Housing market takes bite out of Synovus profits

A weakening real estate loan business, mixed with several one-time expenses, pushed profits sharply lower at Synovus Financial Corp. in 2007 and the year's fourth quarter, the regional banking firm reported Thursday.

Fourth-quarter net income dropped 53.4 percent, while full-year earnings were off 14.7 percent.

"These are challenging times," Richard Anthony, Synovus chairman and chief executive officer, said during a late-afternoon conference call with stock market analysts.

"I wish I could find words to describe the environment that have not been used before," he said. "But all of the bankers are talking about this difficult credit environment and the challenges we face as an industry."

Residential construction and development loans are the prime culprit behind the tough financial picture, Anthony said. Real estate represents more than half of nonperforming loans at Synovus, as well as nearly 42 percent of the loans it has had to write off as bad debt.

The worst areas, the company said, are the Florida Panhandle, Atlanta and Tampa Bay. Those three markets account for more than 80 percent of the firm's nonperforming loans.

The Columbus bank does not have any exposure to subprime home loans, said Fred Green, Synovus president and chief operating officer. The subprime market has been roiled nationwide because of a plethora of homeowners defaulting on variable-rate loans in which their payments adjust sharply higher.

Green said Synovus tackled its entire problem loan portfolio in the fourth quarter, reviewing it with a "fine-tooth comb" in an attempt to get a handle on the situation. More reviews are planned, he said.

"We're attacking the problem as quickly as possible," he said. "We're aggressively working through it. Our desire, as this credit cycle turns, is we'll be one of the first to come out of it."

The turbulent mortgage sector was only one of the factors affecting Synovus' fourth quarter performance, which saw net income, or profits, fall from $175.5 million a year ago to $81.9 million, a 53.4 percent drop.

For the full year, net income was $526.3 million, off 14.7 percent from $616.9 million reported in 2006.

Like its former credit-card processing subsidiary TSYS, which released earnings Wednesday, Synovus reported expenses related to the two firms' separation, or spinoff, that took effect Jan. 1. The expenses were $31 million.

Synovus also reported $22.5 million in litigation expenses as part of a settlement in an antitrust lawsuit by American Express against MasterCard Inc. and Visa Inc. Synovus is a member of the Visa network.

American Express had alleged that the rival credit-card networks were conspiring to keep their member banks from offering competitor cards such as AMEX.

Excluding the spinoff and legal expenses, Synovus said its full-year earnings per share would have been $1.76 rather than the $1.60 it reported.

That compares to earnings per share of $1.90 in 2006. But that year also included one-time items, primarily $33 million in expenses related to a $69 million payment from Bank of America for terminating its credit-card processing contract with TSYS.

For the fourth quarter 2007, earnings per share came in at 25 cents, down from 54 cents a year ago.

A half-dozen analysts surveyed by investment research firm Thomson/First Call were expecting fourth-quarter earnings of 26 cents per share and full-year earnings of $1.12 per share.

TSYS accounted for nearly 30 percent of Synovus' non-interest income during the year. The other major performer was brokerage and investment banking revenue, which grew nearly 20 percent.

Bankcard and asset management fees saw single-digit growth, while mortgage banking and service charges on deposits were in negative territory.

The real question for Synovus and other banks caught up in the mortgage and credit crunch is how bad might things get in 2008, affecting the confidence of consumers who may stop spending and borrowing, said Ed Timmons, a stock market analyst with the brokerage firm Stifel Nicolaus.

"I think what you're going to see in '08 is probably, at best, modest growth on the balance sheet," he said. "Loan demand, I think, will slow. The banks are tightening their credit and they're not going to lend as much. But I think on the demand side that's going to slow as well.

"I think you will get some benefit on the funding side from the (recent Federal Reserve) rate cuts and competition waning a little bit. But I think for '08 the number one issue is clearly credit."

Looking into 2008, Anthony said more loan and credit deterioration is likely in the first half of the year, although the second half could show improvement.

"These credit challenges will continue to evolve," he said. "There is, obviously, in our industry and in our economy a high level of uncertainty about the depth of this cycle."

The company noted it still remains flush with the $485 million cash dividend it received from TSYS during the spinoff.

Synovus issued its earnings report early Thursday afternoon. By the end of the day, shares of the company's stock (Ticker: SNV) had fallen 49 cents to $12.05 in trading on the New York Stock Exchange.

TSYS stock (Ticker: TSS) jumped sharply Thursday, closing $1.35 per share higher at $22.41.


Exchange: NYSE

Ticker: SNV

Closing price: $12.05 Thursday, down 49 cents

Market value: $3.96 billion

PE ratio: 6.41

52-week high: $33.82

52-week low: $10.35

Business: Bankholding company and wealth management firm with $33 billion in assets. Owns 37 affiliate banks with about 300 branches and 440 ATMs in Georgia, Alabama, Florida, South Carolina and Tennessee.

Chairman and CEO: Richard Anthony

President: Fred Green

Employees: 7,400 companywide

Headquarters: 1111 Bay Ave., Columbus, GA 31902

Phone: 706-649-2311

Online: www.synovus.com