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Synovus on the offense, biz journal says (2.26.10
RICHARD ANTHONY
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A headline in Friday's Atlanta Business Chronicle says Synovus is getting back on the offensive in its quest to restore profitability and confidence.
They're right.
Synovus Chairman Richard Anthony recently sat down for a frank conversation with the Business Chronicle — just as he did last week with the Ledger-Enquirer's Tony Adams.
Those interviews followed two off-the-record talks key Synovus officials had with Richard Hyatt's Columbus. They reached out to the reporter instead of the reporter reaching out to them.
Taking the offense is a positive step for the Columbus company. Acting rather than reacting impresses financial observers and more importantly sends a message to stakeholders that Synovus intends to be in charge of its destiny.
Interesting too are comments Anthony made about newly-named Synovus President Kessel Stelling — his heir-apparent, the Business Chronicle noted. Stelling is singled out for his charisma as well as his banking acumen.
A copy of the Business Chronicle article follows:
Friday, February 26, 2010
Synovus seeks to get back on offense
Atlanta Business Chronicle
by J. Scott Trubey Staff Writer
It’s been a tumultuous two years for Synovus Financial Corp. and its chairman and CEO, Richard Anthony.
Once a high-flier among Southeastern banks, the Columbus, Ga.-based bank holding company (NYSE: SNV) has been swamped under a flood of souring real estate loans, seen its stock price tumble to previously unimaginable lows, and been the subject of takeover rumors.
But Synovus has also been aggressive in trying to solve its problems, and Anthony is optimistic for a much brighter tomorrow.
He sat down Feb. 19 with Atlanta Business Chronicle for a wide-ranging, 90-minute interview at the company headquarters overlooking the Chattahoochee River.
“There’s plenty to keep you up at night,” Anthony said. “But even now I feel a responsibility to focus on growth, on the opportunities that are going to be in front of us and how we can capitalize on those opportunities.”
Once praised for punching the accelerator on aggressive growth in metro Atlanta and Florida that reaped more than $1 billion in profits based largely on real estate in the boom years, Anthony has been chastised for being too gung ho on residential and commercial development.
Profits were replaced by federal bailouts to the tune of $968 million.
The parent of 30 subsidiary banks went from earnings exceeding $1.5 billion from 2005 to 2007 to losses of nearly $2 billion the next two years — much of it from writing off real estate development loans turned bad.
The greatest example of that — its estimated $220 million loan to Sea Island Co. — turned south when the owners of the historic Georgia coastal resort defaulted on the company’s debt and are preparing for a likely sale of the posh but debt-riddled golf and seaside playground to the world’s elite.
Now Synovus finds itself at a crossroads. It is transforming itself from the inside with a new, simpler constitution. And Anthony — though he has no plans to step aside any time soon — has welcomed his likely successor to the C-suite as Kessel Stelling was named chief operating officer on Feb. 22.
In the interview, Anthony discussed the Great Recession, Sea Island, his vision for Synovus in the years ahead and how Georgia’s second-largest banking company competes in a changed environment for financial institutions.
Lessons learned
“This is an unprecedented sequence of events in my career,” said Anthony, 63, who has worked through every recession since the 1970s, the real estate crisis of the late ’70s and early ’80s and the Savings & Loan debacle.
“This is the most difficult of them all.”
Real estate was the fuel of growth for Synovus, the parent of banks including Bank of North Georgia, Columbus Bank & Trust and Bank of Coweta.
In 2005, the company turned a $516 million profit, and in 2006 a $616 million profit.
At its peak, Synovus had 45 percent of its loans in real estate.
But Synovus started seeing weaknesses develop in its loan portfolio starting in 2005 and 2006, Anthony said, and started addressing the problem.
“The good news is we had our eyes on many of these things, the bad news is we didn’t slam our foot on the brakes,” he said.
The company continued to lend to developers. Profits were good and the economy had never before experienced a real estate and credit-influenced recession like what was to come. “Any mistakes we made were made in the spirit of supporting investment in our communities,” Anthony said. “It just so happened that a lot of that was in real estate. We did support a lot of developers and builders.”
And at times, the money was in the hands of too few borrowers.
“We’ve had larger loans than you will see us putting on the balance sheet,” he said. “Going forward we’ll trim a lot of that back.”
Credit standards and underwriting will be tighter and expectations for high growth have been tempered. “That said, the whole country thought real estate was a can’t-miss area,” he said. “It wasn’t just banks.”
In the future, Anthony said, instead of 45 percent of the portfolio in real estate, it will be 35 percent. Traditional commercial and industrial lending will grow to 45 percent, and consumer banking and segments like wealth management will grow as well.
Chip MacDonald, banking attorney with Jones Day, said Synovus is doing the right things. “They’ve taken their lumps over the past 12 months or so, but that should position them for the future,” MacDonald said.
Sea Island
Those lessons learned seem to sum up the experience with Sea Island.
Synovus affiliate Columbus Bank & Trust was the lead lender on the $500 million renovation and expansion of the glitzy coastal Georgia resort. Sea Island Co. is now in default on at least $400 million in debt outstanding from a massive renovation of its Cloister and Lodge hotels and residential developments.
In November, Wells Fargo & Co. took over the deeds to its 3,000-acre Frederica golf course community on the Georgia coast and to an undeveloped 400-acre parcel on St. Simons Island. In October, Sea Island announced it was selling nearly 18,000 acres, including land planned for a massive residential and mixed-use development.
Bill Jones III, the chairman and CEO of Sea Island Co. and a former Synovus director, has said the resort is pursuing options under the advisement of Wall Street investment bank Goldman Sachs & Co., including a potential sale.
Anthony said the underwriting by Synovus and its subordinate lender partners was appropriate, but the community was a victim of “an unprecedented meltdown” in high-end real estate.
Sea Island is “controlling its own destiny,” Anthony said. The bank has agreed to the hiring of Goldman Sachs, but “they are driving the process.”
Anthony said it would be inappropriate to comment about what kind of capital hit Synovus would take were the resort sold. The bank listed a $220 million relationship with a hotel as non-performing in the third quarter.
“There’s a lot of debt that needs to be serviced and it’s become clear to them that they need to pursue all options, which might include a sale of the company or pieces of it or perhaps the infusion of equity,” Anthony said.
Sea Island is drawing interest from prospective buyers or equity partners, Anthony said.
Among those rumored to be interested is Kohler Co. CEO Herb Kohler, and it’s possible a deal might be reached to sell the exclusive Ocean Forest golf club and enclave to its members.
Anthony declined to address rumors specifically.
“There’s interest because of the uniqueness of Sea Island,” Anthony said. “It’s an exceptional lifestyle.”
He declined to call the Sea Island deal a mistake, but said loan concentrations to single borrowers and putting too many eggs in the land development basket certainly was. “The size of the loan would not be one that we would accept today because we have reviewed our large borrower concentration limits,” he said.
Acquisition target
Synovus’ woes and its prime position in several attractive Sun Belt markets — namely Atlanta; Nashville, Tenn.; Birmingham, Ala.; Columbia, S.C.; Columbus, Ga.; and northern Florida — has some industry analysts calling the $35 billion-in-assets banking company a trophy platform for a Wall Street bank to enter the Southeast at a discount price relative to the cost to acquire other rivals like Atlanta-based SunTrust Banks Inc.
When its stock price went on a suicidal decline in early 2009, rumors floated that Synovus might not be a survivor.
A $600 million stock raise at $4 per share was followed by another steep drop.
The price has since rebounded some, and Synovus met analyst expectations in the fourth quarter, despite its ugly $249.9 million net loss.
Promising signs are emerging, including the slowing pace of new problem loans, and the bank is forecasting a profit for the fourth quarter of this year.
Chris Marinac, bank analyst with FIG Partners LLC, said Synovus is moving in the right direction.
The bank has a “very attractive franchise” of core depositors, customers and branches in a region that will return to growth with the rebounding economy.
“Will they be here in five years? That depends on their own profitability,” he said.
JPMorgan Chase & Co. and other major players have been rumored to be interested in making a big acquisition in the Sun Belt.
“We have every intention of coming through this in a strong position, strong in capital, strong with a good strategy and a good team and in good markets,” Anthony said. “But just as before the crisis, you always have to earn your independence through shareholder value creation. And certainly our shareholders do not feel like we have created value for them lately. We haven’t.”
“If we’re not able to earn our way back to higher levels of performance, then we would become more vulnerable [to a sale],” he said. “But our strategic priority would not be that, it would be to get out there, be a consolidator, and to play offense and to have performance that we’re proud of.”
Playing offense
One way Synovus could help prove its viability in the marketplace is by becoming a player in the failed bank sweepstakes.
Georgia is the nation’s leader in bank failures, with 32 since 2008. Florida is another state hard-hit by the current financial system turmoil. Both are key markets for the regional power.
Anthony said his company has inquired about opportunities with the Federal Deposit Insurance Corp., but will likely wait until it has a handle on its own credit issues and returns to profitability before making strategic moves.
A deal for a failed bank or a series of them would be attractive to investors, Anthony said, because it would be viewed “that Synovus is playing offense again.”
“We’ve got it on our agenda, but we’re just not ready to do it,” he said.
Bank failures are predicted to accelerate this year nationwide. Georgia suffered 25 in 2009, and as many as twice that number could come this year, experts warn.
New entrants have thrust themselves on Synovus’ turf by snatching up broken banks at bargain basement prices.
“We’re keeping our eyes open,” Anthony said.
Bank buys have tended to boost bank capital levels — the firewall to backstop problem loans and the firepower needed to be opportunistic. Anthony said he feels Synovus has enough capital, but will look for ways to increase its cash cushion. Synovus previously said it would sell its merchant services portfolio. And its plan to streamline itself, the consolidation of its 30 charters into one, could be accretive to capital.
“Capital gives you flexibility, the ability to be opportunistic when acquisitions are available,” he said.
Consolidation
Before Synovus can help in the clean up of the Sun Belt’s banking mess, it has its own house to get in order, banking insiders say.
Synovus piloted a program, “Project Optimus,” in 2008 and tasked employees with developing cost savings. More than 1,000 jobs were cut and back-office functions at the 30 disparate banks were centralized as the company enacted 750 employee-proposed efficiency initiatives.
Last month, Synovus announced its plan to consolidate the legal charter structure of its subsidiary banks, pending regulatory approvals. The historically decentralized company, which has prided itself on the independent operations of its 30 member banks, is taking steps to consolidate control.
By mid-2010, Synovus intends to reduce the number of bank charters held by the company from 30 to one. The Synovus affiliated banks will continue to use their names and brands and each bank will retain its own directors and officers.
The real benefit here is capital management and streamlining of regulatory governance over the bank, Anthony said.
Anthony insists the local boards and management will retain decision-making power, but analysts say the move will help Synovus hold firm to the reins.
“Consolidating these charters is no small task,” Marinac said. “For years Synovus affiliates were used to their own fiefdom and with that fiefdom there was an independence to act locally.”
But that independence also led to many of its problems, namely an overindulgence in real estate. Marinac said he expects Synovus to craft a new model that respects that local independence as much as possible, but “at local level this is now going to be Synovus,” he said.
Anthony said Synovus will continue to consider its board members, whether legally advisory board members or not, to be full directors. They will retain their director’s compensation and clout in the organization.
Some in the industry have argued that Synovus should re-brand all its banks, and that the consolidation plan does not go far enough. But company officials and insiders argue such a change could disrupt the carefully crafted model of being a regional power with a community bank persona.
“We still deliver service and make decisions with this community bank image,” Anthony said. “For us to strip that away through a name change we felt would be taking a step back.”
Bank analyst Marinac agrees, though he contends the change should have been done earlier this decade when rivals like United Community Banks Inc. (Nasdaq: UCBI) condensed its structure.
Work will be deliberate and will likely not wrap up entirely until the end of 2010.
The consolidation could lead to some additional job cuts, though Anthony stressed that would likely be through attrition.
“We’ve not identified or communicated any per se,” Anthony said of job cuts. “But obviously there will be some opportunities we think to do more with less.”
Succession
Much of the work to consolidate Synovus, which still requires regulatory approval by the Georgia Department of Banking and Finance, will be led by the newest addition to Synovus’ senior ranks, Kessel Stelling, as heir apparent to Anthony.
The former president and CEO of Alpharetta-based Bank of North Georgia and Synovus market CEO for Atlanta, Stelling has been the point man addressing the banking company’s Atlanta problems.
Stelling’s appointment fills a hole in Synovus’ management structure left vacant since the May 2009 departure of former Chief Operating Officer Frederick Green.
Synovus revealed in September it had entered into a Memorandum of Understanding (MOU) with state and federal regulators. The MOU, a form of regulatory order, directs Synovus to improve its balance sheet and risk-management practices, shed bad assets, increase capital and develop a plan of succession.
Stelling, the former chairman and CEO of Riverside Bancshares Inc., has led the integration of several smaller bank subsidiaries into Bank of North Georgia, now Synovus’ largest bank with $5.5 billion in assets.
“Our team has been through it,” Stelling told the Chronicle. “We’re changing a 100-plus-year operating mode and there’s uncertainty that comes with this.
“I don’t believe you get the trust and respect of the team by the title you’re given,” he said. “I need to get down there and earn the trust and respect of people.”
He has both an outsider and insider perspective that makes him the ideal candidate for the job, said Marinac.
“He’s the most logical choice. It would have been a mistake to go externally,” Marinac said.
Stelling has a reputation of generating shareholder value from his days at Riverside, Marinac said, and other Synovus watchers said the 53-year-old Stelling has a charisma and operations acumen that has been lacking in the company’s executive suite.
But don’t expect to read of Anthony’s departure any time soon, the CEO said.
“I have a desire to get us on solid ground and headed in the right direction,” he said. “I wouldn’t say my retirement is imminent, but it is becoming clear that I’m in a stage in my career that the succession piece needs to be better understood.”
A glimmer of hope
The company still faces enormous challenges. It could be late 2011 before it pays off its nearly $1 billion infusion of Troubled Asset Relief Program funds, and that will likely require a future capital raise to pay off.
But Anthony sees opportunity ahead.
The company is forecasting a slower pace of new non-performing loans, and much of its residential problems are already through the pipeline, Anthony said. But the bank isn’t out of the woods yet, and more pain could come if the economy languishes.
Commercial real estate, what some analysts say is the next major bank-smashing shoe to drop, does not appear to be as large a problem for Synovus as residential loans.
“We can’t be consumed just with the credit challenges. We have to start thinking about growth, new customers, business development and new lines of business,” he said. “It’s my job to keep the problem aspects of the company separate from the growth aspects.”
Reach Trubey at strubey@bizjournals.com
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