Synovus Financial Corp. (NYSE:SNV) Q1 2024 Earnings Call Transcript April 18, 2024
Synovus Financial Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, and welcome to the Synovus First Quarter 2024 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I will now turn the call over to Jennifer Demba, Head of Investor Relations. Please go ahead.
Jennifer Demba: Thank you, and good morning. During today’s call, we will reference the slides and press release that are available within the Investor Relations section of our website, synovus.com. Kevin Blair, Chairman, President, and Chief Executive Officer, will begin the call. He will be followed by Jamie Gregory, Chief Financial Officer, and we will be available to answer your questions at the end of the call. Our comments include forward-looking statements. These statements are subject to risks and uncertainties and the actual results could vary materially. We list these factors that might cause results to differ materially in our press release and in our SEC filings, which are available on our website. We do not assume any obligation to update any forward-looking statements because of new information, early developments, or otherwise, except as maybe required by law.
During the call, we will reference non-GAAP financial measures related to the company’s performance. You may see the reconciliation of these measures in the appendix to our presentation. And now Kevin Blair will provide an overview of the quarter.
Kevin Blair: Thank you, Jennifer. Good morning, everyone, and thank you for joining us for our first quarter 2024 earnings call. Our first quarter results demonstrate tangible progress on the strategic priorities that we have outlined for you over the last several quarters. Synovus produced steady loan growth in key commercial categories such as middle-market, corporate and investment banking, and specialty C&I, as well as continued rationalization in loan portfolios where we have less meaningful deposit or fee relationships. We generated core deposit growth in a seasonally weaker quarter and are seeing improving trends in non-interest-bearing deposit diminishment, as well as continued contraction in higher-cost broker deposits.
Core non-interest revenue categories continue to grow on a year-over-year basis, while operating expense control remains disciplined with investments in key areas continuing, while keeping total expenses roughly flat. Our quarterly loan losses remain stable and our balance sheet continues to strengthen with further improvement in key safety and soundness metrics, highlighted by lower wholesale funding and higher capital ratios. Our financial success is a direct result of how well we are meeting the needs and expectations of our clients through trusted advice and valued service. In that regard, Synovus and our talented team members continue to be nationally recognized for service excellence. We are extremely proud to report that Synovus recently received 25 Greenwich awards for our 2023 performance, serving small businesses and middle-market clients.
We earned the fourth-highest number of total awards among the over 500 banks that were evaluated. We also continue to perform very well against our Southeastern peers and the recently released J.D. Power Survey for consumer client satisfaction and trust. Our Grow the Bank initiative continued to gain traction in the first quarter, as we finalized our new GreenSky program, expanded our middle-market banker team, built our largest CIB pipeline to date, generated over 50 new relationships from our business owner wealth strategy, grew wealth AUM by 12% year-over-year, added a new commodities hedging capability and expanded existing relationships with approximately 75% of our treasury sales to existing clients. Speaking of our Treasury and Payment Solutions team, we are excited to introduce a differentiated new solution called Accelerate Pay, which alleviates administrative burdens faced by accounts payable staff and seamlessly integrates into existing workflows, providing an immediate return on investment for our clients.
We launched this new capability earlier this month and the pipeline has been building steadily since the announcement. Lastly, we have a long successful track record in community banking. This quarter, our community bank generated core deposit growth of almost $350 million and our consumer bank produced growth of approximately $300 million. Our longstanding well-positioned core businesses continue to drive growth through a value relationship approach, allowing us to invest in new sources of revenue and future growth. Now let’s move to Slide 3 for the quarterly financial highlights. Synovus reported first quarter 2024 diluted EPS of $0.78, and adjusted EPS of $0.79. However, a $13 million incremental FDIC special assessment reduced our reported and adjusted first quarter EPS by $0.07, following a $51 million or $0.26 EPS impact from the initial special assessment in the prior quarter.
As previously mentioned, we generated healthy and consistent loan growth in our high-priority commercial business lines, including middle-market, corporate and investment banking, and specialty lending, with these categories up 11% annualized. However, period-end loan growth was flat in the first quarter due to flat line utilization, commercial real estate, and senior housing paydowns and payoffs, and strategic loan portfolio rationalization efforts. Despite seasonal headwinds, our core deposits grew modestly in the first quarter. The team remains highly focused on accelerating core funding generation through sales activities and product expansion, which led to an increase in deposit production of roughly $300 million versus the fourth quarter and at a rate that was approximately 8 basis points lower.
January’s non-interest-bearing deposit decline was impacted by seasonality, but deposit flows improved throughout the course of the quarter with a $299 million increase in the month of March. Given the strength of our core deposit growth, we reduced broker deposits for the third consecutive quarter. Looking at non-interest revenue, we experienced year-over-year growth in key categories, including treasury and payment solutions and our commercial sponsorship lines of business. However, total adjusted non-interest revenue declined modestly from a year ago, primarily driven by lower service charges and wealth management income as a result of the 2023 consumer checking modifications and third-quarter 2023 GLOBALT divestiture. Also, capital markets income was lower relative to more elevated levels experienced in the first quarter of 2023, given the strong correlation to loan production.
2023 cost initiatives, as well as ongoing diligence, has led to flattish overall core expense growth year-over-year, while maintaining a level of strategic investments that position Synovus well from a competitive standpoint in order to drive long-term shareholder value. On the asset quality front, credit losses were stable with previous quarters. Lastly, given continued economic uncertainty, we further bolstered our common equity Tier 1 ratio in the first quarter through solid earnings accretion and balance sheet management, while completing a measured amount of opportunistic share repurchases. Common equity Tier 1 levels are the highest in over eight years and currently sits in the upper half of our stated range of 10% to 10.5%. Now, I’ll turn it over to Jamie to cover the first quarter results in greater detail.
Jamie?
Jamie Gregory: Thank you, Kevin. As you can see on Slide 4, total loan balances were essentially stable on a linked-quarter basis. As expected, our loan growth was muted as key strategic business lines saw growth, which was offset by balance sheet optimization efforts and transaction-related declines. Consistent with our focus on core client relationships, growth in middle-market commercial, CIB, and specialty lines was $287 million during the first quarter. There is increased strength in the commercial real estate and senior housing markets, as evidenced by higher levels of transaction activity over the last two quarters due to property sales and refinancings. We expect this increased transaction activity to result in declines in these portfolios throughout 2024.
We also continue to strategically reduce our non-relationship syndicated lending and third-party consumer loan portfolios in the first quarter, further positioning our balance sheet for core client growth. Consistent with our overall balance sheet strategy, we continue to prioritize clients with meaningful deposit and non-interest revenue relationships, while rationalizing growth in credit only lending areas, such as syndicated lending and third-party consumer lending, that have a lower return profile or don’t meet our strategic relationship objectives. Our organic balance sheet optimization efforts will continue as we focus on balanced loan and core deposit growth. Turning to Slide 5, core deposit balances grew $165 million sequentially during the first quarter.
The community bank and the consumer bank saw strong growth, while seasonality contributed to a decline in deposits in the wholesale bank. As we look to the remainder of the year, growth from the wholesale bank and continued execution within our consumer and community segments should support core deposit growth within our previously stated guidance range. Client demand for time deposits remained elevated during the first quarter. This growth, combined with their continued remixing of non-interest-bearing deposits, pushed total deposit costs higher during the quarter. We are encouraged by trends in non-interest-bearing deposits as the $601 million decline in January was followed by significantly less contraction in February and $299 million of growth in March.
Brokered deposits declined $324 million or 5% from the fourth quarter, which was the third consecutive quarter of contraction. We expect further declines in broker deposits in the coming quarters. As we look at funding costs, the aforementioned trends resulted in our total cost of deposits increasing by 17 basis points to 2.67% in the first quarter. For the month of March, total deposit cost was 2.67% versus 2.53% in December. Our cycle-to-date total deposit beta in March was 49% versus 46% in December. Moving to Slide 6, net interest income was $419 million in the first quarter, which represented a decline of 4% from the fourth quarter. The primary factors contributing to this decline included a lower day count, which impacted spread revenue by approximately $4 million, a modest decline in loan balances and earning assets, and further cost increases within our core interest-bearing deposit portfolio.
Deposit mix also impacted our margin for the quarter. Though as we mentioned, trends later in the first quarter were somewhat more constructive than the averages for the quarter. Net interest margin ended the quarter at 3.04%, a sequential decline of 7 basis points as the benefits of higher rates on newer production, fixed-rate asset repricing and the partial securities repositioning in the fourth quarter were more than offset by the core deposit mix trends and deposit cost increase. As we look forward to the second quarter, we expect relative stability in the net interest margin. Slide 7 shows total reported non-interest revenue of $119 million in the first quarter. Adjusted non-interest revenue was $117 million and declined $10 million or 8% from the previous quarter and was down $1 million or 1% year-over-year.
On a sequential basis, commercial sponsorship income declined by $5 million, primarily related to a decline in back book related GreenSky fees. We expect relatively stable quarterly commercial sponsorship fees for the remainder of the year. BOLI revenue was also elevated in the fourth quarter impacting the quarter-over-quarter comparison. These declines were partially offset by higher mortgage, wealth management, and capital markets fees. When looking at the year-ago quarter, core banking fees increased 5% driven by Treasury and Payment Solutions fee growth of approximately 8%, as well as the impact of our second-quarter 2023 Qualpay investment. Also, other non-interest revenue increased sharply year-over-year, primarily from the expanded GreenSky relationship.
These tailwinds were offset as a result of the consumer checking modifications implemented last year. Also, wealth management income was down year-over-year due to the GLOBALT divestiture in the third quarter of 2023. Despite a slower first quarter for capital markets-related income, we expect capital markets growth in 2024 led by our middle-market and CIB business lines. We continue to invest in core non-interest revenue streams that deepen client relationships such as Treasury and Payment solutions, Capital Markets, and Wealth Management, which have demonstrated healthy growth over the past few years. Moving to expense. Slide 8 highlights our operating cost discipline. Reported and adjusted non-interest expense was impacted by a $13 million incremental FDIC special assessment.
The total impact of the two special assessments was $64 million, including the initial $51 million recognized in the fourth quarter. Reported non-interest expense was $323 million and adjusted non-interest expense of $319 million was down $34 million or 10% from the prior quarter. Adjusted non-interest expense increased $14 million or 5% year-over-year, which was almost entirely driven by the $13 million incremental FDIC special assessment incurred in the first quarter. Employment expense was down 1% year-over-year, benefited by our headcount reductions made over the past three quarters. Seasonally higher employment expense inflated non-interest expense by approximately $11 million in the first quarter, which impacted earnings by an estimated $0.06.
Importantly, we will remain proactive with disciplined expense management in this revenue-challenged environment. As a result, adjusted non-interest expense should be relatively flat in 2024, excluding the FDIC special assessments imposed in the fourth quarter of 2023 and the first quarter of 2024. Moving to Slides 9 and 10 on credit quality. Our allowance for credit losses ended the first quarter at $546 million or 1.26%, up from $537 million or 1.24% in the fourth quarter. Consistent with the prior quarters, we continued to raise the allowance to reflect asset valuations, credit migration trends, and a heavier weighting toward downside economic scenario. Net charge-offs in the first quarter were $44 million or 41 basis points compared to 38 basis points in the fourth quarter and 40 basis points in the third quarter, which excluded the loan sales.
The non-performing loan ratio increased to 0.81% of loans as credit metrics migrate from historically low levels. Total criticized and classified credits rose slightly, but remain at very manageable levels. First-quarter net charge-offs and credit metrics were impacted by one particular commercial and industrial credit, which accounted for 17 basis points of net charge-offs and is expected to be resolved later this month. We have a higher degree of confidence in the strength and quality of our loan portfolio, and we will continue to reduce our non-relationship credits and manage the portfolio with a heightened level of diligence in this more uncertain macroeconomic environment. As seen on Slide 11, our capital position continued to increase in the first quarter, with the preliminary common equity Tier 1 ratio reaching 10.38% and with total risk-based capital now at 13.31%.
Retained earnings supported capital accretion in the first quarter. Additionally, our efforts to rationalize growth within certain segments resulted in a modest decline in risk-weighted assets, which further supported the increase in our capital ratios. Against this backdrop, we executed about $30 million of common stock repurchases in the first quarter, which equates to approximately 6 basis points of capital. We will continue to target a CET1 ratio within a range of 10.0% and 10.5%, and aim to maintain a robust capital position against what remains an uncertain macroeconomic environment. Looking into the second quarter, we would note that our risk-weighted asset optimization is currently underway, that is expected to result in a subset of our loan portfolio being eligible for a reduced risk weighting.
When completed, this should support our capital ratios and provide flexibility for incremental capital deployment. This incremental capital deployment is contingent upon the analysis and documentation of the eligibility of certain loan portfolios for reduced risk weightings. We will share further details on the results of this exercise over the near term. Finally, on April 1st, we reclassified $3.4 billion of our securities portfolio from available-for-sale to held-to-maturity. This reclassification will reduce the interest rate sensitivity within AOCI and thus the variability of our tangible common equity ratio. I’ll now turn it back to Kevin to discuss our 2024 guidance.
Kevin Blair: Thank you, Jamie. I’ll now continue with our updated fundamental guidance for the remainder of 2024. Based on first-quarter experience in our existing pipelines, period-end loan growth is still expected to be 0% to 3% in 2024. Growth should be supported by the continued success in middle market, corporate and investment banking, and specialty lines offset by rationalization in non-relationship credits and commercial real estate and senior housing payoff and paydown activity. Our current forecast for core deposits indicates growth within a 2% to 6% range for the year, aided by seasonal tailwinds as the year progresses and new core funding growth initiatives. With the last FOMC rate increase now having occurred roughly nine months ago, we believe deposit costs are in the process of stabilizing, and with some residual upward pressure remaining into the second quarter should result in a peak total deposit beta for the cycle between 49% and 50%.
Under this forecast for deposit cost, our current outlook points to the revenue growth at the low end of our negative 3% to 1% range, largely impacted by the continued deposit remixing that we and the industry are experiencing. Our forecast is based upon a stable interest rate environment and does not include any potential benefits from the ongoing risk-weighted asset optimization exercise. Net interest income should improve in the second half of this year as fixed-rate asset repricing overcomes deposit repricing and remixing. Non-interest revenue should experience growth this year as pipelines for capital markets-related fees remain strong. We continue to execute on our core growth in treasury and payment solutions and the new GreenSky forward flow program continues to build.
Our adjusted non-interest expense growth guidance is unchanged after adjusting for the impact of the first quarter FDIC special assessment. Excluding the special assessments in the fourth quarter of 2023 and first quarter of 2024, we anticipate our adjusted non-interest expense will be relatively stable this year. We continue to closely monitor and manage our loan portfolio to uncover any credit deterioration or systemic themes across industry and geography. We expect the first half of the year net charge-offs to continue to be relatively stable at approximately 40 basis points. Given current credit migration trends, assuming a relatively stable economic environment and considering the impact of certain large individual losses, we expect net charge-offs to be flat-to-down in the second half of the year.
Moving to the tax rate, our current forecast points to the upper half of our 21% to 22% range. Finally, our common equity Tier 1 ratio is at the high end of our targeted range of 10% to 10.5%. And we will remain opportunistic with measured amounts of share repurchases to manage capital levels. Prudent capital management remains our top priority to ensure we have strong and liquid balance sheet for all economic environments. Through the actions we have taken over the past several quarters, Synovus is well-positioned to meet the needs of our clients while operating from a position of strength amid this evolving economic landscape. We are focused on growing the bank through the expansion of relationships and the delivery of new sources of revenue, all while improving returns and building an even more risk-resilient bank.
And now, operator, this concludes our prepared remarks. Let’s open the call for questions.
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