Synovus Financial Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
January 16, 2025

There are 16 speakers on the call.

Operator

Please note this event is being recorded. I'll now turn the call over to Jennifer Demba, Senior Director, Investor Relations. Please go ahead.

Speaker 1

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, genovus.com. Kevin Blair, Chairman, President and Chief Executive Officer, will begin the call. He will then 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.

Speaker 1

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.

Speaker 1

And now Kevin Blair will provide an overview of the quarter.

Speaker 2

Thank you, Jennifer. Last night, we were pleased to release strong 2024 Q4 and full year results. Cenovus reported 4th quarter EPS of $1.25 which was up 6% from the previous quarter. Excluding the FDIC special assessment, adjusted 4th quarter EPS rose 18% year over year. For 2024, EPS was $3.03 while adjusted EPS was $4.43 2024 was a year of healthy focused growth, effective collaboration and delivery of exceptional value to our clients, team members and shareholders.

Speaker 2

Over the past year, Synovus executed well on the strategies we outlined in late 2023 and demonstrated solid momentum, which should continue in 2025 and beyond. Last year, we grew balances 4 percent in our higher growth commercial lending segments, which includes middle market, corporate and investment banking and specialty lending. While we had strong loan production in these segments, they were impacted by significant payoffs in 2024 due to broad based market activity. We also grew core deposits by 3% and launched a new legal industry deposit vertical and small business banking product bundle. As a result of our relationship banking approach, we grew treasury management, capital markets and wealth fees at a healthy and sustainable pace.

Speaker 2

At the same time, we continue to exercise disciplined operating cost control in 2024 with adjusted non interest expense declining 3% and an adjusted efficiency ratio of 54.33%. Our loan losses improved year over year and the preliminary common equity Tier 1 ratio increased 62 basis points to 10.84%. Finally, we had strong profitability metrics with adjusted return on average assets of 1.15% and adjusted return on tangible common equity of 15.84 percent. Now let's move to the financial highlights for the Q4. The most notable highlights in the Q4 included net interest income growth, significant quarter over quarter improvement in our cost of deposits, net interest margin expansion and continued growth in noninterest revenue.

Speaker 2

Also net charge offs were at the lower end of the expected range, while capital ratios continue to move higher. Adjusted revenue increased 3% on a sequential and year over year basis. Lower deposit and funding costs and loan hedge maturities drove 3% quarter over quarter growth in net interest income. Funded loan production remained strong, but period end and average loans declined from a drop in commercial line utilization, elevated levels of loan payoffs and further strategic non relationship loan rationalization. Healthy core deposit growth was supported by public fund seasonality as well as growth in money market and operating deposits across our core commercial business line.

Speaker 2

Our team members remain focused on accelerating core funding generation through sales activity and product expansion such as the new legal industry deposit vertical. Adjusted non interest revenue increased 2% from the prior quarter as stronger core banking, capital markets and wealth management income more than offset lower mortgage lending and commercial sponsorship sponsorship revenue. Adjusted non interest expense was up 2% from the 3rd quarter and down 12% year over year. Ongoing cost initiatives and continued diligence have contained overall expense growth. At the same time, we have continued making strategic investments that position Cenovus to drive long term shareholder value.

Speaker 2

On the asset quality front, as expected, net charge offs were 26 basis points compared to 25 basis points in the Q3 and 31 basis points in 2024. Lastly, we further bolstered our common equity Tier 1 ratio in the 4th quarter through solid earnings accretion while executing about $50,000,000 of share repurchases. Before I turn it over to Jamie, I want to acknowledge Chief Credit Officer, Bob Derick's significant contributions to this company over his more than 20 years at Synovus. Today's earnings call is his final one before he retires at the end of March. Bob has been a tremendous credit organization leader over the past 5 years, and we wish him well in his retirement.

Speaker 2

Now Jamie will review our Q4 results in greater detail. Jamie?

Speaker 3

Thank you, Kevin. As you can see on Slide 6, period end loan balances ended the 4th quarter down $512,000,000 or 1% sequentially and down 2% year over year. The loan growth environment was particularly challenging in the 4th quarter. Lower commercial line utilization primarily from larger corporate facilities resulted in $150,000,000 quarter over quarter headwind. Also, there were robust payoffs of about $1,800,000,000 over the past 3 months, which impacted our higher growth C and I lending verticals.

Speaker 3

Despite these headwinds, funded loan production remained strong in the 4th quarter, while commitment production rose 8% from the 3rd quarter, which was the strongest period of the year. The lending environment in 2024 was significantly impacted by market headwinds and balance sheet optimization. However, we are pleased with the progress Cenovus made in repositioning non core portfolios and expanding strategic verticals to support growth in 2025. Turning to Slide 7. Core deposit balances grew $1,100,000,000 or 3% sequentially during the 4th quarter as seasonality contributed to public funds growth of $940,000,000 up 13% from the 3rd quarter.

Speaker 3

Core deposits excluding public funds increased $206,000,000 in the quarter and were up 2% year over year. There was a 6% sequential increase in interest bearing demand deposits and money market funds combined which were partially offset by a 5% decline in time deposits. Importantly, non interest bearing deposits were stable in the 4th quarter. Our core commercial business lines were the primary drivers of our non public funds deposit growth. Our strong 4th quarter core deposit growth allowed us to further reduce brokered deposits by $230,000,000 As a result, our wholesale funding ratio improved further and is now 11% compared to 13.5% in the year ago period.

Speaker 3

As we look at funding costs, our average cost of deposits declined 26 basis points in the 4th quarter to 2.46% from 2.72% in the 3rd quarter. That reflects an approximate 42% repricing beta quarter over quarter and aligns with our intentional efforts to manage our deposit costs amid the changing rate environment. Now moving to Slide 8. Net interest income was $455,000,000 in the 4th quarter, a 3% increase from the prior quarter. Our net interest margin came in at 3.28 percent for the 4th quarter.

Speaker 3

The 6 basis point increase was supported by hedge maturities and effective management of our deposit pricing. There was also a non recurring favorable interest adjustment in the 4th quarter, which benefited the NIM by 4 basis points. Conversely, a higher cash position in our $500,000,000 debt issuance earlier in the quarter served as headwinds. As we look to the first half of twenty twenty five, we expect the margin to be in the mid-320s, which is relatively stable exclusive of the non recurring 4th quarter items. Our guidance assumes a modest but consistent pace of NIM expansion in the second half of twenty twenty five on continued fixed rate asset repricing and a more steady rate environment.

Speaker 3

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 still exhibit short term pressure due to the timing lag between loan and deposit repricing. We continue to produce solid consistent growth and non interest revenue driven by key areas such as treasury management, capital markets, wealth services and commercial sponsorship. Slide 9 shows total reported non interest revenue of $126,000,000 and adjusted non interest revenue of $125,000,000 which was up 2% quarter over quarter. Sequential growth in core banking, capital markets and wealth management fees was partially offset by a drop in mortgage banking and seasonally lower commercial sponsorship income.

Speaker 3

Adjusted non interest revenue declined 1% year over year as growth in capital markets and wealth services income was more than offset by the elevated commercial sponsorship fees in the year ago period. In 2024, treasury management fees increased 11%, while capital markets fees grew 13%. Also, commercial sponsorship fees jumped 66% in 2024 as we fully onboarded our new GreenSky relationship and saw healthy increases in other sponsorship revenue. We will continue to invest in core non interest revenue streams that deepen our client relationships and have shown steady growth over the past few years. Moving to expense.

Speaker 3

Slide 10 highlights our continued operating cost discipline. Reported and adjusted non interest expense was $309,000,000 in the 4th quarter, which was down 12% year over year. Adjusted non interest expense increased 2% from the prior quarter, impacted by higher personnel costs, FDIC premiums and technology initiatives. Also charitable contributions as well as an increase in our donor advised fund increased $2,500,000 from the 3rd quarter. Excluding the FDIC special assessment, adjusted non interest expense rose 1% in 2024.

Speaker 3

While headcount declined 2% last year and fraud related losses improved, growth was primarily due to higher incentive payments, credit related legal fees and technology related infrastructure investments. Importantly, over the past 5 years, we have realized significant back office efficiencies through an 11% decline in ad count, which have been reinvested into frontline talent and various product enhancements. As we outlined at an industry conference in December, our operating expense growth range should normalize in 2025 driven by strategic investments. These initiatives include expanding our middle market, commercial and wealth relationship manager teams and other growth and infrastructure related investments that are critical to long term sustained performance. Moving to Slide 11 on credit quality.

Speaker 3

Our 4th quarter net charge offs were $28,000,000 or 26 basis points, which fell at the lower end of our expected range of 25 to 35 basis points. Non performing loans were relatively flat at 0.73 percent of total loans. The provision for credit losses increased from the Q3. The allowance for credit losses rose by approximately $4,000,000 to $539,000,000 or 1.27 percent of total loans compared to 1.24 percent in the 3rd quarter. The increase was primarily due to strong 4th quarter loan production, partially offset by elevated payoffs, which impacted the duration of the portfolio.

Speaker 3

We continue to expect net charge offs to be 25 to 35 basis points in the first half of twenty twenty five. As seen on slide 12, our capital position improved 20 basis points during the 4th quarter with the preliminary common equity Tier 1 ratio reaching 10.84 percent and preliminary total risk based capital now at 13.8%. Our core earnings profile continues to support our capital position even with about $50,000,000 of share repurchases completed in the Q4. In 2024, we increased our preliminary CET1 ratio by 62 basis points inclusive of $270,000,000 of common stock repurchases. Healthy earnings accretion was supplemented by a risk weighted asset optimization exercise in the Q2, which freed up capital for securities repositioning and share buybacks.

Speaker 3

I'll now turn it back to Kevin to discuss our 2025 guidance and capital plan.

Speaker 2

Thank you, Jamie. I'll now continue with our updated financial guidance for 2025, which is unchanged from the expectations we outlined in December. Our goal is to tighten our guidance range as the year progresses and there is more certainty on the pace of the underlying economic and balance sheet growth as well as the timing of planned strategic investments. Period end loan growth is expected to be 3% to 6% in 2025. In the prior quarters, we have experienced increases in our pipeline and committed loan production.

Speaker 2

Also, our 4th quarter survey confirmed that commercial client sentiment continues to improve post election, which will likely boost loan demand. Growth will be primarily driven by ongoing success in middle market, corporate and investment banking and specialty lending business lines, with anticipated growth between 10% 15% this year. This growth should be supported by the success of previous relationship manager hires as well as planned 2025 additions. Furthermore, we expect that loan payoffs from market related activity and non relationship loan rationalization will decline in 2025. We maintain our expectations for core deposit growth of 3% to 6%.

Speaker 2

Despite a competitive landscape and uncertainty around Federal Reserve monetary policy, we have confidence that our focus on core deposit production, a continued slowing in the pace of diminishment as well as new deposit verticals and expansion of relationships will continue to bear fruit in 2025. The adjusted revenue growth continues to be a range of 3% to 7%, which assumes the target Fed funds rate declines to 4% and the 10 year treasury yield remains relatively stable to recent levels. We expect the NIM will be in the mid-three 20 range in early 2025 as the short term headwind due to lead lag impact is offset by the tailwind of fixed rate asset repricing. Over the medium term, our balance sheet remains relatively neutral to short term interest rates, which is expected to lead to solid margin expansion once the easing cycle concludes. We anticipate adjusted non interest revenue of $500,000,000 to $520,000,000 this year.

Speaker 2

We believe continued core execution areas such as Treasury and Payment Solutions and capital markets as well as refinement of our delivery models in consumer banking, wealth services and third party payments will support our sustained fee income momentum. Adjusted non interest expense is expected to grow 3% to 7% from a combination of several initiatives, which include a revenue producer hiring program that should increase our middle market, commercial and wealth teams. That said, we will continue to be very disciplined in expense management while investing in areas that deliver long term shareholder value. On the credit quality front, we anticipate that net charge offs should remain in the 25 to 35 basis point range in the first half of twenty twenty five. As we have stated previously, our loss given default on current problem credits is expected to be lower than it was in several periods over the last 2 years.

Speaker 2

Moving to capital, we will target a relatively stable CET1 ratio. Beginning in April, our quarterly common equity dividend will increase to $0.39 Our priority on capital deployment remains client loan growth. However, we do expect to leverage share repurchases to balance out organic capital generation to achieve our overall capital objectives. For 2025, the Board authorized a $400,000,000 common share repurchase program that gives us flexibility to manage capital in multiple scenarios. Finally, we anticipate the tax rate should approximate 22% in 2025, largely supported by additional tax credit investments.

Speaker 2

Synovus' strategic actions over the past 2 years as well as the strength of our business model and the relative economic growth of our footprint have positioned our company for strong long term revenue, earnings and tangible book value growth and top quartile operating metrics. We are focused on opportunities where we have the greatest right to win, being clear and confident in the actions we take and winning as a collective team. And now operator, let's open the call for questions.

Operator

Thank you. We will now begin the question and answer session. Thank you. Our first question for today comes from Jon Arfstrom from RBC. Your line is now open.

Operator

Please go ahead.

Speaker 4

Thank you. Good morning, everyone.

Speaker 5

Good morning. Good morning, John. Good morning.

Speaker 6

Kevin, can you talk

Speaker 4

a little bit more about the loan growth expectations? You flagged some of the headwinds, but it looks like you've seen better production as well. Curious

Speaker 5

what

Speaker 4

you're hearing from the borrowers and then what could keep you at the lower end or the higher end or puts you at the higher end of the range? It feels like I'd take the over, but just curious what your thoughts are on that.

Speaker 2

I appreciate your optimism, John. I really do. Look, I'm very optimistic about our prospects for returning to what we consider to be a more normalized growth environment in 2025. It starts with client sentiment and we just completed our Q4 commercial client survey. And as you would expect post the election, we saw a fairly sizable increase in expectations for business activity in 2025.

Speaker 2

Now we know that that optimism is largely anticipatory, but we're starting to see some green shoots in various areas across our footprint and amongst several industries. And I think you see that secondly in our production and pipelines. We expect our production to increase roughly 15% in 2025. We saw production trough this past year in Q1 and it continued to build. So much so that in the Q4, John, our committed production was the highest level that we've seen in both CRE and C and I in 8 quarters.

Speaker 2

So that production momentum is continuing to build. Thirdly, we have been adding new resources throughout 2024 and those resources will continue to mature in that they'll bring over more and more relationships and grow the balance sheet. Last year, we added 11 middle market bankers, which is a roughly 30% increase in that business line. Fourthly, as you know, we've been optimizing our balance sheet over the last 2 years. In 2023, we sold a portfolio, but in 2024, we proactively reduced our exposure to various asset classes, syndicated lending, senior housing, aviation.

Speaker 2

Those 3 combined were about $1,000,000,000 in runoff. That's largely complete. And so as you look into the future, you're not going to have that headwind. The other factor that I think will help us is line utilization. We've kind of bottomed out at 43%.

Speaker 2

If you just arc back to last year, that number was 50% or 47%. The previous year was over 50%. So we could get good growth just by seeing utilization return to normalized levels. And then I'll just end with the payoff activities. You mentioned that this past quarter, we had $1,600,000,000 in commercial payoffs.

Speaker 2

And if you compare that to the 1st three quarters, it was roughly $1,000,000,000 So if that number will return to more normalized levels, which we expect, it will take that headwind off the table. So for all those factors and that's why I think there's a lot of levers that give us great confidence that we'll be able to produce strong loan growth in 2025.

Speaker 4

Okay. Good. That's very helpful. Jamie, just one for you. You're indicating very slight margin pressure in the Q1 and that gives us a good starting point.

Speaker 4

But how do you expect the margin to trend after the Q1? Can you give us some of the puts and takes around that? Thank you.

Speaker 3

Yes, John. If you look at the margin in the first half of the year, as Kevin mentioned in the prepared remarks, we are expecting to be in the mid-320s. We did have about a 4 basis point impact in the Q4 on some non recurring interest. But once you normalize for that stability in the first half of the year and then we expect to see margin expansion as fixed rate asset repricing starts to flow in, in the second half of the year. Given the current outlook, we believe that the margin could end the year in the mid-330s with a tailwind heading into 26 from there.

Speaker 4

Okay. Thanks guys. Appreciate it.

Speaker 5

Thank you, John.

Operator

Thank you. Our next question comes from Michael Rose of Raymond James. Your line is now open. Please go ahead.

Speaker 5

Hey, good morning, everyone. Thanks for taking my questions. Maybe just on the buyback and capital return. I know you guys are talking about keeping the CET1 relatively stable, but if we do go into this kind of deregulatory environment, is there more leverage there as we think about kind of the intermediate term for the CET1 ratio? And could we kind of expect even more capital return assuming your growth expectations on the loan side hold?

Speaker 5

Thanks.

Speaker 3

Yes, Michael. Let me jump in here. As we look at our capital plan before we get into the deregulation or potential deregulation, our capital plan for 2025 gives us a lot of flexibility. If you look at the authorization for $400,000,000 in share repurchases, we believe that gives us flexibility in a wide range of scenarios. If loan growth is anywhere in our range of 3% to 6% or if it's above or below that, we have flexibility to maintain stable capital ratios even beyond that.

Speaker 3

If loan growth was as high as 10%, we could maintain relatively stable capital and keep CET1 10.5% or higher. But you're right that we do use the industry and what others are doing is one of the things that influences our capital ratio objectives. There is no modeling that would tell us we need to be running as high as we are in CET1. When we do severe adverse stress testing, we are adequately capitalized. We have plenty of excess.

Speaker 3

And so we will be keeping a close eye on where the industry is, and we'll take that into consideration as we think about our future CET1 targets.

Speaker 5

Very helpful. And then maybe just as a follow-up, I'll just back to John's question around the margin. I think one of the potential levers is just the continued decline in broker deposits. I think you guys are about 9.5% of total now. Is there a range you'd like to get that down to?

Speaker 5

And as you think about the margin guide that you just gave for the back half of the year, what does that assume in terms of cash balances, which you called out as being elevated? And are there any other levers that could be supportive of a range even above what you just guided to? Thanks.

Speaker 3

Cash balances definitely were elevated in the Q4. We do expect some reduction in cash balances, which will be margin accretive as we go through 2025. With regards to broker deposits, we do expect to see that continue to decline in 2025. But as you're aware, we use that as basically just a marginal funding vehicle just like home loan bank advances. You can see that those are currently sitting at 0.

Speaker 3

And so we have a lot of available liquidity available to us. But we use broker deposits, home loan bank kind of entered we can intermix between the 2 of those. But currently we're not expecting to need to grow those. We expect those to stay low and actually broker to decline because we're forecasting core deposit growth and core loan growth to be relatively in line in 2025.

Speaker 5

Very helpful. Thanks for taking my question. Thank you, Michael.

Operator

Thank you. Our next question comes from Anthony Elian of JPMorgan. Your line is now open. Please go ahead.

Speaker 7

Hi, everyone. On your 2025 outlook slide, you reiterated pretty much all parts of it, but you still expect the FOMC easing cycle to continue in the first half. I guess if we don't get a rate cut in the first half, can you just talk about the impact to your 3% to 7% revenue growth guidance you expect?

Speaker 3

Yes, Tony, it's a great question. We have spent a lot of time talking about the lead lag impact and how that will be a temporary headwind to NII as we go through the easing cycle. But you can rest assured that as much as we've talked about it externally with you and investors, we've talked about a lot more internally and the team had a lot of success in the second half of twenty twenty four being prepared for all scenarios both as far as knowing exactly what we wanted to do, but also how we wanted to communicate it with our clients. And we were really successful in that. And so if you go back in July October, we were talking about a $4,000,000 to $7,000,000 impact per 25 basis point ease.

Speaker 3

When we executed that in the second half of the year, the realized lead lag impact was more like $2,000,000 to $4,000,000 about half of what we had said before. And that was because we were able to efficiently and effectively reprice those deposits lower. So I think as we look forward, it's hard to know exactly what the industry will do, but for us, we think that it's likely that reduced impact of $2,000,000 to $4,000,000 per 25 basis points would be incremental to the guide that we put on that slide. Thank you.

Speaker 7

And then my follow-up, if your revenue growth guidance comes towards the lower end, so say that 3% range, Will expenses follow towards the lower end as well? Or do you have less of a lever to pull on expenses given the strategic initiatives, hires and tech investments you plan to make this year? Thank you.

Speaker 3

Toni, that will result in reduced expenses because they are variable. But you're right to assume that there are some of those expenses that are more fixed because they're part of our strategic goal to see your plan of incremental hiring, incremental technology and product solutions. And so that's been we expect to happen. But you're right that some of the expense base is variable and would decline if we are at the lower end of the revenue guide.

Speaker 8

Thank you.

Operator

Thank you. Our next question comes from Jared Shaw of Barclays. Your line is now open. Please go ahead.

Speaker 9

Hey, good morning everybody. Good morning, Peter. Looking at the capital markets, any color you can give in terms of trajectory there as we look through the year? Anything specific coming up at the beginning that could drive either upside or downside there?

Speaker 2

Yes, Jerry, that business can be lumpy just based on large transactions. But when you look over the last year, we're up about 13% in capital markets. And as we've talked about on previous calls, what's most exciting about that line item is the level of diversity and that exists underneath that roll up, where it used to largely be derivatives sold to clients. It's much more diversified into not only derivatives, but also getting fee income from syndication and lead arranger fees, debt capital markets, FX, small business sales. And so with that increased diversification, we feel very confident that we should produce yet another year of double digit growth in capital markets.

Speaker 2

And that's a function of continuing to offer these new solutions and increasing the penetration into our client base. But as I mentioned earlier, when loan growth returns to more normalized levels, it's these fees are largely correlated with higher production. So we are very confident that we'll continue to grow that line item. And as we build out some of our businesses like our structured lending division, our corporate investment bank, middle market, these are the business units that generally generate the large share of those fees. So yes, we're very confident in our ability continue to grow that.

Speaker 2

And that's across the board quite frankly, Jared, in fee income. We gave you numbers there, but that's going to be another year of single digit, mid single digit growth. But when you look over the last 4 years, our core fees excluding mortgage and I only exclude mortgage because of the interest rate environment, we've grown 11% on a CAGR basis over those last 4 years. So the important part for us is creating a sustainable level of fee income growth. And that means that we'll continue to focus on things like capital markets, but expand our 3rd party payments business.

Speaker 2

We'll continue to focus on things like treasury and payment solutions and wealth and all those things combined will continue to generate good organic growth.

Speaker 9

Okay. Thanks. And then just as my follow-up following up, I guess, on Michael's question on capital. With very strong capital here and an administration coming in that's perceived to be more industry friendly. Does that change your view on M and A at all?

Speaker 9

Or how should we think of your appetite on M and A?

Speaker 2

I don't think anything's changed on our side. We've said the best investment we can make is in Synovus and executing on our plan. We feel like the last year we've had a tremendous amount of momentum. You see it in some of our numbers where we believe we're performing in top quartile levels with returns. And as we look into 2025 and 2026, we think that our organic growth strategy will continue to play out.

Speaker 2

Now what I've said on previous calls, if the world around us changes, we'll have 1 of 2 options, right? We'll either take advantage of all the disruption that occurs if there's more M and A or we'll have to participate at some point. And I believe that right now our best approach going forward is to continue to focus on organic growth, continue to improve our returns and our relative currency that maybe one day it puts us in a position to talk about M and A, but it's not a front burner part of our strategy today.

Speaker 9

Great. Thanks for taking the questions.

Operator

Thank you. Our next question comes from Bernard von Gazzi of Deutsche Bank. Your line is now open. Please go ahead.

Speaker 8

Hi, guys. Good morning. Good morning. So my first question on the 20 25 expense growth range of the 3% to 7%. I think you previously identified 1% to 2% inefficiencies to help offset some of that expense pressure.

Speaker 8

Could you just maybe talk through some of the areas you're looking for the efficiencies, whether it's reduction in footprint or headcount or technology efficiencies that you could lean into to possibly get that 1% to 2%?

Speaker 3

The story on efficiency remains similar to what we said in the past. I mean, the majority of our expenses and personnel and so we try to get as efficient as we can and how we go to market. And what we believe is that when you look at these, improvements, process improvements typically it's a win for the client, it's a win for the team member and it's a win for the shareholder. And so we continue to focus our efforts on optimization, automation, in the back office. And so that's our number one area of focus.

Speaker 3

And then beyond that is looking at our real estate, ensuring that we're optimized there with our square footage, both for corporate offices and branch and really just looking at how we go to market. So it's the same story as before. It's just a continuous improvement mindset as we look at how we go to market with our to our clients.

Speaker 8

Okay, great. And then, just I know you're trying to refine the delivery models for payments, the consumer bank and wealth. Could you just talk to how far along you are and the benefits you see there?

Speaker 2

Each one is a little different. Let's start with payments. What we're doing on the payment front is we're expanding our 3rd party ISO sponsorship model. So today, let's say we have a little less than 20 clients that we provide sponsorship for. We have a pipeline that could in essence double the number of clients that we serve on that sponsorship side.

Speaker 2

So you could see continue to see good growth there. Just to put that in a reference point, we make about $25,000,000 a year off that sponsorship business. So it could be growing at a much faster pace there. On the wealth side, we've been under this reimagination strategy for some time. We started with a business owner wealth strategy where we created positions that just focused on advisors who work with our commercial bankers and taking our commercial clients and winning their private wealth business.

Speaker 2

We had over 200 new relationships this past year, and incremental revenue associated with that. We're taking that same model and trying to apply it across all of our wealth platforms to create a much more seamless delivery model that will allow us to get deeper wallet share of our commercial clients, but also just quite frankly some of our consumer and prospects around our footprint. And on the consumer side, what we're trying to maximize is the productivity of our branches. So as you know, the number of transactions that occur within the branch continue to decline. We continue to create a lot of digital applications that provide self-service capabilities for our clients.

Speaker 2

And so we're asking our branch team to focus more on the small business client. And that's the client that is much more has the needs of a branch and would react positively to having more outreach from our bricks and mortar. So we're not that we're leaving the consumer business, we're using digital analytics and other things to maximize that business continue to generate deposit growth, but starting to focus a little more on the small business client around those branch locations. And so that's early on. The other 2 are further along.

Speaker 8

Okay, great. Thanks for taking my questions.

Speaker 5

Yes. Thank

Operator

you. Our next question comes from Manan Ghasalia from Morgan Stanley. Your line is now open. Please go ahead.

Speaker 10

Hi, good morning. I wanted to follow-up on the question on expenses. It sounds like you're suggesting there's room for positive operating leverage if you're at the mid to high end of the revenue guide, but it might get a little bit more difficult if you're at the low end of the revenue guide. A, is that the right way to think about it? And then, just in terms of the puts and takes there, is loan growth and the shape of the yield curve really, are those the 2 biggest drivers and whether you can get that positive operating leverage or not?

Speaker 3

You are thinking about it correct. If we're at the high end of the revenue guide, the positive operating leverage is definitely easier. As we look at 2025, as you can see in our guide, we do expect those to be relatively in line with each other given our current outlook. But you're right that the higher end makes that easier. As we think about it, operating leverage is positive operating leverage is an important goal for us, but it's less important to us than winning on our strategic priorities.

Speaker 3

And we believe in these hires that we're making, we believe in the technology improvements and we think that they position us well for 2026 and beyond. And so we're going to lean into those in 2025 and it's our objective to shoot for positive operating leverage as well, but that's secondary to winning on the strategic objectives. And so that's generally how we think about it. If you look at the Q4, quarter on quarter versus prior year, we do expect to see positive operating leverage starting there and then it gets easier from there. So that's at a high level how we look at it.

Speaker 2

Jamie, let me just add one thing there. So when

Speaker 5

I look at our investment

Speaker 2

can I just add one point? When I look at our investments and I think about what Jamie has talked about in terms of $25,000,000 roughly in investments that includes the market expansion that we've talked about. It talks about the wealth optimization, expanding our 3rd party payments platform, our legal entity, deposit strategy as well as an expansion of our structured lending division. So that's almost $20,000,000 there. All of those initiatives will drive significant revenue and balance sheet growth in the future.

Speaker 2

So that's one of the things we really don't want to stop. We feel like we have a unique opportunity at this point to lean in on all of those items and we want to do it. To Jamie's point, there's some flexibility and some other things, but that's the fixed expense that from an investment standpoint we think pays dividends for many years to come.

Speaker 3

And then on let me continue. I didn't answer your question of what puts us at the high end of the range. You are right to think that loan growth is clearly the biggest driver there as far as revenue like what could push us to the high end. But in that there's also fee revenue growth. If market activity is more elevated, you could see higher than the mid single digit and fee revenue growth.

Speaker 3

Funding mix is an important component there. So there are a lot of different pieces that could come together to push us to the high end or the low end of our revenue guide.

Speaker 10

That makes a lot of sense. Thank you. On loan growth, part of the weakness that we've seen in loan growth across the banks has been the yield curve has been inverted. It makes more sense for borrowers to term out some of their funding. Now that the yield curve is deepening again, are you seeing some more borrowing from the banks essentially on at the front end of the curve, borrowers using more of those revolvers?

Speaker 10

Do you think that that starts to pick up now that the yield curve is steeper?

Speaker 2

I mean the theory is there and that to your point with line utilization down to 43%, we've seen a continuous decline in that number. We feel like it's kind of hit rock bottom at this point and you would start to see some sort of increase from here. If you go back to prior to when rates were higher and we had more of a flattish yield curve, we were in the low 50% range, 50%, 53%. Today, we're at 43%. So if you just extrapolate that, that would give us $1,000,000,000 in balances if we were to return to more of a normalized utilization level.

Speaker 2

But we haven't seen that in actuality and it's something that we anticipate and I think your hypothesis is spot on. We'll just have to wait and see if borrowers do that.

Speaker 10

Great. Thank you.

Operator

Thank you. Our next question comes from Stephen Scouten of Piper Sandler. Your line is now open. Please go ahead.

Speaker 11

Good morning. Thanks. I guess as I think about some of these strategic initiatives in 2025 and the relationship management hiring plan and continued progress in capital markets, can you kind of talk about where you guys think you are kind of in the, I guess, the stage of those strategic initiatives, maybe even like what inning in terms of developing out capital markets? And if there's kind of an aspirational goal of, hey, here's where we want to get the size of the bank as we think about maximum scale and efficiency within the sector today?

Speaker 2

Steve, it's a good question. I think each when you think about capital markets, it's less about some goal to become a global capital markets player. It's more so to say, we know that the clients we bank today have needs outside of the traditional commercial banking sector and we want to make sure that we're able to capture the revenue from those solutions, whether that's debt capital markets, whether that's syndicated facilities. We're building capabilities that we know that our clients will use. And so over time, you may see us build out new capabilities like securitizations or we may have more equity capabilities, but we're not in the mode of build it and hope that they come.

Speaker 2

We believe that you go out and you generate new business, you serve your clients, you put an ear to the track to figure out what they need and you bring in the resources and the capabilities to serve those needs. So it's not a destination, it's really more so making sure that we capture the lion's share of our clients' needs through our own capabilities versus having other banks take that over. As it relates to just the overall innings that we're in, in terms of adding folks, we've been adding middle market bankers for the last 5 years. We took that group from having roughly 10 bankers to now we're almost up to 50. Our CIB unit is fully built out with 3 industry verticals.

Speaker 2

So we'll be adding a second vertical or sub vertical under the FIG team this year. So that's just more of an extension. What's different in this expansion is that we're investing more heavily back in our community bank, which we haven't done in quite some time because throughout the last 10 years as we've built out some of these industry verticals and we've built out middle market, we've been able to optimize our resources on the community bank side. As we look around today, we believe that there's an opportunity to focus more what we would consider down market clients with revenues between $5,000,000 $50,000,000 and that's where we're starting to add back again. And that's probably the biggest change from what we've done in the past.

Speaker 2

So I don't think we're in the early innings with that because we've been in that business for 136 years, but it's the first time in some time that we've really leaned in and bringing more resources back in that business.

Speaker 11

Got it. That's really helpful, Kevin. And then maybe the last question for me here, follow-up. It's just kind of around the credit outlook. I mean, obviously, it feels like credit is smooth for much of the industry.

Speaker 11

Your trends are continuing to improve and are encouraging. But is there a tension point for you all as you model out future loss given defaults with where the 10 year could go? I mean, do you get more trepidation if the tenure goes to 5% or 5.5% and kind of how do you think about that trajectory and the impact around credit?

Speaker 12

Yes. Hey, Steve, it's Bob. I'll start with that. Kevin can chime in as well. But as far as the rate curve goes, clearly if we get too high up there certainly gives me trepidation.

Speaker 12

But I don't think from a modeling perspective, it's having where we think we're headed in terms of rates having a negative effect on our credit outlook. I do think we're kind of at normal and beginning to see some perhaps improving credit metrics even from where we are. Remember we have 5 basis points of 3rd party lending. So our core charge off ratio really around 20 ish basis points versus the 26 we report given the 3rd party. So I think that's a fair number in the intermediate term.

Speaker 12

And as we look forward, number could actually improve somewhat. NPLs, we continue to make progress on flat, but we see a decline over time. So overlay an interest rate scenario on top of that that perhaps gets adverse with a steeper back end of the curve. I don't think has a material effect on us. Most of our borrowers quite frankly are at the shorter end of the curve.

Speaker 2

Yes, Bob Naled, it's Steve. The only thing I'd add to it is we've kind of gotten away from these disclosures. But based on that question over the last year and a half, we've shown a lot of information that speaks to those renewals or those clients that are up for renewal that have a higher that would go up 200 plus basis points in interest rate just based on where their current rate is. And it's a very small percentage of the book. I'd remind you that we're almost 60% on the front end of floating based loans on the commercial side.

Speaker 2

So it's less of an impact obviously for those guys. But it's something we watch and our credit team underwrites assuming different interest rate scenarios and distress those debt service coverage levels. So there's not an inflection point to your point to your question that says we're worried about it. We just have to be mindful that that does have some impact to debt service.

Speaker 11

Got it. That's great color. Thank you guys for the time.

Speaker 2

Thank you, Steve.

Operator

Thank you. Our next question comes from Christopher Marinac from Janney Montgomery Scott. Your line is now open. Please go ahead.

Speaker 13

Thanks. Good morning. Just to continue with Bob, there was about $110,000,000 Bob of office loans that were rolling over in the Q4. Could you just walk us through what happened with those? And did some of those get renewed or they paid off?

Speaker 13

And then we see the very good and stable criticized numbers. I just want to use that as an illustration for what to expect on the rest of the portfolio.

Speaker 12

Yes. Thanks Chris for the question. Let me start with the overall portfolio and kind of drill into what's happening on maturities. As we look at 25%, we've got about 23% of that portfolio maturing. And if you take kind of what we had maturing in the Q4, most of those the answer to your specific question is they got renewed, reworked, re graded and we didn't see material overall detrimental effects to us in terms of credit costs.

Speaker 12

So we think that's probably a good indication that the 23% that's maturing in 2025 will be similar. We have one office relationship that's on non accrual that's got some size to it. We're working through that. When you get behind that one, the rated levels as you mentioned are less than 10% and we see some stability there. So we'll manage through these maturities in 2025 and I think the Q4 is a good indication.

Speaker 12

I would view that as a positive And I think 25% should be similar. Now it doesn't mean we won't have some office hiccups as we go forward. But quite frankly, I think we're at a stable point and actually beginning to see what may be a longer term improvement as we get more back to office. Valuations have stabilized, we think, with cap rates. And it's really market specific as you know.

Speaker 12

But overall starting to feel better about as we manage through this office portfolio.

Speaker 13

Great, Bob. That's really helpful. And then just Kevin, a quick one for you on sort of lift outs in general. I mean, what would be your kind of pipeline, if you will, of new personnel and maybe what's happening below the surface there?

Speaker 2

Yes. Chris, it's when you look at the market expansion program that we have in place, it involves about 70 resources to be hired in 2025. But in order to lift out those teams, it's only about 35 to 40 production resources and then we'll have support resources behind it. Our team's gone through and has done the work to identify the talent that we want. I mean, it's everyone says that they're out there hiring the best talent.

Speaker 2

So, we've asked our teams to identify those individuals. And when timing is right, we'll have the opportunity to hire those individuals and bring them over. So, as I said, this is it's not a strategy that we're the only ones running. So I think what bodes well for us is our culture, people that have come here in the past over the last several years, they serve as our best reference point to be able to tell folks that are coming from those same institutions that this is an institution that values client centricity, which is what bankers want and ultimately that we have the products and capabilities that they had at generally larger institutions. So we built a model that appeals to those individuals and now it's just dotting the I's and crossing the T's and come Q1, early Q2, we'll make many of those hires.

Speaker 13

Great, Kevin. Thank you both very much.

Speaker 2

Thank you, Chris.

Operator

Thank you. Our next question comes from Catherine Mealor from KBW. Your line is now open. Please go ahead.

Speaker 14

Thanks. Good morning. I had one follow-up on just the margin on the deposit side. The reduction in deposit cost was really great to see. Is there any can you talk to us about the trend throughout the quarter and maybe where deposit cost ended the quarter to give us a sense as to where we'll be starting our Q1?

Speaker 3

Catherine, as we went through the quarter in 2020 and the Q4, we saw the production rates decline fairly nicely, fairly significantly. If you look at overall production, we were down about 75 basis points from the prior quarter on production. A lot of that reduction came through in money markets. And so we are pleased to see that. And the good thing was that money market production remained elevated even with the reduction in rates.

Speaker 3

And so things are proceeding as we expected. We're seeing the decline in rates. If you look at the portfolios and where we broke out the beta by portfolio in the evening cycle, Those betas are proceeding kind of as we expected. And so things are proceeding as we had laid out in the prior quarter.

Speaker 14

Great. That's helpful. And then one question or one comment you made Kevin about the pipeline. You mentioned that both C and I and CRE pipelines were up in the Q4, which I thought was interesting on the CRE side. And just curious if you could give a little bit of color around that and just with the move in the 10 year, how sensitive you think CRE new production is to that level of rates?

Speaker 2

Yes. Catherine, I'll answer that. And also just wanted to draw your attention to Slide 32 in the deck, which will give you the December average rate for total deposits at 2.39%. So that'll it's about 7 basis points below the quarter in average rate. But as it relates to CRE, I think part of this is just as we as an organization, we're still doing deals over the last year, but there weren't a lot of term sheets being issued because there just weren't a lot of transactions.

Speaker 2

And so as the market activity picks up, we're well positioned with our client base to be able to do new deals and our bankers are being a little more aggressive at going out and pitching deals. We there's 2 sides of that equation. 1 loan demand. We can't create that on the CRE side that's picking up. And 2, our bankers are leaning in a little more.

Speaker 2

Over the last year, I think it's safe to say that many of our CRE bankers were focused on managing the credit side of it, but also cross selling into the book. So we saw tremendous growth in deposit sales into our CRE client base. We saw greater treasury adoption. And so they had a great year in that. Now they're transitioning back into leaning a little more into loan growth.

Speaker 2

So market's picking up and our bankers are a little more focused on generating that. So as a result, even in 4th quarter, as I mentioned, our committed production was the highest level we've seen since the Q4 of 2023. So I'm sorry, 2022. So it is starting to pick back up and we think it will pick up from here.

Speaker 14

Great. Helpful. And, I see Slide 32, so thank you for pointing that out. Appreciate that. Yes.

Operator

Thank you. Our next question comes from Nick Haloco from UBS. Your line is now open. Please go ahead.

Speaker 6

Hi, good morning. Thank you for taking my question. Appreciate all the color on the margin trajectory as we're progressing throughout the year. I know in the past, I think you've talked about a 15 basis point benefit or so in 20252026 from the fixed rate asset repricing opportunity. I'm wondering with the moves in rates over the past couple of weeks months, is that still a fair way to ballpark the opportunity?

Speaker 6

Or could there be some incremental upside from repricing, on the yield side?

Speaker 3

There could be incremental upside from those numbers as we look at 20252026, we believe that the fixed rate asset repricing benefit could be in the context of around 20 basis points a year. But when we look at that, I would just say a portion of that would drop to the margin. And it's uncertain exactly what that portion is because that can be impacted by loan spreads, cash on the balance sheet, deposit mix, etcetera. And so it's uncertain and we're guiding for 2025 to have somewhere in the margin going somewhere between mid-20s to the mid-30s. But when you look beyond that, it's a little more uncertain how those other things will play in.

Speaker 3

But we do see that as a material tailwind to 2026 margin.

Speaker 6

Perfect. Thank you. And then just touching on credit, I know non performing and criticized loans were pretty stable in the quarter and but a small increase in the reserve ratio despite some improvement in the scenarios, which it looks like was performance driven a small component of it. So I was wondering if maybe you could touch on that and then how you're thinking about the direction of the allowance coverage as we're progressing throughout the year? Thank

Speaker 3

you. Yes. As we look at the allowance, the $4,000,000 increase in the allowance, there are a lot of small components that led to that. The one that we called out in the prepared remarks was the extension of the loan portfolio due to production and that was one of the larger impacts. You're right that there was not that material of a change in the economic outlook, but I would say that the near term unemployment rate is a little bit higher in a consensus forecast and that is a driver of the allowance calculation.

Speaker 3

When we look at life and loan losses, the change in unemployment is one of the largest drivers of that calculation. So, as we look forward, we're very comfortable with where the allowances at 127, and we would expect to see relative stability there, but it is uncertain how the unemployment rate will play out in 2025. We will learn more as we go through the year as far as policies, but the unemployment rate will be a key driver of that life of loan loss estimate.

Speaker 6

Perfect. Thank you for taking my questions.

Speaker 2

Thank you.

Operator

Thank you. Our next question comes from Matti Marezala from Wells Fargo. Your line is now open. Please go ahead.

Speaker 15

Hi, good morning.

Speaker 5

Good morning,

Speaker 15

team. Looking back on the loan growth, clearly the entire industry is looking for loans to rebound. I think that statement is even more profound for some of the Southeast banks. I'm just wondering what that portends for the competitive landscape. Are you starting to see greater competition on the lending side?

Speaker 15

Is that mainly on rates right now? I guess, how are you thinking the competitive landscape progresses as

Speaker 2

we go through the course of the year here? Timur, I think you nailed it. People have excess liquidity, they have excess capital and they want to deploy it. And if you think that the economy is going to grow at an exponential rate, you want to get your share. So that always comes down to price competition.

Speaker 2

I think what the industry has done over the last 10 years is not use credit as a vehicle to lean in. Everyone's still trying to hit down the middle of the fairway on credit. So then it comes to price. We're starting to see some margin compression there. And I think that's expected because we over the last year saw inflated spreads on new production.

Speaker 2

If you just look at this last quarter, our going on production yield was 7.19. The prior quarter, it was 7.47. Some of that has to do with just the lower index, but we're starting to see a little bit of compression around the spread over so far or relative to our internal funds transfer pricing. Having said that, what's been great, Jamie mentioned this earlier, are going on production for deposits were 2.78 versus the previous quarter of 3.56. So net net, if you just look at new production, we're getting a 4.41 spread off that where last quarter were 3.89.

Speaker 2

So we've got to continue to be smart and price loans appropriately. We have tools in place with our bankers to evaluate returns on capital and they'll use those tools to make sure that we're making the right strategic decisions. But the other offset to that is we've got to continue to price our deposits appropriately. And if we do so, as Jamie just talked about, it gives us the opportunity to not only grow NII, but to continue to expand the margin. But we have not gone at this growth strategy without recognizing that there will be some margin compression in the industry and we built that into our plan.

Speaker 15

Great. And then just looking at the other side of the balance sheet, just on the wholesale funding, you guys did a good job working that down. I'm just wondering, where that 11% goes throughout

Speaker 2

the course of 2025? How much lower? How much more room is

Speaker 15

there to bring that down?

Speaker 3

Yes. Looking at that 11%, the first thing you'll notice is, as we mentioned earlier that the home loan bank advances are at 0. So we can't really reduce that any further. But if we have core deposit growth in line with core loan growth, you would expect to see some reduction in that, but it's not going to be as material as what you've seen over the last 12 or 24 months. Great.

Speaker 3

Thank you for the question.

Operator

Thank you. Our next question comes from Gary Tenner of D. A. Davidson. Your line is now open.

Operator

Please go ahead.

Speaker 5

Thanks. Good morning. Most of my questions have been answered, but I had a short term kind of loan question. You talked about it and I think we probably expect the year to start off slowly for loan growth in the group overall. But as you talk about the headwinds versus the kind of 4th quarter production levels and the good pipelines, is there an avenue to stabilize loan balances in the Q1 or is the greater likelihood another quarter of contraction before we maybe pivot the other direction?

Speaker 2

Gary, I think we expect to see some growth in the Q1. Obviously, it will not be the level of growth that we would expect to see in the Q4 of next year. But based on our production pipelines, based on what we're expecting from a payoff activity standpoint, we would expect modest growth in the Q1.

Speaker 5

Helpful. Thank you. That's all I have.

Operator

Thank you. This concludes our question and answer session. I'd like to turn the conference back over to Mr. Kevin Blair for any closing remarks.

Speaker 2

Thank you, Alex, and thank you all for your questions and your continued interest in Cenovus. I want to extend my deepest appreciation to all of our team members for their exceptional contributions and achievements in 2024. Together, we delivered exceptional client service, deepened relationships and strengthened our value proposition, which continues to differentiate Synovus in a competitive and crowded landscape. This year's performance has led to an increase in clients who are raving fans, stronger and more resilient communities and shareholders who are both delighted and optimistic. Internally, we branded 2025 as Cenovus Go.

Speaker 2

This signifies our commitment to connect, act and win with even greater collaboration and boldness. We are leaning in more as we believe we have an opportunity to create sustainable outperformance in 2025 and beyond through core execution as well as accelerating growth through strategic investments and market share gains. With our footprint continuing to expand and economic and interest rate environment offering new tailwinds and a competitive marketplace presenting opportunities through consolidation and disruption, we feel confident in our ability to navigate the future successfully. Given this is his last earnings call, I want to again offer our heartfelt gratitude to Bob Derick for his 21 years of dedicated service to Synovus. His numerous contributions will leave a lasting impact and he will be greatly missed.

Speaker 2

As Bob embarks on this next chapter of his life, we wish him all the best and much happiness and I'm delighted to have Bob pass the baton to Ann Fortner and want to congratulate her on a well deserved promotion. As always, we value and look forward to our ongoing relationships with each of you. We look forward to meeting many of you at upcoming industry conferences and want to remind you that we are always available if you have questions. Thanks again for your attendance. And with that, Alex, we can conclude our call for today.

Operator

Thank you all for joining today's call. You may now disconnect your lines.

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Earnings Conference Call
Synovus Financial Q4 2024
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