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

All right. Joining us, we are pleased to once again have Synovus. Synovus has done an outstanding job managing through the current backdrop by prioritizing capital, managing expenses and optimizing several loan portfolios. Looking ahead, it appears poised to benefit from the strong growth demographics across its footprint with a goal of generating top quartile returns over time. Here to tell us more about the story is CEO, Kevin Blair; and in the audience, we have CFO, Jamie Gregory. With that, I'm going to pass it over to Kevin, who's going to give us a presentation, followed by a Q&A.

Thank you, Ryan. It's great to be with you. Jamie is my lifeline. If I don't have an answer, I just look at him and he throws the answer at me. But I don't know if you guys know. Today is December 6. And it's National Miner's Day and National Microwave Oven Day. Now that just proves that there's a day for everything. So my attempt today to honor the December 6 is that I hope to uncover some nuggets for you for the miners. And I hope to speed up the process where we'll talk about returning to a growth orientation, just like a microwave. So it's great to be with everybody here today. I told Ryan, I wanted to just take a brief moment to give you an overview of a deck that we uploaded last evening. And really, some of this will be for those of you that are familiar with our name, provide you with a little bit of history, but I think it helps to provide context from what we've done over the last 10 years and where we're going over the next 10 years. This slide is just a visual that speaks to our 135-year history as an institution. But I would submit to you that we're the youngest 135-year-old bank in the United States. Coming out of the global financial crisis, we've made substantial changes to our model, including collapsing the 29 individual charters that we had, unifying our brand under the Synovus name, which as you know combines Synovus, which is something that's synergistic where we bring a team-based approach to serving clients with something new that's advice, and the 1 plus 1 equals 3 because the aggregate is always greater than the sum of the parts. And I would tell you that model is working for us, but you can believe me or you could believe what our clients are saying. This past year, we were recognized as the #1 bank in the Southeast for client service by J.D. Power as well as trust, and we won 20 Greenwich awards, which puts us in the top 5% of all commercial middle market and small business banks in terms of the Greenwich Awards. So we're delivering on our value prop and our clients are telling us as much. Now look, over the last 10 years, we've had to change our operating model. We've also been focused on improving our risk management. We focused on changing out our independents where we still have a local delivery, but we've also added lines of business and back-office centers of excellence. But we haven't lost sight of the need to grow. And so this chart shows an illustrative -- or not illustrative, it actually shows the actual history of our EPS and our PPNR as well as our core deposits per share. We've grown our PPNR at a CAGR of 11% over the last 10 years. Our EPS has grown at a 17% CAGR. And when you look at the deposits per share, core deposits per share, those have grown roughly 7% per year over that 10-year period. So despite the fact that we've had to change, transition and continue to build out our organization, we haven't lost sight of what's important to our long-term shareholders. One point of Synovus that shouldn't be lost is that we're in a great footprint, the 5-state footprint in which we serve: Florida, Georgia, Tennessee, Alabama and South Carolina. When you look at those states in aggregate, we have a population growth that's 2x the national average. And I would submit to you that across that 5-state footprint, we have 55 markets in which we serve. But if you look at where we've focused more attention recently, we put more assets and more liabilities, our deposits and our loans have moved more towards those faster-growth markets. And you can see on the slide that there are some markets in there that we have top 5 market share, which puts us in a very strong competitive position because as I've said in the past, we're not the only bank in the world that knows that the Southeast is growing and they want to be able to participate in that growth. If we talk about the -- go back -- no, let's go forward. If we talk about the fourth quarter, I want to start with a couple of transactions that we've completed or in the process of completing. The first is given that we felt very comfortable with our capital position, we felt like we had excess capital. We evaluated our securities portfolio and we're in the process of conducting a restructuring of approximately 10% of the book. With the proceeds, we'll reinvest those proceeds in similar slightly longer-duration, high-quality liquid assets. It will result in roughly an $80 million loss, but it will increase our go-forward NII over the next several years by approximately $25 million. Again, this is a testament to the fact that we feel very comfortable with our capital levels. We felt like now given where rates are, it's an appropriate action. And most importantly, we made it -- we conducted a transaction that had a size that would have a 3-year earn-back or less. We believe that this makes sense. But from an investor standpoint, if we were showing longer payback periods, it wouldn't be a great trade for you as an investor. The other thing that we announced, we began talking about this in the third quarter, is we've enhanced our GreenSky relationship. And just real quickly, there's 2 components to this. First, as you may know, Goldman Sachs is in the process of selling their GreenSky position to Sixth Street Partners. As part of that, there's 2 transactions that we'll help to facilitate. First, there's a back book. All of the loans that are in the books of Goldman today, we'll facilitate 2 transactions that we label here. The first tranche will be here in the fourth quarter. We'll get those loans. We'll sell them to a third party, and we'll book a $12 million fee for that. There's also a second tranche that will happen in the first quarter of next year, which will be roughly $5 million. Now there's a little bit of trailing income that comes with both of those transactions, but I'd rather talk about the forward production. Going forward, once the deal closes in the first quarter, we'll be the sole administration agent for GreenSky, where all of GreenSky's future origination, we'll be the lender of record for that. We'll receive -- every time they produce a new loan, we'll portfolio that for a very short period of time. And when we talk about a short period of time, that's in days, not weeks. We'll have a commensurate level of funding for that balance sheet usage, and we'll sell those loans to a third party. For doing so, we'll receive what we call an administration fee or origination fee, and we'll also receive a trailing fee that will be a portion of the servicing fee that's paid by the buyer to the sub-servicer, which will be GreenSky. All that said, we believe that this new program that's enhanced will create an opportunity for us to continue to produce additional fee income. And for 2024, that number could be greater than $20 million based on the projected production from GreenSky. Fourth quarter, in general, has turned out to be more positive than we originally expected in the third quarter earnings call, and you'll see here, loan growth is going to be 0% to 1%. Loan growth continues to be a bit muted and not because of production. But we've -- as we've said in previous quarters, we knew we would see incremental payoff and pay-down activities in CRE at some point. We're starting to see that. And that's a positive thing. That says the marketplace in transactions are beginning to fall, and that's showing a little more velocity to the balance sheet. And you'll hear later, we expect that to continue into '24. Core deposits, we've had a really strong fourth quarter. Some of that is seasonal with our public funds portfolio, but we continue to see good deposit production. We're up 180% year-over-year in deposit production, and we're continuing to see diminishment decline -- the rate of diminishment decline, which is producing strong core deposit growth. Adjusted revenues are going to be better than we originally anticipated. And you'll see here that will push us outside of our initial range, our full year range for revenues, and that's mainly due to 2 functions: number one, NIM. Our betas on our deposits are going to be 46% to 47%. We originally thought closer to 47%, so betas are coming in a little lighter. We also have the $12 million from the GreenSky transaction that will feed into this quarter. Expenses, on the other hand, have actually come at the low end of the range. So we're continuing to show good expense discipline. You'll note here that we will start to show expenses with and without the onetime FDIC assessment. Jamie reminded me that we were guiding everything off of an expense baseline that excluded FDIC, but FDIC is not adjusted out of our adjusted expense. So we're going to leave it in. But when you look at our guidance, I'll give you a calibration as to when we exclude that. Net charge-offs. Net charge-offs will come down in the fourth quarter versus the third quarter, remembering we had one large idiosyncratic loss in the third quarter. And we feel like that's a level that will be manageable into the future. We have not seen any degradation as it relates to NPA, NPL, inflows. And delinquency levels have stayed low through the -- into the fourth quarter. CET1 will dip a little bit to 10%. That's a function of 2 things, the FDIC onetime assessment as well as the portfolio restructuring. And then we'll be poised to grow CET1 thereafter. And as a function of the new agreement with GreenSky, there will be a onetime write-down of our deferred tax asset. And what that really means is as we look forward, our loan production will be more spread out outside of the state of Georgia. And so that will reduce our effective tax rate going forward, but it makes us have to take a onetime write-down in our DTA this quarter. So 25% versus 22%, but you'll see later, that's a onetime item that our ETR will go down. As we talk about credit, I know that's another point that folks are keenly focused on. We've done a lot of work over the last 10 years to diversify our loan portfolio across industry, across geography, across asset class. But the questions that we hear today are not what you see in your NPAs or what you see in your book, but what are the concerns you have based on interest rates. And on this slide, there's a full appendix slide here that will give you a greater detail when you're actually able to read it. But what we tried to do is go over the next 2 years and look at all loans that are fixed rate or have been swapped that are up for renewal or maturity and try to capture what percent of those loans actually are going to reprice greater than 300 basis points. And what you'll see is that over this next 2 years, only about 20% of the loans that we have on the books will mature. So about 1/5 of the portfolio will reprice, and a very small percentage of those loans will reprice greater than 300 basis points. And so we think that repricing will be very manageable. And we've seen that today with our variable rate portfolio that's seen more than a 300 basis point increase with minor or modest increases in NPLs. So we're looking at not only what's happening today, but we're trying to project what will happen with these loans that we'll have to reprice. Secondarily, we've had a lot of questions about CRE and what's going to happen when those loans mature and with the elevated cap rates that you're seeing. So our market intelligence team went loan by loan through all the maturities, a little over $2 billion in 2024, and we adjusted the cap rates anywhere from 175 basis points to 400 basis points. And adjusting those cap rates based on external research, it would suggest that of those loans that are maturing, only 7.5% would now exceed an LTV of 75%. Zero would exceed 100%. So when you're thinking about the impact of cap rates alone, it says that we're not going to have a major impact. Now in all fairness, this doesn't include any changes in the net operating income, which certain borrowers could have problems there. But it shows you, at least for 2024, that cap rates alone shouldn't create a big credit issue across our CRE book. The other question that we receive is trying to understand what the tail risk for credit losses are in this sort of environment. So we're trying to give you the perspective here. This is what the ACL would be based on the different Moody's scenario. And what you should note, first and foremost, is that our current 1.22% at the end of the third quarter is about 10 basis points higher than the Moody's consensus. So that would say that our weightings on the different scenarios would be a little more conservative relative to what the Moody's consensus would be. But we want to show you 2 bookends here. Number one, what would our ACL be if we return to an upside normal environment? That would be roughly 95 basis points of ACL. And why is that important? When we adopted CECL, our day 1 CECL number was about 1.06%, so those were similar economic scenarios. So it says, since we adopted CECL, we've seen about a 10 basis point decline in the underlying EL ACL in our portfolio, which says the loans that we're putting on today have lower risk than the ones we had just a couple of years ago. Now on the other side of that spectrum, what would this look like? What would ACL have to be if we saw a fairly adverse scenario? So we pick out Moody's S3, which shows unemployment going to roughly 8%. It has the negative GDP of 1 point -- almost 2 points next year. And that would suggest that we need about 184 basis points of ACL. So we would move up from 1.22%. Ironically, somewhat similar to what we saw back at COVID. So what does that mean in terms of P&L? That means post tax, that would be a little over $200 million provision that would allow us to grow our ACL to that level. So that means you'd have one quarter of slightly negative earnings, and then you would return the next quarter to positive earnings, and it would not be dilutive to capital at all. So if that's the tail risk, it helps you to understand what that tail risk looks like. As we turn to 2024 and we talk about some of the positive momentum that we've had in this fourth quarter, it transitions well into '24. And when we think about net interest income, we have a couple of things that provide tailwinds. Number one, we've talked a lot about our fixed rate repricing that will continue. We show here that as we bottom and trough at about 3.05% this quarter in NIM, we believe that the margin has the potential to grow 20 basis points from this level by the fourth quarter of next year. So not only is NIM bottoming out in the fourth quarter, we think that now we'll start to have growth. And more importantly, the cost of deposits will reach their maximum early in 2024. We also are going to continue to have some loan growth, which I'll talk about in a little bit. That's being driven off C&I, so we'll have middle market loan growth, C&I loan growth. So our net interest income from the fourth quarter will continue to grow. On the revenue side, we've talked about GreenSky, which will give us $20-plus million of fee income. We talked about treasury in the past. Treasury will grow 10% year-over-year. Our cash management team is, I think, one of the best in the industry. We also have CIB, which continues to generate fee income as they grow their business. That will be up 100%, and that fee income will allow us to offset the headwinds that we're seeing as we eliminate the insufficient funds and overdraft charges on our free checking product as we continue to see headwinds in mortgage. And we also sold our money management firm, which had about $10 million of revenue this past year. As we look at expenses, we're still focused on being disciplined. We'll be able to have flat expenses year-over-year. We've already -- we initiated the process to eliminate 8% to 9% of our FTEs. We're being very vigilant on third-party spend, corporate real estate and centralization of back office, which will allow us to offset some of the inflationary pressures that we're seeing on the expense line. All that translates into our initial guidance on the loan side. We believe that we'll grow 0 to 3% in 2024. As I mentioned earlier, C&I will continue to grow in that mid-single-digit area. Where we'll see the headwinds will be in the payoff activities on CRE. So if what continues to happen in fourth quarter actually accelerates into 2024, we'll see a very constructive real estate market. You'll see payoff activity, and so it's going to put pressure on CRE. And our pipelines, our new production pipelines are still off about 90%, 95% on the CRE front. So C&I will grow, CRE will contract, and consumer will contract a little bit as we see less portfolio mortgage activity. Period-end deposits, 2% to 6%. This is a continuation of what we've been able to accomplish in the second half of 2023. Production levels, as I mentioned earlier, up 180%. As we keep producing at a high level in the level of diminishment, the average balance per account decline continues to abate. We'll start to see stronger growth. We've also implemented several deposit-related initiatives that we'll continue to push on the production side. Our CET1, as I mentioned this quarter, it declined slightly because of the 2 -- the one charge and the repositioning of the securities portfolio. We expect it to continue to build in 2024, and that will give us the opportunity to be much more strategic and opportunistic about share repurchase. As we look over to the income statement, when we look at the adjusted revenue, it means our range will be negative 3% to 1%. That's predicated on holding rates flat and ultimately, as I mentioned earlier, it's predicated on the margin bottoming out this quarter and then starting to grow from there, increasing 20 basis points, and the underlying loan growth that we have associated with 0% to 3%. The expenses, as I mentioned earlier, we don't want to create a new category for adjusted expenses. So inclusive of the onetime FDIC assessment, our expenses will be down 5% to 1% next year. But excluding that $50 million charge, they're going to be roughly flat to up modestly in 2024. And then as I also mentioned, our effective tax rate will decline to 21% to 22% as we go forward. So in summary, I have a couple of slides. We believe that our momentum continues to pick up as we remove some of the uncertainty and the volatility that exists in the marketplace. And this is a great view of not understanding what a year-over-year looks like but rather, what a fourth quarter '23 looks like versus a fourth quarter '24. And if you look at the far right there, we do ex GreenSky because we said we have a $12 million onetime gain this quarter. So we exclude that for '23, but it would suggest that total revenues from fourth quarter this year to next year would be up 4% to 10%. So call it high single digits. At the same time, our expenses are going to be down 1% to up 3%, so call it up a percentage point. So very strong positive operating leverage, fourth quarter to fourth quarter, with manageable credit cost. We see -- from what we can see today and using our roll rates, we see that the first half of the year is likely to stay within that manageable level of 30 to 40 basis points. And we're doing all that, improving our growth trajectory, returning to that growth orientation, while we're not forgetting about the fact that we can continue to de-risk the balance sheet and improve our overall risk profile and remove uncertainty. Core deposit growth, which was a question for so many months this year, I think we've turned from a question mark on insolvency to what the mix shift is going to be and what the rate is going to be on those deposits. One of the things that we built into the plan is that noninterest-bearing deposits will continue to decline slightly from roughly 26% of deposits to below 25%. So that will continue, but we'll continue to be able to grow the balance sheet and actually improve the loan-to-deposit ratio. On the net interest margin, I've kind of hit that ad nauseam. But the 3.05% will grow from this point. We've done a good job of not only managing our deposit betas where we originally thought 47% this quarter, now 46% to 47%. And going forward, when we get into a position, if the Fed were to cut rates, we're now positioning the company to be able to cut those deposit rates as fast as we can. Asset quality has also been a big question mark, and I'm not ready to close that final chapter on that. But what we feel like we've done, we feel like the NPAs and the charge-offs are at a manageable level. They plateaued. We expect no significant change in the foreseeable future. And when you look at some of the tail risks that we tried to show today, we think those levels are manageable even if we were to see deterioration in the underlying economy. Our earnings profile is starting to expand. The EPS, as I just mentioned, would be somewhat correlated to that PPNR growth that we have from fourth quarter this year to next year, so you're returning to a growth orientation. And lastly, we're able to do all of that and continue to reduce our risk profile. So we'll reduce our wholesale funding even greater. What we talk about with core deposits, that excludes broker. Throughout the year, as we grow core deposits, we'll continue to pay down broker and reduce overall wholesale funding. We also -- even though our capital ratios at 10% will decline a little bit this quarter, we're at the highest capital levels we've been since 2015. And having excess capital allows us to be more strategic with share repurchase or ultimately allows us to do additional loan growth. And then as I mentioned before, our ACL is about 10 basis points above consensus today. We've been a little more conservative. And I would expect modest ACL build from this point forward just based on the current economy. But the reality is nothing substantially different than what we've done over the last several quarters. All of this can be done through execution. And as an organization, that's what we're focused on. It's making sure that we can deliver on our promises and that starts with making sure that we continue to focus on the client. And all of this, to me, is what the outcome is. What we're good at is helping our clients achieve their financial objectives. That means providing great advice, deepening the share of wallet, enhancing profitability and doing it more efficiently. And if we do all those things, then these financial outcomes should be easier to achieve. So with that, Ryan, I'll stop there. And we'll go into the Q&A portion.

A lot in there, Kevin. It's a lot. No, that was good. Thank you for such an in-depth presentation. Maybe to start a little bit with the guidance. So the expectation is for the margin to bottom this quarter and then start to grow 20 bps of NIM expansion. A couple-part question. One, maybe just unpack for us a little bit what some of the assumptions are. What gives you the confidence? And third, a big discussion point across the conference has been at points, the forward curve was indicating 4 cuts, 5 cuts now. I think we've settled into 3. Most market participants believe it's going to be 2. Maybe just talk a little bit about how the forecast would change, if we were to adopt to the forward curve.

So first on what gives us confidence on this inflection point of the trough in NIM and then growth from there. First, it starts with deposit costs. And as we look at this quarter, the future is predicated on what we see today. And as betas on deposits are slowing, the repricing is slowing. It allows us to think forward a quarter or 2, and we think we'll see the peak of deposit prices. And that doesn't mean that CDs won't continue to reprice. But as we remix and pay down broker and we slow down some of the runoff in the noninterest-bearing based on that, we think that you'll see the peak of deposit prices early in 2024. Couple that with the fact that what we've seen on new loan production, we've seen, I think, 6 consecutive quarters of margin expansion. That's spread expansion on new loans. And I think that's a function of less competition, focus on having our bankers be a little more attuned to the pricing side of it. So when you look at deposit repricing and loans that are coming on the books, we see positive trends there. When you think about the fixed rate repricing, we've shared this slide a lot. We have about $30 billion of swaps, securities, fixed rate loans that over several years will continue to reprice. And that feels pretty good, knowing that we've seen that happening to this point. So the components of NIM, the bigger risk of all of this is really that NIB percentage and what happens with the remixing because that's something that internally, it's a hard equation to control because the NIB declines that we're seeing today have less to do with people searching out higher rates. It has to do with consumers predominantly using their cash, and you can't stop folks from using their cash. They're getting -- feeling the impact of inflation. So our forecast assumes a little less than 25% of total deposits in NIB. We feel pretty good about the repricing part of deposits. We feel good about our loan pricing, and we feel really good about that fixed rate repricing. Now to the second part of the question, what happens if the Fed starts to cut? We did a flat rate scenario, number one, because I don't believe the forward curve. But number 2, it will be interesting to see in this environment what the lag is on the repricing on the deposit side because we have a 45% beta on the way down. But the question is, how quickly will you be able to reprice those deposits? And that's really more of a competitive landscape question. And so we're -- we have different scenarios there. And obviously, depending on when the Fed -- if you didn't believe the forward curve, even if they decided to start reducing rates in 2024 late, it would have less impact on that. But all of that, we're fairly -- when you look at the front end of the curve, we're -- we feel like we're fairly in equilibrium between asset sensitivity and liability sensitivity. So if it were to happen, you may have a latency in how you could reprice the deposits. But you're ultimately going to pick that back up, so all it does is it just pushes out that 20 basis points we're talking about. It may delay it, but you're ultimately going to get it because we basically were fairly insensitive to that front end of the curve. So I'm of the belief that the Fed is in a position where they're going to keep rates flat and -- but if we do start to cut rates, instead of trying to tell you what the lag is going to be, what our team is working on is ensuring we can reprice them as fast as possible, including some of our deposits that are indexed or pseudo indexed. We're putting them into an indexed product, so they'll reprice fairly quickly.

I wanted to hit on 2 different sort of growth earnings things. Obviously, there's a ton of guidance there. We can spend the next few hours. We can have our own earnings call sitting up here. But instead, we'll pivot to some strategic questions. There's obviously been a lot of dislocation across the Southeast, restructuring, deals falling apart. Maybe just talk about what you're seeing or where you're having opportunities to pick up new talent and what are the areas that you're looking to expand upon.

Yes, Ryan. That's a really important question because one of the things that we did when we went through our expense initiatives is we are also long-term shareholders in our stock. And as we look to cut expenses, what we were very keen to point out is we don't want to cut out things that we think are going to continue to create long-term value, whether that's investment in corporate investment bank, our money-as-a-service platform, new talent across the organization. And what we've done is we've culled back maybe the size of some of those things. So maybe we're not growing them as fast, but we're still convicted. In our middle market banking team, we've been able to increase the number of bankers just the last couple of years by 25%. This last quarter, we've added a new team down in South Florida. We've added new talent in Atlanta. And as we look to 2024, I think we have between 6 and 10 new hires in that middle market space. It's a very attractive space for us. We think we have the right to win there. And also, when you look at it from a portfolio perspective, they fund about 50% of their loan balances with core deposits, and they get good treasury fee income. And we found that Synovus has been a very attractive platform for some of the RMs that are leaving some of the super-regionals and money center banks who are looking for a more client-centric platform. So we're going to continue to invest there. In CIB, we have about 30 FTE today. We were talking about adding a new vertical in 2024. We'll delay that. But we'll continue to invest in the talent that we have there with some junior resources to allow them to grow. I think we had in the deck, they'll grow another $0.5 billion in loans, increase their fee income 100% year-over-year. So they're doing very well. The other area that we've continued to invest in from a talent standpoint is in our private wealth strategy. We rolled out something called BOWS, which is the Business Owner Wealth Strategy. Today at Synovus, as good as we are about cross-selling our clients, we recently learned or we did an analysis that showed when we have commercial clients today, we have a little less than 10% of their personal business. So if you have a CEO of a commercial client that you have a great relationship with, to me, it's disappointing that we only have 10% of those individuals with a full private wealth relationship. So we've added a specialty focus just on business owners, where we have private wealth advisers that just deal with private CEOs, private company CEOs, and it's already paying dividends. The number of referrals and closed referrals that we have just in 2023 are very promising. And so to be able to make that work going forward, we need to continue to add private wealth advisers. And outside of that, I would tell you, we still have an initiative budget every year, whether that's improving the client experience through digital applications or adding new treasury and payment solution capabilities. We're investing in the things that will continue to allow us to differentiate ourselves, improve the client experience and drive long-term sources of growth, which just means you got to cut back in other areas to be able to do that.

Maybe switching to credit. You highlighted -- I think it was 30 to 40 basis points in the fourth quarter and a similar number for the first half. So sort of a multipart question. Thinking specifically about office and multifamily, maybe just talk about what you're seeing there. How are you expecting loss formation over the next few quarters? And what are the parts of the portfolio you're closely watching?

So I go back to the slide we put up first, Ryan, that says, if you look at all asset classes in CRE and you stress them with cap rates, 8% are going to have LTVs over 75%. And so I just -- what I've said in previous meetings is please don't take a broad-based -- broad-brush approach to all banks on what CRE looks like. I mean we're -- our average office loan is $9 million. We're not doing large towers in major metropolitan cities. And so for us, if you think about office early in this cycle, we identified about $200 million of office properties that we said could have problems as they continue to come closer to maturity due to vacancies, due to location and the like. We have not increased that number over the last 2 quarters. And so the ring-fencing of those properties and the credits that we were concerned about has not grown. And so although we'll have a charge-off or 2 in the office space, we're not seeing any inflection point or any new losses that are formulating. Same thing on the multifamily side. I think one thing that's important to note is that most of our multifamily is in the Southeast. And if you look at the underlying data there, rent growth continues to be fairly strong and there's a lack of inventory of single-family homes. And so those properties and those projects continue to perform very well. It was also, I think, lost in our third quarter that our actual NPLs in CRE declined quarter-on-quarter. So we're still very bullish on our portfolio. Our teams are working on deep dives in every category. You didn't mention it, but like senior housing is another area that for us shows up in C&I because we're banking the operating accounts. But for call reports, people see it in CRE. We've had some deterioration there where we had some criticized and classified assets, and we'll have some losses, some very small losses. But again, it was very manageable where it was several credits. And you didn't see it across many, many more credits. And so that's what we're trying to do, and that's why we're doing these analyses around interest rates. And we're looking at rent rolls on these CRE properties just to be able to ascertain not what the problem today is, but what it could be in the future. And as rates continue to rally a bit and come back down, maybe some of the concerns around the debt service coverage in the future will abate.

You're talking about 30 to 40 for the next couple of quarters. As you look out, we had some banks yesterday saying they think that there's still further normalization to go. Do you think you have a targeted loss rate for Synovus? What are you estimating for where we'll be over the course of the cycle?

It depends on what the cycle is, right? That's the hard part. We think -- and that's why we kind of range bound 30 to 40. If you look at our NPL levels today and you're not seeing any significant change there, we feel like that's a good flow-through rate. If you think about the old roll rates where you have things roll from 90 days to 120 as charge-off whatever, so there's nothing we see today. But the reason why we didn't give second quarter '24 guidance is because we don't see what we don't know. And will the underlying economy improve? Will it deteriorate? And that could change. But for the foreseeable future, we felt like 30 to 40 basis points was manageable and, quite frankly, is something that when we look at our delinquencies and we look at the non-accruals that are there today, that's what it feels like. And so who knows if it goes up. I don't feel today as if I would see anything on the horizon that would drive it. But if the unemployment levels went to 8% and we saw a decline in GDP, obviously, that would change.

So I'm going to throw a 2-part question out there, and you have as long as you need to answer it. In the capital sitting at 10%, you showed a willingness to use some to restructure the bond book. How are you thinking about using capital, particularly share repurchases and the like? And then secondly, which is a more longer-term oriented question, how are you thinking about M&A over the next few years? Whether you have any specific hurdle rates or goals? And how would you think Synovus will participate in Southeast bank consolidation, which is likely to occur?

Yes. That is a long question. If you go back and just talk about capital and we've talked about it in some of our individual meetings today, we've generally had CET1 levels a little lower than 10%. And part of that is because both Jamie and I have come from larger institutions that participated in CCAR processes that when you go and look at your stress test analysis and you understand what your capital erosion would be in a severely adverse scenario, then you know how much excess capital you have. And if you have excess capital, you got to do something with it, whether it's through dividend, whether it's through share repurchase or the like. So we've always tried to manage our capital very efficiently to where those stress tests have led us. And when you compare us to larger institutions, our CET1 levels look very commiserate with those companies. More recently, as we've entered this cycle, people have questioned and asked why aren't our CET1 levels higher when you're compared to other mid-cap banks. And so what we've changed in our process is not our stress testing. Our stress testing would still suggest that we're carrying excess capital. What we've changed is that if that's going to create a higher beta stock by having lower CET1, we're going to carry extra capital to be more in line with our peers. We don't want to screen negatively for that, and so that's why we built our capital over 10%. And that's why for next year, you'll see it go potentially as high as 10.5%, which leads to your question. What would we do with that excess capital? First and foremost, our top priority is to allow this capital to be used for loan origination with our clients. That's our best and greatest use. We're going to continue to maintain a competitive dividend, which we have today, and then you're left with what's left. And so the question is, just like we've conducted with this securities repositioning, we felt like we had excess. That was a good trade. In the future, we would look at share repurchase in the same fashion. Opportunistically, does it make sense based on our capital levels, based on the underlying risk-weighted asset growth, would we buy back shares? Potentially, yes. If we felt like that would make us screen lower than some of our peers, we may hold the excess capital because we don't want that to be something that is a detriment for folks looking at Synovus as an investment. On the second half of that question with M&A, that's a pretty easy answer. I think for us to be talking about M&A, we've got to earn the right. And earning the right means continuing to execute on our strategy. If we execute on our strategy, improve our returns, generate a level of EPS and bottom line growth that exceeds that of the market and of our peers, then we'll earn a premium currency. If you have a premium currency, then it puts M&A back on the table. Today, we feel like the best investment is an investment in Synovus, and we truly believe that just based on the marketplace that we're in, the opportunities to deepen the share of wallet, the opportunities to gain market share. But eventually, you would say, yes, if you're doing that well and you're executing with that level of dexterity, why wouldn't you want to be bigger and have scale? And what's changed, Ryan, maybe in the last 6 months is you see that bright line at $100 billion, which maybe before wasn't as bright, and the cost to be compliant for enhanced prudential standards and to carry the extra capital becomes more punitive. So if you were ever to do M&A, I don't know that you'd want to get into no man's land, which is now labeled $80 billion to $100 billion, $120 billion. You'd want to get past that or you'd want to stay below $80 billion. And so we're very comfortable at $60 billion today and have a lot of runway even before that $100 billion mark even becomes part of the discussion. But if you're going to do M&A, you'd want to get enough scale to where the additional capital and the additional requirements that would be part of the tailoring rules aren't punitive.

And in closing here, because we are out of time, but I don't think there's a presentation yet, so I'll squeeze in one last one. You've generated outstanding PPNR, EPS and dividend growth per share. Stock still trades at a discount. Any last message for investors what you think the market is missing about the story at this point?

Yes, Ryan. I think it's a risk profile discussion. And we've talked about that more recently. We displayed the growth that we showed on that slide. So why are we trading at a discount to some of our peers? I believe it's a risk equation. Number one, people look at the global financial crisis and see that our losses were higher and we haven't really had an economic downturn where we can prove that point that we're a different balance sheet today. And we have the opportunity to do that or may have the opportunity that. Number 2, in this environment with liquidity, we screen a little higher for wholesale funding. And that's a little bit of a function of the history of our bank. We've always been kind of a CRE bank, not a retail bank. And so we haven't had the lowest-cost deposit base. And so in this environment where we've seen the highest increase in Fed rates in my history, it showed that our deposits reprice faster than our peers on average. And so we have the opportunity to continue to improve our liquidity and our cost of funds while balancing our balance sheet. That's why we've eliminated some assets. And the third really just comes down to capital. And I think we've heard the question about why your capital levels are lower, and that's easy to achieve. So if we show you the growth, if we keep winning these awards that our clients tell us we're doing really well and we reduce our risk profile, I would argue that we're a great investment.

Fantastic. Well, please join me in thanking Kevin and the Synovus team.