Synovus - Georgia's second largest bank - feels a squeeze

A similar diet of toxic loans has Synovus — and its investors — feeling queasy, too.

The bank’s stock price recently plunged 60 percent in six weeks to its lowest level in 17 years, as the bank reported more losses for the third quarter. Its losses for the first nine months of the year are nearly $1.2 billion.

Shocked by the latest dose of red ink, hedge funds and other big Wall Street firms that had bought into a $600 million stock offering in late September have abandoned the stock almost as though Synovus was sinking. Its market value is now less than a tenth of its 2006 peak.

But even though Synovus is facing its biggest challenges in decades, folks like Atlanta investment banker Lee Bradley argue that the sell-off by institutional investors is overdone.

“They kind of move with a herd instinct,” he said. “It’s just that people are so bearish on financial stocks,” said Bradley, with Washington D.C.-based Compass Point Research and Trading.

Likewise, Atlanta banking consultant Joel Rosenberg said he doesn’t think Synovus and its subsidiaries are in immediate danger. A few units are showing strain by some risk measures, but the bank can deal with that issue, said Rosenberg, with ProfitStars in Dallas, Texas.

“It’s just a matter of moving capital to some weak links,” he said.

Indeed, industry analysts and Synovus executives argue that the bank is working hard to fix its problems, and isn’t in as dire shape as several smaller Georgia banks that have recently failed. Some analysts predict the bank will begin making profits in the second half of next year.

“It’s not like Synovus’ problem loans are three times worse than everybody else’s,” said Chris Marinac, with Atlanta-based bank securities firm FIG Partners. “Flushing out the problems is exactly what they need to do.”

Synovus Chief Executive Richard Anthony said he has “no doubt that we’ll come through this in excellent shape.”

Litany of problems

In the meantime, however, Synovus also faces tough hurdles, according to some experts and company disclosures:

● Synovus still has $2 billion in problem loans and foreclosed properties on its books. It faces a daunting task unifying 30 separate bank subsidiaries and shoring up those hit hardest by the real estate crash, including several units in metro Atlanta, coastal Georgia, Florida, South Carolina and Memphis.

● State and federal regulators have turned up the heat on Synovus and several of its subsidiary banks with enforcement orders requiring it to preserve cash, limit losses and improve operations.

● The plunging stock price — to as low as $1.49 last month — indicates that Synovus executives will have to work on repairing the bank’s credibility with investors, according to some industry watchers.

● Synovus also has to find a new heir-apparent after its president, Frederick Green, who some viewed as a future chief executive, abruptly stepped down with little explanation in May. He did not return a call to his home.

Synovus’ longtime former chief James Blanchard has come partially out of retirement, becoming chairman of the board’s executive committee. From there, he can take a more active role working with Anthony, his successor since 2005.

Marinac, the Atlanta bank analyst, said Blanchard is a charismatic leader who can help unify employees who have been roiled by pressures to consolidate the bank’s dozens of separate charters.

“He understands how to get people rallied up,” said Marinac. “I think that having Jim back has brought focus and stopped some of the infighting.”

Consolidation an issue?

Times are tense because Synovus wants to consolidate and its local bank teams are fighting back, Marinac believes.

In good times, Synovus’ many separate banks, which kept their names and local teams after being acquired, had helped Synovus win business in each town.

But the separate units probably also contributed to Synovus’ excessive real estate lending, said Marinac. He believes regulators pushed Synovus’ management to simplify the banking operation to about five separate bank charters from about 40 a few years ago, but the managers at those banks fought back, eventually leading to Green’s departure.

Anthony now has a “thankless job” to continue the consolidation, said Marinac. “He has people coming at him from both sides.”

Anthony, who is also Synovus’ chairman of the full board, said there is little dissension in the management ranks. “I would say our team is very unified,” he said. “Our team is aligned and engaged, is really on a mission.”

Anthony said the bank has been taking “bold steps” to shed its problem loans and foreclosed properties, cut expenses and turn around its losses.

“I think the trends are going to be better,” he said. He predicted that Synovus will report a smaller loss in the fourth quarter and “exit this cycle” in 2010 without having to raise new capital.

But he acknowledged that the company got off on the wrong foot with institutional investors not long after selling $600 million worth of new stock to them on Sept. 22 at $4 a share.

Such firms were among Synovus’ largest shareholders after the stock offering. They included hedge funds Metropolitan West Capital Management in Newport Beach, Calif., which held 27 million Synovus shares at the end of September, and Second Curve Capital LLC in New York, with 6 million shares. Neither firm returned a reporter’s call.

Some investors upset

Communications with these investors “is an immediate priority,” said Synovus’ Anthony. “I think there have been some misunderstandings along the way.”

The trigger for the spat was a $155 million write-off in the third quarter of assets similar to tax credits. The write-off boosted its losses to $440 million for the quarter ended Sept. 30.

“People feel that the company should have told them about that [expected write-off] in September” but Synovus may not have known yet, said Marinac.

“I think people aren’t being realistic,” he said, though he added, “there is somewhat of a trust issue.”

It’s not the only time disgruntled investors have challenged Synovus’ forthrightness. Synovus disclosed in a recent filing that the Pompano Beach employees’ pension system sued the bank in July in U.S. District Court in Atlanta alleging that the company failed to disclose pertinent information that caused its stock to be “artificially inflated.” Another shareholder group filed a similar action in the same court in November.

The company said it plans to “vigorously defend” itself against the allegations.

Meanwhile Synovus is “being aggressive in recognizing its problems,” said Kevin Fitzsimmons, with New York-based Sandler O’Neill, which helped with Synovus’ recent stock offering. Synovus’ turnaround efforts and capital infusion should give the company breathing room in dealing with bank regulators, he said.

Succession plan key

State and federal regulators reached a type of enforcement action called a “memorandum of understanding” with Synovus during the summer, Anthony said. The enforcement action requires the bank to strengthen its operations by reducing loan losses and problem loans, beefing up risk management and making other improvements.

As long as the company is progressing, “the regulators will likely give them time,” said Fitzsimmons.

The enforcement order is “largely a monitoring and reporting process,” said Anthony, adding, “we have a good relationship with our regulators.”

One other area where regulators want to see progress, according to Synovus’ disclosure of the enforcement action, is in devising “succession planning for key corporate and regional management positions.”

Anthony said investors question him about the same issue because Green, the former president, “was viewed as a possible succession candidate.” He said Synovus’ board of directors is now working on a “succession process” to find internal and outside candidates who might serve as a future chief executive.

“I have no plans to leave,” said Anthony, who is 63, but a potential successor could be named chief operating officer in the interim, he said. Synovus may have “more to say” about that in late January, he said.