Synovus Financial Corp. (NYSE:SNV) Q4 2022 Earnings Call Transcript

Synovus Financial Corp. (NYSE:SNV) Q4 2022 Earnings Call Transcript January 19, 2023

Operator: Good morning, and welcome to the Synovus Fourth Quarter 2022 Earnings Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask a question. Please note, this event this event is being recorded. I would now like to turn the call over to our host, Cal Evans, Head of Investor Relations.

Cal Evans: Thank you, and good morning. During today’s call, we will reference the slides and press release that are available within the Investor Relations section of our Web site, synovus.com. Kevin Blair, President and Chief Executive Officer, will begin the call. He will be followed by Jamie Gregory, Chief Financial Officer, and they will be available to answer your questions at the end of the call. Our comments include forward-looking statements. These statements are subject to risks and uncertainties, and the actual results could vary materially. We list these factors that might cause results to differ materially in our press release and in our SEC filings, which are available on our Web site. We do not assume any obligation to update any forward-looking statements because of new information, early developments or otherwise, except as may be required by law.

During the call, we will reference non-GAAP financial measures related to the company’s performance. You may see the reconciliation of these measures in the appendix to our presentation. And now, Kevin Blair will provide an overview of the quarter.

Kevin Blair: Thank you, Cal. In many regards 2022 was a banner year for Synovus. We began last year with an investor day which affirmed to the market who we are and detailed our path forward to become a more innovative, resilient, and high-performing bank. As the year progressed, we faced an increasingly volatile operating environment. However, our team rose to the challenge, continuing to execute the plan laid out in February. Given our strong footprint, the ability to monetize rising rates and the performance of our business units, we’ve demonstrated, throughout 2022, our ability to execute and deliver profitable growth, resulting in top quartile return on average asset, and efficiency ratio levels as compared to our peers.

We achieved this success while also investing in the future and pivoting where needed to address the changing economic, liquidity, and credit landscape. I want to thank our team for delivering on our purpose again, in 2022, enabling people to reach their full potential. Feedback through resources, like J.D. Power showing record client satisfaction scores, and 15 awards from Greenwich Associates for excellence in service to middle market and small business clients prove we remain trusted partners to a growing and loyal legacy client base across our geography. Credit for this kind of recognition goes to this exceptional team and our ongoing investments in strong, scalable capabilities and solutions that add value. Today’s report is shaped by continued growth and stability in our core banking franchise, given our ability to deepen the wallet share of existing clients and consistently attracting new relationships.

We are also benefiting from investments in technology, process improvement, and innovation, as well as a common sense approach to expense, credit, and capital management. For these reasons, we exit 2022 a stronger company, with a tremendous amount of momentum as we continue to execute on our roadmap which will allow us to deliver sustainable, top quartile financial performance. Now, let’s review 2022 and fourth quarter highlights on slides three and four. We realized robust revenue growth in 2022 as net interest income expansion was fueled by double-digit loan growth and our overall asset sensitivity given rising rates. A challenging mortgage environment pressured fee income. However, excluding mortgage, client fee income collectively increased high single digits on a full-year basis, signaling the depth and breadth of our core client relationships.

Our efforts to double down on the commercial client segment is producing outsized growth as our commercial lines of business generated $4 billion in loan growth, all at higher spreads, while adhering to our conservative credit standards. To that point, credit metrics improved over the year, and currently stand at or near historically low NPA, NPL, NCO levels. We applied the same disciplined approach to capital management, growing capital in the quarter and ending the year with a CET1 ratio of 9.63%. Our two-year Synovus Forward initiative surpassed its $175 million run rate goal in the fourth quarter. And although the initiative is complete, the emphasis on expense control and efficient revenue growth is more deeply engrained in our culture.

And we identify and act regularly on new opportunities to generate incremental value to our financial performance. Despite increasing pricing pressures on the deposit side, we managed deposit costs well throughout the year, benefiting from prudent strategy and an extended lag on deposit repricing. Overall, deposit production rose 30% for the year, and was sourced from multiple lines of business. I was especially pleased with our sales efforts in the fourth quarter as our teams’ increased sales activity resulting in overall growth of $900 million in new production quarter-over-quarter. The operating environment for deposits remains competitive, with the retention of client balances and growth in new production remaining primary focuses in 2023.

While delivering great financial performance during the year, we also continue to make progress with the development and rollout of the key initiatives that will allow us to deliver new sources of revenue in 2023, and well into the future. CIB continues to prudently grow and execute reaching 20 team members in the fourth quarter, and booking their first capital market fees and depository relationships. Maast also reached a key milestone as they were live with their first client, and have booked revenue during the month of January. On the Treasury & Payment side, we fully completed our client migrations into the Gateway portal, and went live with our new foreign exchange platform. We continue to see traction with the investments we’re making in Treasury & Payment Solutions as the growth in production and the associated revenue continues to outpace the underlying markets and our peer benchmarks.

In order to continue to increase the capacity of our commercial relationship managers while improving the client experience, we are also investing in new technology and reengineering our processes to streamline the client underwriting and onboarding experience. On the consumer side, we further streamlined our branch network by closing 36 locations during the year, while investing in analytics and digital capabilities to ensure we continue to efficiently and effectively serve our targeted client base. Simply, 2022 was a year of progress across our entire organization. I am extremely proud of our team and their accomplishments, and encouraged by our positioning as we enter 2023. Jamie will now share greater detail on the key activities and financial results for the fourth quarter.

Jamie?

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Jamie Gregory: Thank you, Kevin. I’d like to begin with loan growth, as seen on slide five. Total loan balance at the end of the fourth quarter, at $44 billion, reflecting quarterly growth of $1.1 billion. On an annualized basis, excluding PPP, this represents a growth rate of 11%, our sixth consecutive quarter of annualized double-digit loan growth. Both was again led by our commercial lines of business, and was diversified across multiple industries and segments. For both and CRE asset sites, growth was a function of moderated production and low levels of paydowns and payoffs. Particularly for transaction-driven sectors such as CRE and corporate M&A, activity and pipelines remain muted as a result of the current environment.

In addition, current underwriting standards account for higher risk in certain sectors. And where we are extending credit, we have been able to exercise greater pricing power to drive margins as reflected by increasing spreads on new floating rate commercial production in the fourth quarter. Moving aside fixed, the industry-wide headwinds for deposit growth remained in the fourth quarter as continued interest rate hikes, seasonal spending, and other liquidity deployment drove account diminishment. Despite these pressures, we were able to growth core deposit balances which increased by $373 million quarter-on-quarter. This growth was a combination of a bank-wide focus on new deposit production and seasonal benefits from public funds. As evidence of deposit momentum we have around deposit production, when looking at the fourth quarter, new production excluding public funds increased over 50% from Q3.

Our resent efforts, both to generate and retain deposits, have been encouraging. And our focus is on maintaining that positive momentum within what remains a challenging deposit environment. To that end, we will continue to ensure that we have a balance between prudently managing deposit costs while remaining competitive through this FOMC tightening cycle. Our average cost of deposits increased 50 basis points in the fourth quarter, to 0.88%, which equates to a total deposit beta of 21% through Q4. As a result of pricing discipline and continued pricing lag, this beta continues to remain lower than the 35% to 40% range we had previously communicated as our base case for total deposit betas, this rate cycle. With recent deposit pricing pressures and a fed funds rate that appears likely to approach 5% in 2023, we still believe that we’ll reach this range as the cycle matures.

Now to slide seven; disciplined deposit pricing, loan growth, and interest rate increases led to growth in net interest income in the fourth quarter. NII came in at $501 million, an increase of 5% quarter-on-quarter or 28% versus same quarter one year ago. The growth in NII for Q4 is supported by both higher loan yields which continue to outpace the deposit cost and the consistent pace of loan growth which I spoke to earlier. The net interest margin was 3.60% in the fourth quarter, an increase of 11 basis points quarter-on-quarter. Supporting NIM are higher asset yields, which continue to increase alongside the recent pace of FOMC rate hikes and are supported by spread widening and the continued growth in our floating rate loan portfolio. While funding costs have also increased, the pace of increase in deposit rates has remained somewhat more consistent and measured than that of the assets are.

This time it served to be a significant tailwind to the margin as we progressed through 2022. As we look forward to the coming quarters and approach what is likely the later phase of the Fed tightening cycle, NIM is expected to be more heavily impacted by the delayed effects of deposit repricing. Assuming rates remain relatively stable from current levels, over the medium term the margin will be supported by fixed rate asset turnover and hedge maturity. And as we enter 2023, NII will continue to be supported by expected loan growth and pricing discipline. Slide eight shows totaled adjusted non-interest revenue of $101 million, down $4 million from the previous quarter and down $15 million when compared to the same period in 2021. Negatively impacting Q4 fee income were two tax related valuation adjustment which in combination totaled approximately $5 million, and were partially offset by benefits recognized in the tax provision.

Outside of these tax related valuation adjustments, we recorded another strong quarter of non-interest revenue. On the wealth side, revenue generated from client’s movement in the short-term investments has provided a positive offset to industry deposit pressures. On the commercial side, increase in client privacy continues to be a key strategic focus. We can point a progress made this year with syndication fees up 59% on a full-year basis despite a challenging capital markets environment. On the card side, we crossed a noteworthy threshold as commercial card spend exceeded $1 billion contributing to a 20% increase in full-year card fee. Commercial on all proceeds are also gaining momentum with strong pipeline heading into 2023. Moving on to expenses, slide nine highlights total adjusted non-interest expense of $307 million, up $13 million from the prior quarter and up $22 million from the same period in 2021, representing an 8% year-over-year increase.

When looking quarter-over-quarter, the majority of our expense growth was attributable to performance related cost, investments in new business initiatives, and infrastructure spend, all previously disclosed as planned increases in Q4. Similar factors drove the year-over-year expense increases. And our top quartile efficiency ratio of 52% for the year highlights are alignment between performance and expense growth. Next to slide 10 on credit quality, our credit performance and the credit quality of our originations remain strong. The NPA and NPL ratios remain stable overall and are at or near historically low levels. The net charge-off ratio was 0.12% for the quarter in line with recent levels. In the fourth quarter, our ACL was $501 million or $1.15% of loans.

As detailed in the appendix, given continued loan growth the ACL increased $22 million quarter-on-quarter while the ACL ratio remained relatively stable. This ratio reflects the positive performance in the loan portfolio, offset by a negative bias influencing economic scenario metrics for 2023 and 2024. We are confident in the composition, diversification, and strength of our loan portfolio. As we recently discussed at industry conferences, when looking further at our exposures that are more sensitive to recessionary pressures, we remain convinced that our targeted and selective approach to industry and sector lending will provide protection from an economic downturn. We also feel that we are well-positioned to detect and respond to shift in commercial loan performance through tool such as our client specific cash flow analytic, originally introduced in the pandemic.

As seen on slide 11, the common equity Tier 1 ratio increased to 9.63%, reflecting our commitment to retain our strong organic earnings to support core client loan growth while also maintaining strong capital levels. For the year, we deployed over 70% of our organic earnings towards supporting core client growth, while also returning roughly 30% to our shareholders through our common dividend, both consistent with the capital management priorities we detailed during our 2022 Investor Day. Looking into 2023, we will continue to prioritize capital deployment towards client growth. And we’ll remain mindful of the evolving economic environment as we manage within our target CET-1 ratios. Additionally, our planned quarterly dividend increases 12% to $0.38 a share, subject to board approval reflects our confidence in our stable earnings profile.

I’ll now turn it back to Kevin to cover our 2023 guidance.

Kevin Blair: Thank you, Jamie. Given the more uncertain economic environment, we have utilized wider ranges on estimates and have shared more detail on the assumption supporting these estimates. We expect loan growth of 5% to 9% in 2023. While lower levels of pipeline activity in some business units and a run down in our third-party portfolio will act as headwinds. We have a number of existing businesses with strong pipelines as well as newer lines of business such as CIB that will support overall growth exceeding that of the general economy. We’re also assuming a normalization of prepayment activity and utilization levels that are consistent with those experienced in 2022. It’s also worth noting that pricing discipline is a key focus in the current environment, where pricing power continues to improve and we therefore expect wider spreads to persist in 2023.

The adjusted revenue growth outlook of 8% to 12% aligns with an FOMC rate that reaches approximately 5% in 2023. The wide revenue range accounts for less certainty in the deposit environment. On the fee income side, we expect mid-single-digit growth driven by continued expansion in core client fee income, impacting fee income, our checking account enhancements plan to be implemented in the first-half of the year that is estimated to negatively impact annual service charge revenues by approximately $5 million to $10 million. On the adjusted expense outlook of 5% to 9%, the year-over-year growth is a function of three primary drivers. First, approximately 40% of the growth in 2023 is associated with core operating expenses. Secondly, we have two sizable environmental factors affecting our expense outlook.

Health care costs and the rise in the annual FDIC assessment rate are collectively forecasted to account for 20% of the overall growth. Lastly, we remain committed to our investments and new initiatives such as CIB and Maast, which in combination with other revenue based investments and projects will comprise approximately 40% of our 2023 expense growth. However, despite these expense headwinds, we have found ways to prudently trim cost and we are benefiting from a full-year of Synovus forward expense saves that will allow us to drive overall positive operating leverage and PPNR growth of 11% to 15%. Moving to capital, as Jamie shared, we plan to maintain our same capital management philosophy in 2023, with a focus on prioritizing core relationship growth and maintaining a strong capital position, all while providing shareholders with a competitive dividend.

While our Board approved a $300 million authorization for the year, as was the case for 2022, any share repurchases will be dependent upon loan growth and the overarching economic factors. Lastly, while we don’t talk about it often our tax rate guide of 21% to 23% accounts for a number of successful initiatives that we have implemented in recent years from affordable housing to solar tax credits. These initiatives offset forecasts that negative headwinds in 2023 and serve a dual purpose of consistently reducing our tax rate while also benefiting our communities given our focus on driving actions associated with our ESG objectives. Our strong momentum has carried us well through the first few weeks of the New Year, and we are so proud of the 2022 accomplishments that resulted in solid financial performance and meaningful progress in nearly every area of our transformational growth plan.

We’re confident in our strategic plan and our ability to hit key 2023 financial targets outlined today, even as we navigate the volatile economic terrain. 2023 is a year of focused execution for our team as we emphasize investments and pour our energy into three key areas; first, advancing successful execution and productivity gains within our core businesses, allowing us to deepen relationships, grow our client base and enhance financial performance. Growth in core businesses enables us to invest in new and future sources of growth, including Maast, CIB, and new Treasury & Payment Solutions. Secondly, continuing to benefit from contributions generated by our new growth initiatives and adding talent in key businesses and markets to expand our presence and profitability.

And then lastly, maintaining a cautious and resilient risk profile through capital management, deposit generation across all lines, and overall credit vigilance. As we head into the Q&A segment, I want to thank our incredibly talented and passionate team again, and affirm our commitment to providing the best career and workplace experiences possible. In 2022, we progressed in our DE&I, launched our new leadership development program, increased base pay, and enhanced incentive plans and enriched benefits like parental leave. As a result, Synovus was again named the top fourth place in Atlanta, and designated a great place to work. But we cannot rest on our laurels. We’re committed to listening and investing even more, in 2023, to meet the needs and exceed the expectations of our workforce.

I also want to mention a few examples of the success and achievements our lines of business delivered in 2022. Our Wholesale Banking team delivered record results, representing the largest growth engine for the company; $5.3 billion of funded loan production, $2.3 billion of deposits acquired, and $39 million in fee income highlighted the year. We also onboarded 55 new team members to support future growth. By focusing on empowering our local leaders, our Community Bank returned to a growth orientation in 2022, with both commercial and private wealth loan portfolios growing for the first time in many years. Moreover, our geographic banking units continue to serve as a portal of entry and a primary referral source, with over 6,000 referrals made to other lines of business.

Our wealth management units, including securities and trusts, grew fee income $10 million or 7% in a year, with significant headwinds from lower equity markets. However, the teams were able to overcome this given strong new client acquisition and the expansion of existing relationships. As referenced earlier, Treasury & Payment Solutions increased production and fees significantly in 2022 driven by success in core cash management solutions as well as commercial card and international services. And our consumer line of business optimized our branch network by closing 13% of our facilities, while expanding our digital and analytical capabilities which resulted in a more efficient and scalable organization. With disciplined deposit pricing and high single-digit loan growth, the consumer line of business expanded their PPNR by double digits.

And certainly, none of these lines of business results would be possible without the hard work and dedication of our corporate services support team. Lastly, I am pleased with our 2022 efforts to build and strengthen our communities. We launched a meaningful partnership with Junior Achievement in mid-2022, one component of more than $3 million and 24,000 volunteer-hours invested in our communities across the Southeast. With that, operator, now let’s open the line for questions.

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Q&A Session

Operator: We will now begin our Q&A session. Okay, so our first question comes from the line of Steven Alexopoulos from J.P. Morgan. Your line is open. Please go ahead.

Steven Alexopoulos: Hi, good morning, everyone.

Kevin Blair: Good morning, Steven.

Steven Alexopoulos: Wanted to start first on the loan outlook, if I look at the loan outlook, it’s very strong. Most banks are guiding to strong growth in average loans for 2023, but not strong growth in period-end loans. So, I’m curious, what’s your assumption for the economy that underlies the forecast? And what gives you so much confidence at this point that you could deliver mid-to-high single-digit growth in period-end loans?

Kevin Blair: Steven, it’s a combination of several factors. To your point, when we look at the economic forecast, that there are parts of the forecast, that would show in the latter half of the year, that you could see contraction in the economy. But we believe, in total, that when you look at our C&I pipeline, first and foremost, we think we will continue to see good growth on the C&I front. That comes from pipelines, but it also comes from some of the newer businesses that we’ve just initiated, like corporate and investment banking, where we really don’t have a portfolio to this point but we’ll be able to continue to generate growth from the new production. Secondly, we continue to see a constructive environment on the home equity side as well as on portfolio mortgages.

Obviously, that volume is down. But when you look at the need for home equity product given rising interest rates, we continue to see a good productive environment there. The area that we’re seeing a decline is really on the CRE side, we’ve seen pipelines decline 60% to 70%. And so, when you think about this year compared to ’23, the real difference will be that C&I will continue to grow in a double-digit fashion, consumer will be in that lower single-digit. And then, instead of being double-digit for CRE, it’s going to be in the low single-digit for CRE — or double-digit for C&I, low single-digit for CRE. Part of that is just due to the fact that the pipeline is down, but the other part is we’ll start to see payoff and paydown activities really start to pick up in ’23.

So, when we look at it by asset class and by business unit, we have certain units that are continuing to see pipelines expand; we’ve had others that contract. But, the end of the day, you kind of look at all of those and you’ll kind of a mid single-digit growth rate next year.

Steven Alexopoulos: Okay, that’s good color.

Jamie Gregory: Yes. The only thing I would add to that is just our non-core third-party portfolio. You should expect to see that attrite as we go through 2023.

Steven Alexopoulos: Okay, that’s helpful, Jamie. And then for my follow-up question, when I look at the net interest margin, basically in line with expectations in terms of the expansion this quarter. But given what you’re seeing on the deposit side, right, talking about a further remix non-interest-bearing, Jamie, how do you see NIM trending in 2023, at this stage, I recognize it could change in a month, but right now, if we look at where you ended the fourth quarter, how do you think about NIM for 2023? Thank you.

Jamie Gregory: Yes, it’s a great question, and it’s kind of the million-dollar question. As we look at 2023, we expect the margin to be down marginally from where we ended in the fourth quarter. And basically what will play into that is, in the first-half of the year we do believe that we will see the pressure of deposit lags. We expect like the quarters with the largest deposit cost increase to be the fourth quarter, that we just experienced, that we’re talking about today, and the first quarter. And so, the first-half of the year we’ll see the margin headwinds associated with those lags. But how this impacts the margin will depend on how long the lag is and how deposit cost increase as we go through it. As you know, longer lags and cost outperformance would be margin tailwinds, and the opposite is true with shorter lags and higher cost.

Our current expectation for the first quarter is that we see deposit cost increase at a little bit of a slower rate than we saw in the fourth quarter. But we do expect to see in the back-half of the year, the NIM headwinds that we’ll see in the first-half turn to tailwinds as our fixed rate exposures become a tailwind with repricing. And all of this is contingent on the interest rate outlook. And so, our guidance today includes the Fed going to approximately 5% and holding there, consistent with their outlook. And so, that’s embedded into this forecast.

Steven Alexopoulos: Got it. Great, thanks for taking my questions.

Jamie Gregory: Thanks.

Kevin Blair: Thank you, Steven.

Operator: Thank you. Our next question comes from Brady Gailey of KBW. Your line is now open. Please go ahead.

Brady Gailey: Hey, thank you. Good morning, guys.

Kevin Blair: Morning, Brady.