Putting His Own Stamp on Synovus

It’s never easy replacing an icon, but that was the challenge facing Richard Anthony in July 2005 when he was promoted to chief executive officer at Synovus Financial Corp. in Columbus, Georgia. Anthony’s predecessor, the highly respected former Chairman and CEO Jimmy Blanchard, had spent 35 years crafting the company’s unique culture and track record of growth. Yet it’s looking like the 60-year-old Anthony, who last October added chairman to his title, might be just what $30.5 billion Synovus needs to move to the next level in the hotly competitive Southeast.

Over the past year, Synovus has posted healthy returns on assets (2.02%) and equity (18.48%)u00e2u20ac”and that profitability helped earn it a sixth-place ranking on Bank Director‘s 2006 Bank Performance Scorecard. Synovusu00e2u20ac”which has been growing earnings per share at a 15% rate in recent quartersu00e2u20ac”disproves the idea that small banks always outperform large ones. “It’s been a good year,” Anthony says. “Business and our performance have been strong, and we’ve got some good momentum that’s serving us well.”

Synovus has some inherent strengths in its arsenalu00e2u20ac”among them an enviable footprint in five fast-growth southeastern states and a decentralized supercommunity banking structure, with 40 well-connected local market CEOs calling most of the operational shots. Officials assert that these factors help win some corporate and government business and make Synovus a powerhouse commercial real estate lender. It has done a good job of balance-sheet management, with a truly “asset-sensitive” mix that pushed the net interest margin up seven basis points, to 4.39%, from the first to second quarter. It doesn’t hurt that the company gets 30% of its revenues from an 81% ownership stake in payments processor TSYS, a historically strong fee generator.

And then there’s Synovus’ high-touch corporate culture. An emphasis on Ivy League-style management training and “servant leadership”u00e2u20ac”the notion that leaders are there to serve the organization and its people, not the other way aroundu00e2u20ac”fosters a sense of loyalty and empowerment that differentiates the company in the eyes of customers. “There’s an unusually high esprit de corps,” says Tony Davis, an analyst with Ryan Beck & Co. in Florham Park, New Jersey. “They get a lot of employee buy-in, and as a result, once they set their minds to do something, they pretty well always do it.”

For all that, the recent success may be due, more than anything, to the willingness of Anthony and his board to tinker with that success formula. Even before he was promoted from the position of chief operating officer last summer, Anthony headed up a strategic planning effort that shifted the focus of Synovus’ 300-strong branch network to gathering more retail and commercial customers and deposits and away from commercial real-estate lending. “We were taking the path of least resistance with commercial real estate. [Those loans] are usually big transactions and are priced pretty well,” Anthony explains. “But we weren’t optimizing the investments we have in branches and people.”

At the end of June, commercial real estate still accounted for 62% of the loan portfolio, compared to 23% for C&I lending and 15% for consumer. But the latter two categories both rose about 6.5% in absolute terms over the past year, and there’s a sense of momentum in the retail business as Synovus seeks to capitalize on a footprint that includes good locations in Alabama, Florida, Georgia, Tennessee, and South Carolina. “They felt there was a lot of low-hanging retail fruit in the banking network that they weren’t tapping. And they couldn’t remember a good commercial real-estate run lasting so long,” says Kevin Fitzsimmons, an analyst with Sandler O’Neill & Partners in New York. “It’s been a very forward-thinking approach.”

Other changes are being embraced, as well. Synovus is one of the largest companies left employing a supercommunity strategy, which aims to marry the back-office efficiencies and product menus of a large bank with the frontline autonomy of a smaller one. While the approach usually leads to stronger community ties, a growing number of consumers seem to appreciate the convenience afforded by a bank with big branch and ATM networks, while middle-market business customersu00e2u20ac”which Synovus is targeting with centralized services such as cash-management, capital markets and international bankingu00e2u20ac”like the lending power of a larger institution.

With those things in mind, Anthony has consolidated charters in a couple of metropolitan market, and slapped on the Synovus brand as an underscore to local names elsewhere. “It has become clear to us that many of our customers want to know they’ve got a strong regional firm standing behind the services they receive,” he explains. The company is studying the impact of those branding changes, and contemplating more. “We’re still passionate about the [decentralized] model. We want it to remain intact. But we also want to facilitate growth,” Anthony says. “Clearly, there are more things that will become more regionalized or centralized.”

Synovus also has been confronting a big disconnect in its operating model. Despite owning a majority stake in a sophisticated high-tech company like TSYS, Synovus has traditionally been a laggard in the use of database-marketing tools and the like for its core business. That’s begun to change. In recent years, Synovus has more fully developed its product- and customer-profitability analysis capabilities and is keeping better tabs on cross-selling and other metrics across the organizationu00e2u20ac”not just by geography. “In many ways, they been competing with one hand tied behind their backs,” Davis says. “Having these capabilities is already making them more effective.”

Such moves, combined with a resurgent appetite for community bank acquisitionsu00e2u20ac”after a short hiatus, Synovus closed deals earlier this year for Naples, Florida-based Banking Corp. of Florida and Riverside Bancshares in Marietta, Georgiau00e2u20ac”has the banking side of the company growing at nice clip. Total assets and core deposits both rose an identical 14.3% during the year ended in June, and Anthony has offered guidance of 14% EPS growth for 2006 after expensing option and restricted stock awards. In that, Synovus is merely continuing a trend: Davis notes that Synovus is the only bank to grow market share in each of its five states during the past five years. “They’ve made a healthy living just chipping away at bigger competitors,” he says.

The role of the 19-member board of directors in all this is to challenge, push, and support the changes. Directors do not get involved in the actual plotting of strategic changes, Anthony explains. “But we give them updates and offer them the chance to challenge components of the strategy,” he says.

On one big looming issueu00e2u20ac”weighing a potential spin off of its stake in TSYSu00e2u20ac”the ball is clearly in the board’s court. Long considered a key differentiator in the eyes of investors for fee-generating capabilities, the processing company has hit some bumps of late. In October, TSYS officially lost its biggest processing client, Bank of America Corp., after a 22-year relationship. There are rumblings that another key customer, JPMorgan Chase & Co., could soon shift from its current full processing agreement to a licensee.

Itself a publicly traded company, TSYS has been working to branch out from its core card-based processing operations in the United States, expanding in Europe, Asia, and Latin America, and moving laterally into domestic markets such as merchant acquiring and prepaid processing. It also recently won a big processing contract from Capital One Financial Corp. Even so, the loss of BofA has prompted a forthright reexamination of the fit with Synovus. “Should TSYS be out on its own, spun off to our existing shareholders?” Anthony asks. “Our management team and board are studying the issue very carefully.”

Davis argues that spinning off TSYS would ultimately benefit shareholders and expects it to happen within the next year. As he sees it, the banking part of the company sells for just 12 times projected 2007 earningsu00e2u20ac”about a 10% discount to similar-sized banks, and well below what a franchise with such favorable southeastern demographics should fetch. A spin off would leave TSYS free to make deals with its own tech-stock currency. It would also make Synovus more of a pure-play banking company. Stripped of $3.5 billion in market cap, the company would be “much more digestible and acquirable,” hence boosting its multiple, Davis says. That would also provide extra buying power to put to work on bank acquisitions of its own.

No timetable is set for a decision, but analysts say the fact that directors are even broaching this once-sacred cow is a positive sign. TSYS was founded by Blanchard, and is widely viewed as his baby. It’s quite possible that the board never would have engaged in such an examination with him at the helm. Even if had, the review is much easier with Anthonyu00e2u20ac”a 35-year Alabama banker who spent 14 years at AmSouth Bancorp. before launching his own bank in Birmingham, Alabama, which was subsequently sold to Synovus in 1992u00e2u20ac”running the show.

Anthony says that, compared with other banking companies its size, Synovus remains a relatively “loosely run, decentralized confederation of banks.” His primary task is to “deliver a disciplined approach to execution and a better understanding of the company’s profit-drivers, so that, as we get bigger, we change in ways that can help us reach our potential.” That inevitably means striking the right balance between the past and future. So far, the numbers show he’s achieving that mandate.

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