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Playing the Devil’s Advocate


A Report on Synovus Financial (SNV- $1.92): 12/18/09
Updated 3/22/10: (SNV-$3.56)

Usually the act playing the devil’s advocate involves taking a contrarian position. So, in the case of a stock that is
trading at about $4, down from over $30 in 2007, presenting a pessimistic outlook for the stock might not seem
particularly bold or unique. However, this analysis was a response to a piece written by Tom Brown from
bankstocks.com recently about Synovus Financial (SNV) that argued pretty persuasively that the bank was
undervalued at the current price, based on some reasonable assumptions about future earnings. Brown also contends
that the bank likely has sufficient capital to survive the credit cycle without diluting shareholder further by issuing
shares. While I do not necessarily disagree with his overall thesis that SNV has the potential to be one of the
survivors, based on my analysis of the bank’s capital position and credit trends I do not agree with Brown’s
assessment of SNV’s near term prospects. Specifically, the data I have analyzed continues to highlight some
troubling developments in the bank’s loan book that could eventually force the company to raise new capital and
could impair earnings for many quarters to come. Clearly, being an investor with a long time horizon, short term
issues should not influence my opinion of the stock as long as I believe the company will make it through alive.
Therefore, let me start off by addressing each one of Brown’s arguments and then close with what I think it all
means for the long term.

Point 1: “The worst-performing loan portfolios have begun to shrink. In any major credit cycle,
different loan categories will have vastly different default frequencies and loss severity. For Synovus, the
worst portfolios, both in frequency and severity, have been (by product type) loans to homebuilders and (by
geography) loans in the Atlanta metro area and in Florida.”

Brown is spot on when he points out that the residential construction book, especially in Atlanta and in Florida, has
been SNV’s worst performing portfolio. As of the end of Q4 2009, $543.8M of this $2,076.6M book was classified
as nonperforming. If an NPL ratio close to 26.2% (up from 23.7% in Q3) sounds high that is because such a rate
would have been unfathomable just 3 or 4 years ago. Fortunately for SNV, the size of the 1-4 family construction
and development portfolio and its potential impact on earnings has begun to shrink. Specifically, this portion of the
book was down to $2,076.6M (8.2% of the total book) in Q4 2009 from $2,963.6 (10.7% of the total book) in Q2.
Also, given how early the southeast portion of the US began to experience the housing bust, it is likely that many of
these construction loans have experienced the bulk of the writedowns they will cumulatively see. However, in my
view, problems with construction loans represent only the first wave of writedowns and losses for SNV and the
other regional banks. The second wave, which consists of prime mortgage defaults, commercial real estate
writedowns and losses on C&I loans, is just starting to play out. In particular, when combined with the lack of
consumer credit and substantial unemployment, the negative derivative impacts of the housing crisis are really
starting to impact other types of businesses and loans. Take a look at the following chart and you can see what I
mean:

Q1 2009 Q2 2009 Q3 2009 Q4 2009


Net Charge Offs: $246.0 $355.0 $497.0 $362.1
Non-Accrual:
1-4 Family Construction $231.8 $209.8 $166.6 $147.3
Other Construction & Land 419.3 548.5 606.9 599.2
Total Construction/Land $651 $758.4 $773.6 $746.5
Farmland 3.8 2.8 2.0 2.9
1-4 Family Mortgage 131 175.7 192.6 206.9
Multifamily 13.5 17.6 12.7 22.9
Nonfarm/Non-Resi Mortgage 258.3 275.3 397.4 420.7
Non-Accrual Tied to Real Estate $1,057.6 $1,229.8 $1,378.3 $1,399.9
Total Non Accrual $1,214.7 $1,378.8 $1,469.8 $1,496.0
Source: FDIC.gov
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I compiled the above data from the FDIC’s website and it only includes loans classified as non-accrual (total
nonperforming assets also includes other real estate owned and loans 90+ days past due and still accruing interest).
Recently, the bank has begun to dispose of some underperforming loans. In fact, in 2009 SNV sold $1.18B in
problem assets, the majority of which ($755.9M) were residential real estate loans and OREO properties. The
company also plans to sell around $600M more of these loans in Q1 and Q2 2010. These sales may be skewing the
data a bit, but I believe the trend is clear. We can see increasing net charge offs (to be addressed more later on) and
increasing non-accrual loans in the following portfolios: 1-4 family residential mortgage and nonfarm/non-
residential mortgage (commonly known as commercial real estate mortgages). I think this data definitely
corroborates what Brown is arguing in point number one. Non-accrual loans in the 1-4 family construction book
were down to $147.3M in Q4 2009 from $231.8M in Q1 2009. But look at the close to 50% increase during the
same period in non-accrual loans having to do with other construction and land. Also look at the dramatic increase
in 1-4 family mortgage delinquencies and in commercial real estate non-accruals. This represents the second wave
of delinquencies that I believe are going to keep credit losses elevated, require SNV to continue to build its reserve,
and ultimately require additional capital.

Point 2: “The inflow of new nonaccrual loans will continue to slow.”

Since the company sold so many loans in 2009, it is important to dig into the number of new troubled loans as
opposed to assessing the credit situation solely based on the nominal value of non-accrual loans. While I am
concerned that the reversal of the influx of new troubled loans (with varying severities) may be short-lived, the news
from Q4 2009 was moderately encouraging. Specifically, the total inflow of new non-accruals in Q4 2009 was
$661M, down from $756M in Q3. Also, new 90 day past due loans were down to $19.9M in Q4 from $43.8M in Q3
and new 30-89 day past due loans fell to $242M from $312.1 in Q3. There is no question that these are positive
trends and absent a significant double dip recession or large drops in the value of commercial real estate assets, SNV
may have seen the peak in new troubled assets.

Having said that, I am having trouble assessing the impact of a particular change, but it looks as though SNV may
have moved the goal posts a bit in terms of classifying NPLs. From the Q3-2009 10-Q:
“During the third quarter of 2009, Synovus revised its definition of nonperforming loans to exclude
accruing restructured loans. Such loans are not considered to be nonperforming because they are
performing in accordance with the restructured terms. Management believes that this change better aligns
our definition of nonperforming loans and nonperforming assets with the definition used by our peers and
therefore improves the comparability of this measure across the industry. All prior periods presented have
been reclassified to conform to the new presentation… Accruing restructured loans were approximately
$193 million at September 30, 2009, compared to $18 million at June 30, 2009. At September 30, 2009, the
allowance for loan losses allocated to these accruing restructured loans was approximately $29.7 million.”

Then, from the more recent 10K:


“Synovus designates loan modifications as troubled debt restructurings (TDRs) when, for economic or
legal reasons related to the borrower’s financial difficulties, it grants a concession to the borrower that it
would not otherwise consider. Loans on nonaccrual status at the date of modification are initially classified
as nonaccrual TDRs. Loans on accruing status at the date of modification are initially classified as accruing
TDRs at the date of modification, if the note is reasonably assured of repayment and performance in
accordance with its modified terms…At December 31, 2009, total TDRs were $588.8 million of which
$213.6 million were accruing restructured loans.”

Now, the company does not give a lot of additional info on these restructured loans, but from what the national data
on housing-related re-defaults tell us (up to a 70% rate when modifications only include interest rate changes), these
may be some of the riskiest loans in the portfolio. If all $213.6M of these loans were classified as NPLs then total
NPLs would increase by 11.7% and the company’s allowance to NPL ratio would look even more insufficient.

Point 3: “The level of net charge-offs should start to decline.”

The first reason that Brown stated for a potential decline in NCOs was that he believed that new non-accruals would
be down quarter on quarter. Brown was definitely right on this. In fact, NCOs declined from $497M in Q3 to
$362.1M in Q4. Based on SNV’s policy to immediately write down new non-accrual loans, since new non-accruals
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were down, so too were NCOs. In addition, the company looks to be taking a very conservative stance when it
comes to writing down loans on non-accrual status. When you combine cumulative writedowns and specific
reserves associated with each loan, SNV has allowed for a 42.4% cushion that should be enough to limit significant
further writedowns in existing NPLs. Accordingly, the combination of having taken large write downs on NPLs and
NCOs decreasing means that total credit costs should continue to fall in the coming quarters. This trend is also
evident when it comes to other real estate owned costs. In Q4 the OREO expense was only $34.1M, far below the
$172.4M figure in Q2 2009.

As mentioned above, counteracting these positive developments, the company plans to complete its sale of up to
$600M in problem assets (including other real estate owned) by the end of Q2 2010, a strategy that may cause SNV
to recognize losses before it would have if it had held onto the loans. Since SNV may be unable to sell its most
distressed assets, the assets sold in 2009 may have been somewhat cherry picked and the associated writedowns may
not accurately represent the overall losses embedded in the portfolio. In any case, under the assumption that SNV is
eventually going to have write off existing dodgy assets whether it sells them or not, a temporary postponement of
NCOs in a single quarter should not influence the overall analysis of the company’s long term value.

Point 4: “The level of OREO writedowns should also start to decline. Synovus had $606 million of credit
expenses in the third quarter, including an unusually high $101 million in OREO expenses. OREO writedowns
should decline for three reasons. First, new nonaccrual loans moving into OREO have been written down to
lower values than in prior periods. Second, the company will be less aggressive in OREO disposition. Finally,
loss content of future OREO dispositions will be lower than in the past because properties being disposed of
now tend to include more income-producing properties and less land than they did before.”

Again, Brown was very prescient when it came to OREO expenses. But, as pointed out above, if the company is
going to eventually have to write down OREO to the lower of cost or fair value, the timing of the writedowns is not
particularly important to someone who wants to buy and hold the stock. Plus, I am concerned that the number of
foreclosures stemming from commercial real estate loans and 1-4 family mortgage defaults are going to keep OREO
costs elevated and negatively impact earnings.

Point 5: “Loan loss reserve building has slowed and will soon stop; reserves will begin to be drawn down
next year.”

“Not only do we expect this to continue but, next year, as more loans are upgraded, we believe the
company will begin to bring its loan loss reserve (3.5% of total loans) down by provisioning less than its
quarterly level of net chargeoffs.”

This is where I think I disagreed with Brown the most. The idea that SNV did not have to continue to build its
reserve seemed unfounded. Going back to the chart on the first page of this analysis that shows the persistent
increase in the total value of non-accrual loans, I could not see a justification for SNV solely matching its Q3
provision to net charge offs. Fortunately, in Q4 2009 the company did have a provision larger than its NCOs
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($387.1M versus $362.1M). But, a conservative ratio of allowance for loan losses to nonperforming assets is 100%.
This means that for every $1 of NPAs, the bank sets aside $1 for potential losses. While this may be unnecessarily
cautious in some cases, it looks to me like SNV may be under-reserved. Take a look at the following chart:

Provision for Loan Losses YTD Q2 2009 Q3 2009 Q4 2009


NCOs $1,098.0 $497.0 $362.1
Provision $1,418.5 $496.5 $387.1
Provision to NCO Ratio 129.19% 99.90% 106.90%

Allowance Q2 2009 Q3 2009 Q4 2009


Allowance for Loan Losses $918.7 $918.5 $943.7
Allowance to NPLs 53.47% 52.56% 51.53%
Source: Company reports

As of Q4 2009, the ratio of the allowance to NPAs was only about 51.5%. In particular, new non-accrual loans in
Q4 were $661M and the company (on net) did not increase its reserve accordingly. The truth is that total
provisioning for 2009 barely even covered total NCOs recognized in that period, a fact that indicates to me that SNV
is barely keeping its head above water. These actions may not be indicative of a conservative management team that
is being realistic about potential future losses. My theory is that the bank is actually concerned about its capital
levels and does not want reduce its common equity even further by increasing the allowance for loan losses. Also,
under-provisioning allows the company to report higher earnings (or less negative earnings) than it would otherwise.
It is in situations like these that I like to create a pro-forma valuation for a bank under the assumption that it had an
allowance to NPA ratio of 100%:

Full Yr 2009 Pro Forma TBV


Allowance for Loan Losses $943.7
Total NPA 1831.4
Difference -$887.7

Total Assets $32,850.1


Net Loan Book $24,439.4
Tangible Common Equity $1900.5
Common Equity $1941.5
Increased Reserved $887.7
Adjusted TBV $1,012.8
Adjusted BV $1,053.8
Gross Loans/TE 25.1x
P/TBV 1.69x
P/BV 1.62x
TE/TA 3.09%

This table shows what multiple to book and tangible book SNV would be trading at if it matched its allowance to
actual NPAs. This is a conservative way to evaluate banks, but in the current economic environment an analysis like
this is a necessity. In comparison to the multiples to stated book and tangible book of .90x and .92x, respectively,
under this scenario the multiples jump to 1.62x and 1.69x. Also, gross loans to tangible equity (a measure of
leverage) spikes from 13.4x to 25.1x and the company’s tangible equity to tangible assets (TE/TA: a measure of
capital sufficiency that I put above all others) drops from 5.79% to 3.09%. Bank analysts look for TE/TA levels at or
above 5%, especially for banks that are seeing their loan books deteriorate. This is a perfect example of how under-
provisioning and not recognizing losses can make a bank look healthier than it really is. Obviously, I cannot say for
sure that SNV’s management team is being too optimistic, but this analysis suggests that SNV may be forced to
raise new capital if it wants to have a sufficient buffer against future losses.
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“Given our forecast for improving credit, declining credit costs, and modestly improving pre-tax, pre-credit
cost earnings, we expect manageable operating losses and a modest decline in the company’s capital ratios
before they start to sharply improve in the second half of 2010 and in 2011. Under this scenario, we do not
expect a dilutive capital raise!”

In addressing the capital issue, Brown includes a chart that highlights a few of the bank’s capital ratios. However, I
do not put a whole lot of stock in Tier 1 ratios and claims of being “well capitalized.” How many banks were
considered “well capitalized” the day before the FDIC walked in and shut them down? This is precisely why I like
to look at TE/TA and leverage ratios such as Gross Loans/TE to get a handle on capital sufficiency. Based on these
metrics I do not believe SNV currently has strong enough capital levels for potential investors to be comfortable. To
make matters worse, Brown indicates that he expects the capital levels to actually decrease even further, partially
offset by some balance sheet shrinkage and gains from asset sales. Honestly, I am not sure what he is referring to
when he asserts that SNV will realize gains from asset sales. Unless the company is planning on selling off
profitable business lines, it appears that sales of loans and OREO are actually leading to significant losses and
further capital destruction.

Future Earnings Analysis

Now that we have finished assessing the balance sheet, it is necessary to look at future earnings and the income
statement. The truth is, no matter how ugly balance sheet is, if SNV can survive the cycle (and even if it does have
to raise some more capital) and get back to somewhat normal earnings levels, the stock at the current valuation may
be very attractive. From Brown:

“Assuming the company turns profitable in the third quarter of next year, its initial earnings will be tax-
free. Then after a few quarters of profitability, the company will be able to reverse its deferred-tax asset
reserve, which today totals $331 million. This would boost the company’s capital ratios by around115
basis points and boost tangible book value by 70 cents per share, or 15%...

Given this [estimated] level of income [$685M], $160 million of “normalized” credit expenses, a full tax
rate, no TARP preferred dividends, and 490 million shares outstanding, we see normalized EPS of 70 cents
per share. Assuming a below-historical normal P/E multiple of 12 times, we see the stock trading between
$8 and $9 over the next two to three years, making it a potential five-bagger from today’s stock price.”

First, I am far from an expert on deferred tax assets (DTAs) and loss carry-forwards, but if what Brown says is
correct the future tax savings could be substantial. As of the end of 2009, the total valuation allowance associated
with DTAs was $438.2M. So, any reversal would provide a nice boost to the company’s capital levels. Here is what
the company says about this allowance in the 2009 10-K:

“Under GAAP, once a company that has recorded a valuation allowance against a deferred tax asset returns
to profitability, it is possible to reduce or reverse the valuation allowance with a corresponding tax benefit
recognized through current earnings. However, reductions in the valuation allowance are subject to
considerable judgment and uncertainty. While Synovus expects to reverse the majority of the valuation
allowance once it has demonstrated a consistent return to profitability, realizing additional operating losses
will increase the valuation allowance. The internal capital analysis used by Synovus management assumes
that Synovus will be able to recover the majority of the recorded valuation allowance in 2010.”

I am not sure how to handicap this since it is hard to know what the next few quarters or even years will look like in
terms of profitability. As mentioned above the level of provisioning is a huge factor in determining whether or not a
bank is profitable in a given period. Accordingly, I would rather focus on what SNV could be worth in a more
normal operating environment, given that the company survives this credit cycle. Brown estimates that normalized
EPS are in the $.70 range and if a 12x multiple were applied to those earnings the stock could be worth between $8
and $9 dollars. On a similar note, here is my analysis based on pre-tax pre provision/credit losses earnings
(eloquently known herein as PTPPE):
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Pre Tax Pre Provision Earnings 2004 2005 2006 2007 2008 2009
Net Interest Income $860.7 $965.2 $1,125.8 $1,148.9 $1,077.9 $1,015.2
Plus: Non Interest Income 1521 327.4 359.4 389 396.6 410.7
Minus: Non Interest Expense 1588.4 646.8 764.5 803.3 986.3 1221.3
Plus: Foreclosed RE Expense 0.0 0.0 3.3 15.7 136.7 354.3
PTPPE $793.3 $645.8 $724.0 $750.3 $624.9 $558.9
Shares Outstanding 310.3 314.8 324.2 329.9 329.3 489.8
PTPPE per Share $2.56 $2.05 $2.23 $2.27 $1.90 $1.14
Closing Stock Price $28.58 $27.01 $30.83 $24.08 $8.30 $3.56ǂ
P/E Multiple 11.18x 13.17x 13.81x 10.59x 4.37x 3.12x
*Includes revenues and expenses from payment processing that were not present post 2004
Source: Company filings and my calculations
ǂ
Current stock price and multiple

In the above chart I calculate PTPPE by adding net interest income and non-interest income, subtracting non-interest
expenses and adding back foreclosed real estate expenses. Over the last 6 years the average PTPPE per share was
$2.03 and the average multiple that the stock traded at in relation to that figure was 9.37x (clearly dragged down by
2008 and 2009 data). The reason I am not trying to estimate EPS like Brown did is because it is very difficult to
make any meaningful assumptions about future credit losses and foreclosed real estate expenses. Having said that, it
is important to be careful not to extrapolate the bank’s current issues too far into the future and to make sure to keep
in mind all that the government might do in the coming years to help boost bank profitability.

Based on my assumption that the company should increase its allowance by about $830M to be safe (shown above),
to get TE/TA back up to a more reasonable 4.5% ,SNV would have to raise an additional $425M in capital. At $3.25
a share (I assume it would have to be done at a discount to the current price), that implies an increase in shares
outstanding of 131M, bringing the total to somewhere around 620M. From there, assuming a conservative run rate
PTPPE of $620M implies per share earnings of $1.00. If the company ever traded at 8x that amount the stock could
eventually get to $8. Of course, it could take years for a normalized scenario to play out, especially given my
expectations of future credit losses, but the analysis of earnings does indicate that Brown may be on to something
with SNV.

Now, I have to temper the optimism a little bit with the following data. I use a basic guideline for valuing the
appropriate multiple of book value for bank as follows: a bank that earns a return on common equity (ROCE) of
10% should trade at 1x book value and a bank that earns an ROCE of 20% should trade at 2x book value. While
SNV has been able to achieve a relatively strong net interest margin (NIM) over the years, the bank’s ROCE has not
been particularly noteworthy:

Historical Returns 2004 2005 2006 2007 2008 2009 2004-2007 Avg.
NIM 4.22% 4.18% 4.27% 3.97% 3.47% 3.19% 3.88%
ROCE 17.90% 12.80% 12.50% 9.60% -18.50% -70.81% 13.20%
ROA 1.90% 1.40% 1.40% 1.10% -1.70% -4.10% 1.45%
Source: Capital IQ and my calculations

Specifically, even if the poor results from 2008 and 2009 are omitted from the data, the average ROCE for SNV
over the boom years of 2004 to 2007 was only 13.50%. This would imply a fair book value multiple of only 1.35x.
However, as is shown below, SNV over that same period traded at much higher multiples to book value:
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Historical P/E Average Multiple Historical P/Tang. Book Average Multiple Historical P/B Average Multiple
2004 19.43x 2004 3.91x 2004 3.28x
2005 19.11x 2005 3.97x 2005 3.20x
2006 16.47x 2006 3.50x 2006 2.79x
2007 15.52x 2007 3.15x 2007 2.52x
2008 14.16x 2008 1.15x 2008 0.97x
2009 NM 2009 0.53x 2009 0.52x
Current NM Current 0.92x Current 0.90x
4 Yr Avg. 16.94x 6 Yr Avg. 2.70x 6 Yr Avg. 2.21x
Source: Capital IQ and my calculations

I think these lofty, growth-like multiples were indicative of irrational exuberance among investors when it came to
banks. People got caught up in the potential for balance sheet and earnings growth due to all of the population
growth-induced new lending opportunities in the southeast and western portions of the US. But now that balance
sheets and earnings are shrinking, unless you view banking as a no risk, money printing business, it is hard to justify
a bank that can only generate a 13.5% average ROCE during a boom trading at 2.70x book (on average). Thus, this
data does not indicate to me that SNV should go back to trading at 2.50x+ times book when the credit environment
becomes more normal.

So, if we apply a fair multiple of 1.35x to an estimate of future book value, we can get a more realistic idea what
SNV may be worth in the coming years. Based on my current fair book value of $1,053.8M (after adding $830M to
the allowance), adding an additional $425M in equity from issuance of new shares, incorporating a 10% additional
reserve build to account for future losses (meaning that the bumped up reserve will not be enough to last through the
cycle), and taking into account about 620M shares outstanding results in an estimate of book value per around $2.09

Full Year 2009


Current Adjusted BV $1,053.8
(+) Additional Equity Capital $425
(-) Additional Reserve 183.14
Future BV $1,295.7
Shares Outstanding 621
BVPS $2.09
1.35x Multiple $2.82

These calculations clearly do not indicate that there is much potential upside as the current price is well over 1.35x
my estimate of equity issuance-adjusted book value per share.

In summary, the analysis of the balance sheet can only be used to establish a margin of safety. After making some
very conservative assumptions about capital raising and reserve building, stress case tangible book value per share
ends up being around $2. This value can be viewed as a reasonable floor for the share price. From there, the
investment case for SNV stems from an earnings story. Specifically, an analysis of the income statement reveals that
if SNV is able to make it through the cycle without being sold in a distressed transaction or taken over by the FDIC
as a result of being undercapitalized, shares are likely to trade much higher in the coming years.

Unfortunately, this conclusion is dependent on a number of assumptions that could prove to be woefully incorrect.
First, there is no way to know if the bank will need to raise capital, how much it will need and how dilutive the share
issuance will be based on the stock price at the time. Next, because of the difficulty in anticipating the direction of
unemployment, housing prices and general economic trends, estimates of future credit losses are likely to be
unreliable. Finally, applying historical rates of returns and multiples in trying to establish intrinsic value is, at best,
an imprecise method of valuation.
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Furthermore, there are plenty of company-specific risks as well. The bank could have to raise substantially more
capital than I have estimated. The capital markets could be essentially shut down at the time SNV recognizes the
need for additional capital and could subsequently become essentially insolvent. Management does not appear to be
publicly acknowledging the continued deterioration in the loan portfolio or the spike in non-accruals in second wave
categories such as commercial real estate and C&I loans. I fear that that some of the under-provisioning that appears
to be going on is based on the hope that the real estate markets begin to turn around as the economy shows
preliminary, but very tenuous signs of recovery. When combined with my suspicion that the company is loathe to
issue more shares and dilute current shareholders further, this extend and pretend philosophy could be very
dangerous. Also, the company is involved in a number of lawsuits that could end up be very costly.

In conclusion, an investment in SNV is not for the faint of heart and anyone interested in accumulating shares would
be wise to follow the company very closely. If you cannot already tell, my experience with the management teams
of regional banks has led me to be very distrusting and skeptical of any and all pronouncements or forecasts. The
people who run these banks have an incentive to downplay current and future problems because in the end banking
is business built on trust. Additionally, with the Federal Reserve handing out money and the yield curve so steep, it
is easy to see why banks would try to extend and pretend in an attempt to earn their way out the cycle. Accordingly,
it is more important to monitor the actions of the bank in terms of recognizing losses, adding to reserves and selling
off troubled assets than to rely on the claims of management.

Another thing to consider is that the company will eventually have to pay back TARP. SNV received $967.87M in
TARP funds that included a 5% dividend the first five years and a punitive 9% thereafter as well as warrants that
allow the US government to purchase shares for $9.36 by December 2018. It is true that if the government exercised
the warrants, the transaction would clearly be dilutive. However many shareholders might be thrilled if the price
ever got back above a level in which it made sense for the government to purchase the shares. Additionally, SNV
was forced to prepay three years of FDIC insurance premiums in 2009. While the FDIC probably will need even
more money as US households remain strained, it is unlikely that SNV will have to again shell out $188.9M as it did
in 2009. Next, in the last two years SNV launched Project Optimus, an attempt to make its operations more efficient
and save as much as $75M a year by the end of 2010. Finally, the company has been consistently writing down its
goodwill over the last year and likely has taken the majority of the ultimate write downs. In 2008 the company wrote
down goodwill by $479.6M, but only wrote down $15.1M in 2009. Therefore, losses and reduction in capital that
result from goodwill impairments will likely be minimal going forward.

From my perspective, I would be inclined to hold off from investing in SNV until management either acknowledged
the need to raise capital and/or started to increase its reserves again. The stock has had a tremendous run since I
wrote about it in December 2009 (from $1.92 to $3.56). I also believe that current investors are likely to be
substantially diluted through additional share issuance and new investors would be better served being patient.
However, for those with a very long term horizon, assuming the bank’s franchise has not been severely impaired and
SNV ultimately raises enough capital to make it through the cycle, I think there is a legitimate possibility that the
shares could double over the coming years.

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