Synovus Financial Corp. (NYSE:SNV) Q4 2023 Earnings Call Transcript

Synovus Financial Corp. (NYSE:SNV) Q4 2023 Earnings Call Transcript January 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 Fourth Quarter 2023 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. And I will now turn the call over to Jennifer Demba, Director 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 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, Jennifer. Entering 2023, our primary corporate goal was summarized as focused execution. That objective was rooted in delivering productivity gains within our core businesses, allowing us to deepen relationships, grow our client base, and enhance financial performance. And secondarily, continuing to accelerate the contributions generated through our new growth initiatives and adding talent in key businesses and markets to expand our presence and profitability. We made steady progress in these areas, which led to solid growth and built on our foundation to deliver healthy and consistent earnings and tangible book value growth over time. In the midst of executing on our plan, we were presented with unforeseen challenges, and our Synovus team acted quickly and decisively in order to mitigate risk and better position the bank for a more challenging liquidity and economic environment.

Despite a more challenging environment, we produced healthy and consistent loan growth in key commercial business lines including middle market, corporate and investment banking, and specialty lending. Corporate and investment banking, which was officially launched in mid-2022, continues to prudently grow and execute with over $650 million in loans outstanding and became PPNR positive in the middle of last year. Also, our team was laser-focused on accelerating our core funding generation through sales activities, product expansion, and specialty businesses. As a result, we delivered an 83% increase in total deposit production in 2023. We delivered strong double-digit growth in adjusted fee income in ’23 as our treasury and payment solutions, capital markets and wealth management teams continue to expand their contributions, supported by new solutions, analytics, and an intense focus on building full relationships.

Also, we further augmented and diversified our non-interest revenue stream with an expanded balance sheet light relationship with GreenSky. We maintain top-quartile efficiency through proactive expense rationalization and disciplined cost management while continuing to make the investments in areas that will drive long-term shareholder value. On the asset quality front, we continue to experience very manageable levels of credit losses and see no systemic deterioration across our asset classes and footprint. Finally, the balance sheet was strengthened in 2023 from solid core deposit growth and a reduction of office commercial real-estate loans, and higher-cost wholesale funding. We also increased our common equity Tier-1 ratio to over 10% through solid earnings accretion and prudent balance sheet optimization.

Moreover, the business mix was streamlined with the sale of our asset management firm GLOBALT, which enables us to reallocate investment into higher returning business lines. Now let’s move to Slides 3 and 4 for an overview of the fourth quarter and full year 2023 financial highlights. Synovus reported 2023 fourth quarter diluted earnings per share of $0.41 and adjusted earnings per share of $0.80. For 2023, we reported $3.46 in diluted earnings per share and $4.12 in adjusted EPS. However, the $51 million FDIC special assessment reduced fourth quarter reported and adjusted earnings per share by $0.26. Therefore, excluding the FDIC assessment, fourth quarter reported EPS would have been $0.67 and adjusted EPS would have been $1.06. Higher funding costs and loan losses were headwinds for the banking industry in 2023.

But in this challenging environment, Synovus was able to grow core deposits, core non-interest revenue, and maintain disciplined expense control. Even with the challenges and excluding the FDIC special assessment, adjusted pre-provision net revenue increased about 2% last year. Net interest income grew $20 million for the year or roughly 1%, despite an 11 basis point margin contraction. Excluding strategic loan sales of $1.6 billion in 2023, period-end loans increased about 3% led by C&I business lines including middle-market, CIB, and specialty lending. Despite muted activity, CRE also experienced year-over-year growth driven by increased utilization on previously committed construction facilities. There continues to be an increased emphasis on stronger returns and more deposit relationship-based lending and we are pleased with the increased margin and relationship profitability profile of the 2023 originations.

On the funding side, total core deposits increased 3% and total borrowings declined 57% in 2023. Our fourth quarter net interest margin of 3.11% was stable quarter-over-quarter and better than our prior guidance as a result of modestly lower-than-expected core interest-bearing deposit costs. Also, we were able to reduce higher cost funding and broker deposits in FHLB borrowings due to the continued success of our deposit production activities. We remain confident that our net interest margin has reached a positive inflection point and should be relatively stable in the first quarter. A more stable monetary policy environment coupled with fixed-rate asset re-pricing should support the NIM as we progress throughout 2024 and provide a multi-year tailwind for net interest income.

Despite continued headwinds from a soft mortgage environment and intentional reductions in checking program fees, adjusted non-interest revenue increased 11% in 2023, supported by increases in treasury and payment solution fees, capital market fees, and wealth management fees, as well as higher GreenSky income. Non-interest expense remains well-contained. Our proactive cost rationalization and management initiatives have placed Synovus in a strong position as we start 2024. In this uncertain environment, asset quality remains healthy. Excluding our loan sales, net charge-offs were a manageable 38 basis points in the fourth quarter and 28 basis points for the full year. Non-performing assets increased at a slower pace over the last three months and we further built the allowance for credit losses.

Finally, we continue to focus on maintaining a strong capital position as we navigate through a more uncertain economic environment. And with our CET1 position ending the quarter at 10.22%, up from the 9.63% a year ago, we remain confident in our capital profile and well within our targeted capital levels of 10% to 10.5%. We continue to make consistent progress in diversifying and optimizing our business mix with growth in several key areas including middle-market, commercial banking, CIB, treasury and payment solutions, capital markets, banking as a service, and wealth management. These are the core businesses where we have shown the right to win and through execution and expansion, we’ll deliver solid revenue growth well into the future. Our talent is what truly differentiates Synovus.

Our key objectives for the team in 2024 are, one, prudently growing the bank, two, winning full relationships, and three, enhancing profits. We are committed to delivering on these objectives while preserving and even improving key elements of our safety and soundness profile. I have great confidence in our ability to not only meet our goals but also to outpace our competition. Now, I will turn it over to Jamie to cover the quarterly results in greater detail.

Jamie Gregory: Thank you, Kevin. As you can see on Slide 5, total loan balances ended the fourth quarter down $275 million sequentially, or about 1%. While loans declined modestly, overall trends were positive as key strategic business lines saw growth and transaction-related declines signal a return to more normal commercial real-estate market activity. There were three primary drivers of the modest sequential decline in loans. First, loan production has been softer over the past few quarters. Also, CRE and senior housing market transaction activity increased significantly over the last three months due to property sales and refinancings, which we believe shows more strength in those markets. Finally, strategic declines in non-relationship syndicated lending and third-party consumer loans continued in the fourth quarter, further positioning our balance sheet for core client growth.

While C&I loans declined $182 million sequentially during the fourth quarter, there was strategic growth in middle-market loans, CIB, and specialty lines. These commercial loan categories also saw growth for the full year. With regards to commercial real estate, excluding the $1.2 billion medical office building sale last quarter, we generated approximately 7% loan growth last year, primarily from fund-ups of existing commitments. We continue to prioritize clients both new and existing with broad-based deposit and fee income relationships. At the same time, we are rationalizing growth in credit-only lending areas such as shared national credits and third-party consumer lending that have a lower return profile or don’t meet our strategic relationship objectives.

As a result of higher loan pay-down activity and muted production, we expect to see a reduction in senior housing and institutional commercial real estate this year. Our organic balance sheet optimization efforts will continue in 2024 as we focus on balanced loan and core deposit growth. Turning to Slide 6. Core deposit balances grew $714 million or 2% sequentially during the fourth quarter, driven by a 9% increase in time deposits and a 4% increase in interest-bearing demand deposits, which was partially offset by a 5% decline in non-interest-bearing deposits. Seasonality contributed to public funds growth of $464 million or 7% on a sequential basis. And the pace of non-interest-bearing declines remains below the level experienced during the peak in early 2023.

Our strong fourth quarter core deposit growth allowed us to reduce brokered deposits by $179 million and overall borrowings by about $670 million, resulting in continued improvement in our wholesale funding ratio to 13.5% from 15.1% in the third quarter. As we look at funding costs, our average cost of deposits increased 19 basis points in the fourth quarter to 2.5%. As a result, our cycle to date total deposit beta was 45%, which was just below the range we communicated at an industry conference last month. From October to December, total deposit costs were up 6 basis points. We continue to expect that deposit costs will peak sometime during the first quarter. Now moving to Slide 7. Net interest income was $437 million in the fourth quarter, a decline of 1% from the third quarter, which is slightly better than our previously disclosed expectations.

Our net interest margin was stable during the fourth quarter versus a 9 basis point sequential decline in the third quarter. Better-than-expected core interest-bearing deposit costs reduced borrowings and increasing earning asset yields supported the margin. The partial securities repositioning, which was completed in December, had an estimated 1 basis point to 2 basis point impact in the fourth quarter with an incremental 3 basis point to 4 basis point benefit expected in the first quarter. As we look forward, assuming a stable rate environment, we continue to expect the first quarter net interest margin to be relatively stable, followed by expansion in the second half of the year. Longer-term, the benefits of fixed asset repricing remain a significant tailwind to the margin.

Our sensitivity profile remains relatively neutral to the front-end of the curve and we remain slightly asset-sensitive to longer-term rates. However, during an easing cycle, the margin will exhibit short-term pressure due to the timing lag between loan and deposit repricing. Slide 8 shows total reported non-interest revenue of $51 million. Adjusted non-interest revenue was $126 million, up $20 million or 19% from the previous quarter. The sequential variance in fee income was due to a one-time GreenSky fee of $12 million related to its legacy loan portfolio, as well as stronger treasury and payment solutions and non-GLOBALT related wealth fees. With the expansion of our relationship with GreenSky, we anticipate one-time related fees of about $5 million in the first quarter and approximately $5 million in ongoing quarterly non-interest revenue thereafter, which is currently reflected in our fundamental guidance.

There were $78 million in security losses during the fourth quarter, which we had previously announced in December. Also, the GLOBALT sale at the end of the third quarter reduced non-interest revenue by approximately $2.4 million. We continue to invest in core non-interest revenue streams that deepen our client relationships and have all demonstrated healthy growth this year. Treasury and payment solutions fees were up 11%, while wealth management fees increased 11% and capital markets fees grew 21%. In fact, syndicated finance and debt capital markets fees jumped over 100% in 2023. Non-interest revenue has also been impacted by a soft mortgage-lending market as well as recent changes to our checking program. However, the bank’s relative stability of core client fee income over time highlights the diversity of our revenue streams, many of which are insulated from the impacts of the volatile rate environment.

Moving to expense. Slide 10 highlights our ongoing operating cost discipline. Reported and adjusted non-interest expense was $353 million in the fourth quarter. The $51 million FDIC special assessment inflated fourth quarter reported and adjusted non-interest expense. Without that expense, adjusted non-interest expense would have declined 1% from the third quarter. In September, we took prudent expense rationalization actions that will still allow Synovus to appropriately invest for infrastructure needs and future growth. Adjusted employment expense was down 4% sequentially and year-over-year, benefited by headcount reductions during the fourth quarter, as well as lower performance incentives. Finally, the recent GLOBALT sale reduced expense by about $2 million in the fourth quarter.

As you can see on Slide 11, total headcount is down 9% from 2019. Over that same period, revenue has increased 14%, resulting in an increase in revenue per FTE of 25% and a top-quartile efficiency ratio. Our sharp focus on operating expense discipline and prudent discretionary spend will continue throughout 2024 as we manage through headwinds that pressure industry earnings. Moving to Slides 12 and 13 on credit quality. Credit metrics were relatively stable from the previous quarter, adjusted for the third quarter loan sales with a net charge-off ratio of 0.38% and NPL ratio of 0.66% and a total criticized and classified loan ratio of 3.45%. The allowance for credit losses increased by $4 million to $537 million or 1.24% of total loans, up 2 basis points from the third quarter.

We continue to expect NCOs to average loans to be 30 basis points to 40 basis points in the first half of 2024, and we have a high degree of confidence in the strength and quality of our loan portfolio. Moreover, we will continue to apply conservative underwriting practices and advanced marketing analytics to new loan originations and portfolio monitoring and management. As seen on Slide 14, our capital position improved during the fourth quarter, with the common equity Tier-1 ratio reaching 10.22% and total risk-based capital now at 13.07%. Capital accretion was impacted by the FDIC special assessment and the securities losses during the fourth quarter, but as was the case throughout 2023, our core earnings profile continues to support our capital position.

Looking ahead, our 2024 capital plan includes a stable common dividend and prioritizing prudent capital management within our targeted range of 10% to 10.5%. Similar to 2022 and 2023, we have authorization for up to $300 million in share repurchases in 2024. I’ll now turn it back to Kevin to discuss our 2024 guidance.

Kevin Blair: Thank you, Jamie. I will now continue with our updated financial guidance for 2024, which is unchanged from the expectations we outlined in early December. Loan growth is expected to be between 0% and 3% in 2024. Growth should be driven by continued success in middle-market, corporate and investment banking, and specialty lending business lines. This growth should be partially offset by market-related loan pay-downs, which are expected to return to more normalized levels and rationalization of credit-only loan relationships. We maintain our expectations for core deposit growth of 2% to 6%. Despite a challenging and uncertain industry-wide growth environment, we have confidence that our focus on core deposit production and expansion of relationships will continue to bear fruit in 2024.

The adjusted revenue growth outlook continues to be in a range of negative 3% to 1%, which assumes a flat interest-rate environment. The recent volatility in interest rates has shown the uncertainty in the outlook for rates. The reduction in loan rates to the 4% area, if maintained, would impact our revenue outlook for 2024 negatively by approximately 1%. However, considering this impact, our outlook remains within the current revenue guidance. It is uncertain how 2024 will play out with regards to Fed interest-rate policy, but we expect two things to be true. First, it’s a short-term negative for net interest income and margin during the easing cycle as deposits reprice slower than loans. And second, over the longer term, we are relatively neutral to the short-term interest rates.

So the margin is expected to revert back to the starting point and likely higher once the easing cycle is completed. Adjusted non-interest expense, which includes the fourth quarter FDIC special assessment, is expected to decline between 1% and 5% in 2024 from a combination of several initiatives, including personnel and business optimization, back-office and corporate real-estate rationalization, and less discretionary and third-party spend. We will continue to be very disciplined in expense management while investing in areas that deliver long-term shareholder value. The result of expanding NIM and controlled expenses is forecasted acceleration of core PPNR growth throughout the year. Assuming a stable economic environment, we expect to end 2024 with strong growth and financial performance and an eye towards our longer-term operating metric targets.

Moving to capital, we are within our CET1 range of 10% to 10.5% and will opportunistically manage our capital levels within this target range, dependent on forecasted economic conditions. We anticipate the tax rate should approximate 21% to 22%, primarily supported by additional tax credit investments and further diversification of our revenue sources. Synovus’ strategic actions in 2023 as well as the strength of the business model and the relative growth of our footprint have positioned the company for strong long-term revenue, earnings, and tangible book value growth. And now, operator, let’s open the call for Q&A.

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Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question today comes from Jon Arfstrom from RBC Capital Markets. Your line is now open.

Jon Arfstrom: Thanks. Good morning, everyone.

Kevin Blair: Good morning, Jon.

Jamie Gregory: Good morning, Jon.

Jon Arfstrom: Just wanted to go back — Kevin, you touched on it, and Jamie as well. But on the revenue growth guide and your interest rate assumptions, when I look at that guidance range, what takes you to the lower end of that range and the higher end of that range? Is this mostly interest rate driven? And what is kind of built into that guidance in terms of the short-term rate variance?

Jamie Gregory: Yeah. Jon, this is Jamie. Thanks for the question. As we think about volatility in revenue in 2024, the risks and opportunities are actually fairly similar to each other. It comes from things like deposit mix, economic activity, and the Fed interest rate policy. So you know that our guidance is basically a flat rate scenario. So we have no Fed easing in the guidance, we have the long end staying stable at 4%. But within that, using those assumptions, we would say that the biggest risks and opportunities come from deposit mix, economic growth, loan growth, business growth. We would say those kind of present both risks and opportunities to 2024.

Jon Arfstrom: Okay. And at this point, if you think about the forward curve in terms of your net interest income outlook, how much of a headwind is that, Jamie? How difficult is that environment?

Jamie Gregory: Yeah. We debated a good bit how to best give insight into our performance in 2024 given the volatility of interest rates. We decided to keep the front end stable but then speak to the impact based on the easing cycle, just so people could use whatever rate scenario they deem most appropriate because the assumptions change weekly. If you compare where we were, even a couple of weeks ago, the assumptions for Fed easing are very different than where they are today. But for us, as Kevin mentioned in his guidance comments just a minute ago, longer term, we are neutral to the front end of the curve. And what we mean by that is that when we come out of the easing cycle and deposits normalize to the lower levels, we expect our margin to be relatively similar to where it was when we entered the cycle.

But during the cycle, that — the lag on deposit costs relative to loan yield declines will reduce the margin. And that’s dependent on a few things. The impact of 2024 is dependent on the timing of easing, when does the Fed begin the easing cycle, the speed of the easing and how far does it go. But when we think about the impact to our margin, we think that that impact during the easing cycle could be anywhere between 2% and 4% reduction in the margin. And then again we would revert back to the starting point once those deposit calls stabilize at the end of the easing cycle. So the timing is very important, the speed is important, the depth is important. But those — that’s generally how we see that impact. With regards to a full year 2024 revenue guide, it could be anywhere up to 2.5% of full year revenue given the scenarios we’ve seen from economists, markets, Fed dot plot et cetera.

But there are other things that are not included in that guide. One is, in an easing cycle, it’s likely that that will be a positive impact to deposit mix shifts and that’s not included in my comments here in our expectations. It also doesn’t take into account the associated positives to economic growth, fee revenue as well as credit.

Jon Arfstrom: Okay, good. That’s all very helpful. Thank you very much, all of you.

Jamie Gregory: Thanks, Jon.

Operator: Our next question today comes from Michael Rose from Raymond James. Your line is now open.

Michael Rose: Hey, good morning, guys. Thanks for taking my questions.

Kevin Blair: Good morning.

Michael Rose: Wanted to go to — good morning. Wanted to go to Slide 8 and, maybe if you can just, Kevin, expand on the tailwinds and headwinds that are on the chart and then how we should frame up expectations for the GreenSky expanded partnership as we move forward as it relates to the outlook for the year? Thanks.

Kevin Blair: Yeah, Michael. When we look at this slide, I think it speaks to the diversity of our revenue and how we’ve continued to try to add new sources of growth that allows us to take on some of the headwinds. And so whether it’s the sell of a business or just reducing our NSFOD income or seeing a movement on products like repo, where we’ve been very successful this last year. If you look at the left-hand side of that chart, banking as a service is GreenSky, which we’re continuing to work through the contractual — finalizing the contract there. And we still expect that to represent a sizable increase in income in 2024. But also within banking as a service, we’re expanding our offerings within our merchant acquiring company where we own a majority interest in Qualpay.