Q3 2021 Synovus Financial Corp Earnings Call
And Lauren Harrington is 14 year old daughter Alley, and alleys friend Giulia, All four were killed in a plane crash on October 8th shortly after takeoff from a private airport in Atlanta. Many of you have likely heard US mentioned jonathan's name or May have even met him and you've certainly heard us talk about the extensive.
Impact he has made on our company since we acquired his life insurance premium Finance company on tear global one in 2016.
In addition to exceeding expectations and growing as premium Finance Division. He also oversaw our asset based lending team and built out a world class structured lending business, but as successful as he was in his work. He was even more passionate about his family and helping others, especially evident through his Rosen family Foundation.
That promotes financial empowerment across the socioeconomic spectrum.
His assistant Lauren was equally equally dedicated to her work and to impacting others. As you can imagine our entire work family is dealing with tremendous shock and sadness over this unimaginable loss, but Jonathan built an amazingly talented team that is doing a remarkable job of carrying on under difficult circumstances Jonathan.
[noise] would've wanted it no other way and would have been the first to acknowledge that all of his business success was more of a product of his team rather than himself I am not sure I agree, but I am confident in the team. He has built to carry his vision forward. Please join us in keeping the families friends and colleagues have all lost.
And your thoughts and prayers.
Now, let's shift to our third quarter results.
We are delivering on our growth objectives as evidenced by the period end loans core operating deposits and broad base fee income growth at the same time, we have maintained good expense discipline, while continuing to invest in longer term initiatives and have managed through the challenging interest rate environment by strategically investing.
<unk> excess liquidity, while continuing to lower the overall cost of deposits.
Loan growth was extremely strong for the quarter as funded commercial loan production increased almost 70% versus the previous quarter, which more than offset the ongoing elevated levels of payoffs and paydowns.
Fee income was up $8 million or 8% versus the second quarter with wealth and capital markets income posting strong growth as well as core banking fees returning to more normalized levels post COVID-19.
Our treasury and payments team set a new high bar in terms of new production at $10 $6 million year to date, surpassing its full year 2020 totals during the month of September.
We also continue to deliver on our synovus forward initiatives, which reached at pre tax run rate benefit of approximately $100 million by quarter end.
And we're making great progress in planning for the additional $75 million worth of benefits to be delivered by the end of 2022.
Synovus for it represents our ongoing innovation and profitable growth mindset, but it will also drive our efficiency efforts in order to ensure we deliver on our sustainable top quartile financial performance objectives.
On the efficiency front additional branch consolidation is underway with four additional branches scheduled for closure by year end and we will continue to rationalize the branch network as we reinvent the retail delivery model. The efficiency efforts will enhance returns, but also allow us to further our investment in specialized talent to build up.
New businesses and product lines through strategic hires this quarter, we have expanded our specialty lending coverage to restaurant services strengthened our middle market, Florida presence and announce our expansion into the corporate and investment banking segment.
We continue to make progress on our efforts to digitize our business through the third quarter, we have migrated 90% of our clients onto synovus gateway, our commercial portal and usage of my Synovus, our consumer platform indicates that digital usage continues to expand with an additional 10% increase in enrollment.
And active users. Moreover, a concerted effort has led to a 43% increase in paperless enrollment in 2021.
We recognize that many of these advancements are table stakes in our industry and therefore, we are focusing additional resources on more transformational opportunities efforts are underway to expand our digital engagement through insights. We are also expanding the solutions, we offer our ISO and <unk> clients and are working on the next generation of <unk>.
<unk> integrated Treasury solutions. These and other initiatives are all focused on delivering new sources of revenue in the coming quarters and years ahead.
Our strategic plan forward balances our investments in both core and transformational initiatives in order to generate both short and long term returns while building on our core differentiation principles now, let's take a look at the financials for the quarter.
On slide three we've included some key financial highlights for the quarter I'd like to begin with loan growth, which increased $923 million excluding changes in P. Three balances as mentioned previously record levels of funded commercial production drove the growth for the quarter. We expect this momentum to carry into the fourth quarter.
As commercial pipelines remain robust quality.
Quality deposit growth continued in the third quarter, including an increase in core transaction deposits of $1 billion. We continue to take advantage of this liquidity environment to focus on Remixing, our deposit base and along with strategic repricing. This has helped lower the overall cost of deposits by an additional three basis point.
To 0.13%.
We continue to experience balance augmentation, but our core focus on operating accounts has led to DTA and now production to increased 34% versus the prior quarter.
Jamie will provide additional details regarding the balance sheet, but our goal remains consistent in this environment, attracting and deepening core relationships.
Total adjusted revenue of $500 million increased 2% from the prior quarter, while adjusted expenses declined $1 million to $267 million. This resulted in a 6% increase in adjusted pre provision net revenue quarter on quarter.
And $8 million reversal of provision for credit losses resulted from the provision expense associated with strong loan growth being more than offset by a reduction in life of loan loss estimates.
Adjusted net income was $178 million or $1 20 diluted earnings per share.
As we have returned to a position of growth we have done so with strong credit liquidity and capital metrics.
The net charge off ratio declined six basis points this quarter to point to 2%, while the NPL and NPA ratios each fell one basis point.
The ACL ratio was down 12 basis points, excluding P. Three loans ending the quarter at 1.42% and the CET one ratio declined 12 basis points to 963% and remained slightly above our stated range.
At this point I'll turn it over to Jamie to provide more details on the financials Jamie.
Thank you Kevin.
Starting with slide four we ended the quarter with total assets of $55 5 billion in loans of $38 3 billion.
Total loans, excluding <unk> balances grew $923 million up 3% from the prior quarter led by growth in C&I and third party consumer loans.
<unk> balances declined $818 million.
In the third quarter, we had record commercial loan production. However transaction activity remained elevated which led to a $500 million increase in payoff primarily in the CRE portfolio.
Regional economic data as well as client conversations continue to give us a cautiously optimistic outlook on the pace of economic recovery in our footprint.
We continue to see growth in commitments and are well positioned to increase funded loan balances as market uncertainty and liquidity subsides.
C&I line utilization declined approximately 70 basis points to 39%.
A return to normalized levels of C&I line utilization would result in over $750 million in funded balances.
The liquidity environment continues to be a headwind to consumer loan demand and resulted in declines in our HELOC portfolio of $50 million.
Our third party lending strategy as one means of responding to this liquidity in capital environment, providing attractive risk adjusted returns while diversifying the loan portfolio.
We continue to leverage third party consumer lending to all set consumer loans declined as evidenced by the $267 million increase in third party consumer loans for the third quarter.
In order to offset continued increase in liquidity, we grew the securities portfolio about $1 billion to 19% of total assets at the end of the quarter.
As evidenced in the appendix a significant portion of the growth was in short dated securities, which mature in less than one year.
We intend to continue rebuilding the third party consumer loan portfolio to prepay endemic levels as long as we secure more assets with attractive risk adjusted return at the end of the third quarter third party held for investment balances were $1 7 billion.
Or 3% of total assets.
Growth in this portfolio is predicated on the overall balance sheet dynamics, including capital and liquidity and client loan growth.
As you can see on slide five core transaction deposits increased $1 billion or 3% from the prior quarter.
Core non interest bearing deposit growth of $490 million or 3% was offset by strategic declines in time and brokered deposit portfolios.
Total deposit costs continued to decline with reduction of three basis points to 13 basis points.
This was primarily driven by deposit mix optimization and strategic reductions in high cost transactional deposits.
Time deposits declined 35% from the prior year accounting for 5% of total deposits compared to 9% a year ago.
This was led by the reduction in higher cost Cds.
We believe there are additional opportunities for improvement through ongoing product repricing and the continued disciplined balance sheet management. It is likely that deposit costs remain relatively stable over the next two quarters.
As shown on slide six net interest income was $385 million, an increase of $3 million from the prior quarter.
The net interest margin was stable with a decline of one basis point to three point or 1%.
We are focused on profitable growth over the long term, which includes further optimization of the balance sheet through strategies I just outlined on the previous slides.
Our top priority remains multi solution client growth.
However, we believe there are further opportunities to balance credit duration and liquidity risks.
We believe this longer term view in conjunction with strong commercial loan production in a high growth southeast footprint can provide outsize NII increase.
We reiterate our previous guidance that NII, excluding P. Three will increase in the second half of the year.
Loan growth.
Appointment of excess liquidity are expected to offset headwinds from continued fixed rate repricing and a slight reduction in LIBOR.
We expect <unk> revenue to decline.
Eight and $12 million in the fourth quarter.
The net interest margin continues to be pressured by the liquidity environment.
While liquidity is generally accretive to NII the impact of cash on the balance sheet and securities portfolio growth are likely to continue to be a NIM headwind for the foreseeable future.
Slide seven shows total adjusted noninterest revenue of $114 million up $8 million from the previous quarter.
The increase was led by growth of $5 million in capital markets.
Which resulted from swap income and $2 million and loan syndication fees.
The growth in syndication fees is evidence of why we believe we have opportunities to go upmarket and compete.
Kevin will speak more to this shortly.
Broad based growth across other NAR categories was evidenced by our performance in our Treasury group and core banking fees and highlighted by our wealth areas that are up more than 25% year over year.
In the third quarter, we had approximately $4 million in revenue associated with SBA loan sales and low income housing transactions.
In the fourth quarter, we expect adjusted NII to decline as broad based growth is more than offset by the continued normalization of mortgage revenues.
Seasonality of our brokerage business.
And third quarter gains that are not expected to repeat.
Slide eight highlights total adjusted noninterest expense of $267 million.
Down $1 million from the prior quarter.
A $5 million reduction in third party processing fees was offset by a $4 million increase in production incentives and additional project spend of $2 million we.
We expect a similar level of adjusted noninterest expense in the fourth quarter with some increases in areas related to increased branch staffing expense as well as revenue and customer facing projects as we invest for future topline growth.
Key credit metrics on slide nine remained stable near historical lows.
Net charge off ratio fell six basis points to two 2%, while criticized and classified loans declined 22%.
The NPA and NPL ratios were each down one basis point.
Past dues were flat at <unk>, 3%, excluding the increase from <unk> three loans.
We expect net charge offs in the fourth quarter to remain relatively stable.
And assuming a similar trend in economic improvement a further reduction in the ACL ratio, which ended the quarter down 12 basis points, excluding <unk> loans to 142%.
This quarter the baseline economic outlook improved however, due to economic uncertainty our multi scenario framework included a 45% bias to downside scenarios.
As noted on slide 10.
The CET one ratio declined 12 basis points to 963% due primarily to capital deployment for growth in our loan and securities portfolios as we continue to actively manage excess liquidity.
Strong financial performance allowed us to return capital to shareholders through share repurchases and common shareholder dividend.
Through the end of the third quarter, we have completed approximately $167 million.
Of the $200 million share repurchase authorization for the year.
Or do you expect to repurchase the remaining $33 million in the fourth quarter.
We will continue deploying capital to support client growth and facilitate opportunistic inorganic opportunities like third party consumer purchases, while returning capital to our shareholders.
Our capital position remains strong and we are well positioned to complete key strategic objective focus on profitable growth prioritizing multi solution client relationships.
I'll now turn it back to Kevin.
Thank you Jamie on March three 2020, the Federal Reserve announced an emergency rate cut of 50 basis points that same day, we unveiled details of synovus forward. A plan. We created in 2019 that would deliver an incremental pre tax run rate benefit of $100 million by the end of 2020.
One.
We're excited today to share that our efforts to date have yielded approximately $100 million in pretax benefits half of the benefit to date comes from expenses, which were frontloaded in the plan to better fund the journey forward as a reminder, the most significant items to date have come from organizational efficiencies and head count reductions.
A reduction in third party spend as well as branch and non branch real estate consolidation as.
As a result of these actions as well as demand management, our adjusted expenses are down $15 million year to date or 2%.
Although expense reductions will become a lower percentage of the synovus forward benefits in 2022, we will continue to manage with discipline as we expect inflationary pressures, especially around wages will impact our overall expense base over the near term.
One of our ongoing initiatives as branch rationalization, we are scheduled to close an additional four branches in the fourth quarter, bringing our total consolidation to 20 locations since January 2020.
We have additional closures planned in 2022 as we continue to see the opportunity to optimize the network and do so without having outsize attrition.
We ranked favorably in key metrics such as deposits per branch and Brock branch proximity we believe our digital efforts as well as the shifting behaviors of our clients provide an opportunity to further streamline our delivery through our bricks and mortar channel.
And these changes are not limited to branches last month, we announced our strategy to optimize our real estate here at our headquarters by selling our own real estate and consolidating our nine corporate and retail locations in Uptown Columbus into three it allows us to evolve our workplace for the future of work, while reducing our overall square foot.
<unk> by over 60%, leading to a lower run rate expense and greater flexibility for potential future optimization opportunities.
As we move forward our key focus on expenses will be on optimizing how and where we invest by delivering ongoing efficiencies. In this quickly changing landscape, we have and will continue to reallocate resources from infrastructure to innovation and support functions to revenue producing talent.
Our investments will be governed and prioritized by the objective of maintaining long term positive operating leverage which leads to our discussion regarding revenue enhancement within synovus forward much of the future benefits are predicated on the use of analytics to drive a deeper share of wallet enhanced analytics are now firmly in play.
As for our commercial line of business and we have begun development for our consumer L. O b to complement the high touch approach that our team members deliver today.
These more timely and actionable insights promote our ability to offer more meaningful advisory capabilities and solutions and better meet the needs of our clients.
A significant portion of the incremental revenue benefit in the third quarter relates to our profitability enhancements as well as our balance sheet management efforts.
Similar to our pricing for value initiative within Treasury management, beginning in the fourth quarter of 2020, we began utilizing various analytical tools and capabilities to actively drive deposit costs lower.
Of the 26 basis point decline in deposit pricing that occurred over that time frame. Our synovus forward initiatives drove additional product and customer level repricing, which represented three basis points of that decline contributing $15 million in incremental pre tax run rate benefit by the end of the quarter.
Additional balance sheet management efforts have largely been centered around increasing the risk adjusted yield of the loan portfolio targeted remixing of a subset of consumer loans throughout 2021 has translated into relative higher yields, resulting in an incremental pre tax run rate benefit of $16 million.
We remain committed and on track to achieve the cumulative pre tax run rate benefit of $175 million by the end of 2022 and are confident about the opportunities ahead to achieve those benefits.
Consistent with our reporting to date, we will provide more detail on each initiative as they are sized and realized some of the future initiatives are a function of our renewed focus on innovation I'm excited to provide more details regarding new products and solutions later in the year as we work towards their respective rollout.
Our 2021 outlook on slide 12 remains unchanged from the prior quarter, However, I'd like to share some additional updates on how we expect to end the year.
In July we mentioned that we expected 2021 loan growth excluding balanced change from P. Three and third party consumer loans to be at the low end of the 2% to 4% guidance, while payoff activity remains a significant headwind recent productions client conversations and our loan pipeline.
Leads us to expect loan growth to be in the lower half of our guidance.
Although excluded from the guidance. It's important to note that we've increased third party consumer loans more than $1 billion year to date and our total loans at the end of the third quarter were up 4% excluding changes in P. Three balances.
Total adjusted revenues are expected at the higher end of the negative 1% to 1% guidance as the balance sheet management efforts, we've taken throughout the year to monetize excess liquidity and reduce the cost of funds are being complemented by a broad base fee revenue growth outside of the normalization.
<unk> of mortgage revenues.
Similarly total adjusted expenses are expected to end the year within the existing guidance of negative 1% to negative 2%, thus, providing the opportunity to achieve positive operating leverage.
We expect to achieve this reduction while making longer term investments in talent and technology that support accelerated topline growth.
We also reiterate our capital and tax guidance the capital guidance assumes we compete complete the full $200 million share repurchase authorization this year and achieve our loan growth targets were.
Were also trending towards the lower half of the effective tax rate guidance of 22% to 24%.
Before opening the call for Q&A, Let me first thank all of our Synovus team members for their third quarter efforts. There are so many to mention but I do want to acknowledge our wholesale banking team who generated record levels of loan production, our Fms in treasury and payment solution teams, who generated 25 plus percent fee.
Income growth versus 2020, and our community bank for continuing to drive strong core deposit growth I also want to reiterate my excitement for our new team members. We have on boarded this past quarter and for those that are scheduled to join us in the fourth quarter.
As I announced in the beginning of the call we will be building out a corporate and investment banking team, which will allow us to move up market a bit into a segment that I believe we have the capabilities and talent to win in the team will be built around specific industry specialties to allow for customized and expert advice and providing credit and deposit.
Tori products as well as traditional capital market solutions.
We'll share more about the progress in this area as well as other build outs, including our restaurant services Division and our expanded Florida commercial strategy over the coming quarters.
Lastly, I am pleased to share that we will be hosting an investor day in early February 2022 are first in many years.
During this event, we will provide clearer long term guidance with supporting information from our various business units to show, where we're focused on and driving profitable growth.
Here for more of our leadership team and I believe youll share the confidence that I have that we will be successfully delivering on our key strategic and financial objectives with that I'll turn the call over to our operator for the Q&A portion.
Thank you we will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
In the interest of time, please limit yourself to one question and one follow up at this time, we will pause momentarily to assemble our roster.
Our first question comes from Brad Millsaps from Piper Sandler. Please go ahead morning, Brad.
Hey, good morning.
Good morning, Brad.
Good morning, Kevin.
You guys had a nice quarter about loan growth.
Curious if you could just add a little bit of color to kind of the nature of the C&I growth.
<unk>.
From your existing customers or are you going you're starting to see success with some of your maybe add market upmarket type.
Lending that Youre looking to do just kind of wanted to get a sense of kind of where some of the growth is coming from and I know you commented. It seems like you are still conservative with your guidance.
At least through the end of the year, but just kind of curious.
Are you encouraged that you can kind of get back to that sort of mid single digit type rate that you've talked about over the longer term.
Yes, Brian. Thank you for the question and look yes, we're really excited about what the third quarter.
Was able to prove out from a from a growth standpoint at the top of the house the $923 million worth of growth ex PPP is about 10% annualized but to your point if you back out the third party. We still grew our what we would call kind of our core loans $660 million or 8% annualized big piece.
That as you mentioned came from C&I, It was roughly $600 million worth of growth or 14% annualized and it was really across a bunch of different areas not only increment you mentioned up market. There was growth in specialty lending, but there was also growth in are our core middle market franchise. We also saw.
A tremendous amount of diversified gross growth across some of the <unk> codes. We had five <unk> codes that had over $50 million worth of growth, including finance and insurance healthcare accommodations and food services construction and manufacturing. So it was really really broad based.
When you look at the total production total production was up about 50% versus where it was last quarter just C&I.
At the same time, we also saw growth in CRE, we saw a 90% increase in production quarter over quarter. There. So as we shared at the beginning of the year, we really felt like commercial was going to be the place we had the right to win and where we would grow and we think the third quarter.
Move that out in terms of being able to maintain that mid single digit long term. Yes. We've always felt like we will be able to produce a level of growth that exceeds that of our state GDP.
Question, Mark that we've had and it continued this quarter, we were just able to overcome it when you look at the level of payoffs that we had at $2 $1 billion in commercial that was about $700 million higher than the nine quarter average. So when you look at what's happening from our clients perspective, we have a lot of customers who are taking <unk>.
It's off the table because of the perspective change in capital gains as well as cap rates on the CRE side being very very low. So we believe that we'll be able to continue the momentum on the production side. We think some of these new businesses that we're bringing on board will provide some tailwind on that with the real headwinds being the payoffs that we.
We saw this quarter and we would expect to see those elevated again in the fourth quarter as we close out 2021.
Thank you and as my follow up.
Jamie I was curious if you could.
Comment on kind of the impact of Green Sky.
Selling to Goldman.
So novus I know a little over a year ago, you change that relationship to where it was less of a balance sheet quite a few guys more one that impact.
Fee income, but just kind of curious what it means for.
For the P&L going forward, presumably if that if that relationship with <unk> no longer exists.
Yes, Brad I mean, it's a great question.
You are well aware that our relationship with Green Sky goes back a long way than it has been a great partnership between organizations.
But also you are aware that our third party portfolio has evolved over time as we look for the right assets that fit our strategic priorities.
Within Green Sky, you've seen the relationship evolved from the <unk> strategy to Hff's strategy.
That actually uniquely help both companies and so the relationship has been very close.
We're pleased with how we've worked together.
So we can both achieve our strategic objectives and priorities.
And we're in conversations with Green Sky as we navigate through their changes and we're comfortable we will find an amicable amicable solution I would say it's too early to think about what the features they may look like because it's just uncertain at the moment, but wearing.
We're in conversations with them and we feel good about where we are.
Okay, great. Thank you.
Thanks, Brian.
The next question comes from Ebrahim <unk> from Bank of America. Please go ahead.
Good morning, good morning.
Maybe firstly.
Sincere condolences for the tragedy and you mentioned Kevin.
Thanks Amy.
Just maybe to start out at the very last point in terms of the build out of the I think restaurant finance and you mentioned the corporate investment bank, how meaningful are those buildout is going to be as we think about operating leverage or.
Over the next few quarters, you've been in that 50, 455% adjusted efficiency I'm, just wondering avi on track where over the next course of the next year or two we are moving to the low fifty's give us a sense of just maybe.
The cadence of what that investment spend around building out those businesses look like.
No.
It's a really good question because as we've said in previous quarters. Our focus is getting back to a long term positive operating leverage environment and for us that that's going to be the calibration for how we evaluate how much money, we're willing to spend on certain investments and so when we look at.
The corporate and investment banking unit or some of the other build outs like the restaurant services Division, our new talent in Florida.
We're going to make sure that when we make those investments number one that they have a solid earn back that we look at what that.
Business or product unit would bring to the P&L and we want to.
To make sure that it's a relatively short payback period too as we build out some of these units and we will share that with you.
We believe that we'll be able to continue to invest while finding efficiencies in other areas that will allow us to maintain that positive operating leverage. So I wouldn't want you to think that we're in.
Going to.
And build out these these new businesses and it's going to be a side note as it relates to our overarching goals on the efficiency front now we're not in a position today to give you our 2022 or 2023 efficiency targets, but based on the goal of maintaining positive operating leverage you should assume that our goal is to continue.
<unk> to push that efficiency ratio lower despite some of these investments in the way that we're ladder in many of these investments many will start to produce and that will allow us to start to fund new initiatives and build out the teams.
And even greater scale over time, but.
It needs to be synergistic to where we're.
Go out and growing the bank, but it is helping to fund future growth.
Got it that's helpful and just I guess, maybe Jamie.
Party partnerships you meant mentioned its about 3% of assets remind us how youre thinking about how large it can get what it was previously when you had a third party relationships.
So pre pandemic and.
Just as a follow up on Green Sky is the only impact, let's say if that relationship would be terminated.
Tied to the held for sale balances or are there additional P&L impacts that we should be thinking about thanks.
Yeah Ebrahim on the third party, we are very comfortable with that portfolio.
They're being.
At the same level that it was pre pandemic and so if you looked at.
The percentage of loans, we show percentage of assets in our in our presentation today.
As a percentage of loans.
It peaked around 6% in the third quarter.
19.
It was 5%.
We're comfortable in that area.
And there is no magic to the size of that portfolio. We feel that we are very capable in managing that portfolio, we believe and our partnerships. We have long relationships with all of them and feel good about where we are and our knowledge of those.
Bones, and so we're very comfortable with that portfolio.
<unk> seen us diversify the risks embedded in that portfolio by looking at.
Collateralized loans as well as shorter duration loans and so we feel good about.
The opportunities were finding there and it is our intent to continue growing that portfolio.
Those as we move forward, but we will only do so if the right risk adjusted returns are there with regards to green sky in the future evolution of that portfolio I would just say to the two <unk>.
<unk> components of that or the HFF strategy and <unk> strategy, but it's too early to.
Around the potential financial impact in the various scenarios that could play out.
But even here I would just add I just want to make sure you had that are held for investment there is now less than $250 million. So it's a relatively small balance.
On our outstanding loans held for investment side, so it hasnt been continue.
To diminish over time.
That's helpful and because one of the big <unk>.
Synergies that Goldman obviously sciences on the funding side, so I would assume at some point they wanted to bring all of that in house. So thanks for that clarification.
Clarification and thanks for taking my questions. Thank.
Thank you.
The next question comes from Jennifer Denver from true.
<unk> Securities. Please go ahead.
Thank you good morning.
Good morning, Jennifer.
Kevin I'm wondering if you can expand on your comment on going upmarket kind of talk about what kind of loan sizes here.
Now willing to do versus previously and if you could talk.
We're a little bit about restaurant services and what that team will do.
So you know Jennifer as it relates to going up market outside of the expansion into this corporate and investment banking capabilities. Our wholesale bank is already built out of syndicated finance arm. This quarter, we had our very.
Barge lead arranger fee $1 $6 million on transaction that we lead and so we believe today, we already have the capabilities to go up market and originate larger loans over $100 million and sell down those loans. So that would continue and under this corporate and investment.
Banking model, we do want to make sure that as we build this out we're not going to build a generalized model we're going to go after industry specialty in the corporate investment banking space and that will be predicated based on what's available in the marketplace from a talent standpoint, but also we will align that with those areas that we think were particularly strong in the southeast and with.
Very largest banking franchise to make sure that we that we leverage that.
In terms of hold limits, we really havent changed our hold limits.
That will stay the same we generally do not keep credits larger than $100 million and that would not change there are total.
Our hold levels would not change, it's really just but will go up market for larger customers will be able to sell some of those down on our restaurant services business. It was really attracting a team from a super regional bank that has been covering franchise and restaurant businesses nationally.
It would be full serve.
<unk> and the like we've proven out with things like specialty finance senior housing, where when we bring in a very skilled bankers that have industry expertise, we're able to grow that business and we think we've been able to do that with the traction of this team that will that will focus on restaurant services.
Service Okay. Thank you.
The next question comes from Michael Rose from Raymond James. Please go ahead.
Hey, good morning, and thanks for taking my questions just wanted to circle back to the revenue guide.
If I just take the high end it implies about a $21 million decline from the third quarter.
I used to get to the adjusted full year guidance and I understand you know about $10 million, that's going to be declining PPP fees, given the eight to 12.
Step down can you just kind of speak to that and what the what the puts and takes are just seems conservative.
So yes this is Jamie.
For the question.
As we.
Look at the revenue guide and the outlook for the fourth quarter you are right there are some.
Revenues that happened in the third quarter that will not likely to recur in the fourth quarter Paycheck protection program being the first as you mentioned, we expect that to decline somewhere between $8 million to $12 million in the fourth quarter.
Revenue that's highly uncertain.
But on the fee revenue side.
<unk> was very strong in the third quarter and we saw the same broad base growth that we've been talking about for quarters.
And it's a really good story however.
There are a few things that happened in the third quarter that are not likely.
Avi would occur in the fourth quarter and those include.
Some sales of affordable housing SBA sales.
And then there'll also be some seasonal impacts in truck brokerage and mortgage there could be quarter on quarter headwinds. So we feel good about our overall revenue guidance for 'twenty, one we expect to land at the higher end.
Two range.
And we think that we're positioned well heading into 2022.
Okay. That's helpful. And then maybe just going to the to the margin if I exclude PPP fees. It looks like the core margin was down somewhere closer to eight basis points this quarter.
I think we're getting to a point where.
The NIM is going to start to stabilize particularly as loan growth.
Next up in the rest of the PPP is forgiven.
Just as we as we move forward.
Yeah.
As we look at the margin I mean, there are there obvious headwinds.
As we move forward just to the headline margin.
I know you.
Excluding <unk>, which we do as well.
But that decline in <unk> fee recognition in the fourth quarter will impact the headline.
Margin fairly significantly in the fourth quarter.
But when you exclude the paycheck protection program.
You have a couple of crosscurrents. So first is current rates are.
Slight headwind.
To both NII and the margin.
Given current short term and long term rates.
But the liquidity environment is a notable NIM headwind.
We're working against as we try to deploy our liquidity and our balance sheet.
Our outlook for the margin in general.
Remains in the same context, we discussed last quarter.
With our medium term margin in the in the 3% area.
But we would highlight that the NIM outlook is very dependent on that future deposit growth.
That that deposit growth that incremental liquidity.
Is generally accretive.
General to NII.
But that increase cash on the balance sheet or even if we deploy it to the securities portfolio as NIM dilutive so.
We feel good about our core NII outlook, we believe are pointing to a steady growth.
And liquidity is deployed in the client loans third party and securities.
<unk> that should more than offset the rate headwinds at current levels.
But we do acknowledge that the liquidity environment can.
Impact the margin pretty significantly.
Very helpful. Thanks for taking my question.
Thank you Michael.
The next question comes from.
Steven Alexopoulos from Jpmorgan. Please go ahead.
Hi, good morning good.
Good morning, This is Anthony Elian on for Steve.
First question on loan growth on slide four you showed that commercial loan payoffs were about $2 billion in the third quarter give a sense of how much of these pay offs or refinance.
Singing staying with synovus and the funded production bucket as opposed to the <unk>.
Pandit bucket, representing brand new loans to the bank.
Sorry.
None of those would have been refinanced out. So those are total pay offs. So they would have exited the balance sheet.
Okay.
Finance or the Blue bar.
Little more than $2 billion represent entirely new.
Production to the bank.
Right those are new loans, new new originations funded loans and then on the other bar that represents pay offs and as I said earlier that $2 1 billion and commercial payoffs.
Over the last nine quarters has averaged only about 1 billion four so we've seen elevation there, but when you look at the production side that $2 $5 billion worth of funded production new loans, it's actually up 70% versus the previous quarter. So despite the fact that we did see elevated payoffs, we were able to overcome that.
<unk> seen a much higher increase in production.
Okay, Great and then my follow up.
So you kept the loan growth outlook unchanged at the low end or it's a little half of 2% to 4% ex TPB and X third party consumer, which if I just do the math it would imply a little bit of a slowdown.
In.
In terms of dollars of growth in the fourth quarter anything particular, you're seeing that could lead to loan growth decelerating or is this just a little bit of conservatism baked in here. Thank you Tony.
It's a good question.
We're looking at a crystal ball and trying to look at all of the elements our pipelines remain robust theres still up 20%.
Sent over where they were entering the year theyre down a little bit from the from the beginning of the third quarter, just because we had such strong production. So we're very confident in the production side of the equation. What's the challenges on these on these payoffs as we close out 2021, knowing that theres a potential for a change in tax treatment.
<unk>, we're cognizant that there could be elevated activity. This quarter that would result in even higher payoff activity now we don't have anything at this point that would show that that's the case, but we want to make sure that as we look into the fourth quarter, we evaluate that as a potential so that's.
Our guidance last quarter.
Order was that we would be at the low end of the range. We suddenly said in our guidance this quarter that we would be.
Above the low end of the range. So we could move more towards.
The median but it really will be a function of what that payoff activity is not our productivity.
Thank you.
The next question comes from Steven Duong from RBC. Please go ahead.
Hey, good morning, guys.
Steve.
Just a question on your margin I guess your interest rate sensitivity table from last quarter.
The gradual parallel 100.
Third basis point rise in rates.
NII goes up by three 2% can you share with us the deposit beta assumptions that you put into that in terms of whether they were fully loaded on the first rate hike or if they were graduated us through to that four quarter period.
Yes, as we think about deposit betas in this environment.
We expect that deposit betas will be very low fairly de minimis for the first few rate hikes.
Beyond that.
We would expect to see something in the area of about a 40% beta.
As rates go higher from there.
<unk>.
Okay. So is that in your interest rate sensitivity table in the second quarter.
Yes.
Okay got it.
And then just my follow up is.
Just on your sense as you guys are doing a great job managing the expenses are you seeing any signs of wage pressure pumping.
<unk> as you try to manage these expenses.
Stephen Thats, a new headwind, obviously, everybody sees what's happening with the labor force and potential inflation around wages, we're seeing that as well predominantly in our entry level positions and those folks that make below the median wage here.
Here at Synovus, which is right around $60000, we did in the third quarter.
Make an adjustment to all of those individuals to give them a cost of living adjustment just based on that but I think as we're looking at hiring and new talent, we see the cost rising across the board and I think thats, just something that whether it's the financial.
Services industry or any other industry I think it's just part of the equation.
Part of what makes it important to build a place that people want to work when you look at our attrition. This year annualized we're still at about 23% and total attrition. If you compare that back to 2019, we were roughly at 19%.
So although we've seen an increase in attrition, it's not at the levels that some of our peers are experiencing from some of the benchmarks I've seen so I think for US part of it is going to be to compete from a wage standpoint, but as we all know theres more to a job and just what you earn in so we're trying to make sure that we drive.
Better levels of engagement.
<unk> through development career development to make sure that we're offering perks outside of wages, but ultimately we agree that youre going to see some inflationary pressure on wages as we move forward.
I appreciate that and right now, it's just occurring at the entry level it hasn't Permian.
Permian is much for.
Is that correct.
I think it's more pronounced at the entry level, just because you have higher turnover there. So youre seeing the new wages come on what's changing I think for all companies is the ability to work remote has widened people.
Sandbox, so that they can get a job working.
And in New York out of Atlanta, Georgia, Columbus, Georgia, and so that in and of itself increases potential that cost of employment just because there is new entrants into the marketplace to be able to compete for that talent. So I think youre going to see it across the spectrum, where we've seen it to date, just because of a higher level of attrition has been on those entry level position.
<unk>.
Alright, I appreciate the color. Thank you.
Stephen Let me jump in on this Jamie on that deposit beta.
Beta we have in there is 35%.
As rates go up the 40% that we had more crucified.
Got it I appreciate.
Got it thank you.
The next question comes from Brody Preston from Stephens, Inc. Please go ahead.
Hey, good morning, everyone. Good morning Brody.
Hey, Jamie just on the expense guidance.
You gave color on the revenue guide that you expect to be.
Towards the higher end of the guidance on the.
As you all are trending towards the better end of that.
That guidance.
Year to date, and so as I think about the fourth quarter run rate.
Given some of the fee income items that might not reoccur and maybe it's.
Another slower mortgage quarters. There is there any reason to think that expenses should should inflect higher in the fourth quarter or should we continue on a downward trajectory here.
Yes, we believe that expenses in the fourth quarter will likely be relatively stable to the to the third quarter.
So there are some typical inflationary pressures on NIH, but we also have.
And we also have incremental spend for growth.
So we have those we have some tailwind that come through on some of our synovus forward initiatives and so as we balance all of those out looking at the fourth quarter, we expect.
NIH.
It would be relatively relatively stable to the.
To the third quarter.
Got it Okay and then my follow up is a little bit of.
Of a multipart question here just around liquidity deployment.
You guys put a decent chunk of liquidity to work.
And so I guess I wanted to ask two questions as it relates to the securities portfolio. One it looked like that was may be weighted towards the back half of the quarter kind of comparing the average balance in the period end.
Little bit.
One is that the case and then to the security yields stabilized and so.
So you know, what's the kind of incremental yield that youre, putting on the books currently.
Yeah. Good questions and you are right generally about the timing and the going on yields are really really in the context of the portfolio yields so our book yield on the portfolio in the.
Third quarter was $1 45.
Our going on yields or are in a similar context between $1 40 and $1 50.
But you can also see that our strategy in the securities portfolio evolved a little bit in the third quarter, and we have about $650 million.
Other investments that are maturities.
Less than one year and so we're trying to you know trying to opportunistic opportunistically deploy that liquidity in the securities book.
In areas that don't have as much duration risk.
Conventional mortgage and so that's one of the strategies that we're currently deploying.
Got it. Thank you very much for taking my questions.
Yes, Thank you Brian.
The next question comes from Christopher Merrimack from Janney Montgomery Scott. Please go ahead.
Hey, Thanks, Good morning, Ken.
Kevin and I also echo condolences for Jonathan's laws and all.
The related parties.
I wanted to ask about your digital evolution at Synovus and it seems that a lot has happened in the last couple of months and I'm. Just curious if you were to make this a baseball game what inning do you think you are compared to where you really want to be and future earnings.
The baseball analogy Chris is hard.
I think unfortunately this is a game that doesn't play in a nine inning framework I think it's something that this game goes on forever. It maybe one of the ones where the timeless.
A game kind of like maybe some of these cricket games that go on for days, but the reality is we made great progress.
Focused on starting with our consumer plan.
Platform my synovus to enhance that several years ago, we rolled it out and if you look at the the Apple store rating today on our App, it's $4 eight which is one of the highest in the industry and I think Thats, a testament to our digital team and our consumer team working to make sure that the functionality and capabilities, we have within that platform meets the needs.
<unk> of our customers and it's agile and pliable. So we can continue to add new functionality over time, and I think you see that with our digital enrollment, adding zelle to the to the functionality last year moving more people to paperless all of the things that you want to see in the digital platform our focus on the consumer side really is about.
In the online account origination to the next level, we've been very successful on the mortgage front originating more than 70% of our mortgages via our digital application, we're seeing more traction on the <unk>.
Depository side and now we're working more towards the consumer lending platform. So youll.
I would tell you that if youre looking at.
<unk>, we're most focused on its online account origination enhancing that capability and making it even easier and faster for our customers to apply for our products on the commercial side. We're excited about the synovus gateway platform as we've shared we migrated about 90% of our customers over to the platform we have one additional way.
The area in the first quarter of next year, and we think that platform in and of itself.
Going to create a better user experience and it's going to allow us to continue to add new products and functionality that our customers not only need but will allow them to reduce their back office expense that we'll be able to automate many of the functions that theyre.
And so we're excited about that as I think you look into the future on commercial it's more about products and solutions and making sure that we continue to add there. So digital for US we will continue to be a part of our ongoing roadmap I think youll start to switch from service into more of a sales capability. We noted on the prepared.
Doing that adding insights both on our commercial side, which we've already done we're moving towards that insight driven model on the consumer side that will allow our bankers to offer advice more frequently and will allow the technology to queue up our customers for exciting offers or opportunities to improve their financial wellbeing. So.
Remarks out of work to go here, but I think we feel like we have the right focus and we have the right resources that will continue to drive ongoing investment.
No that's great I appreciate all the background there and I guess in addition to the positive operating leverage that Jamie both talked about this morning is it fair that the per transaction costs for synovus is going to be a lot.
There's a lot of it in future years, so what we've seen in the past.
Absolutely I mean, we talk about internally.
Radically automating our platforms to make it not only to cut the cycle times, but to reduce the expense. In addition, when you think about the cost associated with our bricks and mortar will continue.
So for you to consolidate that network and have the opportunity to reduce that cost of operations and ultimately then reduce our cost to serve but that has to be a key component of our positive operating leverage you won't do it just from asset sensitivity you won't do it through balanced augmentation and youre going to have to do it by growing your business, which is a keen.
Change of ours, but at the same time cutting your cost to serve.
Great. Thanks again for the time this morning.
Thank you Chris.
The next question comes from Brady Gailey from <unk>. Please go ahead.
Hey, Thanks, good morning, guys.
Good morning Brady.
I wanted.
So far with the reserve you came into this year with a reserve of a little over 180 basis points.
As credit has improved and fears of Covid have gone away. Its now down to about 140 basis points, assuming credit continues to hold in and get better from here how much further down do you think.
That reserve can can release too.
Yes.
Great question.
As you can look at our credit metrics you can see that we're not seeing credit deterioration in our loan portfolio. So we feel really good about where we are and what we have line of sight into on the credit side.
Is strong.
And when you look at the employment outlook overall for next year for 2022, our base outlook continues to improve.
However, we do believe that the uncertainty in the economic outlook is.
<unk> elevated.
And we quantify that as a higher.
Waiting to downside scenarios, we have that at 45%.
This quarter and that impacts the allowance.
And so when you look at just the base case scenario.
Over the past few quarters, we've seen a sequential improvement in life of loan losses in that scenario.
However, we do use a multi scenario framework.
And downside scenarios kind of.
They remain as severe as they were in the past and so.
That weighting impacts the rate of improvement of your allowance to loan ratio. So.
That's kind of what's been driving the decline.
Time and why the decline is.
Maybe maybe different.
Then what youre seeing seeing elsewhere.
But we do believe that our day one allowance.
Is indicative of where we should return in a more normalized economic outlook.
Assuming.
Loan mix remained the same and so we are seeing loan mix evolve, but and that could result in even better than day, one allowance to loan ratio but.
Those are the main puts and takes I mean, there is nothing that we see today.
Thats concerning to us on the credit side.
Base case scenario continues.
That though to show show.
<unk>.
And.
If we can reduce the uncertainty in the outlook.
We believe that that will drive further allowance to loan ratio improvements.
And Jamie remind us where was the day one ratio.
106%.
And then my follow up I wanted to ask just about share buybacks not necessarily for the fourth quarter. I think we know what you guys are going to do there, but as you look longer term.
In the past several years you guys have been pretty active in the buyback but.
Growth.
Feels like it's inflicting.
Industry It sure.
Like it's inflicting for you all in the third quarter with the uptick when you look longer term.
As growth kicks in or does the buyback take a back seat to that and should we expect a lesser amount of buybacks longer term just with you guys focusing more on deploying that capital through growth, which I know is your preference.
Well, you're exactly right on that being the preference and our strategic priority you know I feel like.
Over the course of 2021, we've all been scanning the horizon with binoculars looking for growth in the third quarter we.
We feel good about how the team performed in what we deliver.
And.
Sure.
That's our priority and that's our target for deploying that excess capital generated through earnings.
But when we look at longer term, we will continue to.
Target, Canada, 30% to 40% dividend payout ratio and then beyond that it really is back.
So between our risk adjusted returns on.
Growth on core client growth as well as third party in share repurchases and so.
Our intent is to deploy as much of that capital as possible to our clients and so we'll see.
Balance we'll see if this momentum continues we believe it will.
That's our intent for today.
Got it thanks guys.
Thank you Brady.
This concludes our question and answer session I would like to turn the conference back over to Mr. Kevin Blair for any closing remarks. Thank you.
Thank you and thanks.
One for your attendance today and for your ongoing interest in Synovus as I close I do want to congratulate once again, our head of Treasury and payment solutions, Catherine Weiss logo, and our chief strategy and customer experience officer, Liz Woolverton for their recognition among American bankers 2021, most powerful women in banking to watch.
It's hard to believe it's been nearly 130 days since I've taken the CEO role, it's been extremely smooth transition and Kessel and I continue to talk regularly as he actively serves in his new capacity as executive Chairman I want to thank our entire team for fresh perspectives for a constructive challenges to new ideas.
Is an opportunities for embracing change and for the excitement about our bright future like many of our peers, we're continuing to monitor COVID-19 trends in preparing for the next phase of the future of work. Despite those continued challenges our team has been unwavering in their ability to serve clients connecting new relationships.
Ships and growth opportunities and finding ways to care for each other and our communities.
Based on our results this quarter as well as the overall customer sentiment we remain very optimistic that we'll continue to see a constructive economic environment as we move into the fourth quarter and into 2022 and this will continue to serve as our platform.
Our focus on growth in the meantime, our team is heads down keenly focused on making the right strategic investments in both our core foundational elements are areas.
And understanding that we must make room for transformational opportunities that make us more competitive more efficient and valuable to our clients prospects in our in our stake.
<unk> for us.
Look forward to these future opportunities and continue to tell our story and deliver on our commitments, but if you allow me I wanted to end todays call with one of the guiding principles that Jonathan Rosen created for his global one business because I believe it's a fitting way to conclude our call and also to recognize him for his many contributions.
Take holders all of his principles were established and they were very concise, but powerful. This principle I chose today was number nine out of 10 and it was titled with purpose and it was it went think strategically act.
Particularly.
What we do each day must advance our.
<unk> if not we are just a day older. So Jonathan my friend. Thank you for that Sage advice, we will not let each day go by and realize we are just the day older. We will advance our strategy and with that operator, we will close out the call.
The conference has now concluded thank you for attending today's presentation.
Strategy now disconnect.
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