Regions, Synovus Fall Behind as Losses Persist

Two of the banking industry's biggest turnaround challenges fell further behind the pack in the third quarter, and it's now up to their rookie CEOs to turn on the afterburners.

O.B. Grayson Hall Jr. at Regions Financial Corp. and Kessell Stelling at Synovus Financial Corp. each took command of his company this year, and both are looking hard for ways to offset the heavy costs of purging bad assets.

Regions and Synovus reported third-quarter losses this week, by contrast with the growing list of competitors now in the black. As the executives urged investors to be patient with their revitalization efforts, experts warned that companies in catch-up mode often take costly risks to increase revenue and slash expenses.

"These types of situations can force you into making certain decisions," said Marty Mosby, an analyst at Guggenheim Securities LLC and a former chief financial officer at First Horizon National Corp. in Memphis. "If you sacrifice everything just to get to a number, you will end up doing more long-term harm. If your customer activities are declining or you are losing momentum in the marketplace, then you know you are cutting too far."

Much is riding on each company's ability to return to profitability as analysts and the media have long speculated that Regions or Synovus would be prime acquisition targets for a bigger U.S. banking company or a foreign bank.

Hall, who took over as CEO in April, continues to promote his Birmingham, Ala., company's business model. "We are successfully executing our plan to return Regions to sustainable profitability," he said during a Tuesday conference call to discuss the quarterly results. "I am convinced that we have the right strategy and the right people to deliver on our commitment."

Stelling, who became the CEO at Synovus this month after serving in an interim capacity, admitted during Monday's conference call that earlier hopes of having a profitable fourth quarter had become unrealistic. "On the last call, I talked about the fact that recent economic events had certainly put pressure on that timing," said Stelling, who took over for the ailing Richard Anthony last summer.

"We believe now that profitability is a 2011 event," he said, without specifying a quarter. Synovus, in an effort to break even, is targeting $100 million in bottom-line improvements that Stelling acknowledged would largely consist of new cost cuts. The $31 billion-asset Columbus, Ga., company had already embarked on an improvement initiative in recent years; it has cut more than 1,000 jobs since 2008.

Stelling said the earlier project did not account for the massive charter consolidation that took place this year and that expense cuts could include more layoffs, a review of the branch network and a reevaluation of relationships with outside vendors. "It is very clear that we have to be relentless in our focus on the cost side and not wait for any economic recovery," he said.

Hall also hinted at more aggressive cost-cutting, just a few years removed from a large effort that took place after the $133 billion-asset Regions bought its Birmingham rival AmSouth Bancorp. "We recognize in this economy that to be successful we have to be diligent in our efforts to manage expenses," he said. "It's going to be a low-growth environment for an extended period," he added. "We have to continue to target all areas of staffing, occupancy and discretional spending. … Rest assured, any changes we implement will at the same time maintain focus on service quality and [on] making sure we are serving the needs of our customers."

Mosby said Regions does appear to be gaining momentum. Its net interest margin expanded in the third quarter, checking accounts were added and some loan categories actually grew. For him, the company is in a position to quickly close the gap with other profitable regional banks if management continues to invest in areas such as marketing and customer loyalty.

Still, credit costs remain high.

At Regions, the loan-loss provision rose 16.7% from the second quarter, to $760 million, due in part to the sale of $709 million in distressed assets; half involved bulk sales. Another $332 million in loans were moved to held-for-sale status, helping reduce nonperforming assets by 1.1% from the previous quarter, to $4.23 billion, despite higher inflows. The moves also contributed to a 16.6% spike in net chargeoffs, to $759 million.

Regions lost $209 million in the third quarter, compared with $335 million in the second quarter and $437 million a year earlier. It has posted six straight losing quarters, and seven of the last eight have been in the red. Also, it remains in the Troubled Asset Relief Program.

Synovus reported its ninth straight quarterly loss, $195.8 million in the July-September period. The loss provision, however, fell 20% from the second quarter, and net chargeoffs were off 45%. Nonperforming assets edged down 1.1%, to $1.6 billion. Synovus sold $172 million in problem assets in the third quarter, but executives said more than $300 million more could be sold by yearend. (The third-quarter sales yielded roughly 39 cents on the dollar.)

Recovery efforts will include more than cost-cutting, executives at the two companies said.

Regions reported 2% commercial and industrial loan growth from the second quarter level, largely in middle-market lending in areas such as energy and health care. Hall vowed to keep pursuing such loans, while evaluating ways to offer short-term loans in "underserved" markets.

Stelling said Synovus, despite expectations of more cost-cutting, is committed to hiring lenders in "high-growth markets" and developing products geared specifically to commercial customers.

Regions shared some moderately positive news, with Hall saying that revenue hits under Reg E could be as much as 44% smaller than forecast as more customers than expected opted in to overdraft protection. He also reduced estimates of losses expected from the Gulf of Mexico oil spill to $20 million, compared to an initial prediction of $100 million.