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

All right. Before we get started, I just want to remind everybody there will be cocktails on the second floor right after this. So Kevin and the team have the daunting task of presenting right ahead of that. But joining us today, we are once again very pleased to have Synovus. I can't think of a bank that did a better job managing the most recent downturn relative to the prior one than Synovus. And it's really been a testament to the changes that happened at the bank over the last 10 years. More recently, it's increased its investment to improve growth across its Southeast footprint, while also managing costs through its Synovus Forward initiative. Lastly, it's continued to add talent, increased tech investments and made several strategic partnerships with FinTech. Here to tell us more about the continued momentum is CEO, Kevin Blair, who is joining us as CEO for the first time, although not his first time at the conference. Also joining him is CFO, Jamie Gregory, who will be joining us for the Q&A. With that, I'm going to pass it over to Kevin to walk us through some slides.

Thank you, Ryan. Hopefully, everybody can hear me at the microphone. It's great to be with you today. I'm super excited to share with you some of the progress we're making at Synovus, but most importantly, talking about the future of our bank. And that's really a privilege to be able to do that today. Now, my CFO has asked me to stay within 20 minutes so that we have ample time for Q&A. So I'm going to quickly go through these slides. But over the next coming days or weeks, if you have questions, please don't hesitate to reach out to Kyle Evans, our new Director of IR, who will facilitate a discussion with us or follow-on for any of the questions you have. Before I move forward, I will tell you that we do have forward-looking statements in here and the variability of our assumptions and expectations may end up in having different results. Let me start with who we are, our DNA, not the number of branches we have or what our footprint is, but who we are as a company. We're built around people, and that's a real differentiator for Synovus. As we think about our ability to enable and empower our team members, it's really about helping our customers achieve their full potential. And that's our purpose, and it's what gets us out of bed every day. And it's what pushes us to do what we do in terms of investments and adding tools around advice and improving the customer experience. And we do it around 5 key value propositions. Number one is we have to make sure that we're bringing expertise and advice to the table. That's why our customers and clients want us there. They want us to help them with their opportunities and their problems. Number two, they want speed and they want reliability that we're going to do what we say we're going to do in an expedient way. Three, it has to come down to a level of personalization that makes that customer feel like we're doing it for them, not a number in a bank that's just another product that's been handed out. And what that allows us to do is build an unparalleled level of trust. Now as we look into the future, I would submit to you that we're starting on very firm ground. We have a strong foundation. When you think about our customer base and our footprint, I mentioned earlier that I think we're in the best footprint in banking in the Southeast, but that comes from 133 year history of being able to deliver what our clients need and what our communities need. And what that's resulted in is that we have a level of loyalty from an NPS score perspective that's top quartile amongst the top 50 banks. And if you carry that over into the small business side and middle market, you would see that our number of Greenwich Awards that we win each year, also put us in the top quartile. Are we delivering on what our customers need? Yes. Are we delivering a unique client experience? Yes, and that allows us to do many of the things that we want to do going forward. Number two is when you think about the knowledge of our team. We have 5,000 team members, which is a great size. We have lower than industry attrition, which means that our people stick with us. We also have higher engagement. So we're in the top quartile engagement, which I'll cover later. So that allows us to build a workplace that people are attracted to, and we are able to retain our top talent. The third lever that allows us to build a strong foundation is our credit capital and liquidity. From a credit standpoint, we've taken a lot of energy and effort and resources post the global financial crisis to ensure that we enhance our risk procedures and policies, diversified our balance sheet that make us a much better risk profile today than we were prior to that crisis. From a liquidity standpoint, we have a great mix of a geography between rural and metro markets that gives us a great source of low-cost funding. And lastly, we have capital that will support our outsized growth objectives. And then lastly, we have the products and solutions that we need to have in order to meet our customer needs. We are large enough that we can outfunction in capability the smaller banks and we're more nimble and service-oriented that we can outcompete the larger institutions. That allows us to be able to deliver a full relationship approach. And that's just not words. When you look at our pre-provision net revenue to total assets, we exceed that of our peers. And that's because they pay for value and they reward us with giving us a deeper share of their wallet. So you may ask if we're on set strong footing, why are we building the bank of the future. The world around us is changing. I don't need to tell you that. Client demands are evolving rapidly. The competitive landscape is changing every day with FinTechs, neobanks and traditional banks. And lastly, the business models are evolving. So we believe in order to maintain our competitive positioning, we need to make sure that we're staying in the front of that change, and we're making the necessary changes that allow us to continue to stand out in the industry. And we're going to do that on 4 basic pillars. The first one is around reposition for advantage. So when you think about our businesses and our focus on growth, what we're doing here is we're aligning our resources with where we think the growth will come from. We're enhancing and augmenting our core businesses by enhancing productivity, while making strategic investments in new businesses and new sources of revenue that will allow us to have outsized growth. The other thing I should suggest here is that part of repositioning for advantage not what you're going to do, but what you're not going to do. We know where we have the right to win, where we're going to prioritize our resources and that means saying no to other things. The second is around talent and culture. I started the discussion by saying we're a collection of top talent around our company. For us to continue to be successful to leverage that culture to leverage the higher engagement, the lower attrition, we have to continue to invest in our teams through programs through development but that will allow us in this new world to continue to attract top talent from around the industry. The third is simplify and streamline. What we know through these NPS scores and higher Greenwich ratings is that our customers love us. But what we have to do in order to keep that and actually expand it is to continue to make us even easier to do business with. So we're focused on removing friction points that our customers experience today. And by doing that, they become even more loyal and then we can grow the relationship greater. And then lastly, we believe in investing in technology, but it's not solely an investment in high tech. We have to match that and complement it with high touch. When you think about how we go to market, this personal advice, this personal solution is delivered with human interactions. But we have to supplement that with continuing to bring technology and new tools to the table that leverage best-in-class technology but that we don't lose sight of that human interaction. We're going to go through each of these briefly. The first is around reposition for advantage. I mentioned earlier, under our solid core franchise, we have a lot of things that are showing strong momentum, but we need to make sure that we're focused on improving our productivity across all of those areas. We'll also talk today about where we're making investments. And then lastly, in order to make sure that we prioritize those things that matter most, we are putting our resources and constraining in other areas where it allows us to put our dollar, where we get the fastest return and the highest return. The first area that you'll hear us talk a lot about is we're doubling down in commercial. This is an area that we not only have the right to win, we've had a history of winning in this space, whether it be in the small business area, middle market or even in some of our specialty areas. Talking about specialty. This has been an area of strength. Starting in post-crisis, we added senior housing as a specialty area. We since have added other commercial real estate specialty areas. And then you fast forward to 2019, where we were able to add our structured lending division, which in 2 short years, has already contributed $1 billion in outstandings and $20 million in PPNR. In 2020, we added an ag and timber vertical. And in '21, actually, in the third quarter, we've added a restaurant services group. We think specialization is a key differentiator, and it's something we're going to continue to expand upon. You look out at future investments, and I'm going to cover this in a second. We made the announcement last week. We are extending our commercial focus into the Corporate and Investment Bank, and that will include 3 new industry verticals, the Financial Institutions Group, health care and tech and media. We also believe that our platform is one that is very attractive, particularly to the large bank relationship managers and product specialists. Over the last 2 years, we've added over 40 bankers in our wholesale and treasury and payment solutions area, because we knew that having the right advisers, bringing the right products to the table, truly differentiate our offerings, and that's produced growth and will continue to do so in the future. More recently, we've added 2 middle market team leaders in Florida, 1 in Jacksonville, 1 in Tampa, to help build out our Florida presence both in the central area of the market of the state as well as West Florida and North Florida, and we're optimistic that these individuals will be able to recruit teams that will aid and continue to produce growth in those markets. When you look out at future investments, it's about relationship managers, it's also about treasury and payment solutions product specialists. But I'd also mention here, private wealth advisers. We think there's a outsized opportunity to be able to go out and create a private wealth commercial partnership, where we can get more of the wallet share from these commercial owners by getting their personal business, and we're going to focus on that in the year to come. But we also recognize it takes products and solutions. In the past year, we've rolled out accelerated AR, which is an automated accounts receivable platform. We've also rolled out our new commercial portal with Gateway. And as we look into next year, we have other tools and products and solutions that we'll bring to the market and accelerate AR product, which will be accounts receivable, we also are looking for money movement technology for our small business through Zelle, and we'll continue to white label new solutions so that we are meeting the needs of this commercial segment. To spend about a few minutes on corporate investment banking. As I mentioned earlier, this is an extension of what we do today. This is a greenfield. This is going upmarket into larger, more complex commercial clients. We feel like there's an opportunity here. We think that the larger banks, as they look at their corporate investment bank, continues to move upmarket to generate scale. And we think it's creating an opportunity to move into the space. Number two, we were able to hire an industry veteran, Tom Deardorff, who will be joining us -- who joined us this past week. We think that not only is he an accomplished leader who's done this before, he's an attractor of talent. And so as we look at these verticals we've chosen in financial institutions, health care and tech and media, not only do we think there's an opportunity in our market, and quite frankly, nationally, we also think there's talent that can come in and play a major role in building out these spaces. When we think about the coverage side of it, we know that we'll generate loans and deposits. But this will give us a chance to also expand our capital markets products by building out new capabilities, including advisory or syndications or securitizations that we feel that would be incremental to what we're doing today. As we transition from the commercial segment over to consumer segment, we're sharing with you today that our plans for 2022 is to further reduce our branch network by 15%. We've done a great job since 2013 in optimizing our branch network. And you can see on this graph, despite the fact that we've been closing branches, we've been able to continue to increase the number of consumer accounts that we have. And we think we can parlay that into the future. As we continue to add digital applications and we'll be able to save money and redeploy some of the money that comes from our bricks and mortar to be able to put it in digital applications and other ways to touch these customers. This is a way that we're reinventing how we go to market. We'll have fewer branches, but the branches we have will have more staff in each, and that will allow us to better fulfill this advisory-based model and also allow us to better meet the needs of the small businesses that sit around those branches today that when you're relatively short staff with 3 and 4 folks in a branch, you can't have people go out and canvass the market. As we take some of the resources from the closure of bricks and mortar, we're reinvesting that in our digital capabilities. Now we've spent the last several years building out My Synovus on the consumer side. And you'll see from this slide, I think we've made great progress at 4.8 stars in the Apple Store. And that in and of itself is not an accomplishment, but I think it's a recognition of what we did when we rolled out My Synovus. We chose the right FinTech partner, and we built a platform that is extremely scalable. And when I talk about scalability, it's about being able to continuously add new features, capabilities and enhancements. And we've been able to do that since we rolled it out initially. As we look into the future, it's all about humanizing the digital application and also innovating. What we've seen from J.D. Power is those customers that have a digital-only relationship typically have much lower satisfaction. It's not until you start having 4 or more digital products that, that satisfaction starts to pick up. So what we have to do is ensure that those individuals that more -- over time are going to use the digital application more that we're able to continue to have that touch point and that we can create the level of loyalty and satisfaction. And part of that is innovating. One of the things that we've been working on for the last 6 months is bringing to our customers the ability to custody and buy, sell and trade cryptocurrency, namely Bitcoin, and we'll be able to roll that out in the first half of next year. Now the third kind of segment is our affluent segment, our wealth segment. And we believe that the work that we've done over the last several years with this advisory-based model across the spectrum of wealth has delivered greatly, but we will continue to leverage this model to generate outsized growth on the fee income side. When you look at the AUM chart here, you'll note that we've actually been growing AUM faster than the market. And I think that's a function of our efforts and our delivery model that's generating net new assets that are coming in. And when we focus on covering the customers we already have, let's make sure we get a full wallet share of those customers that we already have that have investable assets. We've also complemented that with an opportunistic strategy to attract new customers. And you'll see at the bottom of this slide, we have a family office at Synovus that this year has added 12 families to their platform, which is a record year, which shows that when we have these unique value propositions and solutions, we can offer it to our customers, and it's a place that customers are willing to move their business. Under simplify and streamline, it really comes down to 3 things. Are we leveraging the technology to make the process easier, are we leveraging processes that are reengineered and improved? And are we empowering our people to deliver on those processes? So one of the things that we've talked about is client journeys. We're going to spend between $4 million and $6 million in 2022 to be able to generate the type of commercial customer experience we want when you apply for credit. We're looking at the best-in-class solutions to do that from a process standpoint. We've done focus groups, we've reengineered the process, and we're leveraging some of our best technology partners to be able to recreate a credit process that will capacitize our RMs, that will make the customer experience better and will create capacity for us to continue to grow our business without having to add new folks, all at the same time of creating a better customer experience. Once we finish the client journey on the commercial credit side, we'll also originate efforts around account opening, problem resolution and money movement. We've also built a center of excellence for back office automation. As we think about automation going forward, we're looking for those processes that are largely manual, that have an impact on the customer. You'll note there's not a big investment here because most of these efforts will self-fund the work that we're doing. But our goal is to prioritize those back-office functions that have an impact on the client, are largely manual and that we can easily replace with some of the robotics that we're building. It's important to note some of the early work here is around account maintenance, AML, BSA and some of our mortgage operations. And then the last pillar is high tech meets high touch, and this really gets into what I said earlier. So we have to bring state-of-the-art technology, but we've got to make sure that we don't lose that personalization, human interaction where we create moments of truth. And it's going to be built around agile technology, making sure that we have scalable platforms; two, fully utilizing analytics to strengthen our relationships; and three, as I mentioned, having a great deal of personalization, where people don't feel like they're just a number. Start with analytics. We've done a lot of work with SMART. You've heard us talk about this in the past. This is our commercial analytics platform that we worked with Boston Consulting Group to build. This is fully rolled out across our franchise. It allows us to have the next product to buy on the commercial side with our RMs. It also allows us to focus on an early warning mechanism for attrition. The good news here is we were looking at our pipeline this morning, we have over 450 opportunities in our pipeline that originated from the SMART tool for over $6 million in revenue. It will produce -- it is producing incremental revenue, and it will allow us to keep our attrition lower than the industry averages. Our next investment is on the consumer side, where we've invested with 2 partners Amplero and Personetics, to do the same thing from a consumer standpoint, to lift up opportunities to cross-sell products and solutions and to develop insights and to share those with our customers that both educate and help them save time and money. This investment is going to be an additional $3 million to $4 million in 2022. And then I'm really excited today to talk about MaaST. This is Synovus' entry into the banking as a service market. MaaST stands for Money as a Service and Technology powered by Synovus. What we're -- we have a long history of being in the payment space, obviously, dating back to our TSYS days. We've continued to be involved through our sponsorship activities. And as we've evaluated the marketplace, we see today that the small and medium-sized businesses over 40% are dealing with integrated software vendors to manage their operations. We are going to provide a full service, full stack solution that will allow these ISVs to provide not only payment services, which they've traditionally gotten from these acquiring companies, but also depository and lending capabilities. This is very exciting for us because we think we're hitting a niche. We're hitting the market before other full-scale products are available from banks. We feel like the aggregators and the FinTech point solutions are not meeting the market. We rolled this product on a soft rollout at Money 2020. We had 20 meetings. And we were very happy to hear that all of those meetings ended in the conversation of when is it going to be available, where have you been. So in first quarter of -- I'm sorry, second quarter of 2022, we'll roll out our pilot of MaaST again, which will provide payments, depository and embedded finance capabilities. As we validate that pilot and execute on it, we'll have a full-scale rollout in the latter half of 2022. I should mention to you that we're going to spend $10 million on this, but based on the addressable market, we think in the first 5 years, this can generate $100 million of revenue. And then lastly, I'll talk about our team and culture. Really, as I started the conversation, our team is what matters. And so we need to continue to invest here. We need to develop our talent that we have to continue to have those low rates of attrition. We need to take advantage of the 84% engagement, which means we're getting discretionary effort. We have passionate team members, leverage their passion, but also use that as a platform to attract talent and make sure that we follow up with our diversity, inclusion and equity targets as we attract talent and we promote talent. And then I should just end by saying we're talking a lot about the future, and I hope you get from my voice that how excited I am about some of the things we're doing. But I don't want you to think that we're betting only on the future. We recognize that in order to be able to make these investments, we have to continue to deliver in the here and now. And so if you look at just third quarter year-to-date basis, if you look at our loan growth, it's more than 4x that of our peers. And we're excited about the fourth quarter, which I'll talk about in a second. If you look at our revenue, our revenue base provides a higher risk-adjusted yield than our peers and we have a higher sustainable base of revenue. So i.e., less revenue at risk for things like NSFOD. We've been able to do that while maintaining a lower efficiency ratio. And if you look at the punchline at the far bottom right, is that when you look at total PPNR to assets, we exceed that of our peers. That tells me, as I said earlier, we're developing value with these relationships, and we're getting paid for it and we're having a deeper wallet share. Let me conclude with our 2021 guidance. As we close out the fourth quarter, we want to make sure that you are aware of a couple of trends that we're seeing. On the loan side, it is positive. We have had a very strong quarter to date. We originally had estimated that we would be in the low end of the range, ex-PPP and third-party for loan growth in the lower half of the 2% to 4%, we now believe that we're going to be in the upper half to the top end of that range. And that's just a function of great production this quarter, slightly lower payoffs and a little bit increase in utilization. So most of this is just coming from robust production. Secondly, from a revenue standpoint, when you look at our revenue, we think we'll be at the upper end of that range or actually outside of it. Again, the loan growth will create a little bit of a tailwind from an NII perspective. Our fee income is resilient. And I should just mention that this quarter, we do expect to receive an $8 million onetime BOLI settlement. And that correlates to why we're guiding up on expenses. In coordination with that onetime BOLI settlement, we are establishing a $4 million donor adviser fund to help with additional philanthropic giving through our corporate efforts there. Those 2 are correlated. If you were to exclude that onetime $4 million build-out, our expenses would fall within the original range, but they would be towards the higher end, i.e., the negative 1% because we are experiencing slightly higher incentive compensation as our performance has exceeded expectations. And then when you look at capital, it's going to come in as expected. And then when you look at the tax rate. We had said prior that we thought it could come at the lower end of the range. It's going to come in closer to the middle to the higher end of the range, discrete items that are going to happen here in the fourth quarter. So as I close out, I hope everybody recognizes that we're excited about where we are today. We have a tremendous amount of momentum. We have built our franchise on a very strong base. We have a clear plan around what the bank of the future looks like, and we are executing on that. So with that, Ryan, I'm going to stop so that we have 10 minutes for Q&A.

Great. Thank you, Kevin and [ Cal ] for the really in-depth presentation. That was great. So maybe to just start with something you touched upon the better-than-expected loan growth. You talked about lower payoffs and a little uptick in utilization. Can you maybe just talk about areas where you're seeing that are driving the upside to growth? And second, if you think about it, pre-pandemic, Synovus, you just talked about 4% to 6% loan growth given the pent-up demand that you're seeing across the business, is this something that you could exceed in the short to intermediate term?

Ryan, it's a great question. And the good thing for us in loan growth, it's not just a couple of areas. It's really broad-based. We're seeing it in our community bank. We've had growth in CRE across several asset classes, on our C&I front, we're seeing it in our specialty areas as well as our middle market banking area. One of our teams are having record levels of production in this fourth quarter. So that's what gives me a lot of optimism towards the future is that it is broad-based across many teams. When we think about 4% to 6% as a normal level, I think that's what we've always felt like our marketplace gives us. We should perform at a level higher than GDP because we should be taking more than our fair share. And what gives me confidence over the next couple of years that, that growth rate, given a constructive economic environment would be slightly higher, is that's our core growth rate. So when we're adding in things like Corporate and Investment Bank, we're adding in new restaurant services verticals, it could be plus over that mid-single-digit number. So I think that's the key is we've got to make sure that we're getting the productivity out of the core business, but continuing to add new levers of growth that are obviously profitable that would generate above market average growth.

And then just to follow up on some of the things that were included in -- within the slides, you outlined a handful of initiatives as you look into '22 and you had expense dollars associated with them. And then you also talked about the branch reductions. And I guess the question is, are the branch reductions part of the Synovus Forward initiative? And is that already included? And maybe can you give us some parameters to think about can you self-fund a lot of these investments through what's left to go on Synovus Forward? And what could that mean for operating leverage going forward?

Ryan, it's a great question. So when you add up all of the investments we had in the slide deck, it's $24 million to $30 million. About 10% of that is already in the run rate. So 90% of those expenses are incremental in '22. Synovus Forward, the additional $75 million that we had for 2022, the $12 million from branch closures was included in that number. But you should assume that, that $12 million helps to offset some of this $24 million to $30 million spend. In addition, we know that there's inflation. We know that there's going to be pressure on the salary line. And we've tried to embed all of the things that we believe will occur from an inflationary standpoint, all of the investments as well as all of the expense reductions. And our goal ex-PPP, is to continue to maintain positive operating leverage. So part of what I -- the reason we want to share these investments today is, number one, we think they're very important for our franchise value long term. Number two, is through our efforts in Synovus Forward and the ability to be as flexible and disciplined as we can, we can fund these type of initiatives even in a year that's seen the type of inflation and still strive for having positive operating leverage.

Got it. And from listening to the presentation, it's clear the company has put credit concerns and expense management, which were the primary focus here. Now you're much more geared towards revenue initiatives that you highlighted throughout the presentation. Can you maybe just talk about your degree of confidence in delivering on these initiatives? What will the paybacks be? And how will you define success in them?

So each one of them have very extensive business cases. And when we pressure test why we invested in these revenue initiatives, because we felt like there was either a business case that had been proven out before, i.e., some of the analytics products that we've built on. We talked to references who had delivered similar products and seeing the revenue growth. Where we've hired talent or built businesses that were extremely convicted on that we think will generate these numbers. I mean revenue numbers are always a little squishy, but I would tell you the reason we're making these bets is because we think they have the highest probability of success.

So a big part of the story over the last couple of quarters is as there hasn't been, what I'll call, core loan growth, you've supplemented with third-party purchases and it sounds like the environment for growth is getting a lot more robust. So I'm just curious what type of role do you see third-party loan purchases playing in terms of balance sheet growth? And how do you think about using these relative to other sources of capital?

Yes, Ryan. Our strategy and what you're seeing us deliver on is client growth. I mean that's obviously our priority. We believe we're executing there. That's how we want to deploy the balance sheet. Once you get beyond that and we think about capital deployment, we think about these strategic growth initiatives, which we are highly committed to and we're excited about. Those we believe that those are next in line as far as prioritization. And beyond that, you have things like the third-party portfolio. Pre-pandemic, we were running at about 6% of loans. We believe that we -- that asset percentage we could get back to over time if the right opportunities present themselves. It's a highly competitive environment for buying loans. But thankfully, we have multiyear relationships with these partners. And so we feel really good about that. We feel good about our management. And we do intend to grow that portfolio if the right opportunities present themselves.

And Kevin, just while Jamie brought up capital. I guess while we're on the topic, just given where we are in the cycle, how do you think about capital levels? And it seems like there's a ton of things going on organically. Does -- do you foresee M&A playing any role in the bank in the near term?

We don't. And because we feel like there's a tremendous opportunity to continue to invest in Synovus. And not just within our franchise today, but as you can see some of these investments. And when you think about the risk that's included with doing whole bank M&A, it's just not something that we feel like is warranted in this time frame. But look, to me, what we have to balance, and Jamie said it is, our #1 capital priority is organic growth. And as long as we continue to deliver on that, the other [Audio Gap] and we feel confident that we are well positioned. We like our asset-sensitive profile. We intend to keep it and manage it [Audio Gap]