Synovus Financial Corp. (NYSE:SNV) Q1 2023 Earnings Call Transcript April 20, 2023
Synovus Financial Corp. beats earnings expectations. Reported EPS is $1.33, expectations were $1.22.
Operator Good morning and welcome to the Synovus First Quarter 2023 Earnings Call. My name is Adam and I will be your operator today. All participants will be in listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask a questions. [Operator Instructions]. Please note, this event this event is being recorded. I would now turn the call over to Cal Evans, Head of Investor Relations to begin. Sir, please go ahead when you are ready. Cal Evans Thank you, and good morning. During today’s call, we will reference the slides and press release that are available within the Investor Relations section of our Website, synovus.com. Chairman, CEO, and President, Kevin Blair will begin the call. He will be followed by Jamie Gregory, Chief Financial Officer, and they will be available to answer your questions at the end of the call.Our comments include forward-looking statements.
These statements are subject to risks and uncertainties, and the actual results could vary materially. We list these factors that might cause results to differ materially in our press release and in our SEC filings, which are available on our Website. We do not assume any obligation to update any forward-looking statements because of new information, early developments or otherwise, except as may be required by law. During the call, we will reference non-GAAP financial measures related to the company’s performance. You may see the reconciliation of these measures in the appendix to our presentation. And now, Kevin Blair will provide an overview of the quarter.Kevin Blair Thank you, Cal. Good morning everyone and thank you for joining our first quarter 2023 earnings call.
This last quarter has proven to be a challenging operating environment for the banking industry. However, once again we have seen the value and viability of mainstream banks like our who operate on a relationship base client model. Despite the media narrative that deposit outflows were rampant in regional banks, our core deposit balances were up in the first quarter and stable in the month of March, a testament to the value of our client base and our team members who serve as trusted advisors in both good and challenging times. We have a long and proven track record of success. In recent years we have taken a deliberate approach to expanding our business, diversifying our client base, and leveraging technology and new solutions to improve the client experience and deepen our share wallet.
But we have never lost sight of the value of building strong trusted client relationships. Trust is a two-way street and is often tested during times of stress. This last quarter serves as an added proof point of the importance of client loyalty and the engagement of team member base that was instrumental and efficiently executing a multifaceted response to the turbulence in our industry. As a result of our team members efforts, we’re pleased to report strong financial results for the first quarter with net income up 19% year-over-year. We also received industrywide recognition, including ranking number one for customer satisfaction and trust in the Southeast according to JD Powers most recent U.S. Retail Banking Satisfaction Study and received 20 Greenwich Excellence and Best Brand awards for small business and middle market banking.
While we’re proud of these results, we’re mindful of the challenges and uncertainties, but also the opportunities that lie ahead. The recent bank failures and industry wide pressures on liquidity serve as a reminder of the importance of strong deposit production, maintaining a strong capital position, managing risk carefully, and remaining vigilant in an ever changing regulatory environment.We increased our core deposit production significantly this quarter, but also fortified our liquidity position out of abundance of caution through the addition of broker deposits and FHOB borrowings. And we currently maintain over $25 billion in incremental contingent liquidity. Also, we continue to accrete capital consistent with our strategy over the last several quarters.Finally, in the middle of the market upheaval seen in March, we kept our eye on the ball and continued to execute our strategic plan in a cost effective manner that provides the maximum value for our shareholders.
One noteworthy event was the regulatory approval of the Qualpay investment, which is a supporting component in the delivery of our banking as a service platform. This quarter’s results reinforced the strength of our balance sheet with growth in deposits, cash balances as well as other contingent sources of liquidity. Moreover, our AOCI improved, net charge offs remained at historically low levels, and we grew our tangible book value per share. Before we transition to the next slide and our financial highlights, I would like to thank our entire team for their tireless efforts since early March and thank our clients for the trust you continue to place in us. Now let’s move to Slide 4 for the quarterly financial highlights. Net income available to common shareholders and EPS were up 19% and $0.21 respectively year-over-year.
Strong earnings growth was supported by 23% year-over-year growth in NII and 19% growth from core client fee income. This revenue growth combined with year-over-year positive operating leverage led to strong performance metrics with ROATCE of 21.9%, return on average assets of 1.36%, and an efficiency ratio of 52.3%. Loans increased 329 million or 1% quarter-over-quarter. Core commercial loans again served as the primary driver of growth offset by runoff of third party consumer loans and a previously disclosed move of third party loans to held for sale. Loan growth ex-third parties moved to held for sale was $753 million or 2% quarter-over-quarter. Overall deposits grew 2% quarter-over-quarter, including growth in core deposits of $133 million.
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Core deposits remained stable through the month of March and we saw minimal outflows related to the industry narratives. Our deposit origination engine remained strong as we once again saw record levels of deposit production. Despite headwinds associated with non-interest bearing deposit remixing and higher costs associated with core interest bearing deposits, deposit rates have tracked reasonably in line with our expectations, though current dynamics are presenting some upward pressures relative to our previously guided range.Our underlying credit performance remains strong and while we are seeing movement away from historically low levels, we have not seen a meaningful change in the underlying performance of our borrower base. Our positive portfolio performance is reflected in continued low levels of charge offs as well as our other performance metrics such as delinquencies and non-performing ratios.
The ACL ratio increased slightly this quarter predominantly due to higher weightings to downside economic scenarios. Lastly, CET1 grew to 9.76%, a result of strong organic capital generation and our decision to continue to retain and grow capital in this uncertain environment. Now I’ll turn it over to Jamie to continue the overview of our quarterly results in greater detail. Jamie.Jamie Gregory Thank you, Kevin. I would like to begin with loan growth as seen on Slide 5. Total loan balances ended the first quarter at $44 billion, reflecting growth of $329 million or $753 million when excluding the previously mentioned move to held for sale. Growth was again led by our commercial businesses with CRE and C&I growth of $346 million and $534 million respectively.
Similar to last quarter CRE growth was a function of draws related to existing commitments and low level of payoffs, while C&I growth was diversified across multiple industries and business lines. When examining our C&I utilization rate quarter-over-quarter, the increase is a function of higher utilization associated with newly originated credits rather than an increase from existing customers. When looking out over a longer period, our increasing C&I utilization rate is a function of our changing lending mix, which has shifted to larger clients. We did not see any meaningful changes in utilization or emergency draws as a result of the recent market disruption. We are judiciously originating new credit to serve our core clients and also to gain market share in our most attractive commercial business lines.
We are also mindful of ensuring new loans are originated at attractive risk adjusted returns as shown through our spreads to index which remain elevated relative to 2022 levels. Overall pipelines and activity remain muted due to lower transaction activity and as Kevin will describe later, we expect the pace of core loan growth to decline as the year progresses. Turning to Slide 6. Core deposit balances grew $133 million quarter-over-quarter and we saw a continued increase in deposit production with both commercial and consumer business lines contributing to the growth. While the current approach to monetary policy continued to pressure balances and the events of March created uncertainty in the banking environment, our relationship banking model proved to be resilient.
Looking at the composition of the quarterly change in balances, non-interest bearing deposits were down $997 million quarter-over-quarter, a byproduct of commercial seasonality, normal cash deployment, and to a lesser extent the continued pressures from the higher rate environment. The decline in M&A and an increase in CD’s were interrelated as consumers shifted excess liquidity between the two account types. Our increase in broker deposits was primarily the result of a conservative approach to proactively source additional funding late in the quarter, which I will touch on in a moment. As we look at deposit rates, our average cost of deposits increased 56 basis points in the first quarter to 1.44%, which equates to a cycle to date total deposit beta of approximately 30% through Q1.
Our deposit costs and betas were impacted by the decline in DDA as well as anticipated pricing lags on core interest bearing deposit costs. To date deposit pricing is generally evolved in a manner consistent with our expectations. However, recent remixing trends along with an FOMC that appears to be biased to hold at or above 5% will likely result in through the cycle betas which track in the low 40% area. Moving to Slide 7, taking a closer look into deposit balance trends within the quarter, as Kevin mentioned previously, our core deposit balances remain relatively stable throughout the month of March. However, we did take precautionary measures in early March and built up our cash balances through increased use of broker deposits and federal homeland bank borrowings.
To further augment contingent liquidity sources we continue to proactively pledge additional collateral to the Federal Home Loan Bank and the Federal Reserve and as of April 17th, we currently maintain over $25 billion of contingent liquidity across a diverse set of sources, which includes immediately available funds as well as funds we expect to be available within short notice. And as we split up the slides 8 and 9, you can see we added additional details around the composition of our core deposit base which highlights our relationship centric portfolio and which supports the stability we experienced in recent weeks. Looking through the key characteristics of our deposits, you can see both the diversity of our balances across commercial and consumer client types as well as the long tenure of our of our relationships.
And given the industry focus around uninsured deposits, I would simply highlight that over 70% of our deposits are either insured, collateralized, or could be insured by switching to an ICS account to existing capacity. Now to Slide 10. Net interest income was $481 million in the first quarter, an increase of 23% versus the like quarter one year ago and a decline of 4% from Q4. The year-over-year increase was supported by the benefits of our asset sensitive balance sheet as well as substantial loan growth of the last 12 months. When looking at quarter-over-quarter, NII was negatively impacted by approximately $9 million associated with lower day count. The asset side of our balance sheet continued to benefit from both higher balances and rates.
However, as I spoke previously the cyclical lags in deposit pricing combined with the remixing within our NIB deposit portfolio served as a notable headwind for the quarter. Those same dynamics were evident as we looked back at the margin for Q1, with higher cash balances also serving to weigh on them by approximately two basis points during the quarter. And as the environment is stabilized, we are working towards more normalized cash balances and thus the associated impact to NIM should reverse in the coming quarters. Looking forward to Q2, we expect NII to continue to be pressured. Specifically, we will see a full quarter impact of the deposit mix shift that occurred in the first quarter as well as the continued headwind resulting from deposit price lags.
The combination of these headwinds is expected to lead to NII declines in Q2 followed by relative stability for the remainder of the year consistent with our full year guidance. Slide 11 shows total adjusted non-interest revenue of $118 million, up $17 million from the previous quarter and up $11 million year-over-year. This quarter’s adjusted fee income performance is the highest in recent history, even accounting for the elevated mortgage environment we experienced in 2020 and 2021. The performance speaks to the investments we have made across our franchise with core client fee income excluding mortgage increasing 19% year-over-year. Our wealth management franchise grew 22% year-over-year despite what continues to be a challenging equity market.
The diversity of our wealth revenue streams including short term liquidity management products continues to drive strong growth.Capital markets also recognize this strongest quarter on record with a revenue of $14 million, a 151% increase year-over-year. Syndication fees as well as interest rate management products drove the strong quarter. Further signs that our commercial franchise continues to grow through enhanced product offerings and the expansion of our middle market line of business. As we look through the remainder of 2023 we do expect core client fee income to decline from Q1 levels as slower economic activity will impact capital market fees and we also begin to implement changes to our consumer checking products. Total non-interest revenue for Q1 was impacted by a $13 million onetime benefit associated with the regulatory approval of our Qualpay investment.
Moving on to expenses. Slide 12 highlights total adjusted noninterest expense of $304 million, down $3 million from the prior quarter and up $25 million year-over-year, representing a 9% increase. As we look quarter-over-quarter, adjusted expenses were well managed. Increases in seasonal personnel expense and planned increases in FDIC and healthcare costs were offset by lower performance-related expenses and controlled core operating costs. When segmenting our year-over-year increase in expenses, the growth is attributable to the three buckets we provided in our guidance for the year: first, new business initiatives such as mass and CIB; second, core operating expenses, including investments in and expansion of our workforce; and third, costs associated with our FDIC assessment rate and healthcare costs.
Our first quarter adjusted efficiency ratio of 50.5% continues to highlight that these expense increases are supported through our growing revenue base. Total non-interest expense was negatively impacted by a $17 million loss associated with the move of third-party loans to held for sale.Moving to Slide 13 on credit quality. Overall, credit performance and the credit quality of our recent originations remained strong. The NPL ratio moved to 0.41%, net charge-off ratio to 0.17%, and criticized and classified ratio finished the quarter at 2.47% of total loans. In the first quarter, our ACL was $514 million or 1.17% of loans, a modest increase of two basis points from the fourth quarter. The deterioration in the forecasted economic scenarios in 2023 and 2024 negatively impacted the ACL ratio, offset by the continuing strong performance of the overall portfolio.While we do expect additional pressure on credit metrics due to the economic environment, we continue to have confidence in the strength and quality of our portfolio.
We continue to be vigilant while monitoring the more recession-sensitive components of our loan book and we utilize rigorous underwriting parameters and exhaustive market and portfolio analysis, not only for these sector, but for the entirety of the loan portfolio. Given the increased interest in the office sector, we have included additional color on our office portfolio in the appendix. What you will see is an office book with low maturity and lease rollover risks that is primarily medical, secured by modern properties and reflective of our footprint’s superior market trends.As noted on Slide 14, the common equity Tier 1 ratio increased to 9.76%. Within the quarter, core earnings supported robust capital generation, which was more than sufficient to meet what continued to be solid core balance sheet growth.
We had no share repurchase activity in the first quarter and in light of the uncertain economic and regulatory environment, we believe that continuing to grow our CET1 ratio is prudent. As we’ve done for the last several quarters, in the near term we will continue to focus on retaining capital generated through earnings to support our core growth while bolstering our balance sheet position. While not a metric that we manage to, given the current environment it is worth acknowledging the improvement in our TCE ratio, which increased 28 basis points from Q4 and ended the quarter at 6.12%. Declining market rates benefited OCI associated with the AFS portfolio and hedges and continued growth in our primary capital levels from earnings retention also provided support.
I’ll now turn it back over to Kevin.Kevin Blair Thanks, Jamie. I’ll now continue to our updated guidance for the quarter as shown on Slide 15. Given the ongoing volatility in the economic environment, we continue to utilize wider ranges for our full year 2023 guidance. We expect loan growth of 4% to 8%. This reduced range accounts for the acceleration of the rundown in our third-party portfolio as well as the diminishing demand associated with the economic environment. These effects will be partially offset by low payoff levels and growth from our newer business lines such as CIB and expansion in verticals such as commercial middle market.The adjusted revenue growth outlook of 4% to 7% aligns with an FOMC that reaches 5.25% in the second quarter.
Changes to the midpoint of our previous guidance are a result of slightly lower loan growth expectations and deposit remixing as well as overall deposit betas, which, as Jamie mentioned are expected to be in the low 40s area. Our expense outlook has been adjusted downward to 4% to 6% with efforts taken to better align with the new revenue guidance. We are prudently managing expenses in this environment while continuing to ensure we do not sacrifice critical investments that will support our long-term success and shareholder value. The result of our revised revenue and expense guidance has forecasted PPNR growth of 4% to 8%. Despite a more challenging environment, we are still committed to year-over-year PPNR growth and generating attractive returns for our shareholders.Moving to capital.
As we have previously communicated, we are targeting a CET1 ratio above our previous guidance of 9.25% to 9.75%. At this time, we believe it is prudent to build a larger capital buffer given the uncertain regulatory and economic environment. I believe the forecast represents the resilience and adaptability of our business model as well as the power of building strong and loyal client relationships. Our strong financial results this quarter reflect the hard work and dedication of our team as well as our commitment to supporting our clients and communities through these difficult times.Looking ahead, as we see many opportunities for profitable growth and success while continuing to improve our overall risk profile through increased liquidity and capital and well-managed credit costs.
Our strategic investments, coupled with our client-centric approach, will continue to differentiate us from our competitors and position us for long-term success. At the same time, as a main street bank, we remain committed to being a trusted partner to our clients, providing them with the tools and resources they need to achieve their financial goals. And now operator, let’s open the call for Q&A.
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Question-and-Answer Session Operator Thank you. [Operator Instructions].
Our first question today comes from Brad Milsaps from Piper Sandler. Brad, your line is open. Please go ahead. Bradley Milsaps Good morning guys. Thanks for taking my questions and for all the details in the deck. Maybe I did want to start with credit. I appreciate all the details.
I was curious, I know you guys are constantly running sort of internal stress on different pieces of the CRE book. Just kind of curious how that’s evolved maybe over the last 90-days kind of given all that’s transpired, also, I think here you note that maybe only about a little less than 15% of the office book rolls over this year. Would that sort of hold for the rest of the CRE book and would just be curious for any color on conversations you are having as these loans mature with borrower’s kind of what you’re doing to shore them up and just kind of how those conversations are going as we think about credit going forward?Robert Derrick Yes, hi Brad, this is Bob. I’ll comment or two, and Jamie and Kevin can certainly kick in. But from a CRE — from an overall perspective, the match up on the maturity risk if you will is similar.
And in terms of you’ve got some duration there, there’s probably three years plus for the most part. I do want to make sure that I touch on office for you because I know that’s what a lot of folks are looking at, but just a couple of points. Number one, in addition to the data we’re showing when you think about office and the spot metrics, today, they’re very clean. Average size of that office portfolio loan is less than $10 million, little to no charge-offs in — low nonaccruals, and even the criticized classified levels today would be in the 5% range.Now with that said, obviously, we’re doing a deep dive into that portfolio. We’ve looked at approximately 70% coverage of loans — all loans greater than $7.5 million. And the result of that, which gives us sort of a watch list, if you will, of credits of somewhere around 10% to 15% of the office book that we would have some level of concern about and I would say some level of future concern about.
These loans are still performing, still got good commitment by the sponsors, etcetera. So when you start narrowing it down, it’s a fairly small quantifiable percentage of the loan book — of the office book that we think potentially we’ll need to think through as time goes on.Now again, that’s strictly property performance based on potential lease expiration, etcetera. So from our perspective, even when you dig back into the portfolio, the potential problems in terms of amounts are fairly manageable. So I did want to get that out. We aren’t seeing a whole lot of softness in other asset classes, Brad. Multifamily continues to be a good asset class, albeit with rent rates certainly beginning to move back, but they were so hot for a year or two.
They’ve got some cushion there. And that’s market-specific. Warehouse, we feel good about as well there, and retail seems to be holding fine. And you know the hotel story as we ran through the pandemic there, and they seem to be improving. So all in all, our CRE book is in good shape. The office story will play out over several quarters, but we feel like we’re well positioned for it.Kevin Blair And Brad, the only thing I would add to that is, Bob talked about our internal evaluation, but you also have to go back and look at the Southeast. I mean, the Southeast continues to perform very well. We believe you’ve seen some distress in certain asset classes, but it’s been very geographical. If you look at the Southeast, we continue to have rent growth higher than the national average.
When you look at specifically our office portfolio, our criticized and classified ratios are far lower than what some others have shared. Part of that is due to the fact that we have 50% of our book in medical office. And the remaining portion of that traditional office book is newer properties in markets that in the Southeast haven’t seen the same work-at-home impact.So in general, our update is that although we expect credit metrics to continue to move off of all-time historical lows, we’re not seeing anything systemically, including office, that gives us greater concerns. On the C&I front, we look at our cash inflows every month and every quarter. We haven’t seen any overall deterioration of any specific industries. Any NPL inflows that we’ve had at this point have been onesie, twosies.
