Synovus Financial Corp. (SYU1.DU) Earnings Call Transcript & Summary

Hi, everyone. We're going to get started. Next up is Columbus, Georgia based Synovus Financial. With over $48 billion in assets, the company stands as arguably the best positioned to capitalize on the disruption from the BB&T and SunTrust merger of equals. To discuss this as well as the fundamental aspects of its business, very pleased to have President and COO, Kevin Blair; CFO, Jamie Gregory; and Chief Credit Officer, Bob Derrick with us today. And with that, I will pass it to Kevin.

Thank you, Michael. So I really want to thank everybody for being here this afternoon and those that are in attendance and those that are on the phone. Before I start, I did want to acknowledge our team members and their families and our customers back in Nashville. I think everyone saw on the news last night a fairly damaging tornado went through there, and I think there's quite a few deaths. So all of our team members and their families, they're in our thoughts and prayers as we're here in Florida today. I want to start off a little bit around those of you that do not know the Synovus story. And I think what's different about Synovus, first and foremost, is our tenure, our longevity. We've been around since 1888. We're headquartered in Columbus, Georgia. And over those 130-plus years, we've leveraged both acquisition and organic growth to allow us to expand our footprint outside of our original home state of Georgia into our 5-state footprint, which now encompasses Tennessee, Alabama, South Carolina, Florida and Georgia. And as we've been able to do that, we've also been able to grow as an institution. As you look at our distribution of revenue, we've moved away from being more of a community bank oriented structure into being one that looks much more similar to a regional bank. And as you can see, our community banking business still comprises almost 50% of our revenue, but we've made great strides in being able to grow our FMS business, which encompasses all of our mortgage, private wealth management and trust-related businesses as well as our wholesale bank, which is a new addition to our operating model that we added in 2019, which I'll get into a little later. The other thing that's very impressive about our track record is the fact that we've been able to grow, but we now are situated in a footprint that is receiving the benefit of the many changes that are happening throughout our 50 states. With the SALT changes, we see population growth coming more so to the southeast, with household income increasing in our footprint at a rate 15% greater than how it will increase in the rest of the United States. We feel as if we were going to be one of the banks that have the rising tide that will raise all boats, but we think we have a value proposition that truly differentiates us in that space. So we're going to get more than our fair share. Now we receive recognition all the time, and we don't use recognition as a goal in and of itself. Quite frankly, it's adjudication for the fact that what we're doing every day with our customers and with our team members resonates, and therefore, we get recognized with awards. You'll see on the left-hand part of this slide, the Greenwich Awards every year recognizing banks across the U.S. for their exemplary performance in the small business and middle market space. This year, we received 13 excellence awards and 4 additional awards for branding. So a total of 17 awards, and that puts us in fairly good order relative to all the other institutions who receive these type of recognitions. On the right-hand side, you'll note, one of the big areas of emphasis for us over the last year has been diversity and inclusion. And the Mortgage Bankers Association this past year recognized Synovus for their leadership in having mortgage loan originators who are diverse. Currently, roughly 20% of our mortgage loan originators are diverse. And this past year, we added 7 new diverse MLOs. We were recognized for our focus and attention to that and, quite frankly, our performance as a result of it. And then lastly, we were just recognized by The Atlanta Journal-Constitution for being one of the top workplaces in Atlanta. And that goes -- it's very important to us as we look at our population of our team members across our footprint. We have roughly 1,000 team members in Atlanta. So to be recognized by them and by The AJC as being the top workplace says that what we're doing for our teammates really matter. So who are we? Why are we here today? And where are we going? First and foremost, I want to talk about our strong and stable foundation. We have a very healthy balance sheet. We have been able to grow at a rate of -- a pace that is exceeding that of our peers. We believe that during the same time that we've been able to grow, we've been able to derisk our balance sheet and put ourselves in a better position for whenever the next economic downturn comes. We've also taken the opportunity to optimize our capital. And we've been a bank that has returned capital to the shareholder in the previous years, and we'll continue to be diligent around doing that. Secondly, we are focused on growth. I think we offer a very unique value proposition, where we strive for not only profitability improvement, but we also want to maintain an elevated growth profile. That was evidenced by our acquisition of Florida Community Bank in 2019, which we believe has already made us a better institution and will make us a stronger bank as we go forward, not only from a growth standpoint, but also from a quality standpoint. We've also made quite a few investments in the customer segments, which I'll talk about. In addition, we put a heavier emphasis on fee income growth. Today, less than 20% of our revenue comes from our fee income businesses, but that's been growing at an accelerated rate. And we know that, that's an important component to be able to improve returns. And then lastly, today, I want to share with you our long-term vision, and it's pretty simple. We want to win. We want to be top quartile as it relates to profitability, we want to be top quartile as it relates to efficiency, and we want to be top quartile as it relates to growth. So let's talk about loans. First, you'll look at the trend over the last 3 years. We've had 16% CAGR growth. If you back out the acquisition of FCB, it's up 5% over that same time frame. And I think what's really important, when you look at it year-by-year, if you go back 3 years ago, we grew 3.7% annually; go back 2 years ago, 4.5%; if we go back last year, it's 5.5%. So the actions that we're taking are delivering momentum as we are taking more share from our competitors, and we're displaying an elevated growth profile and our ability to produce, originate and keep loans on the balance sheet. Now it's not always just about growth. We've also had a secondary focus on diversification, and you'll notice by the pie chart that we provided, that 45% of our loans today are in C&I, 28% in CRE and 27% in consumer. That is down substantially from where our CRE concentrations were closer to 50% during the last global crisis, and that was intentional. We want to diversify across industries, we want to diversify across asset classes, and we want to do it in a way that we can get proper returns. So when you look at C&I, there's really 2 large buckets. Our direct middle market business which is just the day-to-day core C&I business that we're generating across our 5-state footprint. We also have a specialty division that has 5 to 6 specialty verticals that focuses on unique expertise around industries, whether that be health care, whether it be senior housing, whether it be premium finance. We believe that our ability to attract teams that have this expertise gives us a competitive advantage, and it's an area that we've had outsized growth that we'll continue to invest in. On the CRE front, 86% of our loans are income producing. And we've been able to reduce the areas that were the most risky in the last crisis, which were land and development loans, representing now less than 3% of our balance sheet. And on the consumer front, we really have 2 buckets. It's the consumer real estate, which is largely comprised of mortgage and home equity, and we also have third-party partnerships. When you look at the mortgage and home equity portfolios, that's almost $7.5 billion. Look at the FICO scores, these are super prime portfolios, a 780 FICO, and they're largely done for our customers. The mortgages that we portfolio are actually done for our private wealth customer segment or our physician product. And on the home equity side, these are all sold through our branch network or through our private wealth advisers. No out of footprint or purchased home equity loans in the book. So 2 -- as I said, 2 focuses, prudent growth and diversification. Now when you look at deposits, we've got to make sure that we maintain a proper funding profile at the same time, and you'll see a very consistent growth pattern with deposits, up 16% and 4%, respectively, over the same time frame. And what's allowed us to do this is our focus on our relationship-based approach and focusing on those customer segments, which I'll continue to reference, that we think are deposit-rich and allow us to bring in low-cost deposits to fund our fast-growing balance sheet. Now what's good for us is we have 2 types of markets. We have a rural market that provides us lower cost sticky deposits, and we have our metro markets. Our rural markets continue to provide us with ample liquidity, and it's a great source of deposits. Our metro markets are growing at a faster pace, it's no secret, but we're able to leverage the funding that we get from some more of our rural markets to be able to fund the lending growth that we're having in the metro markets. So it's a nice complement to have. If you look at the right-hand side, our composition has changed slightly since the acquisition. So we have more in time deposits based on the fact that Florida Community Bank was more concentrated in time deposits. When we made the acquisition, we were very comfortable with that composition as we expected rates to continue to increase. As that's changed, and as we've seen today, the fluidity of the market where rates are declining, we've made the strategic decision to optimize the funding side of the equation as well, and we've allowed a little over $1.2 billion of high cost, single-serve CDs to leave the balance sheet. And we're replacing those with wholesale deposits, mostly on the broker side. And we're doing that because we're betting on lower rates. And it's, again, it's playing out as we see it today. And those deposits that we put on the wholesale side have a much higher beta. So as rates go down, we'll be able to reprice them quicker. But the long-term plan here is to replace those wholesale deposits with the core deposits that are going to come from our organic growth in our franchise. You also note that when you look at the cost of our deposits in fourth quarter at 98 basis points, that has PAA, the purchase accounting accretion, in it. If you were to exclude that, we currently have a cost of deposits right around 125 basis points. So as we enter this environment where there's a likelihood of additional rate cuts, we have the flexibility to continue to price our deposits lower, which will help to mitigate some of the asset sensitivity that we have on the other side of the balance sheet. As I mentioned earlier, we focused a lot on improving the balance sheet, but at the same time, we wanted to make sure that we significantly improved our risk profile. We, obviously, are in the longest recovery period that we've had here in the United States. But what's made us very comfortable with where we are is, if you look at our credit statistics over this time frame, they've continued to get better. And if you look at the fourth quarter of 2019 with 37 basis points in NPAs and 27 basis points in NPLs, that's the lowest level we have experienced in the last 25 years. And so we, today, feel very good about where we are with our portfolio. You look on the right-hand side and translate that into charge-offs. You'll see mid-20 basis points for C&I, 20 basis points for consumer, and we were actually in a net recovery situation in our CRE book last year, which translated into total charge-offs for the year of only 16 basis points. And if you look at that over the last 4 years and you compare it to our peers, we would be in the 60th percentile, in the lowest level of losses over that 4-year period. So we've been able to grow, we've been able to diversify and at the same time derisk the balance sheet and put us in a position to weather the storm whenever the next downturn arrives. Mentioned earlier, we've also taken the opportunity to optimize our capital. If you look at total capital levels, we're actually up 25 basis points versus where we were in 2016, but you'll note that we've added around 130 basis points in Tier 1 preferred, and the effect that has is effectively lowering our overall cost of capital. But what you'll note on the far right-hand side of this with the graph is that when we look at our capital levels today, with the CET1 range of right around our target of 9%, we believe that we have over 220 basis points of buffer to remain well capitalized in a downturn. Now we do a lot of internal stress testing analysis, and we believe that even if we were to have a similar severely adverse scenario that we had in 2009, that our capital levels in all of our stack -- throughout the entire stack, we would remain well capitalized, i.e., far less than 220 basis points of capital erosion. And as we look into 2020 and we think about our priorities, our #1 priority for capital is funding our organic growth, but we'll continue to return capital to our shareholders, and we've targeted a 60% to 80% total payout ratio. So what does this translate to, kind of bringing this section to a close. We've had tremendous improvement in our growth. EPS up 25% over this time frame. We've been able to increase our ROTCE by 7 full points and bring down our efficiency ratio by 11 full points. The focus on the balance sheet, the focus on positive operating leverage and the focus on fee income and capital optimization is leading to results. So let's turn to growth. As I think about growth going forward, as I've already mentioned, the best opportunity we have for growth is serving the 5-state footprint we already have. We're top 5 market share in 60% of the markets we serve. We're the #1 mid-cap bank in the southeast. And when you look at the GDP that we've had in our footprint relative to the rest of the nation, we're 13% higher over the previous year. I mentioned earlier, we have a more targeted and focused approach to customer segments. That's for investment, but it's also in terms of talent acquisition. You'll see here, I'll start on the right, in the community bank side, we focus more on private wealth management and the mass affluent and the high net worth customers. We've added client advisers to support that. We rolled out a new checking product called Synovus Inspire that will provide relationship benefits. But at the same time, we've maintained a focus on efficiency in that we're closing 8 branches this year, but taking that opportunity to add 3 new branches, 2 in South Florida and 1 in Atlanta. On the FMS side, as I mentioned earlier, this is really a scale business. We've been adding mortgage loan originators, financial advisers and trust officers to take share and to generate new household growth. And on the wholesale banking side, we brought in new specialized teams, whether it be the structured lending division that's already contributed $250 million in commitment in a very short period of time or the Synovus affordable housing team that we announced just this past month. And we've also made major investments in our middle market and our treasury and payment solutions area because we think it's important to develop full holistic relationships that have a full share of wallet. Fee income. As I mentioned before, CAGR growth of 9% over the last 3 years. If you exclude FCB, it's 6%. But what's really nice about this, it follows a similar trend as loans. Last year, organically, group fee income 11%. And you'll see it's across every category. Core fees are only up 2% because they're being held down by the lack of growth in NSF fees, which is a phenomenon that most of our bank peers are seeing based on higher average balances. But you'll see 11% growth in our asset management businesses. That's on the back of double-digit growth in assets under management, ending fourth quarter with $17 billion, which was a record level. We've had almost 100% growth in capital markets, and that's a function of us going upmarket in our middle market space, delivering derivatives to our customers and then a 10% growth in our mortgage business as we look to add productivity as well as add scale to our business. We also completed the FCB acquisition in 2019. And I would submit to you that it has met our expectations. Things have changed since we made the announcement in terms of rates and the environment. But quite frankly, everything that we thought we were getting, we got. If you look at the production side, this past year, they produced loans and deposits at 90% of what they did the year before. You may say, well, why is that important? Well, during a year of transition with integrations and changes in systems and policy changes, to be able to get 90% of record level production they had the year before, we think that's great. And if you look at the capital markets side, they actually increased their productivity, increasing that 40% year-over-year. We already mentioned the deposit change. You'll see that from pre-conversion to post-conversion, where we're renewing their CDs are much more normalized with what the legacy Synovus franchise would have observed. And so that is the goal going forward, to make these 2 portfolios look more similar. If you think about cost savings, we originally said we would get $40 million in cost savings. We actually got $50 million in cost savings, and we redeployed the extra $10 million back into the marketplace with 40 new revenue producers in 2019. And we've received throughout this time frame, before and after the close, questions about the credit quality of the FCB book. We evaluated 75% during due diligence. And since we've closed the loan, we've already renewed or re-underwritten 20% of the portfolio. And we've had events like selling all of the NPLs at a rate that is in excess, better than what we had on the marks. So everything we've seen to date, both from a due diligence all the way through the last year where it's been on our balance sheet, their portfolio has exceeded our expectations. So let's transition in the future. And the one thing I started off with, which I want everyone in the room to hear, is that we're focused on delivering top quartile returns, efficiency and growth. And it all starts with being able to get back to positive operating leverage. Now look, this is a fairly remarkable track record here in that the last 16 quarters, the last 4 years, Synovus has exhibited positive operating leverage. And so I would submit to you that we've proven over a long period of time we can do that. Now the next 3 or 4 quarters, we're going to have negative operating leverage. And that's on the backs of the change in the rate environment as well as many of the investments that we're making to drive future growth in our company. But we feel quite confident through the execution of our Synovus Forward initiative, which I'm going to cover in a second, we're going to return to positive operating leverage, and that's going to put us in a position to achieve our other goals. So when you look at this slide, I'll take you a little bit back down memory lane, and you think back to 2009, coming out of the crisis, our first priority was to stabilize our businesses. Coming out of the crisis, we had to derisk our portfolio, return to profitability, recover our debt -- our DTA. We did all that. We move then to the 2013 and '14 time frame where it was rebuilding. This was an opportunity to proactively rebuild and focus on execution that would accelerate our growth and profitability, and we delivered on that. And then you entered the more recent phase where we call it the invest phase. It included the acquisition of FCB. It includes the targeted addition of revenue-producing FTEs that we've had this year. It includes a reemphasis on our digital platforms, where we rolled out a new consumer portal. We're in the process of doing a commercial portal, and we've also looked at online account origination. All of those things have been consistently improving our returns. And that's important because with a balance sheet that comprises over 80% of the revenue from loans and deposits, it's more difficult based on business mix to get a higher ROTCE, but we've been able to do it. And so as we enter the next phase, you'll see that Synovus Forward will be the program that we utilize to continue our ascent to achieve that top quartile performance. So what is it? It's pretty simple that we've spent 5 months working through this to try to uncover what are the best opportunities for Synovus to increase its pretax income. And we're here today to share with you our plan that will include $100 million of additional incremental pretax income, and it's going to start, it's already started. A first wave of initiatives that will fund the journey, starting with some expense initiatives, which I'll cover in a second. But ultimately, we believe this $100 million will allow us, through a lower efficiency ratio, through a faster growth profile, through better returns, to be a top quartile performer. We're going to update you quarterly on our progress. And every leader in our company is committed to delivering on this program. So to give you a little more detail, the expense initiatives will be roughly 55% of the program while revenue is 45%. You'll see on this slide, we cover all gamuts of the expense categories, whether it be organizational effectiveness and efficiency, where we're going through our organization, looking at duplicate functions and opportunities to outsource or remove low-value task to rationalizing our real estate, to reducing our third-party spend. And on the revenue side, it also covers many areas, whether it's pricing for value or whether it's using data and analytics to improve our cross-sell and retention, to actually investing in outsized levels to businesses that we think can provide faster growth. But it also has financial -- nonfinancial benefits. It enhances the customer experience as well as the team member experience. This will be the platform for the next 3 years that will be able to deliver the financial results, but ultimately, make it easier to do business with Synovus and attract new talent and be the platform of choice for talent across our footprint. So a deep dive into 2 initiatives, just to show you the granularity that we've gotten into in the last 5 months. The first one is on optimize third-party spend. Today, we spend about $400 million with third parties. We believe over the next year or 2, through bundling of products, renegotiating, demand management, we'll be able to save $15 million to $20 million of this third-party spend. And that's the kind of reductions we want because it's coming from folks outside of our company, and it's something that is sustainable once we get it locked in the contract. It can't happen all immediately because some of the contracts don't mature in the window of opportunity. On the revenue side, we think there's $20 million to $25 million of opportunity conservatively by utilizing analytics to create better sales leads, to deepen wallet share and to reduce attrition while providing timely leads to our frontline bankers to offer solutions that our customers want. So when we started this process back in December -- or back in September and when we finalized our strategic plan, obviously, the environment was very different. We expected rates to be flat. We expected the economy to continue to grow at a normalized pace and stable credit environment. Things have happened in the last 2 weeks that put our baseline forecast at risk, whether it's the less favorable interest rate environment with the 50 basis points today or it's the coronavirus and what it would do to our economy if it's a sustained impact, to what that also means for CECL going forward. But we also think there are opportunities that we're not losing sight of. We continue to see a tremendous amount of disruption in our marketplace, and we think we're a winner, as Michael teed up in the beginning. We have an outsized opportunity to reprice deposits for the reasons I mentioned earlier. And recently, we've added $3.5 billion in hedges that largely will support the fact that on the front end of the curve, we are largely neutral. We're still exposed to the long end of the curve, but we've largely neutralized the front end of the curve. So let me leave you today with our plan. And I'll start -- I'll end where I started. We have a strong and stable foundation. We have a history of meeting expectations and executing on our initiatives. We're in a footprint that allows us to grow faster than national average. And we've made bets on customer segments that we have the right to win in and are winning today. We're displaying positive momentum in all aspects of our business, whether it's loan growth, fee income or our ability to optimize our deposit mix. And so we sit here today launching Synovus Forward, and it gives us the opportunity to deliver on $100 million of incremental performance. And if we do that, and we shared these numbers, when we did this math just 2 weeks ago, top quartile within the mid-cap space would mean that we would have to achieve a 14.5% to 15% ROTCE and mid-to-single-digit -- or mid-to-single 50% -- mid to -- lower-50% to mid-50% efficiency ratio. Things have all changed today. But what you have from us is our commitment wherever that plays out with the new consensus numbers, we're still committed to being top quartile. And we're going to be able to do that with the $100 million. But at the same time, you're going to see the top quartile growth, which we saw as of 2 weeks ago, was 4%. We think we'll be able to continue to exceed that 4% range. So we're not going to shrink our way to prosperity. So look, I'll end by just saying that it's great to be in front of you today. We've been very eager to share the details of our program. We have already begun the execution, and we're eager to talk about our ability to deliver on these numbers. But I'll end with a tagline that I've been using internally that I want to share with you. We talk about the bank we want to be is the bank we've always been, but just better, and that's what we're going to do. We're going to deliver on the $100 million, and we're going to be able to return our company financially to those top quartile numbers. So with that, Michael, I'll stop and see if there are any questions?

Maybe I'll just start with one. You guys have been through, going through this [indiscernible] what is [indiscernible] on this one that made you [indiscernible]?

So Michael asked, what have we uncovered in this diagnostic that we didn't uncover in others? Look, there are no silver bullets and there's no secret sauce. The areas that we've looked at this time are similar to what they've been in the past. But there are different opportunities each time based on -- I'll give you an example where we are with procurement. As we become a larger institution, it gives us more buying power to be able to go back to our vendors and achieve savings through contract renegotiations. As we think about our businesses today and we look to optimize performance, there might be -- there are opportunities to invest more in one business and less in another, which in effect helps us deliver our goals. And then on the revenue side, what's really changed is the continued improvement of data and analytics. And today, we feel like we're in wonderful position to be able to use the data that we have to be more proactive in selling. But no one should know -- think here that we've come up with a new way to get there. It's typically the same categories that we've looked at in the past. We're just taking a keener look at how we get there.

What are you seeing in terms of this merger of equals? And is there opportunity for you to hire people or [indiscernible] you guys consider that [indiscernible] yourself?

Yes. So the question was, how do we look at these MOEs? And does it create opportunity for us? It really does. And we've been able to show that in the last 12 months, when you look at the number of revenue-producing FTEs we've added, those have been long-dated recruitment efforts with some of these firms that, quite frankly, we weren't able to get them until the MOEs were announced, and they were uncertain of their future at the new institution. So we have been a platform that some of these larger institutions who have merged have wanted to come to. We also know that it's not so easy to do that because these are very formidable competitors. So the best way we can put our best foot forward in attracting talent is continuing to grow, to provide opportunities for relationship managers and bankers to come to us and have an ease of doing business that they don't have at their existing organization. And three, we need to make sure that our incentive plans and our compensation structure provides an opportunity for them to see value in moving to us, and we're concentrated on all 3 of those. As it relates to the second part of the question, for our interest in MOEs, we think the best investment we can be making today is in Synovus, and that's what we're doing. We're not looking for a partner. We're not using M&A as a key lever in the 2020 plan. It's nowhere to be found in Synovus Forward. We think the investment is in Synovus. And over time, as we execute on our program, it would provide us with a currency in which acquisition and M&A may reenter the playbook, but it's not in the playbook today.

How confident are you in terms of [indiscernible] the strength of the credit or potential credit duration if we [indiscernible] into [indiscernible]?

Yes. So the question is, how confident am I in the credit profile and if we enter a severely different economic period and downturn? I'm very confident in our portfolio for the reasons that we have shared in the presentation. Number one, we do a tremendous amount of stress testing and analytics in our credit shop to understand how these asset classes would perform in a mild recession or in a severely adverse recession. And we're quite confident that even in a severely adverse scenario, as I mentioned earlier, the amount of capital erosion that we would have from our balance sheet would be less than 220 basis points. So it shows you, to put that in perspective, the losses that we would incur over a 9-quarter period would be far less than what we had during the economic crisis. So if you believe our models and the sensitivities we run there, we feel very good. Number two is, you can look at the underlying data of our loans. Whether it be the LTV, whether it be our scores on the consumer side, our debt coverage on the C&I side, we have built a portfolio with credit products -- policies that have been unwavering through this recovery period. And so where our balance sheet sits today with the underlying credit statistics, we feel very confident, even if there's a shock in real estate values or a reduction in the GDP or short-term supply chain issues. But each industry and asset class is different. But holistically, we feel very good about where we are today.

I think that's all the time we have. Thank you very much.

Thank you, Michael.