Synovus Financial Corp. (NYSE:SNV) Q2 2024 Earnings Call Transcript

Synovus Financial Corp. (NYSE:SNV) Q2 2024 Earnings Call Transcript July 18, 2024

Operator: Good morning, and welcome to the Synovus Second 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. Jennifer, 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 second quarter 2024 earnings call. Synovus reported a loss of $0.16 in the second quarter of 2024 which included a previously announced $256 million loss from the recent securities re-positioning that was executed as a result of the capital benefits derived from our risk weighted asset optimization exercise, however, adjusted earnings per share were $1.16 compared to $0.79 in the first quarter. While adjusted pre provision net revenue rose 20% from the prior quarter to $262 million. Adjusted revenue and earnings inflected higher in the second quarter. Net interest income increased 4% from the prior quarter on 16 basis points of sequential NIM expansion.

Also, adjusted non-interest revenue jumped 9% sequentially while adjusted non-interest expense declined 5%. Moreover, our net charge-offs and non-performing loans declined meaningfully this quarter, and our liquidity and capital positions remain as strong as they’ve been in several years. Our success and positive momentum are a direct result of the work of our talented team members. We are also making progress and key initiatives and further strengthening our value proposition for our clients. We continue to attract our value proposition for our clients. We continue to attract talent in the expansion of our commercial and wealth lines of business. Our retail analytics platform has translated into a better client experience and is delivering 60% increase in new revenue resulting from the insights and leads generated.

Our focus on the business owner wealth strategy is delivering a 52% conversion rate on qualified referrals. Our growth and the current pipelines remain robust in treasury and payment solutions. Our efforts to reduce fraud and operating losses have proven fruitful with year-to-date expenses down 11%. And lastly, we saw significant improvement in credit costs this quarter. In fact, our community bank line of business ended the quarter and year-to-date in a net recovery position. So our progress is broad based and truly a team effort. In addition, as we discussed in recent quarters, our focus remains firmly on execution while reducing uncertainty and performance associated with the net interest margin and credit cost. The second quarter results reflect our progress towards these goals.

Now let’s turn to slide three for the highlights. As previously noted, net interest income increased 4% from the first quarter as a result of 16 basis points of sequential net interest margin expansion. Despite funded production increasing almost $500 million this quarter, period in loans were down just over $200 million from the first quarter. We continue to generate healthy and consistent loan growth in the middle market, CIB and specialty commercial units, but payoff activity and senior housing and national accounts as well as lower C&I utilization drove the overall decline in outstanding for the quarter. Core deposits declined slightly in the second quarter driven by a drop in non-interest bearing deposits all said by growth in time deposits.

Furthermore, we reduced broker deposits for the fourth consecutive quarter. Our team remains highly focused on accelerating core funding generation through sales activities and product expansion. Adjusted non-interest revenue increased 9% from the prior quarter, primarily from significant growth in capital markets income. On a year-over-year basis, there was strong growth in commercial sponsorship income from the expansion of card sponsorship business as well as our partnership with GreenSky. Capital markets and treasury and payment solutions fees also contributed to healthy year-over-year growth. Adjusted non-interest expense was down 5% sequentially and relatively flat on a year-over-year basis. Our 2023 cost initiatives as well as ongoing diligence have led to a modest core operating expense growth from a year ago, while maintaining a level of strategic investments that positions Synovus well from a competitive standpoint in order to drive long-term shareholder value.

On the asset quality front, net charge-offs of 32 basis points were 9 basis points lower than the first quarter levels while non-performing loans declined by 22 basis points. Lastly, we further bolstered our common equity tier 1 ratio in the second quarter through solid earnings accretion and balance sheet management while still completing about $91 million of opportunistic share repurchases. Common equity tier one levels are the highest in over eight years at 10.62% and currently set modestly above our stated range of 10% to 10.5%. Now I’ll turn it over to Jamie to cover the second quarter results in greater detail. Jamie?

Jamie Gregory: Thank you, Kevin. Moving to slide four, period end loans were down $216 million from the prior quarter. Loan production actually rose significantly from the first quarter but was all set by payoffs, paydowns, and continued portfolio rationalization as well as lower utilization from our larger corporate and specialty line clients. We continued to maintain pricing discipline as evidenced by loan spreads on new production which remain elevated relative to the prior year. Consistent with our focus on core client relationships despite utilization headwinds, growth in middle market commercial, CIB, and specialty lines was $157 million or 5% annualized during the second quarter. During the first half of 2024, we produced 8% annualized growth in these core commercial business lines which we believe should continue throughout the remainder of the year.

Senior housing loans declined $196 million from the prior quarter. There has been increased strength in the markets as evidenced by higher levels of transaction and refinancing activity over the last few quarters. That said, we anticipate more stable senior housing balances throughout the remainder of 2024. We also continue to strategically reduce our non-relationship lending within our national accounts portfolio as well as our third party consumer loans, further positioning our balance sheet for core client growth. These balances were down $223 million in the second quarter. In the second half of this year, third-party consumer loans should continue to decline and estimate $60 million per quarter, while national account balances should be more stable.

We estimate we should see stable to higher total loans in the second half of 2024, with continued growth in our key commercial segments. Turning to slide 5, period-end core deposit balances were relatively flat on a linked quarter basis, with somewhat more stable mixed shifts within the quarter. Non-interest-bearing deposit balances were down $387 million from the prior quarter. However, average balances were more stable in the second quarter relative to the first quarter. We still see some further pressure on non-interest-bearing deposits, though the trends continue to suggest notable slowing in the pace of decline in those balances. Finally, broker deposits declined $317 million, or 6% from the first quarter, which was the fourth consecutive quarter of contraction.

Deposit costs were stable in the second quarter, up just one basis point from the prior quarter. This equates to a cycle-to-date total deposit cost beta of approximately 49%, which was unchanged compared to the first quarter. As we look at the back half of the year, we expect deposit cost to remain relatively stable and are looking for broad-based deposit growth across our business segments, which should be supported by seasonal tailwinds into the end of the year. Moving to slide 6, net interest income was $435 million in the second quarter, which was an increase of 4% from the first quarter. The second quarter benefited from various drivers, including improving loan yields, the residual impact of first quarter hedge maturities, and the securities repositioning in May.

As we alluded to in the first quarter, we also witnessed relative stabilization in deposit calls to mixed trends, which resulted in a much more modest headwind to interest expense. As we translate that to the margin, NIM expanded 16 basis points sequentially to 3.2%. This was primarily driven by the same factors, which supported net interest income, along with a one-time positive impact from our securities held to maturity reclassification, which served to reduce earning assets. As we look forward to the third and fourth quarters of 2024, we continue to expect net interest margin expansion, driven by fixed rate asset repricing and fourth quarter hedge maturities, as well as a full quarter impact of the securities repositioning, which was completed in May.

Kevin will provide further detail on our guidance momentarily, which is based on an FOMC rate cut of 25 basis points in December. Slide 7 shows total reported non-interest revenue was impacted by the $257 million securities walls related to our securities repositioning in the second quarter. However, adjusted non-interest revenue was $127 million, which is a 9% jump from the previous quarter. Adjusted non-interest revenue was up $17 million, or 15% year-over-year. The majority of the sequential growth was attributable to higher capital markets fees, which surged 128% from the first quarter and are expected to remain elevated in the second half of the year. The growth was driven by syndication, finance, arranger fees, and debt capital markets income.

Also, commercial analysis, treasury and payments, solutions fees increased 4%, while core wealth management income increased 2%, outside of an expected decline in repo income due to client asset allocation changes. When looking at the year ago quarter, core banking fees increased 4%, supported by growth and treasury and payment solutions, while capital markets fees increased 59%, and commercial sponsorship income jumped 188%. We continue to invest in core non-interest revenue streams that deepen client relationships and provide further healthy fee growth in areas such as treasury and payment solutions, capital markets, and wealth management. Moving to expense, Slide 8 highlights our operating cost discipline. Reported and adjusted non-interest expense were both $302 million.

Adjusted non-interest expense declined 5% from the first quarter and was flat compared to the year-go-quarter. Employment expense fell 4% from the first quarter, largely due to seasonality, partially offset by a full quarter impact of the 2024 merit increases, and higher employee incentives. Turning to other expenses, FDIC premiums declined as a result of the $13 million FDIC special assessment that was accrued in the first quarter, and a partial special assessment reversal of $4 million in the second quarter. Legal expenses increase from the prior quarter, primarily due to expenses associated with previously resolved problem loans. Employment expense decline 1% year-over-year, benefited by our 7% year-over-year decline in headcount. Occupancy and equipment expense increased 8% as a result of ongoing technology investments, as well as increased property expense.

Importantly, we will remain proactive with disciplined expense management in this growth-constrained environment. Moving to slides 9 and 10 on credit quality. Provision for credit losses declined 51% from the first quarter to $26 million. Our allowance for credit losses ended the second quarter at $538 million, or 1.25%, which is relatively unchanged from the first quarter. Net charge-offs in the second quarter were $34 million, or 32 basis points, compared to 41 basis points in the first quarter and 38 basis points in the fourth quarter. Non-performing loans declined 27% and are now 0.59% of loans, down from 0.81% in the first quarter, primarily from the resolution of a previously charged-off credit and slower inflows. The Criticized & Classified credit ratio declined slightly to 3.7% and remains at very manageable levels.

We have a high 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 build in the second quarter, with the preliminary Common Equity Tier-1 ratio reaching 10.62% and total risk-based capital now at 13.59%. A strong quarter of core earnings, coupled with the completion of our previously announced risk-weighted asset optimization exercise, helped to support over 80 basis points of capital accretion within the quarter. Against that, we completed the anticipated available-for-sale security repositioning and we executed approximately $91 million in share repurchases.

These actions served to diligently deploy our capital while still ending the quarter near the top end of our targeted CET1 range. More details on the securities repositioning can be found in the appendix of our presentation deck. We look to the remainder of the year. We will maintain a disciplined approach to capital management, which balances the uncertain economic environment with prudently managing near the top end of our 10% to 10.5% CET1 range. As a reminder, our focus remains on prioritizing the deployment of our balance sheet in capital position for core client growth. However, we expect to complement that with share repurchases to effectively manage within our capital management framework. I’ll now turn it back to Kevin to discuss our 2024 guidance.

Kevin Blair: Thank you, Jamie. I’ll continue with our updated guidance for the remainder of 2024. Based on the first half results and our existing pipelines, period end loan growth is expected to be 0 to 2% in 2024. Growth should be supported by continued success in middle market, corporate investment banking, and specialty lines. Year-to-date headwinds with senior housing and national accounts syndicated lending are expected to subside, but broader commercial real estate payoff activity should increase in the second half of the year. Our forecast for core deposits now supports growth within the 2% to 4% range, aided by seasonal tailwinds as the year progresses, and new core funding growth initiatives. Stable deposit calls should result in a peak total deposit cost beta for this cycle near current levels of approximately 49%.

Our outlook now points to adjusted revenue growth in the negative 3% to 0% range. Importantly, our adjusted revenue guidance now assumes there is one 25 basis point rate cut in December 2024, compared to our prior assumption of stable rates, as well as the realization of our robust capital markets pipeline in the second half of 2024. We expect more net interest income improvement in the second half of this year as deposit cost stability combined with fixed rate asset repricing are hedge maturities and the full impact of the securities repositioning benefit are net interest margin. Adjusted non-interest revenue is now forecasted to grow in the mid-single digit percentage range this year versus our previous guidance of low to mid-single digit growth.

The previously mentioned capital markets fee pipeline remains strong. We continue to execute on core growth and treasury and payment solutions and the GreenSky Forward Flow Program continues to build commercial sponsorship fees. We remain very focused on discipline expense control. Excluding the FDIC special assessments, we anticipate our adjusted non-interest expense will be up 1% to 3% this year. This modest increase in expense guidance is due to incremental expenses and infrastructure spend and investments, legal costs primarily associated with resolved credits, and higher team member incentives. We continue to closely monitor and manage our loan portfolio for any credit deterioration or systemic themes across industry and markets. Given current credit migration trends, assuming a relatively stable economic environment and considering the impact of certain large individual losses in late 2023 and early 2024, we expect net charge-offs to be flat to down in the second half of this year compared to 36 basis points in the first half of 2024.

Moving to the tax rate, our current forecast points to an approximately 21% level as compared to 21% to 22% previously. Finally, our common equity tier 1 ratio is above our targeted range of 10% to 10.5%. Therefore, we will remain opportunistic with share repurchases to manage overall capital levels at or near the top end of this range. Prudent capital management remains our top priority to ensure we have a strong and liquid balance sheet which is prioritized towards serving the growth needs of our clients, regardless of the economic environment. And now, operator, this concludes our prepared remarks. Let’s open the call for questions.

Operator: Thank you very much. [Operator Instructions] The first question is from the line of Ebrahim Poonawala with Bank of America. Ebrahim, your line is now open. Please go ahead.

Q&A Session

Ebrahim Poonawala: Thank you. Good morning. Maybe I guess just around the comments on net interest margin expansion in the back half, if you could unpack that in terms of the drivers of margin expansion, obviously the full quarter impact from the bond book restructuring should help. But beyond that, just remind us in terms of the back book repricing and how NII evolves in the face of potential for rate cuts starting in September. Maybe if you could start there.

Jamie Gregory: Thanks, Ebrahim. When you look at the margin and the trajectory in the second half of the year, there are a few different moving parts. First, as you mentioned, the securities repositioning, we experienced about half of that benefit in the second quarter and will experience another, the other half here in the third quarter. And so that’s a tailwind to the margin this quarter. There is, as you know, a little bit of fixed rate asset repricing as well in the third quarter that’s a positive, but then there’s a headwind due to average DDA balances. You can see that in the appendix. We put average balances and end of period balances and there will be a decline in average balances just given the second quarter where that landed.

And so that’ll be a headwind to the margin in the third quarter. But we expect margin expansion in the third quarter. We expect margin expansion again in the fourth quarter and we expect to end the year at or approaching a 330 margin given with the assumption of a rate cut in December.

Ebrahim Poonawala: Understood. And just incrementally, if we get a series of rate cuts, Jamie, is that a drag to the name, at least short term?

Jamie Gregory: It does. It does. So for our guidance, we used the fed dot plot from June. But if you are to pivot to a September rate cut, which is more consistent with the forward curve today, there would be pressure on the margin in the month of September and October. And so let me just kind of unpack that a little bit, because this is an important question as we head into an easing cycle. In the period of time leading up to the ease, there is NIM pressure, which is minor due to short rates declining in the expectation of an ease. And so asset yields will decline and there’s really not an offsetting benefit to funding costs. Then once the ease happens, the margin will be pressured further as the majority of floating rate loans reprice down.

The full impact of the ease will flow through on the loans almost immediately as the majority of our floating rate loans are one month rates or shorter, but that will be partially mitigated by the 13% of floating rate loans that are hedged. And then when you’re post easing, then you will start to see the benefit of reduced liability cost. And so you have the asset repricing, but then the reduced deposit cost, reduced funding costs will come through. And we believe that that will neutralize the reduction in asset yields over the course of one to two months. And so kind of to be more specific around that, if you were to just compare a September and December ease, the forward curve relative to the fed dot plot, which is a December ease, there’s about a $5 million to $7 million margin.

NII impact between those two scenarios and is split between the second and the third quarter. I mean, the third and the fourth quarter, because it’s a September and October.

Ebrahim Poonawala: That’s extremely helpful. And just the only other follow up, Jamie, you mentioned stable deposit cost, second half one, if you don’t mind, give us an update on the pricing sort of competition in your markets. We had a peer of yours, talk about intensity picking up. So would love any color there. The deposit pricing is playing out like we, like we said in April, as we look at the outlook from here, we expect stable deposit calls through the remainder of the year. We feel good about our positioning here. We feel good about our production pipelines, pricing. What we’ve seen in the marketplace is not necessarily an increase in competition, but we’ve seen more coalescing around rates and less volatility between highs and lows.

And it feels to us, like on the promotional rates, that there’s a concentration around, if you look at CDs, a concentration around 5%, and you’re not seeing a lot of the outliers that we were seeing early in the year that were much higher. And it appears that the banking industry, it appears everybody is preparing for an easing cycle by shortening the duration, which is appropriate. And you’ve seen that with us as well, where we have two thirds of our CDs that will mature in six months. And so I feel like the industry is preparing for easing. The industry is shortening the duration of time deposits and kind of coalescing around market rates. So it feels competitive but stable to us.

Kevin Blair: And, Ebrahim, just to put a data point behind Jamie’s comments, our production rates for the quarter were 377, and we achieved kind of peak rates back in the fourth quarter of 2023 at 382. So we’ve seen stable production yields quarter-on-quarter and actually a reduction versus where we ended last year.

Ebrahim Poonawala: Extremely helpful. Thank you for taking my questions.

Operator: Thank you. Our next question is from Steven Alexopoulos with JPMorgan. Steven, your line is now open. Please go ahead.

Steven Alexopoulos: Hi. Good morning, everyone.

Kevin Blair: Good morning, Steven.

Steven Alexopoulos: I want to start on the long road headwinds, maybe could you help us better understand what’s left in terms of the remaining headwind from rationalization efforts? And then, Kevin, I thought you said that the creep payoffs would increase in the back half of the year. Maybe you could quantify that for us. And how far away do you think we are to when these cumulative headwinds are really behind the company and that strategic growth and other areas of growth we’re seeing start becoming the total low growth?

Kevin Blair: Yes, Steven, it’s a great question because I think to your point, when you assess the growth of loan outstanding’s there’s multiple components, and we’ve talked a lot about our ability to grow predicated on increasing production. But as you mentioned, there’s a couple things that are driving outstanding’s lower in the current environment. First and foremost, we’ve been rationalizing some of our portfolios that either we think have lower returns or have a lower funding profile. And that specifically is senior housing third party consumer, our national accounts. Thank you. And when you look at those portfolios, and we’ve run off about $2.3 billion in the last 12 months in those portfolios, that’s reduced their total percentage of outstandings from 18% to 13%.

And that’s largely been accomplished. And so as we look forward for senior housing national accounts, those balances will stay roughly flat. And when you look at third party consumer, those are going to continue to decline just because we’re not putting on a lot of new production. So I would say that the headwinds around rationalization and any loan sales, which as you recall, we did the MOB sale, the medical office sale last year, that’s largely done. So as you look into the future, our production levels are actually increasing. When you look at this quarter alone, we are at $1.3 billion in funded production. That was up 37% quarter-on-quarter and almost back to the levels we saw back in 2023. So production is picking up. Our pipelines are up 8% quarter-on-quarter.

So then the other question mark is the payoff and pay down activity. This quarter, as Jamie referenced, the payoff activity occurred more on the C&I side. It was the national accounts and senior housing, and we saw about $250 million of lower utilization on C&I. From a CRE perspective, we don’t expect the payoffs to really pick up this quarter, but rather in the fourth quarter. And that’s just based on some of the maturities that we have. And to put it in context, we had about $570 million of payoff and pay down activity this quarter. That number could get as high as $800 million to $900 million. So we’re talking about $400 million-ish increase in payoff activity. And those are the headwinds. Now, again, that’s predicated on some of the renewals.

As we look into 2025, as we’ve shared in the past, we think a lot of those headwinds are completely abated and we return to more of a normalized growth rate, pending what the underlying economic environment looks like.

Steven Alexopoulos: Okay, that’s terrific color. Maybe just from my follow-up question, thank you for that. In terms of the non-interest bearing deposits, there was a bit of excitement last quarter. When you guys talked about seeing a trough, maybe it’s stability of February, March, April, and then this quarter of the period, a non-interest bearing came down quite a bit again. Could you walk us through what you ended up seeing there? Because it seems like they trended a bit down.

Kevin Blair: Yes, we had a good start to the quarter and we saw some declines as the quarter progressed. And it was really relegated to our commercial operating accounts. And when you look at the average balance there, we’re still running about 20% higher than what the average balances were prior to the pandemic. So it still suggests that there’s some sort of excess cash sitting on our commercial client balance sheets and they’re using it. As maybe correlated to the reduction in utilization, we continue to see our commercial clients use cash as rates decline, as we achieve pre-pandemic levels, which we’re getting closer to that. We think that diminishment will continue to decline. And ultimately, the production and some augmentation that we’re starting to see will offset that. So still expect to see some DDA remixing in the second half of the year, but the pace at which it’s diminishing continues to decline.

Jamie Gregory: And Steven, one thing I would add to that is, when you break it down, we have to Kevin’s point on commercial, we’ve seen stability and retail DDA since the beginning of the year. Commercial, like the smaller commercial clients, that is down, but just only down slightly. And so it’s, I feel like the stability is increasing, but it’s going up market as we go through this. And so that’s what we’re seeing. And we’ve, one thing that helps us believe that it’ll diminish in the second half of the year as well.

Steven Alexopoulos: Got it. Terrific. Thanks for taking my questions.

Jamie Gregory: Thank you.

Operator: Our next question from Jared Shaw with Barclays Capital. Jared, your line is now open. Please go ahead.

Jared Shaw: Hi. Good morning, everybody.

Kevin Blair: Morning.

Jared Shaw: Maybe just quickly just following up on the margin discussion, and you mentioned that we have half the benefit of the securities repositioning. What’s the spot yield on the securities book at the end of the quarter going into the third quarter?

Jamie Gregory: Jared, I don’t have that handy. I mean, we were at 3 or 4 for the quarter itself. It’s about a 40-basic point impact just due to the repositioning, but I don’t have the spot yield at quarter-end.

Jared Shaw: Okay. That’s fine. And then looking at that credit, if you could give, just a little more discussion around that. It’s great seeing sort of the confidence there in the longer, the bigger trends. When you look at the driver of the lower ACL, is that really loan-level performance that you’re feeling more comfortable with or was there some change to the, to the broader macro model assumptions driving that? And then, should we, should we assume that we’re sort of stable here at these levels given the broader economic outlook?

Jamie Gregory: Yes, Jared, this is Jamie again. And by the way, it was 332 in June for the securities yield. The allowance, when you look at that, the change quarter-on-quarter, it really was to the macro drivers, you can see the waterfall in the appendix of the change. Forward-looking we feel good about the level where we are right now. When you look at the components of the allowance quarter-on-quarter, the performance in CRE continues to be very strong. And the allowance loan ratio for the quarter life alone [ph] loss estimate was down in CRE and it was up a little bit in C&I. So you see a little bit of shifts within the portfolios. But altogether we would expect stability from here given the economic outlook as we continue to look at how the portfolio migrates going into the second half of the year.

Kevin Blair: I think, Jared, just to your broader question on credit, I think it was a solid quarter on all fronts. When you look at the data net charge-offs, down nine basis points, NPLs declined 22 basis points. Our FDMs declined $93 million. We only had $62 million of NPL inflows. And to Jamie’s point, only a million of that was in CRE. And when you talk about the ACL, it came down a bit, but our coverage to NPLs increased back to 210%. So, all-in-all, I think it was a storyline that was broad based. And as we’ve been talking about, as we look at the data and the underlying credit metrics, we’re not seeing any additional deterioration. In many ways, we’re starting to see some improvement in some of the metrics. And so as we look into the next couple of quarters, that’s why we feel very comfortable about guiding flat to down in overall charge-offs.

Jared Shaw: Great. Thanks very much for the color.

Operator: Our next question from Manan Gosalia with Morgan Stanley. Manan, your line is now open.

Manan Gosalia: Hi, good morning. I wanted to ask, on the expenses front, can you expand a little bit on the drivers of the higher expense guide? And the number implies, I think, about 315 million or so of expenses, a quarter in the back half. So how do you think about that as a jumping off point into 2025?

Jamie Gregory: Thanks for the question, Manan. I would just start and say the baseline for the second quarter, I would use $306 million, which is adjusted expenses, excluding the FDIC reversal. And we are expecting the third quarter to be in the $310 million area, so not the $315 you mentioned. We expect that to be driven by increased personnel costs, and that’s largely a day count issue. We do have some infrastructure project spend, some of that’s fraud detection, fraud prevention, pricing analytics, and then there are just simply some other inflationary impacts. And so it’s about a 1% increase from the second quarter getting to the 310 area, and we expect that to hold in the fourth quarter as well.

Manan Gosalia: Got it. And that’s a good run rate for 2025.

Jamie Gregory: As we look at 2025, we do think that expense rate will be a little more normalized. We will give an update on 2025 more at the end of the year, but we do expect expenses to be more normalized in 2025. And so, 2024 benefited from a lot of the efforts that we did in 2023 with Cenovus Ford [ph] in the second half of the year. In 2023, we had a lot of efficiency efforts that were very successful in reducing cost, improving efficiency, reducing headcount. And those benefited this year. I mean, when you think about the full year 2024, we’re talking about up 2%, if you use the midpoint of the guide, excluding FDIC. And there are some large drivers in there, of expense increases. We have about a 1% impact of simply of merit, about a 1% impact of the consolidation of Qualpay, about a 1% impact of credit related expenses from the first half of the year.

And with all of that and every other inflationary impact, we’re still guiding to a 2%, 1% to 3% number that feels pretty good. But we do expect 2025 to likely be higher than that.

Manan Gosalia: Got it. I appreciate the color. Then maybe separately on capital, your target, CET1, is 10% to 10.5%. You’re slightly above that. I think you’re saying you want to manage to the higher end. What keeps you at the higher end of that? A 10% to 10.5% target. Is it a current uncertainty in the economy? Is it credit? What would drive you to move to the lower end or even below that 10% number?

Jamie Gregory: In isolation we would drive to be there today. It’s just when you look at capital management, stress testing, scenario analysis, there’s nothing quantitative that would drive you to the levels where we are now, or even to 10%, to 10.5%, you would actually likely run below that. When we think about capital deterioration in a severe adverse scenario, but we believe it’s prudent to operate with higher capital than the models would suggest just given one, there is uncertainty in the environment. But again, that wouldn’t point you to the levels where we are today and two, where peers are. So if we’ve seen one thing we’ve seen over the past few years in economic uncertainty and market uncertainty, we do believe that relative capital ratios to peers in uncertain times can lead to higher betas.

And we think it’s prudent to stay closer to peer levels. And so while it’s not quantitative, it’s not due to uncertainty in the income statement, it’s not due to uncertainty in the balance sheet we do think it’s prudent to run at these higher levels in the current environment.

Manan Gosalia: Great. Thank you.

Operator: Thank you. Thank you. Our next question is from Brandon King with Truist Securities. Brandon, your line is now open.

Brandon King: Hey, good morning.

Kevin Blair: Good morning, Brandon.

Brandon King: So capital markets was pretty strong in the quarter, and Jamie, you mentioned how you expected to stay elevated going forward, I guess, the rest of the year. So does that mean we’ll still see that’s close to that 15 million run rate in the back half of the year?

Jamie Gregory: We do expect to see that continue. However, I would just qualify it with. It is uncertain how it will play out quarter-to-quarter. So I feel more confident in the total number in the second half of the year than being able to say it’s a stable number quarter-to-quarter. Because with our client base, with the uncertainty with the economy, with the uncertainty with the election, we do believe that it’s likely that there are deals that will wait until the fourth quarter, and so that could back end load the capital markets fee revenue. So, again, we feel good about the total number, just not certain how much will come through in Q3 and how much will come through in Q4.

Kevin Blair: And Brandon, add to the reason we feel comfortable with that. As Jamie mentioned, we’ve been investing in some of the capital market solutions for some time. And I look back several years, I would say 80% of our revenue in capital markets came from the derivative side. I look at this quarter as a standalone basis. Only 25% of the revenue came from derivatives. Almost 30% came from syndications and lead arranger fees. We had almost a quarter of the revenue from DCM fees, a little over 10% in FX, 10% in SBA. So it is so broad based that it gives us the opportunity that we’re not over reliant on one particular area. And that’s what gives us confidence that we’ll be able to continue with this new kind of high water run rate.

Brandon King: Okay. And that was actually my follow up question, is, if you thought this was kind of a base to grow off of in 2025 and beyond.

Kevin Blair: Yes, I think, and think about this. When we start to see loan production pick up again, the derivative income will pick up with it. So I think there’s not only a run rate here, but there’s a lot of growth that could come off this base.

Brandon King: Okay, that’s helpful. And then lastly, your expectations around deposit broker deposit runoff. You had a decline in the quarter. Just how are you expecting that to trend in the back half of this year?

Kevin Blair: As we look at the back half of the year, we would expect to see, see that stable to declining. We saw some decent declines in the first half of the year, but I think we’ll look to see how loan growth progresses in the second half of the year to really see how broker deposits will play out. But we probably would say stabled it down.

Brandon King: Okay, thanks for taking my questions.

Kevin Blair: Thank you.

Operator: Our next question is from Timur Braziler with Wells Fargo. Timur, your line is now open. Please go ahead.

Kevin Blair: Hi, good morning, Timur.

Timur Braziler: I guess I was a little bit surprised that the revenue guide, the top end of the revenue guide was maybe guided down a little bit following the strong NII quarter and the momentum you’re seeing on the fee side. I guess maybe just talk us through some of the dynamics that could still net us to that kind of low end at that negative 3% or maybe you have greater confidence, given some of the results and expectations for the second half of the year, that revenue is going to be more or less flat for the year.

Jamie Gregory: As we look at the second half of the year, the upside drivers to our guidance would be largely loan growth. And so you think about we took 1% off the top on loan growth and that helped lead to the reduction of the top end on revenue growth. But when we look at the rest of the year, high end of our revenue guide would be, one, it could be a flat rate scenario which would be accretive. Two, it would be continued strength and fee revenue that outpaces the mid-single digits that we, where we’ve given guidance, which is a possibility. Three, it would be increased loan growth. As Kevin mentioned, that the assumptions in our guide include declines in CRE. And that is not something that we’ve seen year-to-date. It’s not something that we expect to see necessarily in the third quarter.

And so that could be a tailwind as well. And so I guess I would point to loan balances being one of the bigger drivers to the high end of the range in NII for the second half of the year. If you think about the lower end of the range, I would say it would be in fee revenue. It could be deals getting pushed out and pushed into 2025, even though we don’t expect that for in fee revenue. But it would also be if there’s more aggressive easing than, than what we have in there, which is the December ease. But as I mentioned earlier, we think that if you just add a September ease, that’s only a $5 million to $7 million impact to NII in the second half of the year.

Timur Braziler: Okay, great. And as a follow up, maybe, can you just talk us through the strategy of reclassifying your available for sale bonds into health and maturity during the quarter, especially the being longer duration bonds that were moved to HTM, kind of locking in that AOCI. Can you just maybe talk through the rationale and that change at this point in the rate cycle?

Jamie Gregory: Yes. Understood. The rationale was, first, that these are securities that were unlikely to ever be sold because they’re longer duration. They were deeper underwater, and so the marks were large enough that it was unlikely there would be a scenario where we would ever sell these securities. Second, we do not look at tangible common equity ratios as far as a risk management tool. We use regulatory capital ratios, we use NII volatility, things like that, to kind of get to what people use tangible common equity for the ratio, the AOCI impact of that. But we have seen the press and the street use tangible common equity volatility and AOCI frequently when they’re comparing banks. And we thought it was prudent to take a little bit of that volatility off the table.

When we moved them to held a maturity, there was approximately 700 million in unrealized losses associated with that portion of the securities portfolio. And moving that to held to maturity reduced tangible common equity volatility of 100 basis point rate move down from 75 basis points to around 50 basis points. And so we just think it’s prudent to reduce the volatility in that ratio. Same thing can be said for CET1, including AOCI, even though we’re not held to that standard. And so that was the general thought, that there was very little opportunity cost. These were not securities that we were likely to ever trade, and it would just reduce the volatility in TCE as well as CET1, including AOCI.

Timur Braziler: Great. Thanks for that color.

Operator: Our next question is from Michael Rose with Raymond James. Michael, your line is now open. Please go ahead.

Michael Rose: Hey, thanks for taking my questions. Just a few quick…

Jamie Gregory: Mike, are you there?

Jennifer Demba: Why don’t you move on to the next caller and bring Michael back into the queue?

Operator: Yes. So our next question is from Catherine Mealor with KBW. Catherine, your line is now open. Please go ahead.

Catherine Mealor: Thanks. Good morning. I just wanted to follow back up on the fee income discussion, and can you just kind of help us just broadly, not just capital markets, but broadly, think about maybe the run rate that you’re expecting in fees in the back half of the year. If we’re kind of trying to look around your mid-single digit growth range, then it would imply that your core fee run rate is going back to around the first quarter level, which is a big pullback from what we saw this past quarter. And so just trying to think about are you being conservative there, or is there actually a case to be made that we could see closer to high single digit growth?

Jamie Gregory: Catherine, as we look at fee revenue growth, the mid-single digit range, you’re right is a little bit higher than the first quarter, but we expect the third quarter again, that the timing of the capital markets piece is the uncertainty. But in the second half of the year, we would expect to see similar fee revenue as what you’ve kind of seen, at or close to what you saw in the second quarter.

Catherine Mealor: Okay. So that is a significant, that does make the case that fee income growth will be much higher than your guidance, which is great. Okay. And then as you think about next year, what kind of longer term growth rate and fees do you — would you expect just given some of the momentum you’re seeing in capital markets?

Jamie Gregory: I think Catherine gets back to what we’re saying earlier, obviously not giving 2025 guidance, but what we’ve been trying to build is a foundation around some of these core fee income revenue sources that will generate sustainable growth. And to your point, when you look at fee income this past quarter, it was up 15% year-over-year, and that was a function of many different areas, not just capital markets. Although capital markets had a strong growth, we were up in core fees about 4%. And that’s largely a function of our treasury and payment solutions area. We’ve been growing at about 14% year-over-year and analyzed fee income. We’ve also had growth in some of our other fee categories, like credit cards and other fee income.

Remind you, there was a big headwind going into this year in wealth management. We had both repo revenue down, and that was a product that we were selling to a large municipality that no longer was using that solution and that was providing just a 4 million. It’s a total of $4 million headwind for the quarter. And we divested of our money management firm, Global, and that was about $2.3 million. So when you think about our results today, you add then those headwinds, along with a change in our underlying consumer account structure that minimizes insufficient funds, which also has a headwind. When you look out to 2025, you’re not going to have those, you’re not going to have a headwind with NSF fees, you’re not going to have repo headwinds. Global will be fully off the books and there’ll be no comparability.

So when we continue to have the performance in core banking fees, capital markets, and we get some of the growth wealth again, I think you could see a growth rate that is even higher than this year depending on the underlying economic environment.

Catherine Mealor: Great. That’s super helpful. And if I just can feed for one more follow up, just the other line, that’s been about 18 million the past couple of quarters. Is there anything kind of one time that you see in that, or do you think that’s also a good run rate for the back half of the year?

Jamie Gregory: There were some one time benefits from some Oreo properties where we took some fee income from that. So that was elevated a little bit this past quarter. So I think other than will come down a little bit and maybe made up in some other categories.

Catherine Mealor: Okay, great. Thank you for all the color.

Jamie Gregory: Thank you.

Operator: Our next question is from Michael Rose with Raymond James. Michael, your line is now open. Please go ahead.

Michael Rose: Okay, can you guys hear me now?

Jamie Gregory: Yes. All right, perfect.

Michael Rose: Catherine actually just asked my question, but just maybe one on the, I know it’s minor, but you did have an inflection in Criticized & Classified. Can you just talk about broadly what that’s composed of by category? And if you’re starting to see migration, maybe more into C&I type credits, where I think we’re seeing an increased number of bankruptcies versus some of the earlier migration. And I assume office, and I know you talked about transportation in the past, things like that. Are you seeing a broadening or a shifting of any sort of migration there? Thanks.

Robert Derrick: Yes. Hey, Michael, it’s Bob. Just a couple of comments on that. But the inflection was really on our past due ratio. We had a past due credit that settled and resolved and came off list the first week of July. So that cleared. So that’s the bulk of a spike in past dues. In terms of Criticized & Classified, we were relatively stable overall around 3.7%. So, again, that’s, that’s a little bit of a moving target as you think about loans moving in and out of your watch list, in and out of Criticized — Criticized categories. So there can be some volatility in that. But the general thought from our perspective is that the portfolio is accurately rated. The migration that was negative is still, maybe perhaps slightly negative bias.

But I would say it’s showing signs of stability that gives us a lot of comfort, comfort in terms of our guidance. And then to your point, as it relates to C&I and CRE, there’s no question that we’ve seen the C&I stress come through again within our expectations. But the C&I stress come through, which is a function, quite frankly, of just rates being this high for longer and the general inflation pressures on some of these leveraged corporate credits. From our perspective, the good news is that that list of challenges continues to get smaller. And you couple that with, to your point, around CRE, we haven’t seen the defaults there. We certainly have had one or two here or there, and we expect that over time. But quite frankly, to date, held up fairly well, to Kevin’s point earlier.

And then finally our senior housing portfolio, which gave us, some dings and scratches earlier on. Those micro growth figures in that industry continue to improve. Occupancy is better, rents are better, label labor costs have stabilized to some degree as well. So we kind of do all that calculus and we come up and feel pretty good about where we are and feel pretty confident in guiding to flat to slightly down in charge offs and feel pretty good about the position of the portfolio. The risk is the unknowns in [Indiscernible] if we stay, rates stay higher for longer. But it looks like that risk potentially may be beginning to come off the table as well. So we’re getting a little more optimistic.

Michael Rose: That’s great color, Bob. And maybe just to follow up. And your last point kind of leads into it is if we do get a couple rate cuts, I would assume that probably too early to call kind of a peak and Criticized, Classified NPAs things like that. But you could definitely make the case, I would think, right, that we would have peaked with a few rate cuts, barring the economy, not getting really any worse. Is that fair?

Jamie Gregory: Yes, I think that’s generally fair, Michael. I would, a little bit of caution there would be, while Criticized, Classified, that’s a $1.5 billion, right? So, it takes a fair amount to kind of move that number. You get into NPLs, and we’re sitting at 59 basis points today. There’s some chunky credits in there, so you could have a quarter where it moves up or moves down. Obviously, last quarter we had a big NPL that we spoke about on this call. So, we’re back down to levels that we feel pretty good about and we, quite frankly, look ahead and don’t see, those chunks, as I mentioned, being quite as big. So that gives us some comfort. But you could still have some movement there. But the general trend line, we think, particularly as to your point, as rates come down, should be, positive for us.

Michael Rose: Perfect. Appreciate all the color. Thanks.

Jamie Gregory: Thank you, Mike.

Operator: Our next question is from Christopher Marinac with Janney Montgomery Scott. Christopher, your line is now open. Please go ahead.

Christopher Marinac: Thanks very much. Bob. Just to continue your, your answer from the last question, do you see restructurings and CRE as possible solutions, or is it a little early for those? I’m just curious about our ways to see further progress on the Criticized number.

Robert Derrick: Yes. Good morning, Chris. Thanks for the question. Yes, I do. I mean, we certainly, as we’ve said before, I mean, our intention is to work with our clients on coming up with solutions. If it needs to be restructured, then we certainly want to work towards a mutually agreeable structure. So I think that’s, in a broad sense, certainly one of the tools in the toolbox. We will do that. We’ve done that. It’s not a extend and pretend or whatever the common phrases you hear are from our perspective, it’s let’s come up with the right solution. I think it’s a little early to your point, probably, to make any kind of prediction on that specifically as it relates to office. Chris, we have one office loan on non-accrual today.

So, I mean, we’ve got a few that are challenged, that are rated, certainly, and one or two that we’re working through modifications on. And again, that’ll give us some chunkiness in our FDM categories, etcetera. But for the most part, I think you’re dealing with a handful of credits and we feel good about being able to work through them. But I do think it’s a little early to say that’s a play that equals a certain amount of dollars for us.

Christopher Marinac: Okay, great. Thank you for that. And then the charge-off guidance has been very consistent for quite a while. I’m just curious if you see any risk to that as we head into the next few quarters, next year, etcetera.

Robert Derrick: Chris, we spend a lot of time forecasting. I feel good about our forecast. I think we’re not, there’s a lot of calculus that goes into being comfortable to tell you that we think charge offs will be flat to slightly down. So we feel good about that. And again, the reasons why, as we spoke about before, the list of corporate credits continues to get smaller. Senior housing continues to improve, although we’ve still got one or two we’re working through. But the macros are good there. And commercial real estate, to your earlier point, continues to hold up well and probably comes out over a longer period of time. You do all that math, add it all up. That kind of equals where we think we’ll be and why we’re comfortable with that, with that type of guidance.

The risk to that is you don’t know what you don’t know. And if rates stay up longer, and particularly in C&I, you could continue to see some pockets of stress. But I think they’re isolated. I don’t think they’re in any particular industry. Just the general stress of higher rates being higher for longer certainly could give you a surprise or two. We feel pretty good about where we are right now.

Christopher Marinac: Great. Bob, thank you again for the background. Much appreciated.

Robert Derrick: Thanks, Chris.

Operator: Our next question is from Samuel Varga with UBS. Samuel, your line is now open. Please go ahead.

Kevin Blair: Sam, are you there? All right, Ezra, I don’t think Samuel’s there.

Operator: Samuel, your line is now open. Please go ahead.

Samuel Varga: Are you able to hear me now?

Kevin Blair: Yes, I can hear you.

Samuel Varga: Oh, perfect. Awesome. I’m sorry. I’m not sure what happened there. So I just wanted to circle back on the fee income and go specifically to Maast. It’s been a long road for the project, and I wanted to get an update from you just about the strategic direction. Still thinking about mast as a revenue, sort of meaningful revenue driver, or is it, has it become a client acquisition tool and that, that’s how we should frame that for the story moving forward?

Kevin Blair: Yes, Samuel, I think it’s still a meaningful revenue opportunity. What we’ve done over the last, really, six months is we’ve taken a step back. We had users on the platform. We had a very active pipeline. And what we tried to evaluate is, are our products that we’re offering through the solution of the class that will allow us to continue to expand and have a scalable product. And so we kind of took a step back and we’re rebuilding some of the underlying functionality and capabilities within Maast. We also are positioning it not as to many, as many clients and prospects. So we had 46 names in the pipeline. We’re going to try to onboard far fewer and focus on larger clients, and not just focus on the ISV segment, but also the ISO segment.

And so you’ll hear more in the coming quarters as we relaunch the product with maybe a more surgical view of who the target audience is. But we still think it’s going to be a viable solution that will not only allow us to generate fee income, but will also generate core deposits. So we’ll talk more about it, but we’re back kind of in the basement working on the products and solutions and we’ll be back out in the market later this year.

Jamie Gregory: And let me jump back in on the fee revenue. And Catherine, you asked the question about the run rate for the second half of the year, and I said flat to the second quarter. I meant. I mean flat to the second quarter. It’s flat to the first half of the year.

Samuel Varga: And then just a quick follow up around capital. I guess you’d mentioned that obviously buybacks are firmly on the table, as they were this past quarter. Could you just share your thought process around the trade-off between doing more buybacks versus perhaps another smaller restructure on the bond portfolio?

Jamie Gregory: Well, when you look at further restructuring to the bond portfolio, the payback just gets longer and longer. We did. The first one we did was about a three year payback, and the second one was about a five year payback. And it’s just not that attractive to us at that duration when you get beyond there. The one we just did was attractive just because of the capital generated from the risk weighted asset optimization efforts. And so it’s unlikely that we will do another repositioning of the securities portfolio. And, we’re very comfortable with capital ratios where they are, they’re near our target of the high end of the range of 10 to 10.5. But you should expect to see us continue doing what we’ve done in the past, which is prioritize client growth, be ready for client growth when it comes, and grow the balance sheet. And, if we’re sitting here with excess capital, you should see us use share repurchases to balance it out.

Samuel Varga: Thanks for all the color. I appreciate it.

Operator: Thank you very much. This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Kevin Blair for any closing remarks.

Kevin Blair: Thank you. As we close out today’s call, I’d like to thank you all for your attendance and your continued interest in Synovus. I’d also like to thank and recognize all of our team members who are listening in today. Our financial results that we presented this morning are a direct result of what you do daily to serve our clients and differentiate us from our competitors. During the second quarter, we did continue to receive national recognition for our work environment and service excellence. We earned a great place to work certification for the fourth year in a row, our family office won two awards from the Family Wealth Report. Our customer Care center and team members were awarded several best of the best awards by the customer contact week.

I am proud of our teams and the recognition of their efforts and the impact it has on delivering on our purpose to help people achieve their full potential. As we look forward in 2024 and we approach 2025, I am confident that we will sustain our momentum and seek key improvement in our financial performance. This confidence is driven by the following facts our net interest margin and our net interest income troughed in the first quarter. With deposit prices peaking and future NIM expansion fully supported by our actions, our credit cost and our credit outlook have improved. Our fee income has hit a new high water mark due to the broad based success and execution. Expenses have been well contained with flat year-over-year growth and with an adjusted efficiency ratio of 53% this quarter, we continue to outperform our peers.

In addition, our efforts to optimize the balance sheet to better position us for growth are largely complete. The benefits derived from risk weighted optimization efforts allowed us in the second quarter to restructure the bond portfolio, which increased yields by roughly 50 basis points. Our loan portfolio optimization efforts around third party medical office, national syndications and senior housing have resulted in a reduction of $2.3 billion in outstandings over the last twelve months, reducing the percentage of loans in these categories from 18% to 13%. Our capital levels are eight year highs and these strong levels provide for additional flexibility and fuel for future growth. And lastly, we remain well situated in a great footprint.

Whatever the economic forecast is for the foreseeable future, we have the opportunity for relative outperformance. Look no further than the recently released Atlanta Fed research titled poised for more growth. The southeastern economy is outperforming the U.S. So yes, I’m optimistic about our future and our ability to drive meaningful and sustainable growth and improve profitability. And I look forward to future earnings calls to provide updates on our progress. In the meantime, we look forward to seeing many of our investors in upcoming meetings and scheduled conferences. So for now, Ezra, that concludes our second quarter 2024 earnings call.

Operator: Thank you very much, everyone, for joining. This concludes today’s call. You may now disconnect your lines.