Synovus Moving from Playing Defense to Going on Offense

Executives at Synovus Financial can breathe a sigh of relief after years of working to rebuild the Columbus, Ga., company.

Synovus' leadership was finally able to specify how the $26.6 billion-asset company would buy back preferred stock issued through the Troubled Asset Relief Program. The update came late Thursday after Synovus reported loan growth and a big decline in credit costs.

The results drew praise from once-skeptical analysts, even though management still sought to manage expectations.

"Our team is certainly not celebrating today," Kessel Stelling, Synovus' chairman and chief executive, said during a conference call Thursday to discuss quarterly results. "The team is energized and ready to . . . to continue to execute on the many strategies that we have laid out for you."

Synovus expects to repurchase $968 million in preferred stock from the Treasury during the third quarter. The company paid nearly $30 million in dividends on preferred stock during the second quarter.

"More growth seems to be the focus, but we wonder if the company would entertain other strategic moves with the excess capital," says Christopher Marinac, an analyst at FIG Partners. "It is too early to speculate since the regulators are hardly going to bless an acquisition in the near term, but this changes the focus of the company from surviving to thriving."

For several quarters, executives said Synovus would repay Tarp by the end of the year, avoiding a big jump in its dividend rate. The company will fund the exit with a $680 million dividend from Synovus Bank and $315 million in capital it will raise by selling common and preferred stock.

Synovus said Friday that it would sell almost 60 million shares of common stock at $3.09 each. The sale, set to close Wednesday, is expected to raise about $175 million.

Some analysts expressed shock that Synovus was required to raise common equity to repurchase Tarp shares. The company has strong capital ratios and a portion of the deferred tax asset that it recaptured late last year has yet to be calculated into its regulatory ratios, Jefferson Harralson, an analyst at Keefe, Bruyette & Woods, wrote in a Friday note to clients.

Synovus "now has too much capital, but we certainly understand that the regulators are in charge and the company has to comply with onerous capital rules of raising enough capital to match the Tarp payoff," Marinac says.

Even with the capital raise, repaying Tarp will be slightly accretive to earnings per share and tangible book, says Kevin Fitzsimmons, an analyst at Sandler O'Neill.

Synovus' executives have a new challenge: determining what to do with its abundance of capital, Marinac says. Executives have been plagued by questions over how it will increase revenue.

In the second quarter, the company's net income rose nearly 24% from a year earlier, to $30.7 million. Most of the lift came from lower credit costs, which fell 51% from the first quarter and more than 65% from a year earlier, to $24 million. Net chargeoffs fell 48% from the first quarter and 70% from a year earlier, to $30 million.

"The challenge is you can't rely on reducing credit costs forever," Fitzsimmons says. "You have to put yourself in a position to grow revenue. Some of that is dependent on the economy and some of it is just being able to" book loans.

During Thursday's conference call, executives pointed out Synovus added about $240 million in net loans in the second quarter. Total loans rose about 1% from a quarter earlier, to $19.6 billion, including increases in commercial and industrial lending and the retail and investment properties portfolios.

The company's net interest income rose 1% from the first quarter but fell 5% from a year earlier, to $202 million. The net interest margin compressed by 4 basis points from the first quarter and 9 basis points from a year earlier, to 3.39%.

Noninterest income rose 0.6% from the first quarter but fell 15% from a year earlier, to $65 million.

Synovus anticipates continued loan growth in the second half of this year, though executives did not provide specific numbers. Credit costs should also continue declining, management said.

"Let it be said that Synovus did a yeoman's job of removing problem assets and positioning the company to survive," Marinac says. "It took longer than many other banks but, in the end, they are finishing the marathon, which is what matters."

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