If you are looking for a worst-case scenario among regional companies, Synovus Financial Corp. might be it.
The $35 billion-asset Columbus, Ga., company was once praised for its super community approach to banking, but problem residential and commercial real estate loans now weigh heavily on it. Synovus has tried to redefine itself, but investors in recent weeks have grown increasingly wary of its credit quality and capital levels.
Richard Anthony, the chairman and CEO, repeatedly sought to reassure them last week by saying the company has enough capital right now. But this only led to more questions about what shape the company will be in a year from now — if it has not been bought by then.
"The questions I keep getting from clients deal with the forward-look, as [the bank] absorbs losses over the next several quarters and capital levels decline," said Robert Patten, an analyst at Regions Financial Corp.'s Morgan Keegan & Co. Inc.
Anthony said during a financial conference Thursday that Synovus, which has lost money for five straight quarters, could return to profitability next year. A prepared statement a day later asserted that the company's capital position "remains strong" and that it has faced no orders from regulators to raise more capital.
What was absent was a forecast of capital strength in coming quarters.
Though no one has predicted a failure, concern is growing that another round of capital-raising could harm existing investors. And some are pondering whether Synovus will have enough gas in the tank to repay the $968 million in capital it got from the Troubled Asset Relief Program.
"Third-quarter losses were higher than I think many people expected," said Kevin Fitzsimmons, an analyst at Sandler O'Neill & Partners LP. "It is clear that the fourth quarter is critical for them. They need a visual road to profitability right now. They definitely need to show the nonperforming assets going down."
Synovus' shares have fallen 50% since Sept. 23, when it raised $600 million in capital by selling stock at $4 a share.
The company heightened concerns about its long-term capital strength in a Nov. 9 filing with the Securities and Exchange Commission that said it would have been "unable to demonstrate" meeting a Tier 1 capital threshold of 4% of risk-weighted assets at June 30 under the "more adverse" scenario of the stress tests the government released to bigger banks in May.
Synovus also disclosed that it had entered into a memorandum of understanding with the Federal Reserve and the state banking regulator in Georgia to develop a plan to minimize credit losses, reduce nonperforming loans and improve credit risk management, among other things.
"It shows why they made the decision" to raise capital, Fitzsimmons said. "You can't throw the $600 million they raised out the window. Will it be enough? I don't know."
Several analysts in recent months have suggested that regulators may replace the current 4% threshold for Tier 1 capital with a higher amount, perhaps 6%, which could put more pressure on Synovus and others to raise capital.
Patten and others said they believe recovery will not come easily for Synovus, once a highly regarded banking company due in part to its attractive Southeast operation and its 80.8% stake in the credit card processor Total System Services Inc. Synovus spun off its TSYS holdings in December 2007, raising $485 million in capital and boosting its Tier 1 capital ratio to 9.4% but costing the company a valuable bottom-line contributor.
The company, which at one point touted having more than 40 banks, fell victim to the decentralized banking model it had fostered, augmented by a culture that had long focused on real estate lending. In the last 18 months, management has aggressively merged banks and centralized lending and risk management operations, but analysts said Synovus lost precious time in getting a handle on its problems, particularly in Florida and Atlanta.
"Because of the decentralized nature of [the] company, it has taken them longer to get their hands around all the issues," Patten said. "You really have to question the business model."
Synovus has ramped up efforts to unload problematic assets, selling $850 million in loans in the first nine months of this year. During the third quarter, these sales brought in 46 cents for every $1 on the books. Despite these efforts, nonperforming assets have continued to rise, growing 1.7% from the second quarter, to $1.75 billion.
Analysts said Synovus may need to take closer haircuts on loan dispositions to more aggressively eradicate its credit issues. Doing so would threaten to burn through existing funds and force the company to raise more capital, they said.
Anthony last week said Synovus would take a measured approach to shedding bad assets. "We're not recklessly throwing assets out into pools and selling them at any price," he said at the conference held by Sandler O'Neill.
Analysts said it could be difficult for Synovus to return to profitability unless it can find a way to dramatically reinvent itself by emphasizing fee-based business and commercial lending over its once-dominant focus on real estate. Executives began trying several years ago to make this adjustment, acknowledging that it would take some time to change the culture.
If Synovus is unable to regain its footing and exit Tarp, analysts said the company may consider selling itself; they list Toronto-Dominion Bank, SunTrust Banks Inc., Regions, and BB&T Corp. among possible suitors.
Synovus "may have to pair up with someone else," Patten said.
For now, the company is focused on the present. In response to several questions about its future, Chief Financial Officer Tommy Prescott said: "We believe that we have adequate capital cushion based upon internal stress testing."