Does The Sad Story Of Synovus Have A Happier Ending Coming?

| About: Synovus Financial (SNV)
This article is now exclusive for PRO subscribers.

One of the saddest stories of the financial crisis in my view is Synovus Financial (NYSE:SNV). The bank which once traded at nearly $30 a share in happier pre-Crisis days today goes for around $3.60 a share (and that's after a significant recovery in the last couple of years). At the end of 2006, the stock's tangible book value stood at $9.14, while in September the firm reported a book value of $2.86.

Don't get me wrong, the number of banks and other firms felled by the Crisis are legion, and in many respects, Synovus shareholders should count themselves lucky. And yet because the firm endured and survived, shareholders who have held the stock a while probably face both a perpetual reminder of the decline in the firm's fortune and also a vague ray of hope that the stock may one day retrace the ground it's lost. But is that realistic? Can long-term shareholders in SNV really hold out hope for an eventual happy ending?

The realistic answer is that it would take many years for SNV to recover to the mid $20's per share level, but that also does not mean that the firm will languish at sub-$5 prices forever either. Realistically, I believe there is a path forward for Synovus that leads to either a sale of the firm, or firm growth such that the stock might trade for as much as $5-6 per share. This level of stock price and the share price appreciation in Total System Services Inc. (NYSE:TSS), whose 81% stake SNV spun off to shareholders in December 2007, would be at least a mild kind of redemption for long suffering SNV shareholders.

In the last year in particular, SNV has made great strides towards turning around its franchise and shoring up the business for the long term. After significant nonperforming loan charge-offs and a restructuring of its balance sheet, SNV now has reasonably high capital levels, a stable net interest margin, and a stable base of low cost deposits. These combined with green shoots in loan growth suggest that the bank may be prepared to earn solid consistent profits going forward.

While the firm still does have a moderately high level of nonperforming loans (2.28% as of Sept. 30 vs. 3.55% a year ago), net charge-offs have fallen very quickly ($23 million vs. $96.5 million a year earlier and annual net charge-offs for 2013 of $130 million vs. $483.5 million in 2012), and the bank did finally get regulatory approval to pay back its $968 million TARP obligation this past July. This TARP pay back approval removed a major overhang from the stock leading to significant price appreciation in the second half of the year.

This TARP repayment is especially important as I believe it serves as a signal about SNV's recovering health to the markets which enables the firm to command a higher multiple and also opens the door to either future growth or a sale of the firm. In particular, while 2013 is likely to see a YOY drop in revenues of around 9.5% (following a 7.5% drop in 2012), this is largely due to a drop in mortgage banking revenue and fee income in particular (likely to see a 20% fall for the year). That said, the bank will probably see 1.5% loan growth for 2013, with more growth to come in 2014 as the economy continues to recover. Let's not forget that for all its troubles in the last few years, Columbus GA based Synovus still has a network of nearly 300 branches and $20B in deposits spread across five Southeastern states. This gives the bank (approximately) the fifth largest market share in both Georgia and Alabama, and the sixth-ranked market share in South Carolina. (~28th in FL and ~32nd in TN). Given this position and the forecast for economic growth across the region, I see 2% revenue growth and 5% net interest income growth in 2014 as very feasible for SNV. Further, while SNV does have a great deal of excess cost in its system (non-interest expenses of 75.3% of revenues in 2012), the bank has been working to bring this down and I foresee these efforts bearing fruit over time.

Revenue

1Q

2Q

3Q

4Q

Year

2013

295.1

296.6

297.4

--

--

2012

346.8

330.3

320.9

320.1

1,318

2011

362.6

355.9

415.4

346.8

1,481

2010

412.4

411.7

408.3

393.5

1,626

2009

475.1

492.3

473.4

498.5

1,920

2008

643.9

565.8

554.2

528.9

2,293

EPS

1Q

2Q

3Q

4Q

Year

2013

0.02

0.03

0.04

E0.05

E0.14

2012

0.02

0.03

0.02

0.78

1.00

2011

-0.12

-0.07

0.02

0.01

-0.15

2010

-0.56

-0.36

-0.25

-0.23

-1.3

2009

-0.46

-1.82

-1.32

-0.58

-4.00

2008

0.24

0.04

-0.12

-1.93

-1.77

In recent quarters after adjusting for unusual items, SNV has been earning $0.03-0.04 per share. As higher mortgage rates begin to prevail and expenses across the bank come down, this should increase to $0.05-0.06 per share during the course of 2014. As such, I think the bank could see 2014 EPS of roughly ~$0.23 per share. Assuming that SNV continues to put its house in order and looks reasonably healthy by the end of 2014, I think the bank could command a multiple of 18-22X, or 1.5-2X tangible book value. The bank's portfolio looks like it should be set to improve in value going forward, so a TBV of $3.10 by the end of 2014 is not out of line. These two figures imply a price of anywhere from $4 to $6 per share. Any reinstatement of the dividend even at as little as $0.01 a quarter would probably push the stock towards the upper end of that range. Regardless, if the SNV clean-up continues apace, then by the end of 2014 or early in 2015, having clearly established that the bank will survive and having removed the junk from its books, I think SNV might become an attractive takeover target for another regional player like (NYSE:FHN). This may not be the happy ending some Synovus shareholders were hoping for, but given that the bank looked all but dead just a couple of years ago, a sale at these levels would be a far better outcome than some might have expected.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.