Loan Sale is Latest Chapter in Synovus' Comeback Story

Synovus Financial's decision to unload $530 million in troubled assets should help it move past lingering credit woes, though the company still faces plenty of uncertainty as it heads into 2013.

The $25.5 billion-asset company said Thursday that it had sold a batch of nonperforming and substandard assets. It said it would record a pretax charge of $155 million in the fourth quarter.

By removing a huge amount of dead weight — the sale equated to about 40% of nonperforming assets at Sept. 30 — Synovus is finally in a position to focus on lending, industry observers say.

"They've had to shrink the loan portfolio dramatically and loans equal revenue," says Jeff Davis, an analyst at Mercer Capital. "Historically, they have been a … real estate lender and they are having to reposition themselves" for commercial lending.

Synovus, of Columbus, Ga., has been reducing its exposure to real estate in recent years while hiring lenders to target areas such as assisted-living projects and asset-based lending. Many of Synovus' competitors are pursuing the same clients, and stiff competition "usually means taking loans from someone else and that has pricing implications," Davis says.

Removing nonperforming assets should free up time and resources to help Synovus focus more on lending. Over the past 12 months a number of banks have been shifting employees who were once focused on resolving bad assets to revenue-generating areas. The same is likely happening at Synovus, Davis says.

The loan sale helps Synovus "get back to aggressively calling on customers that would like to have a smaller bank to deal with," says Lee Burrows, CEO of Banks Street Partners. "The world will open up to them."

Synovus will likely target midsize businesses that need lines of credit and inventory loans, Burrows says.

The loan sale included $400 million in nonperforming assets, $110 million in loans that it had classified as accruing substandard and $20 million in loans rated special mention. The sale surpassed the $100 million to $150 million in quarterly sales that management had projected during an October conference call.

"Every quarter we are in the market with a number of assets" for sale, Kessel Stelling, the company's chairman and chief executive, said during the quarterly conference call. He added, however, that Synovus "certainly could accelerate" asset sales.

A spokesman said Stelling was unavailable for further comment.

Pricing for distressed assets had shown signs of stabilizing, Kevin Howard, Synovus' chief credit officer, said during the call. Still, he cautioned that unloading nonperforming loans continued to be a "hard process."

A low interest rate environment could be leading more entities to buy distressed assets as a way to find higher-yielding investments, industry observers say. For Synovus, the bulk sale helps it put credit issues in the past so it could "get back to the business of banking," Burrows says.

Challenges remain. The company still has a high percentage of nonperforming assets, "implying that there is still quite a bit of wood to chop," Steven Alexopoulos, an analyst at JP Morgan Securities, wrote in a Thursday note.

The company also remains an attractive takeover target because of its large deposit share around Atlanta. It is still in "phenomenally attractive markets that have high growth," Davis says.

Synovus said Thursday that it could reverse substantially all of its deferred-tax asset valuation allowance, valued at $787 million at Sept. 30, at some point over the next three quarters. That could position it to exit the Troubled Asset Relief Program next year.

"When you look at the way the company has performed this year, particularly based on stock price, it's been a comeback story," Burrows says. "They continue to right the ship."