

With losses still rolling in, there is an incentive for the company to allow its asset balances to shrink, thereby maintaining its capital levels.

"The important factor for investors now is the timing of the next capital raise, and the quantity of capital needed," Siegenthaler said.

Synovus' stock fell 2.4% for the day and is down 6.4% for the year.

Shrinking assets are hardly something bankers celebrate, but a smaller balance sheet has made it easier for Synovus to re-engineer its funding mix.

"Our balance sheet has obviously contracted driven by low balances, and across that whole time period we have been shifting the deposit mix away from broker and time deposits to lower-cost categories," Chief Financial Officer Tommy Prescott said. Over the last year, the company has eliminated more than $1.8 billion of brokered deposits, a relatively expensive form of funding. Brokered deposits fell by 25% and now amount to 13% of the company's overall deposits. That reduction contributed to the bank's improved net interest margin — even in a quarter when other banks struggled to keep them steady.

Personnel costs also loomed large for Synovus. Stelling trumpeted the bank's elimination of 591 jobs in the first quarter, or 10% of its employees. The company plans to cut another 300 by yearend.

The cuts are proof of the company's dedication to bringing "down head count in line with today's economy and the current size of our balance sheet," he said, and would result in savings of more than $75 million in 2011 alone.

Synovus' ability to make the cuts was "impressive," Pancari said, noting that other institutions are also now seeking to impose tighter controls.

Though Synovus' rivals have already turned the corner on profitability, they can only get so far ahead as long as weak loan demand persists. At the very least, banks like Synovus are under less pressure than they might otherwise be.

"The key story of this quarter is execution," Stelling said. "Execution on credit resolution, execution on efficiency initiatives and execution of our process redesign as we complete our efforts to simplify our business model."