Synovus Financial Corp.
Headquarters: Columbus
Founded: 1888
Assets: $26 billion
Operations: 274 branches in Georgia, Alabama, South Carolina, Florida and Tennessee
United Community Banks
Headquarters: Blairsville
Founded: 1950
Assets: $7.4 billion
Operations: 102 branches in Georgia, North Carolina, Tennessee and South Carolina
After years of struggle to recover from the Great Recession, two of Georgia’s largest banks joined dozens across the nation in an unusual step to boost the appeal of their battered shares.
Columbus-based Synovus Financial Corp., Georgia’s second-largest banking firm, last month issued one new share to investors for every seven they held. United Community Banks of Blairsville, the state’s third-largest bank, did a similar exchange in 2011, converting each five old shares into one new, higher-priced share.
You read right. Instead of a traditional stock split, in which one share is divided into two or three and the per-share price drops, these so-called “reverse splits” cut the number of shares and raise the price.
The idea: attract new investors not by making expensive shares cheaper but rather by doing the opposite — boosting the price of shares that may be so cheap investors are avoiding them.
Such moves don’t change the total value of what investors already own. They just hold more or fewer shares that still add up to the same total value.
Some banking industry analysts say the moves could be a way for Georgia’s revitalized banks to make themselves more attractive to investors ahead of an expected wave of mergers. Others see the opposite: a sign that some banks are still hobbled with comatose stock performance following years of losses.
“The reverse split is just a band aid approach. It doesn’t solve the underlying problems of the company,” said James Rosenfeld, a finance professor at Emory University’s Goizueta Business School.
Either way, investors notice. Share prices often rise after a conventional stock split because investors see it as a sign that the company has a bright future.
By contrast, many consider reverse splits bad news — a last-ditch effort to keep a sinking share price high enough to stay listed on a major stock exchange and remain in money managers’ portfolios. Some researchers say it can also signal that a company’s profits and stock price will stay depressed for some time to come.
Nationwide, 28 banks have done the relatively rare stock maneuver since 2011, according to Atlanta-based bank advisory firm FIG Partners.
Investors were angered after banking giant Citigroup did a 10-for-1 reverse split in 2011. Three years later, its stock return has been about half that of most other banking firms.
Investors have good reason to be wary of reverse splits, often done to “get rid of a penny stock image,” Rosenfeld said.
In a study of more than 1,600 firms that did reverse stock splits since 1962, he and other researchers found that those companies’ stock market returns and financial performance remained weaker than competitors’ results over the next three years. Their stock returns typically lagged similar firms’ by about 50 percent over the three years.
“The financials mirrored the stock price performance. Both were horrible,” said Rosenfeld.
Some industry analysts believe the story may be different for banks that recently did reverse stock splits. They argue that the banks’ performance is improving. The reverse splits, they say, are evidence that they’re finally recovering from the 2008-2009 financial crisis, and putting the pieces in place for eventual expansion.
“I really think they’re hitting the reset button,” said Chris Marinac, with FIG Partners. “All these banks have recovered.”
In the first three months of 2014, Georgia’s financial institutions logged their best profits since before the Great Recession, according to Federal Deposit Insurance Corp. data. Nearly 90 percent of the state’s 219 banks posted a profit in the first quarter. That’s a turnaround from 2009, when 45 percent of the state’s banks were losing money.
The state, which had more than 350 banks when the crisis hit, led the nation in bank closings, with 87 since mid-2008.
No Georgia banks have failed in more than a year. Healthier banks are beginning to gobble up smaller banks, said Gerald Blanchard, a banking attorney in Atlanta with Bryan Cave.
“Banking has generally stabilized across Georgia, but it hasn’t fully recovered,” he said. “You’re going to continue to see some consolidation.”
Many survivors, including Synovus and United Community, had to recruit new investors to shore up their operations after taking heavy losses on loans to home buyers, builders, developers and other customers.
After losing almost $2.9 billion from 2008 to 2011, Synovus has reported more than $1 billion in profits since 2012. Likewise, United Community’s profits have totaled $322 million since 2012, after losing $866 million during the 2008-2011 period.
But that added millions of new shares to their books even as they continued to lose money, said Nishil Patel, assistant vice president at investment bank Keefe Bruyette & Woods’ Atlanta office. Synovus, for instance, went from 47 million shares in 2006 to 945 million shares in 2013, he said, as it issued shares to new investors and raised $785 million to cover losses and help pay off a federal bailout loan.
When you “issue all these shares,” he said, “your stock price is going to get rocked.”
Before their reverse splits, Synovus’ and United Community’s shares both fell close to $1 at times.
“The purpose of (the reverse split) was to get our stock price up to a reasonable level,” said United Community Bank Chief Financial Officer Rex Schuette, noting that some mutual fund companies won’t buy shares that are below $5. United Community got $380 million in new capital from private equity investors. But as a result, the bank’s shares ballooned from about 50 million to 240 million. “We had too many shares,’ he said.
United Community also has become profitable again, and dozens of additional mutual funds and other institutional investors have bought up its shares, said Schuette. The bank’s shares lagged other banks’ stocks for months after its 2011 reverse split, but are now around $16, up about 50 percent. That matches competitors’ average three-year returns.
“Obviously we’re one of the companies (that did a reverse split) that performed much better,” said Schuette.
Synovus did not grant an interview to the Atlanta Journal-Constitution for this story.
Synovus’ share price has been mostly flat, matching other bank stocks, since it disclosed its reverse split plan in March and completed it last month.
Patel, of Keefe Bruyette & Woods, said the move is“a small step, but … a positive step toward recovery.”
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