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Text: Kessel Stelling, chairman and chief executive officer, will begin the call.
He will be followed by Jamie Gregory, chief financial officer; and Kevin Blair, president and chief operating officer.
During the call, we will reference non-GAAP financial measures related to the company's performance.
And now here's Kessel Stelling.
This is the 45th quarterly earnings call I participated in with this great company.
My 44th as CEO, and I can tell you with great certainty that despite the lingering challenges for our company and the industry, these calls are ending for me on a much more positive note than when they started.
My very first call was in April of 2010, 11 years ago to the day as chief operating officer.
We were weeks away from completing the consolidation of 30 bank charters into one, and still very much in the early stages of recovering from the financial crisis.
Our team looks forward to these calls every quarter, in part because of the relationships we built with you.
While we don't always agree, we appreciate your commitment to and usually your delivery of fair assessments of our opportunities and our strengths.
Many of whom are listening in today.
This team has a passion, a drive, an incredible depth of talent, they simply won't take no for an answer.
They're time-tested and battle worn.
They dig deep and always find new ways to win.
I truly believe I work alongside the best team in the industry, and I'm regularly in awe of their dedication to each other, our customers, communities, and shareholders.
On Thursday, I'll confidently pass the CEO baton to Kevin Blair, who I strongly believe is more than capable and ready to take the helm.
I'm so proud of all we've done and beyond excited about what's still ahead, and that's where I'd like to focus the remainder of my comments.
The first is being positioned for success, which includes capturing the growth in our southeastern footprint, and capitalizing on our strong reputation with customers and communities.
Second is providing an exceptional customer experience, in which we continue to invest aggressively through efficiencies generated by Synovus Forward.
And third is delivering core organic growth, which remains our top priority for capital deployment with expectations for core customer loan growth this year consistent with our guidance of 2% to 4%, excluding P3 loans.
Our results in the first quarter demonstrated our ability to deliver in these areas.
Adjusted diluted earnings per share were $1.21 compared to $1.08 last quarter and $0.21 a year ago.
Total adjusted revenue of $488 million, adjusted expenses of $267 million, and a $19 million reversal of provision for credit losses led to strong earnings that further increased capital levels.
Core transaction deposits grew $2 billion, helping reduce the total cost of deposits by six basis points to 0.22%.
Commercial loans, excluding those under the Paycheck Protection Program, increased $212 million or 1% from the end of the year.
Through mid-April, we processed 10,000 new Phase 2 applications for $1.1 billion and have funded approximately $950 million for our customers.
Net charge-offs remained low at 21 basis points.
NPA, NPL and past due ratios all remain near historical lows, and we remain confident in the credit performance of our portfolio.
We continue to be pleased with the progress in our Synovus Forward initiatives.
By the end of the quarter, we've achieved a pre-tax run rate benefit of approximately $50 million of the $175 million expected by the end of 2022.
Kevin will also provide more detail later on the call.
Again, our team did an outstanding job delivering strong results for the quarter, and I look forward to continued progress throughout the year.
Total loans increased $552 million in the first quarter, highlighted by $894 million in fundings from the second phase of P3 as well as the $476 million in direct auto portfolio purchase in March.
With back-end loaded growth, period-end loan balances were $593 million higher-than-average balances.
Loan growth of approximately $212 million in commercial loans, excluding P3, was led by our specialty verticals while we saw declines in balances associated with our smaller commercial customers.
Total C&I loans, excluding P3 balances, increased to $4 million in the first quarter.
Despite total commitment growth of $93 million, line utilization declined $43 million and the ratio remained stable at 40%.
With the recent $2.9 trillion stimulus plan, we expect C&I line utilization to remain at or near these historically low levels for longer as customers prioritize use of their own excess liquidity before making meaningful draws.
And returning to a more normalized average of 46% would add approximately $650 million in funded balances.
Total CRE loans increased $208 million as the recovery of commercial real estate markets continues.
Total consumer loans, excluding lending partnerships, declined $333 million.
The reductions are a continuation of the post-COVID trends witnessed across the industry as the consumers use the government stimulus to reduce revolving credit balances and deleverage.
This trend was particularly apparent within our consumer mortgage and HELOC portfolios, which declined $214 million and $105 million, respectively.
We continue to deliver on the P3 program for our customers.
We have processed $1.1 billion of P3 loans and funded approximately $950 million to date as part of the second phase of the program.
We also continue to work through the forgiveness process on Phase 1 loans.
In the first quarter, we had $711 million of loans complete the forgiveness process.
Total P3 loans ended the quarter at $2.4 billion.
More details related to some of these loans are available in the appendix.
Total lending partnership loans held for investment increased $503 million, led by the purchase of prime auto loans.
We will continue to use lending partnerships as a strategy to manage the balance sheet, which I'll discuss further in the capital and our liquidity sections.
As shown on Slide 5, we had total deposit growth of $677 million.
The main drivers of the change include the deposits associated with Phase 2 of P3, declines in public funds and continued remixing of our deposit base.
Deposit growth was led by an increase in core noninterest-bearing deposits of $1.4 billion, allowing the continued strategic runoff of higher cost deposits.
The more favorable mix supports further declines in the total cost of deposits, which declined another six basis points in the quarter to 0.22%.
At the end of the quarter, total noninterest-bearing deposits accounted for 31% of total deposits, which improves our cost of deposits and NII sensitivity.
The cost of money market deposits fell by three basis points, and we will continue to manage these costs down in the low rate environment.
In the first quarter, we were able to reduce the cost of time deposits by 24 basis points to 0.89%.
The reduction then included a 19% decline in brokered CDs, which included $309 million at an average rate of approximately 1.85%.
Further reductions in our deposit costs will come from time deposit maturities as well as further price reductions in nonmaturity deposits.
Slide 6 shows net interest income of $374 million or $349 million, excluding P3 fee accretion.
Those figures represent a $12 million decrease from the fourth quarter, largely due to lower day count and a continuation of some low pressure.
This includes a greater-than-expected increase in refinance activity and higher premium amortization within the securities portfolio.
These headwinds were partially offset by lower deposit costs and the continued deployment of excess liquidity.
In addition to the increase in lending partnerships of about $503 million I referenced earlier, we increased the size of the securities book by $1 billion.
In the first quarter, we realized $25 million in P3 fees.
At quarter end, the net unrealized fees were $25 million for Phase 1 and $36 million for Phase 2.
We expect most of the remaining Phase 1 fee accretion will occur in the second quarter and Phase 2 fee accretion will pick up in the second half of the year.
As such, a reminder, most Phase 1 loans have a two-year term.
It's a five-year term for Phase 2 loans.
Securities accounted for approximately 16% of total assets at the end of the quarter, and we continue to expect further growth within that portfolio for the foreseeable future to deploy excess liquidity.
Based on current market conditions and our loan growth expectations, we reiterate our expectation that our core NII should trough in the first quarter, exclusive of accelerated P3 fee accretion.
And as we progress through the year, we expect to see increases in NII driven by loan growth, deployment of liquidity, a deceleration of prepayments and further deposit cost reductions.
The net interest margin was 3.04%, down eight basis points from the previous quarter.
We will continuously monitor our forecasted liquidity position that we consider the appropriate size and composition of our securities and lending partnership portfolios.
Slide 7 shows noninterest revenue of $111 million.
After adjusting for security losses, adjusted noninterest revenue was $113 million, up $1 million from the prior quarter and $14 million from the prior year.
Core banking revenues increased $1 million as a $2 million increase in account analysis fees following the first wave of some of our pricing for this value initiative, offset declines in NSF fees of $1 million.
Increased customer derivative activity and interest rate movement contributed to a capital markets improvement of $3 million.
We saw continued growth in assets under management, which were up 2% quarter-over-quarter and 35% year-over-year.
Net mortgage revenue of $22 million remains strong, although we're seeing some normalization in activity from the extended low rate environment.
And so while first-quarter mortgage production levels remained elevated, the recent increase in interest rates is likely to reduce production levels going forward.
Moving on to noninterest expense on Slide 8.
Total and adjusted noninterest expenses were $267 million.
Adjusted NIE was down $9 million from the prior quarter and $5 million from the prior year.
The employment expense increase of $8 million from the prior quarter include seasonal first-quarter increases in employment taxes and other related employment expenses that were partially offset by this benefit of Synovus Forward initiatives, including a full quarter benefit of the voluntary early retirement program last quarter.
Professional fees declined $8 million from the prior quarter, primarily from lower expenses associated with Synovus Forward-, P3- and CARES Act-related initiatives.
Kevin will share an update on the Synovus Forward progress shortly.
We remain committed to prudent expense management, enabling us to continue investing in areas that position us for greater success, deliver a superior customer experience and promote profitable growth.
We remain confident in the credit performance of our loan portfolio.
As you can see on Slide 9, key credit metrics remain stable with NPA, NPL, and past dues all remaining near historical lows.
I'd further note that our allowance estimates show reduced life of loan losses versus the prior quarter.
Net charge-offs declined $2 million to $20 million or 21 basis points.
Given elevated levels of liquidity and continued economic recovery, and particularly in Southeast, we are not expecting a significant change in net charge-offs in the near term.
The $19 million reversal of provision for these credit losses resulted from the improved economic outlook and stable loan portfolio metrics that were partially offset by an increased size of the loan portfolio.
As expected, we saw an increase in criticized and classified loans that reflects the timing from our grading process, which uses trailing quarterly financial statements and reflects the lower levels of revenue experienced during the pandemic.
Approximately 60% of the $263 million increase is hospitality-related, including hotels and full-service restaurants.
The most recent cash inflow data, which is located in the appendix, shows positive momentum in year-over-year activity.
We also expect to see a significant reduction in criticized and classified levels as the real-time improvements we're seeing in cash inflows, which serve as a proxy for revenues, translates into improved quarterly financial statements for borrowers.
This more positive outlook is reflected in ending ACL ratio of about 1.69%, excluding P3 loans.
It is the first quarterly decline since implementing CECL over a year ago.
The decrease aligns with the more positive economic outlook and reduced uncertainty.
The allowance at the end of the quarter incorporates an outlook with moderate economic expansion and benefits from the recently approved stimulus.
There is more detail included in the appendix.
As noted on Slide 10, the CET1 ratio increased eight basis points to 9.74% from strong core earnings despite a risk-weighted asset increase of $1.2 billion.
The RWA increase is now primarily from balance sheet management efforts I referenced earlier as well as a $234 million increase in loans held for sale.
The CET1 ratio grew more than 100 basis points over the past year, and we remain above the top end of our 9% to 9.5% operating range for CET1.
We are well positioned to really complete our key strategic objectives, including a commitment to profitable growth.
Our top priority is to deploy our balance sheet to core multi solution relationships.
We also believe it's important to return a portion of current earnings through dividends, targeting a long-term payout ratio of 30% to 40%.
When we are comfortable that our capital is sufficient to cover these primary objectives, we consider secondary priorities like share repurchases and noncore growth.
Before handing over -- it over to Kevin, I'd like to highlight the active balance sheet management efforts we've taken, shown on Slide 11.
Because that goes hand-in-hand with our ability to deploy excess liquidity as well as capital above the top end of our operating range.
And the first graph is a historical view of our cash position to give a sense for where normalized operating levels were pre-COVID.
We've talked about the impact on NIM, but there's also the opportunity cost of not deploying that liquidity.
Our current interest-bearing funds with the Federal Reserve of $2.7 billion are about three and a half times higher than normalized levels, and we've actively managed our balance sheet the past few quarters to monetize that excess liquidity.
One way we were able to accomplish this was in our lending partnership portfolio, which a year ago had approximately $2 billion and held for investment loans.
With our actions and restructuring the GreenSky relationship and active management of these other lending partnership portfolios, our total lending partnership exposure at quarter end was $1.9 billion with approximately $1.2 billion and held for investment loans and approximately $700 million and that are held for sale loans.
We will continue to manage this portfolio as we navigate the current capital and liquidity environment.
In the first quarter, we purchased auto loans because we believe that the risk return profile and the two-year average life and the auto loan market liquidity was a good fit under current market conditions.
As you can see in the third graph, we also increased our securities as a percentage of total assets.
The yield on first-quarter purchases was about 1.4%.
The last graph is just a historical view of the loan-to-deposit ratio, which currently stands at 82%.
This provides significant longer-term opportunities highlighted by the ability to be more selective and efficient with our funding, of which you've seen us actively manage over the past year.
This includes deposits and other liabilities.
With excess liquidity and capital above this high end of our targeted operating range, we can increase assets, including securities and loans, which results in much higher yields than the overnight rates with the Federal Reserve.
We can also accomplish this without sacrificing core organic loan growth, our highest priority for capital and liquidity deployment.
The entire Synovus leadership team and I also sincerely appreciate the unwavering support, and then especially skillful and influential leadership Kessel has provided as CEO.
And we're grateful he will remain in the mix in his role as the executive chairman of the board.
Kessel and I have worked very closely together since I joined the company in 2016.
He's taught me too that our entire team has a lot as we've watched and listened to him steer us through challenges no one ever dreamed we'd face.
It's certainly an honor to take the helm of this incredible company as we continue to build on the strong foundation that is part of his legacy.
As Kessel stated during his introduction, and we've been working intently not only to perform in the present, but also building upon our core foundations and further transforming the company to be in a position to deliver sustainable top quartile growth.
Slide 12 provides a basis for which we believe creates a compelling formula for our ability to achieve and sustain our top quartile objectives.
It begins with this -- being positioned for success, which is a combination of the longevity and resulting value of a strong core franchise as well as the more recent transformation of the company.
In the appendix, we've included a timeline with a series of highlights under Kessel's tenure as CEO.
We certainly don't have time today to discuss all of these accomplishments and transformation over the last 11 years, spanning the four phases of stabilize, rebuild, invest and accelerate.
However, I want to highlight a couple of imperatives that have been instrumental in better positioning Synovus for scalable growth and winning in the marketplace.
And during this time frame, we moved to a more centralized banking model without impacting our agility and customer connectivity that has long been a staple of Synovus.
We built out robust and comprehensive risk management procedures and practices while strengthening and diversifying the balance sheet to better withstand periods of stress.
And lastly, we have enhanced our products and solutions as well as expanded our coverage through this addition of many talents and through Global One and Florida Community Bank acquisitions.
As we evaluate our performance over the prior 12 months, these initiatives and efforts have been essential in helping to weather and overcome the challenges of the economic downturn while continuing to strengthen the bank for the future.
Synovus is well positioned competitively to be in our industry.
We are large enough and aligned with the right fintechs and partners to deliver the capabilities and functionality of our largest bank competitors.
We have also doubled down on remaining local and focusing on delivering a personalized rightt approach to banking, which competes well with the smaller institutions.
Lastly, we have solid coverage across our markets, customer segments and industries, but we continue to have opportunities to expand our asset classes, products and solutions and talent base.
We also believe that we're in the best footprint in banking.
This belief is strongly supported by the demographic and economic data as we evaluate relative comparisons of metrics such as GDP, employment rates, home prices, and many others.
Our five-state footprint is performing at levels far better than the national averages.
And we believe this trend will now continue and will likely become more pronounced with population and business flows into our markets.
In addition, our capital levels have increased significantly throughout 2020 and into 2021, and we have demonstrated prudence given the unprecedented changes in this underlying economic environment.
And we are now in a position to fully utilize our capital to support the organic growth as our current capital levels are in excess of our stated target levels.
So, in addition to being well positioned, we fully understand the importance of and are committed to delivering a superior customer experience.
The industry also attempts to make more complex than it really is.
It is all about making it easier to do business with us.
And through our actions over time, building a strong level of trust with our customers.
We accomplished this by putting their interest first and partnering with them as advisors.
We have a long and our successful track record with high levels of customer loyalty, as evidenced by our Net Promoter Scores, but we know there's an opportunity to continue to improve.
We are also redesigning our customer processes and leveraging technology to further strengthen relationships with a model of high-tech meeting high-touch with our highly engaged and experienced team members serving as a key point of differentiation.
It is not about addition by subtraction, but rather building synergies from the combination of both aspects.
The line between service and sales is also becoming blurred.
Customers want advice and guidance, and they expect their financial partners to provide it in a proactive manner in order to support their financial objectives.
We are prioritizing investment in data and analytics as well as the channels that support customer interactions in order to be more proactive and timely in providing his insights and advice.
Not only is it leading to creating longer-term sticky relationships, but it is also generating new sources of revenue, which brings me to our third area of focus, profitable growth.
Jamie summarized our capital priorities well as we will continue to prioritize this core organic growth as our primary objective.
Given the strength of the economic activity in our footprint and our calling activities, we are starting to see pipelines and production levels return to pre-pandemic levels.
We will continue to expect the second half of 2021 to be the strongest in terms of growth.
We have also had a concerted strategy to accelerate the growth in our fee income generation businesses, including our wealth management, treasury, and payment solutions and capital markets.
The first-quarter results continue to show good momentum in these areas with increases in wealth management revenues, up $2 million or 5% from the fourth quarter, as well as our AUM continuing to grow, as we referenced earlier.
Treasury and payment solutions, overall production and onboarding efforts continue to hit record levels, combined with the repricing efforts, produced a $2 million or 23% increase in service charges versus the fourth quarter despite increases in customer liquidity.
And lastly, the addition of key talents that will serve as a catalyst for growth.
Synovus continues to be a model that is attracting top talent.
We continue to double down on businesses where we have the right to win and present the opportunity for profitable growth.
We have increased the producing team members in our wholesale and specialty banking units, treasury and payment solutions as well as wealth management.
Our ongoing disruption in the industry as well as a targeted approach for expansion will allow us to opportunistically add top talent in areas where we continue to see this relatively short payback periods and sources of long-term growth.
Moving to Slide 13.
This outlines our Synovus Forward initiatives, which we've shared previously.
We are confident these initiatives will help us achieve our stated objectives and align with our three tenets that Kessel outlined earlier.
As a reminder, we expect to achieve the pre-tax run rate benefit of around $175 million by the end of 2022.
We have prioritized efficiency initiatives as we kicked off the program in late 2019 in order to fund our journey forward.
These initiatives will result in approximately half of the $175 million anticipated pre-tax benefit.
At the end of the first quarter, we have now achieved a pre-tax run rate benefit of approximately $50 million with about $40 million in cost reductions and $10 million in incremental revenues.
We are in the process of realizing the additional Phase 1 efficiency initiatives, and announced in January that we expect to generate an additional $25 million in Phase 2.
We have also initiated our Phase 2 program in over the next two quarters, we will begin to make decisions that will lead to the incremental savings with the goal to have all of the efficiency programs executed by the fourth quarter of 2022.
As we continue executing the Synovus Forward plan, the mix of benefits will shift toward revenues.
As such, we are really pleased with the progress we've made in both our commercial analytics and pricing for value revenue initiatives.
We are currently in the pilot phase of our commercial analytics enhancements, which include the smart tool that I detailed on our previous earnings call.
Our team is now receiving and closing these actionable leads from this tool, and you'll begin to see the benefits in both net interest and noninterest revenue lines going forward.
The smart tool will be fully adopted and in production by the third quarter of this year.
We remain confident in our ability to generate a pre-tax run rate benefit of over $20 million by the end of the year.
We are also in the initial phases of developing a very similar tool to be leveraged by our retail and wealth management bankers and expect to have a program in place by year-end.
Our pricing per value initiative in treasury and payment solutions began in the fourth quarter and will continue through our second quarter of 2021.
Results, to date, have exceeded our expectations with fees increasing $2 million quarter-over-quarter and we expect to maintain and even increase profitability in these products as we continue to increase our value proposition and treasury and payment solutions, including the new Synovus Gateway platform, priority service and enhanced solutions.
Delving deeper into our focus on expanding our products and solutions, sales in our new merchant solution continue to outpace our expectations, and we are also tuning our attention to rolling out additional functionality and capabilities in 2021, including international export financing, integrated payables and receivables and a one card digital wallet solution.
To achieve sustainable top quartile growth, we understand that continued investments in technology and talent are paramount.
And as we evaluate the need to balance short-term headwinds from interest rates or economic activity, we have emphasized not making short-term decisions that impact our long-term valuation or growth opportunities.
As such, it requires more rigorous prioritization and focusing more intently on businesses where we have the right and proven track record of winning.
Synovus Forward is now predicated to be the support in our aspirations as a growth bank and not simply cutting our way to prosperity.
Since our announcement in December, we've been asked a lot about how the strategies will be changing under new leadership.
While there will be some changes over time, like Kessel, I will continue to execute the Synovus Forward plan.
We have been aligned with the company's direction and areas of emphasis outlined in Synovus Forward and our other strategic initiatives.
We are both clear on our strengths as well as our opportunities for improvement.
Also, we both have a lot of confidence in the Synovus team and our ability to win versus our largest and smallest competitors.
And lastly, we are both committed to lead our company forward to deliver on our -- both the short- and long-term objectives while not losing sight of what makes Synovus a great company: its team members, its customers, and the communities we serve.

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q1 adjusted earnings per share $1.21.

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