Synovus to sell medical office loans, use proceeds to reduce borrowings
Synovus Financial said Thursday that it struck a deal to sell a medical office loan portfolio that represented roughly 42% of its exposure to the office sector.
The Columbus, Georgia-based bank did not disclose the price tag or the buyer, but it said the sale of the $1.3 billion portfolio will free up funds that it can use to pay down higher-cost funding. Such funding, which includes brokered deposits and advances from the Federal Home Loan banks, has escalated across the industry following a surge in interest rates.
The sale's proceeds "will go to pay down just more expensive funding. Whether that's FHLB or broker deposits, it will likely be one of those two," Chief Financial Officer Andrew Gregory said during the $61 billion-asset company's second-quarter earnings call.
The bank said its total deposits ended the second quarter at $50.1 billion, up $126.5 million sequentially. But that deposit growth came at a cost. Due to higher rates and increased competition for funding following recent bank failures, the bank's total deposit costs increased 51 basis points sequentially to 1.95%.
Gregory said there were no credit quality issues associated with the medical office book that it's agreed to sell. Given that health care providers generally continue to treat patients in person, medical offices have largely avoided work-from-home challenges that have plagued other parts of the office sector.
Earlier this year, Synovus executives touted the fact that a substantial part of the bank's sizable exposure to office loans was in the medical sector. On Thursday, Gregory said that the pristine nature of the credit in the medical portfolio led to a strong sale price.
"That was just a unique one," Gregory said. "The credit quality was so pristine that we were able to get what we believe was a very fair price for that portfolio."
Synovus Chairman, President and CEO Kevin Blair told analysts that the medical office portfolio, while clean, did not generate robust returns in a high-rate environment. The sale, he said, is "an example of diligent balance sheet management optimization efforts, where we free up capital and liquidity to pursue higher-returning, more expandable relationships."
Other regional banks highlighted similar moves alongside their earnings results this week.
Truist Financial in Charlotte, North Carolina, said it sold a $5 billion student loan portfolio in the second quarter and used the proceeds to reduce "other wholesale funding." The $555 billion-asset bank unloaded the portfolio as part of a plan to scale back what it called "lower-yielding and single product" relationships.
And on the office property front, the $74 billion-asset Webster Financial reported selling off a chunk of its CRE portfolio in the second quarter. Webster divested some $80 million of loans that were mostly secured by office properties.
The Stamford, Connecticut-based bank still likes the medical office sector, though. It has been gradually cutting back its exposure to other parts of the office sector over the past year, reducing its exposure by $400 million, or 25%. Webster said it continues to find willing buyers even as worries over office buildings grow.
"There are buyers of this real estate at a reasonable price still out there, although it's obviously getting more expensive to execute on balance sheet moves like that," Webster CEO John Ciulla said Thursday during an earnings call.
Synovus said its medical office loan portfolio sale will result in a one-time negative net income impact of approximately $25 million in the third quarter. The move also contributed to a muted loan growth outlook.
"Loan growth is now expected to be 0% to 2% for the year," Blair said, due to both the medical office loan sale and "lower anticipated production volume."
Total loans at Synovus did inch up nearly 1% sequentially during the second quarter to $44.4 billion.
Gregory said that overall credit quality remains solid, including in the bank's office portfolio. That portfolio totaled $3 billion before the sale of the $1.3 billion portion.
Nonperforming loans ticked up in the second quarter to 0.59% of total loans — from 0.41% the prior quarter — but were still low relative to historic norms.
"We continue to have confidence in the strength and quality of our portfolio," Gregory said. "We do not see any specific industry or sector stress within our loan book."
Synovus reported second quarter net income of $165.8 million, or $1.13 per share. That compared with $193.9 million, or $1.32, a year earlier.
Polo Rocha contributed to this report.
