Synovus Taking Measured Steps to Boost Investor Returns

Investments in specialty lending, technology and personnel seem are setting the stage for long-term momentum at Synovus Financial in Columbus, Ga.

The $27.6 billion-asset company has been cutting costs in certain areas, closing and selling underperforming branches, and then reinvesting some of the savings elsewhere. Management used their quarterly earnings call to tout progress made in those areas, along with efforts to build capital.

In doing so, Synovus is joining a list of other banking companies, including KeyCorp in Cleveland, that have turned to reallocation as a way to boost revenue, deepen client relationships and improve long-term efficiency.

"Banks have to be creative in this environment, and they must also be assertive to find new growth avenues," said Christopher Marinac, an analyst at FIG Partners in Atlanta. Synovus also has a large capital position and "strong enough" reserves to cover any "risk of credit problems from these specialty areas."

Synovus was hard hit during the financial crisis, largely because of a high concentration of residential construction and development loans. The company, which accepted nearly $1 billion from the Treasury Department's Troubled Asset Relief Program, was often rumored to be a takeover target.

Management has made significant strides; Synvous reestablished consistent profitability and recaptured its deferred-tax asset in 2012 and repaid Tarp the next year. And in recent months, the company's stock has been outperforming the bank stock sector, Marinac said.

Synovus' turnaround has been partly fueled by management's focus on niche lending, including senior housing, health care and equipment finance. The company has also laid the groundwork for increased fee income, due in part to an expansion of the company's mortgage business in certain markets and increased production in Small Business Administration loans.

SBA lending, in particular, represents a "great opportunity" for the company, Kessel Stelling, Synovus' chairman and chief executive, said during the quarterly call.

The SBA "group has momentum as we've added talent there and as our bankers quite frankly getting more familiar with those opportunities," Stelling said. "Georgia has been the primary driver, but we do think we have opportunities in other states."

Total loans at Synovus increased almost 5% in the first quarter compared to a year earlier, to $21.1 billion. Commercial-and-industrial loans rose more than 3%, while the retail portfolio expanded by nearly 8%. Gains from the sale of SBA loans jumped by roughly 80% from the fourth quarter.

Overall, the company's earnings rose 12% from a year earlier, to $51.4 million.

"The loan growth isn't the highest of their peers, but I would say these investments are becoming visible," said Jefferson Harralson, an analyst at Keefe, Bruyette & Woods. "Hopefully they will ramp up even further as the year goes on."

Noninterest expenses fell almost 3%, to $178.9 million. Last year, Synovus closed 13 branches while also selling six branches in Memphis, Tenn. More branch closings are possible as mobile banking and other technology upgrades cut into branch traffic and teller transactions, Stelling said. Still, he said that expenses will likely remain flat even as the company looks for cost savings due to investments in talent and growth initiatives.

"We have a very robust teller staffing model that we continue to update, so we look at not just staffing within a branch but then the productivity of the entire branch," Stelling said. "It's a continuous process."

KeyCorp has also been cutting branches while simultaneously looking to boost revenue. KeyCorp pledged in 2012 to lower its cash efficiency ratio to between 60% and 65%, through a blend of expense cutting, including branch closings, and improving revenue, partly through an emphasis on niche lending.

Such a strategy can take time to show tangible progress, and investors are anxious to see Synovus increase its returns, industry experts said. Key, which is three years into its efficiency effort, still has a cash efficiency ratio hovering around 65%.

Synovus, meanwhile, is slowly improving investor returns, Harralson said. The company's return on average assets inched up a basis point from the end of 2014, reaching 0.8% at March 31. Given management's strategy, investors will need to be patient, he said.

"There are strategies that could improve Synovus's ROA faster, but they're taking a longer-term view," Harralson said. "They're cutting expenses, but reinvesting those into revenue initiatives that will pay off. They are taking a view that this will make them a stronger, more valuable, company, but it doesn't make for significant near-term progress."

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