Synovus Financial Corp. (NYSE:SNV) Q1 2024 Earnings Call Transcript

Synovus Financial Corp. (NYSE:SNV) Q1 2024 Earnings Call Transcript April 18, 2024

Synovus Financial Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and welcome to the Synovus First Quarter 2024 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I will now turn the call over to Jennifer Demba, Head of Investor Relations. Please go ahead.

Jennifer Demba: 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. Kevin Blair, Chairman, President, and Chief Executive Officer, will begin the call. He will be followed by Jamie Gregory, Chief Financial Officer, and we 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 maybe 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, Jennifer. Good morning, everyone, and thank you for joining us for our first quarter 2024 earnings call. Our first quarter results demonstrate tangible progress on the strategic priorities that we have outlined for you over the last several quarters. Synovus produced steady loan growth in key commercial categories such as middle-market, corporate and investment banking, and specialty C&I, as well as continued rationalization in loan portfolios where we have less meaningful deposit or fee relationships. We generated core deposit growth in a seasonally weaker quarter and are seeing improving trends in non-interest-bearing deposit diminishment, as well as continued contraction in higher-cost broker deposits.

Core non-interest revenue categories continue to grow on a year-over-year basis, while operating expense control remains disciplined with investments in key areas continuing, while keeping total expenses roughly flat. Our quarterly loan losses remain stable and our balance sheet continues to strengthen with further improvement in key safety and soundness metrics, highlighted by lower wholesale funding and higher capital ratios. Our financial success is a direct result of how well we are meeting the needs and expectations of our clients through trusted advice and valued service. In that regard, Synovus and our talented team members continue to be nationally recognized for service excellence. We are extremely proud to report that Synovus recently received 25 Greenwich awards for our 2023 performance, serving small businesses and middle-market clients.

We earned the fourth-highest number of total awards among the over 500 banks that were evaluated. We also continue to perform very well against our Southeastern peers and the recently released J.D. Power Survey for consumer client satisfaction and trust. Our Grow the Bank initiative continued to gain traction in the first quarter, as we finalized our new GreenSky program, expanded our middle-market banker team, built our largest CIB pipeline to date, generated over 50 new relationships from our business owner wealth strategy, grew wealth AUM by 12% year-over-year, added a new commodities hedging capability and expanded existing relationships with approximately 75% of our treasury sales to existing clients. Speaking of our Treasury and Payment Solutions team, we are excited to introduce a differentiated new solution called Accelerate Pay, which alleviates administrative burdens faced by accounts payable staff and seamlessly integrates into existing workflows, providing an immediate return on investment for our clients.

We launched this new capability earlier this month and the pipeline has been building steadily since the announcement. Lastly, we have a long successful track record in community banking. This quarter, our community bank generated core deposit growth of almost $350 million and our consumer bank produced growth of approximately $300 million. Our longstanding well-positioned core businesses continue to drive growth through a value relationship approach, allowing us to invest in new sources of revenue and future growth. Now let’s move to Slide 3 for the quarterly financial highlights. Synovus reported first quarter 2024 diluted EPS of $0.78, and adjusted EPS of $0.79. However, a $13 million incremental FDIC special assessment reduced our reported and adjusted first quarter EPS by $0.07, following a $51 million or $0.26 EPS impact from the initial special assessment in the prior quarter.

As previously mentioned, we generated healthy and consistent loan growth in our high-priority commercial business lines, including middle-market, corporate and investment banking, and specialty lending, with these categories up 11% annualized. However, period-end loan growth was flat in the first quarter due to flat line utilization, commercial real estate, and senior housing paydowns and payoffs, and strategic loan portfolio rationalization efforts. Despite seasonal headwinds, our core deposits grew modestly in the first quarter. The team remains highly focused on accelerating core funding generation through sales activities and product expansion, which led to an increase in deposit production of roughly $300 million versus the fourth quarter and at a rate that was approximately 8 basis points lower.

January’s non-interest-bearing deposit decline was impacted by seasonality, but deposit flows improved throughout the course of the quarter with a $299 million increase in the month of March. Given the strength of our core deposit growth, we reduced broker deposits for the third consecutive quarter. Looking at non-interest revenue, we experienced year-over-year growth in key categories, including treasury and payment solutions and our commercial sponsorship lines of business. However, total adjusted non-interest revenue declined modestly from a year ago, primarily driven by lower service charges and wealth management income as a result of the 2023 consumer checking modifications and third-quarter 2023 GLOBALT divestiture. Also, capital markets income was lower relative to more elevated levels experienced in the first quarter of 2023, given the strong correlation to loan production.

2023 cost initiatives, as well as ongoing diligence, has led to flattish overall core expense growth year-over-year, while maintaining a level of strategic investments that position Synovus well from a competitive standpoint in order to drive long-term shareholder value. On the asset quality front, credit losses were stable with previous quarters. Lastly, given continued economic uncertainty, we further bolstered our common equity Tier 1 ratio in the first quarter through solid earnings accretion and balance sheet management, while completing a measured amount of opportunistic share repurchases. Common equity Tier 1 levels are the highest in over eight years and currently sits in the upper half of our stated range of 10% to 10.5%. Now, I’ll turn it over to Jamie to cover the first quarter results in greater detail.

Jamie?

Jamie Gregory: Thank you, Kevin. As you can see on Slide 4, total loan balances were essentially stable on a linked-quarter basis. As expected, our loan growth was muted as key strategic business lines saw growth, which was offset by balance sheet optimization efforts and transaction-related declines. Consistent with our focus on core client relationships, growth in middle-market commercial, CIB, and specialty lines was $287 million during the first quarter. There is increased strength in the commercial real estate and senior housing markets, as evidenced by higher levels of transaction activity over the last two quarters due to property sales and refinancings. We expect this increased transaction activity to result in declines in these portfolios throughout 2024.

We also continue to strategically reduce our non-relationship syndicated lending and third-party consumer loan portfolios in the first quarter, further positioning our balance sheet for core client growth. Consistent with our overall balance sheet strategy, we continue to prioritize clients with meaningful deposit and non-interest revenue relationships, while rationalizing growth in credit only lending areas, such as syndicated lending and third-party consumer lending, that have a lower return profile or don’t meet our strategic relationship objectives. Our organic balance sheet optimization efforts will continue as we focus on balanced loan and core deposit growth. Turning to Slide 5, core deposit balances grew $165 million sequentially during the first quarter.

The community bank and the consumer bank saw strong growth, while seasonality contributed to a decline in deposits in the wholesale bank. As we look to the remainder of the year, growth from the wholesale bank and continued execution within our consumer and community segments should support core deposit growth within our previously stated guidance range. Client demand for time deposits remained elevated during the first quarter. This growth, combined with their continued remixing of non-interest-bearing deposits, pushed total deposit costs higher during the quarter. We are encouraged by trends in non-interest-bearing deposits as the $601 million decline in January was followed by significantly less contraction in February and $299 million of growth in March.

Brokered deposits declined $324 million or 5% from the fourth quarter, which was the third consecutive quarter of contraction. We expect further declines in broker deposits in the coming quarters. As we look at funding costs, the aforementioned trends resulted in our total cost of deposits increasing by 17 basis points to 2.67% in the first quarter. For the month of March, total deposit cost was 2.67% versus 2.53% in December. Our cycle-to-date total deposit beta in March was 49% versus 46% in December. Moving to Slide 6, net interest income was $419 million in the first quarter, which represented a decline of 4% from the fourth quarter. The primary factors contributing to this decline included a lower day count, which impacted spread revenue by approximately $4 million, a modest decline in loan balances and earning assets, and further cost increases within our core interest-bearing deposit portfolio.

Deposit mix also impacted our margin for the quarter. Though as we mentioned, trends later in the first quarter were somewhat more constructive than the averages for the quarter. Net interest margin ended the quarter at 3.04%, a sequential decline of 7 basis points as the benefits of higher rates on newer production, fixed-rate asset repricing and the partial securities repositioning in the fourth quarter were more than offset by the core deposit mix trends and deposit cost increase. As we look forward to the second quarter, we expect relative stability in the net interest margin. Slide 7 shows total reported non-interest revenue of $119 million in the first quarter. Adjusted non-interest revenue was $117 million and declined $10 million or 8% from the previous quarter and was down $1 million or 1% year-over-year.

On a sequential basis, commercial sponsorship income declined by $5 million, primarily related to a decline in back book related GreenSky fees. We expect relatively stable quarterly commercial sponsorship fees for the remainder of the year. BOLI revenue was also elevated in the fourth quarter impacting the quarter-over-quarter comparison. These declines were partially offset by higher mortgage, wealth management, and capital markets fees. When looking at the year-ago quarter, core banking fees increased 5% driven by Treasury and Payment Solutions fee growth of approximately 8%, as well as the impact of our second-quarter 2023 Qualpay investment. Also, other non-interest revenue increased sharply year-over-year, primarily from the expanded GreenSky relationship.

These tailwinds were offset as a result of the consumer checking modifications implemented last year. Also, wealth management income was down year-over-year due to the GLOBALT divestiture in the third quarter of 2023. Despite a slower first quarter for capital markets-related income, we expect capital markets growth in 2024 led by our middle-market and CIB business lines. We continue to invest in core non-interest revenue streams that deepen client relationships such as Treasury and Payment solutions, Capital Markets, and Wealth Management, which have demonstrated healthy growth over the past few years. Moving to expense. Slide 8 highlights our operating cost discipline. Reported and adjusted non-interest expense was impacted by a $13 million incremental FDIC special assessment.

The total impact of the two special assessments was $64 million, including the initial $51 million recognized in the fourth quarter. Reported non-interest expense was $323 million and adjusted non-interest expense of $319 million was down $34 million or 10% from the prior quarter. Adjusted non-interest expense increased $14 million or 5% year-over-year, which was almost entirely driven by the $13 million incremental FDIC special assessment incurred in the first quarter. Employment expense was down 1% year-over-year, benefited by our headcount reductions made over the past three quarters. Seasonally higher employment expense inflated non-interest expense by approximately $11 million in the first quarter, which impacted earnings by an estimated $0.06.

Importantly, we will remain proactive with disciplined expense management in this revenue-challenged environment. As a result, adjusted non-interest expense should be relatively flat in 2024, excluding the FDIC special assessments imposed in the fourth quarter of 2023 and the first quarter of 2024. Moving to Slides 9 and 10 on credit quality. Our allowance for credit losses ended the first quarter at $546 million or 1.26%, up from $537 million or 1.24% in the fourth quarter. Consistent with the prior quarters, we continued to raise the allowance to reflect asset valuations, credit migration trends, and a heavier weighting toward downside economic scenario. Net charge-offs in the first quarter were $44 million or 41 basis points compared to 38 basis points in the fourth quarter and 40 basis points in the third quarter, which excluded the loan sales.

The non-performing loan ratio increased to 0.81% of loans as credit metrics migrate from historically low levels. Total criticized and classified credits rose slightly, but remain at very manageable levels. First-quarter net charge-offs and credit metrics were impacted by one particular commercial and industrial credit, which accounted for 17 basis points of net charge-offs and is expected to be resolved later this month. We have a higher degree of confidence in the strength and quality of our loan portfolio, and we will continue to reduce our non-relationship credits and manage the portfolio with a heightened level of diligence in this more uncertain macroeconomic environment. As seen on Slide 11, our capital position continued to increase in the first quarter, with the preliminary common equity Tier 1 ratio reaching 10.38% and with total risk-based capital now at 13.31%.

Retained earnings supported capital accretion in the first quarter. Additionally, our efforts to rationalize growth within certain segments resulted in a modest decline in risk-weighted assets, which further supported the increase in our capital ratios. Against this backdrop, we executed about $30 million of common stock repurchases in the first quarter, which equates to approximately 6 basis points of capital. We will continue to target a CET1 ratio within a range of 10.0% and 10.5%, and aim to maintain a robust capital position against what remains an uncertain macroeconomic environment. Looking into the second quarter, we would note that our risk-weighted asset optimization is currently underway, that is expected to result in a subset of our loan portfolio being eligible for a reduced risk weighting.

When completed, this should support our capital ratios and provide flexibility for incremental capital deployment. This incremental capital deployment is contingent upon the analysis and documentation of the eligibility of certain loan portfolios for reduced risk weightings. We will share further details on the results of this exercise over the near term. Finally, on April 1st, we reclassified $3.4 billion of our securities portfolio from available-for-sale to held-to-maturity. This reclassification will reduce the interest rate sensitivity within AOCI and thus the variability of our tangible common equity ratio. I’ll now turn it back to Kevin to discuss our 2024 guidance.

Kevin Blair: Thank you, Jamie. I’ll now continue with our updated fundamental guidance for the remainder of 2024. Based on first-quarter experience in our existing pipelines, period-end loan growth is still expected to be 0% to 3% in 2024. Growth should be supported by the continued success in middle market, corporate and investment banking, and specialty lines offset by rationalization in non-relationship credits and commercial real estate and senior housing payoff and paydown activity. Our current forecast for core deposits indicates growth within a 2% to 6% range for the year, aided by seasonal tailwinds as the year progresses and new core funding growth initiatives. With the last FOMC rate increase now having occurred roughly nine months ago, we believe deposit costs are in the process of stabilizing, and with some residual upward pressure remaining into the second quarter should result in a peak total deposit beta for the cycle between 49% and 50%.

Under this forecast for deposit cost, our current outlook points to the revenue growth at the low end of our negative 3% to 1% range, largely impacted by the continued deposit remixing that we and the industry are experiencing. Our forecast is based upon a stable interest rate environment and does not include any potential benefits from the ongoing risk-weighted asset optimization exercise. Net interest income should improve in the second half of this year as fixed-rate asset repricing overcomes deposit repricing and remixing. Non-interest revenue should experience growth this year as pipelines for capital markets-related fees remain strong. We continue to execute on our core growth in treasury and payment solutions and the new GreenSky forward flow program continues to build.

Our adjusted non-interest expense growth guidance is unchanged after adjusting for the impact of the first quarter FDIC special assessment. Excluding the special assessments in the fourth quarter of 2023 and first quarter of 2024, we anticipate our adjusted non-interest expense will be relatively stable this year. We continue to closely monitor and manage our loan portfolio to uncover any credit deterioration or systemic themes across industry and geography. We expect the first half of the year net charge-offs to continue to be relatively stable at approximately 40 basis points. Given current credit migration trends, assuming a relatively stable economic environment and considering the impact of certain large individual losses, we expect net charge-offs to be flat-to-down in the second half of the year.

Moving to the tax rate, our current forecast points to the upper half of our 21% to 22% range. Finally, our common equity Tier 1 ratio is at the high end of our targeted range of 10% to 10.5%. And we will remain opportunistic with measured amounts of share repurchases to manage capital levels. Prudent capital management remains our top priority to ensure we have strong and liquid balance sheet for all economic environments. Through the actions we have taken over the past several quarters, Synovus is well-positioned to meet the needs of our clients while operating from a position of strength amid this evolving economic landscape. We are focused on growing the bank through the expansion of relationships and the delivery of new sources of revenue, all while improving returns and building an even more risk-resilient bank.

And now, operator, this concludes our prepared remarks. Let’s open the call for questions.

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Q&A Session

Operator: Thank you. We’ll now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Jon Arfstrom from RBC Capital Markets.

Jon Arfstrom: Hi. Good morning.

Jamie Gregory: Good morning, Jon.

Kevin Blair: Good morning, Jon.

Jon Arfstrom: Hey. Kevin, if I can try to get you off script a little bit if I can. Stocks off a little bit this morning, I would say it’s been a battleground in terms of feedback. And I think the core looks okay to me, maybe soft in a couple of areas, fine in others, some positive trends also emerging. But curious how you see it, maybe a chance to defend your stock a little bit. How do you see the puts and takes of the quarter? Where do you think you need to do better? What do you think is going well? Just curious on your thoughts to start the call.

Kevin Blair: Yes. Jon, look, I love the question, because I think that’s what’s on my mind. If you look at a lot of the information we provided today, it really comes down to two areas, margin, and credit. Because when you look at our expenses and when you look at fee income, I think we continue to meet and exceed our expectations there. So let’s dig in a little bit first on margin. We’re off 7 basis points this quarter and that is largely a function of deposits and that was higher than what we had modeled. So when you look at what caused it, it was fairly evenly split between our non-interest-bearing declines, our interest-bearing non-maturity deposit cost increases, and a little more CD remixing. And I don’t want to get into the weeds around each of those because we could spend the rest of the call, but I expect those trends to improve.

And as we look at some of the things that we’ve already done, as well as some of the trends that we’ve seen this quarter, which would include some positive trends around DDA, I think those headwinds on the margins will abate. And as Jamie said in the prepared remarks, we would expect this quarter to be flat. And then as you’ll hear later, there are some things that we have in place, both from the fixed asset repricing, but also some of these trends changing that will allow us to expand our margin by 10 basis points to 15 basis points by year-end, getting us right back to the 3.20% that we shared back in January. And that obviously assumes flat rates. That does not include any impact of any of the potential use of any capital that we would realize as part of this risk-weighted asset optimization exercise.

So, quarter was down more contraction than we thought. I think we have a path to expansion and one that’s very similar to what we talked about back in January. Now on to the credit front. We had stable net charge-offs this quarter, including one very large credit that has since been resolved. And that credit really impacted our credit metrics this quarter, 17 basis points of our charge-offs and it also represented 18 basis points of our increase in NPLs. Having resolved this credit this month, that will ultimately result in a commiserate decline in NPLs, meaning, that without that credit NPLs would have actually declined this quarter. And maybe what’s most important is what I just said there at the end, which was, we expect our net charge-offs to be flat-to-down in the second half of the year based upon our portfolio metrics and trends.

Now some had probably questioned how can that be given some of the metrics? Well, one of the things that we did this quarter, we initiated a deep-dive through our entire multifamily portfolio, very similar to what we did last year in office and similar to what we did with the hospitality industry back in COVID. And that led to a downgrade of four credits, which totaled right around $96 million. So that deep dive represented 22 basis points of the 25 basis points increase in our criticized and classified ratio. Also on the provision front, given what we’ve seen on valuation and across all asset classes, this quarter we added a qualitative adjustment to the allowance of just under $30 million to account for higher loss given default, if we were to see any sort of defaults on the CRE side.

Without that adjustment, our allowance would have actually declined quarter-on-quarter. And I’ll just remind you that our CRE portfolio continues to perform very well. We have a NPL ratio of 13 basis points and we only had $2 million of NPL inflows this quarter. So when I look at everything in totality and I think about the two areas that probably had some softness to your point, I look at the stability and improvement in those areas. And when I couple that with our expense discipline and our increased forecast for fee income. And then you add on top of that, the potential to have incremental capital from our risk-weighted asset optimization, I feel like our opportunities in the forecast outweigh those of the risk.

Jon Arfstrom: Okay, good. Yeah, those are the issues, it’s credit margin. So I appreciate that, Kevin. And then just a follow-up quickly, Jamie, for you. Kevin just mentioned it, but what do you need to do for the RWA optimization efforts? Who needs to bless it? When could it happen? And how much capital do you think it could free up? Thank you.

Jamie Gregory: Yes. Jon, thanks for the question. Hey, look, you’re aware, we’ve been working on improving our ROE for multiple years. And recently, we put a lot of effort into review of what is consuming our risk-weighted assets. We’ve been looking at real estate lines, C&I unfunded commitments, and general kind of return for every dollar of risk-weighted assets that we put on the books. Some of these strategies affect our go-to-market strategy, some of them affect what we do as far as our inorganic strategies like the sale of business lines that we did in 2023. But the effort we’re talking about today is around certain loan categories that could be eligible to have reduced risk weightings, including mortgage, government lending, securitization exposures, and multifamily term loans.

The largest impact of this effort is coming from loans that qualify for reduced RWA treatment within our lender finance portfolio. But in order to achieve that risk-weighting, down to 20% in many cases relative to the 100% risk-weighting we have today. We have to perform proper analysis of documentation in light of the regulatory capital requirements under the simplified supervisory formula approach. And unfortunately, we haven’t completed that effort. So we cannot give specific details on the impact of capital ratios. But as we said in the prepared remarks, as we show in the deck, we believe it could be meaningful. Given what we’ve completed to date, we think the impact could be $1 billion or more reduction in risk-weighted assets and the impact of capital ratios could be greater than 20 basis points.

So if we successfully complete this work and given where we are with capital, we’re already at the higher end of our range. And that’s our intent is to stay at the higher end of our target range. And so, we’ll likely deploy this capital, any capital generated from this when it’s completed to either securities repositioning or share repurchases and kind of try to maintain our capital ratios at the given levels. We say — you ask about what could this be and we feel confident about the $1 billion or more comment. The upside is probably around $2 billion. And so, we have work to do, but we do expect to complete it in the near-term and we’ll report back once we get further along.

Jon Arfstrom: Okay. Very good. Thank you very much.

Jamie Gregory: Thanks, Jon.

Operator: The next question is from the line of Ebrahim Poonawala from Bank of America. Please go ahead.

Ebrahim Poonawala: Hey, good morning.

Kevin Blair: Good morning, Ebrahim.

Ebrahim Poonawala: Yes. So, I guess, just following up on NII and the NIM outlook. So you always had this expectation around no rate cuts in your guidance. So I’m trying to think through around what’s changed versus what’s not changed. Can you talk about the pricing competition in your markets like we had one of your peers reported yesterday talked about a significant pickup in pricing competition on deposits in the Southeast markets? Are you seeing the same thing? And just the level of visibility around NIB mix and the peak deposit beta that you call out in the slide deck? Thanks.

Kevin Blair: Ebrahim, as we’ve talked about in the past, I don’t think the pricing competition is going to abate. I mean, everyone’s in the market for liquidity. And as an industry, we traditionally use price to attract new deposits. And so, we haven’t seen a big change there. We also haven’t seen any of the competitive data suggest that rates are going higher. Matter of fact, when we look at our production this quarter for new deposits, we actually declined about 8 basis points. And so, we’ve kept our rates roughly the same and that has left us in a competitive position roughly in the same place. Our production was up about 12% quarter-on-quarter. So I wouldn’t suggest to you that there is a big change in the competitive landscape.

I think it’s always very competitive and we’re looking for ways to position ourselves not just with rate, but other ways to win new deposits. But I haven’t really seen a big change in the pricing backdrop. Jamie, do you want to talk a little about NIB and how we think about that?

Jamie Gregory: Yes. Ebrahim, let me just speak to the first quarter going to the second quarter, because this is the inflection point, right? We had 17 basis points of deposit cost increase in the first quarter. And obviously, given our margin outlook, we expect that to abate in the second quarter. So let’s kind of go through the components. And in the first quarter, the driver of margin compression on the liability side was NIB declines and then increased interest-bearing costs. And when you think about those individually, for non-interest-bearing deposits, as we showed on Slide 5, the trends there are positive and we had a January where we saw a large amount of attrition in that portfolio, but then we saw stabilization in February, and growth in March.

And we expect the stabilization to continue in NIB given the change in trends. Now to be clear, we expect NIB as a percent of total deposits to decline as we head through year-end. But we think that pressure will be much more moderate than what we saw early in the year. When you think about interest-bearing deposits, the pressure on the first-quarter cost was driven by increases in each category of now money market and CDs. When you look at the non-maturity deposits on money market deposits, the average rate of money markets for us has been flat since December. When you look at the [NAV] (ph) accounts, the average rate of NAV accounts has been flat since January. So we’re seeing stability in these portfolios. Now, time deposits do continue to creep up due to production being higher than the rolling-off rate of time deposits and the growth in the portfolio.

But what I’d say about that is, when you look at the second quarter, we had $2.4 billion of maturities in time deposits. And our new and renewed rate on time deposits in the first quarter was right at 2.5% — I mean, 4.5%. So we have $2.4 billion maturing at 4.4% and our going on new production in the first quarter for new and renewed is 4.5%. So very similar. So that’s just going to — we expect that to be reduced pressure going forward to the cost of interest-bearing deposits. And so, combination of all of those things on the liability side, along with the normalization of loan fees, less interest reversals, and the residual benefit of the first-quarter hedge maturities give us confidence in the second quarter margin, which is the launching point for margin expansion in the second half of the year.

Ebrahim Poonawala: That’s a great color. So thank you for walking through all of that. And just separately on credit also, so we built reserves. Has your macro view changed in terms of what you’re seeing in the markets today for the economy, for your credit book today versus back in Jan? Or is this reserve bill essentially just putting aside some money, being conservative? I’m trying to get a sense of, are you seeing signs within the portfolio that imply a little bit more worsening than you expected a few months ago.

Jamie Gregory: Ebrahim, no, we are not. As a matter of fact, when you think about the general macro-economy, we’re actually seeing general improvement in the outlook there and you can see that in our waterfall and the change in the allowance, you can see that that pushed towards a reduction in the allowance this quarter. And as Kevin mentioned earlier, the performance was really the deep-dive we did on multifamily. Now just to be clear, as he mentioned, we haven’t seen a degradation in the quality of that portfolio. But what we have done is just increase the allowance based on what we’re seeing out there with valuations, with office occupancy, just out of prudence. And so, the allowance increase you see is based on that. You’ll see an increase in the allowance associated with CRE due to that move.

We’ve increased the allowance-to-loan ratio in CRE about 14 basis points in this quarter. And so — but again, that’s indicative of the environment more than the performance of the portfolio.

Ebrahim Poonawala: Got it. And just on that multifamily deep dive, we downgraded four loans, anything else? I mean, there is obviously a lot of chatter about supply coming on over the next year or two. So I’m assuming you kind of worked through that and the four loans that you downgraded is all you kind of identified as having any signs of weakness?

Robert Derrick: Yes. Hey, Ebrahim, it’s Bob. Thanks for the question. Just as Kevin mentioned, those four credits were downgraded to what we would classify as a special mention status, just based on interest rate stress as it relates to coverage. We have great sponsors there. We don’t see really any significant loss content, more just making sure we had the classification right. And again, it was just four multifamily loans that move to special mention, but nothing changed in terms of our outlook for any kind of loss content relative to multifamily. We still feel like, yes, there is some supply issues in pockets in certain markets. But again from our perspective, there’s a lot of equity in these projects. Rent increases have been going strong for a few years.

They’re settling now and actually we’re retracting a little bit. But there is a fair amount of cushion in these projects and certainly the demand is still there relative to housing or single-family housing constraints.

Jamie Gregory: And Ebrahim, I’ll just reference Slide 23 in the appendix, where we give you a little more detail on the entire multifamily portfolio, including the fact that 11% of it is student housing, again very low LTV, performing at a very high level, NPL ratios of only 5 basis points. So the deep-dive is, as Bob said, we have done in other asset classes just to get that look. And your question was, did you find anything else? Obviously, if we had found anything else, we would have seen greater risk migration.

Ebrahim Poonawala: Got it. Thank you for taking my questions.

Kevin Blair: Thank you, Ebrahim.

Operator: Thank you. The next question is from the line of Steven Alexopoulos with J.P. Morgan.

Steven Alexopoulos: Hey, good morning, everybody.

Kevin Blair: Good morning.

Jamie Gregory: Good morning, Steve.

Steven Alexopoulos: I wanted to start. So looking at the 2024 outlook slide, it’s based on flat rates from current levels. And I’m curious, I know the forward curve is changing by the minute, but assuming the current one does play out and we did get two cuts or something in that range. Do you still think we would see this NIM expansion 10 bps to 15 bps in the second half of the year? And are you still in this adjusted revenue growth range if we do get those cuts?

Jamie Gregory: Yes. I mean, the simple answer to that is, and to your point, the forward curve changes all the time, which is why we gave our guidance to flat rates what we did in January as well. But when we look out there, what we would say is, during an easing cycle, we do expect to see margin pressure. We remain relatively neutral to the front of the curve. So we do expect once deposit costs stabilize to be at a similar spot when we come out of the easing cycle as we were going in. But during the cycle, we would expect somewhere between 6 basis points and 12 basis points impact to the margin. But with the forward curve, to your question on the full year revenue, we think that the forward curve, given where it is today, would be less than 1% impact on revenue for 2024.

Steven Alexopoulos: Okay. Got it. So you wouldn’t see that NIM expansion and you’d be below the low end of the range if we did get cuts. That’s what you’re saying. Not materially.

Robert Derrick: It would be less than 1% impact. It just depends — yes. We gave guidance to the low end of the range, but it’d be less than a 1%.

Kevin Blair: And again, Steve, that’s before we would do anything with the risk-weighted asset. That’s just based on the current baseline forecast.

Steven Alexopoulos: Yes. Got it. Yes. Okay. And then on this large C&I credit that you guys called out, I thought you said a couple of times it will resolve. Now, does that mean that NPAs associated with this just go away in 2Q or does it also mean that maybe you’re getting recovery on that loan? What does resolved mean?

Robert Derrick: Yes. Hey, Steve, it’s Bob. It’s — it was [indiscernible]bankruptcy. We took the charge-off this quarter. The NPL obviously stayed into the second quarter, but it’s been refinanced, and resolved. So yes, that NPL should go away.

Steven Alexopoulos: That won’t come out. Got it. Okay. Thanks. And then, Kevin, I had a big-picture question. So I love reading your Annual Report where you talked about this Grow the Bank mantra, right, the shareholder letter. And when I look at this year, I get why expenses are flat because the revenue environment is pretty tough. But when I look in your markets, right, I mean, most banks would be very envious of your markets. How do we think about this balance of investing enough to really take advantage of the growth potential in your markets? And as the environment improves, do we expect this a pace of investments to improve? Because honestly, your loan growth is not much different than banks that really have a much worst footprint than you have. Just wondering, when do we start to see Synovus deliver growth that’s really commiserate with the great market that you’re in? Thanks.

Kevin Blair: Look, Steven, it’s a question that we wrestle with every day in terms of investments, how much do you spend today for long-term shareholder value. And we are leaning in. Behind the scenes, we’re at zero for this year, but we’re still adding team members in our commercial area, our private wealth area. We’re investing in technology, and you never spend enough. You always want to spend a little more. We take a very financial approach to how we look at investments in terms of earnback period. And whether that’s adding a new resource or adding a technology, we look at how long it takes for that investment to pay back. And we continue to keep a very regimen approach to doing that. But as revenue grows, we’re going to increase the level of spend.

We want to make sure positive operating leverage for us is less about something we’re trying to do. I just think it’s good stewardship of — for shareholders. We want to invest as much as we can as presented by the revenue growth that we have. So yes, as revenue improves in 2025 and 2026, you’ll see us invest more. And I couldn’t agree with you more. We have a real opportunity in the Southeast, not just because of the demographic shifts. But as we’ve said, you look at our J.D. Power survey, you look at [indiscernible] survey. Our clients tell us that we serve them better than our competitors. And in that case, we should not only get the benefit of the growth of the Southeast, but we should get higher market share growth by taking clients from our competitors.

So yes, we want to continue to invest prudently. We do use revenue growth as a calibrator on how much we’re willing to spend as margin starts to expand, as the economy provides us more growth, we’ll spend more money. And lastly, just on the loan growth side, I think in our loan slide, you’ll see that the areas that we continue to invest in, we are growing. We are up 11% annualized in middle-market, CIB, and specialty. But because we’ve been rightsizing the balance sheet, we’ve been downplaying our shared national credits, as well as senior housing, which has had a fairly big headwind on loan growth. And we’ve seen some more constructive activity on CRE that allows us to see some payoff activities that we haven’t seen for some time. So, as we get to a more normalized level on shared national credits and senior housing, and we get our pipeline start to build again on CRE.

When you add in the strategic growth, you’re going to see that loan growth go back to levels that are far higher than they are today and ones that I think you would point to as being higher growth.

Steven Alexopoulos: Okay. Perfect. Thanks for taking my questions.

Kevin Blair: Thank you, Steve.

Operator: Thank you. The next question is from the line of Catherine Mealor with KBW.

Catherine Mealor: Thanks. Good morning.

Kevin Blair: Good morning.

Jamie Gregory: Good morning, Catherine.