Synovus Financial (SNV) has taken a surprising turn back onto the M&A trail.

The Columbus, Ga., company acquired a failed bank last week though it owes roughly $968 million under the Troubled Asset Relief Program. The pairing of a bank on public assistance with a failed one seems odd at first, but regulators have allowed current participants in Tarp or the Small Business Lending Fund to do more than two dozen such deals.

In the minds of some, this kind of deal was supposed to happen.

"Really the whole intent of Tarp was to give money to healthy institutions and for them to use that capital in order to grow by acquiring troubled institutions," says Michael Iannaccone, the president and managing partner of MDI Investments, a bank advisory firm. "It's not a bad thing to use the government-assisted money to grow."

Synovus executives made it clear that they were looking forward to making deals again after spending the last few years handling soured construction loans and losses totaling about $3 billion.

Kessel Stelling, its chairman and chief executive, called M&A "a natural extension of who we are and what we do" at an investor conference this year. Synovus bought about 50 banks in becoming a $26.8 billion-asset regional player — though none since 2009.

Management had expected to resume acquisitions after the company repaid its Tarp funds and cleaned up more of its credit portfolio. Because of this, its acquisition of the $60.8 million-asset Sunrise Bank in Valdosta, Ga., prompted some double takes.

"I was surprised to see Synovus doing a deal," says Kevin Fitzsimmons, an analyst at Sandler O'Neill & Partners. "My initial impression was that Synovus was getting healthier, but I really wasn't thinking of them as being a bidder yet for an acquisition."

Synovus' generally healthy balance sheet and capital levels, history as an acquirer and Southeastern presence probably contributed to it being able to complete the deal, industry experts say. Additionally, the Federal Deposit Insurance Corp. cares less about a bidder's Tarp or SBLF status, and more about its overall health and minimizing losses to the Deposit Insurance Fund, the experts say.

"The FDIC is looking at fit and whether the purchaser has sufficient capital to absorb the bank," says Shaheen Dil, managing director of risk and compliance at the consulting firm Protiviti. "Ultimately their primary function is to preserve the safety and soundness of the industry."

Since 2009, 16 banks that still owe money under Tarp or SBLF have acquired 25 failed banks, Iannaccone says. This includes Synovus's last acquisition, in April 2009, when one of its units obtained American Southern Bank.

The FDIC declined to comment, except to say that it consults with each bidder's primary regulator and seeks the least costly resolution, a spokeswoman said.

Synovus officials did not directly answer questions for this story but reiterated that the deal was carefully structured. Synovus paid no premium for Sunrise's $57.8 million of deposits, acquired 22% of its $60.8 million of assets, acquired only those loans secured by deposits and took no real estate or branches, according to an email from a spokesman.

Owing money from Tarp has taken on a negative connotation since the program was implemented, although it did not start out that way, industry experts say. Initially the funds were "not going to weak banks," says R. Lee Burrows Jr., CEO of the investment banking firm Banks Street Partners. "If you got Tarp, it was an honor."

However, once the idea there "was a bailout of banks" took hold, public opinion soured on the program, Dil says. Many banks repaid their funds as soon as they could because of this and other restrictions imposed by the program, she adds.

Adding to the negative perception, a recent report found that the banks still in Tarp's Capital Purchase Program are in a weaker financial condition than the banks that have exited the program.

There are some failed-bank acquirers still in Tarp or SBLF that may be in a position to look for more acquisitions, Iannaccone says.

For example, Southern Missouri Bancorp (SMBC) in Poplar Bluff may look for another deal to lower its cost of funds, which is more than twice as high as the industry average. The $771 million-asset Southern Missouri owes $20 million from SBLF. It acquired the failed First Southern Bank in 2010.

Additionally, banks, such as Community Bankers Trust (ESXB) in Glen Allen, Va., that need to diversify their loan portfolios may also look for deals. The $1.1 billion-asset company has about 87% of its loans in real estate. It acquired the failed Suburban Federal Savings Bank in 2009 and owes $17.7 million under Tarp.

Both Community Bankers and Southern Missouri did not respond to requests for comment about their M&A plans.

Synovus' M&A future remains cloudy. Stelling talked about pursuing deals this year in a recent conference call, but analysts raised a lot of questions given the weaknesses in its first-quarter results.

Many observers have marked Synovus as a potential takeover target because it is still grappling with elevated credit costs and where to find profit growth.

Still the failed-bank deal was a vote of confidence from regulators and bodes well for its plans to repay its Tarp money as early as the third quarter, industry experts say.

"It's another signal that the recovery of Synovus is not complete but certainly in the late 8th inning or maybe even top of the 9th," says Jeff Davis, managing director of the financial institutions group at Mercer Capital. "Regulators have more confidence in them."

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