Synovus Financial Corp
NYSE:SNV
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Synovus Financial Corp
Earnings Call Analysis
Q2-2024 Analysis
Synovus Financial Corp
Synovus reported a mixed bag of results for the second quarter of 2024. On one hand, the company reported a net loss of $0.16 per share due to a significant $257 million loss from securities repositioning. However, adjusted earnings told a different story, with an adjusted EPS of $1.16 compared to $0.79 in the first quarter. Adjusted pre-provision net revenue increased by 20% from the prior quarter, reaching $262 million. This positivity was driven by a 4% increase in net interest income and a notable 9% jump in adjusted non-interest revenue, while adjusted non-interest expense decreased by 5%.
During the second quarter, Synovus saw some significant financial improvements. Net interest margin (NIM) expanded by 16 basis points to 3.2%, and net charge-offs decreased meaningfully. Despite a $200 million decline in loans quarter-over-quarter, funded production was up by nearly $500 million, which helped maintain overall health. Core deposits slipped slightly due to a drop in noninterest-bearing deposits, but broker deposits were reduced for the fourth consecutive quarter. The company's common equity Tier 1 capital ratio hit its highest level in over eight years, standing at 10.62%.
On the expenses front, Synovus showed strong discipline with a 5% sequential decrease in adjusted non-interest expense, despite flat year-over-year numbers. Employment expenses fell by 4%, influenced by seasonality and lower headcount. The company has also reduced fraud-related expenses by 11% year-to-date. Technology investments and increased property expenses led to an 8% rise in occupancy and equipment costs.
The second quarter also saw Synovus making strategic moves to strengthen and diversify its business. The retail analytics platform delivered a 60% increase in new revenue, and the business owner wealth strategy achieved a 52% conversion rate on qualified referrals. Treasury and payment solutions pipelines remain robust. The company's commercial and wealth lines continue to expand, showing success in attracting new talent and clients.
Synovus showed commendable performance in managing its credit quality. Net charge-offs reduced to 32 basis points, down 9 basis points from the first quarter, while nonperforming loans decreased by 22 basis points. The allowance for credit losses remained stable at $538 million, or 1.25% of total loans.
Looking ahead to the remainder of 2024, Synovus estimates stable to slightly higher total loans, driven by growth in key commercial segments. The company expects a stable deposit cost scenario and broad-based deposit growth, supported by seasonal tailwinds. Net interest margin is projected to expand further, reaching around 3.3% by year-end. Adjusted non-interest revenue is predicted to grow in the mid-single digits, buoyed by a strong capital markets pipeline and continued investment in core revenue streams. The focus on disciplined expense control remains, with a forecasted increase in adjusted non-interest expense of 1% to 3% due to incremental infrastructure investments and higher team member incentives.
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Good morning, and welcome to the Synovus Second Quarter 2024 Earnings Call. [Operator Instructions] Please note, this event is being recorded.
I will now turn the call over to Jennifer Demba, Head of Investors Relations. Jennifer, please go ahead.
Thank you, and good morning. During today's call, we will reference the slides and press release that are available within the Investor Relations section of our website, synovus.com. Kevin Blair, Chairman, President and Chief Executive Officer, will begin the call. He will be followed by Jamie Gregory, Chief Financial Officer, and we will be available to answer your questions at the end of the call.
Our comments include forward-looking statements. These statements are subject to risks and uncertainties, and the actual results could vary materially. We list these factors that might cause results to differ materially in our press release and in our SEC filings, which are available on our website. We do not assume any obligation to update any forward-looking statements because of new information, early developments or otherwise, except as may be required by law. During the call, we will reference non-GAAP financial measures related to the company's performance. You may see the reconciliation of these measures in the appendix to our presentation.
And now Kevin Blair will provide an overview of the quarter.
Thank you, Jennifer. Good morning, everyone, and thank you for joining us for our second quarter 2024 earnings call. Synovus reported a loss of $0.16 in the second quarter of 2024, which included a previously announced $257 million loss from the recent securities repositioning that was executed as a result of the capital benefits derived from our risk-weighted asset optimization exercise.
However, adjusted earnings per share were $1.16 compared to $0.79 in the first quarter, while adjusted pre-provision net revenue rose 20% from the prior quarter to $262 million. Adjusted revenue and earnings inflected higher in the second quarter. Net interest income increased 4% from the prior quarter on 16 basis points of sequential NIM expansion. Also, adjusted non-interest revenue jumped 9% sequentially, while adjusted non-interest expense declined 5%. Moreover, our net charge-offs and nonperforming loans declined meaningfully this quarter, and our liquidity and capital positions remain as strong as they've been in several years.
Our success and positive momentum are a direct result of the work of our talented team members. We are also making progress in key initiatives and in further strengthening our value proposition for our clients. We continue to attract talent and the expansion of our commercial and wealth lines of business. Our retail analytics platform has translated into a better client experience and is delivering 60% increase in new revenue, resulting from the insights and leads generated.
Our focus on the business owner wealth strategy is delivering a 52% conversion rate on qualified referrals. Our growth in the current pipelines remain robust in treasury and payment solutions. Our efforts to reduce fraud and operating losses have proven fruitful with year-to-date expenses down 11%.
And lastly, we saw a significant improvement in credit cost this quarter. In fact, our community bank line of business ended the quarter and year-to-date in a net recovery position. So our progress is broad-based and truly a team effort.
In addition, as we discussed in recent quarters, our focus remains firmly on execution while reducing uncertainty and performance associated with the net interest margin and credit cost. The second quarter results reflect our progress towards these goals.
Now let's turn to Slide 3 for the highlights. As previously noted, net interest income increased 4% from the first quarter as a result of 16 basis points of sequential net interest margin expansion. Despite funded production increasing almost $500 million this quarter, period-end loans were down just over [ $200 million ] from the first quarter. We continue to generate healthy and consistent loan growth in the middle market, CIB and specialty commercial units, payoff activity in senior housing and national accounts as well as lower C&I utilization drove the overall decline in outstandings for the quarter.
Core deposits declined slightly in the second quarter, driven by a drop in noninterest-bearing deposits, offset by growth in time deposits. Furthermore, we reduced broker deposits for the fourth consecutive quarter. Our team remains highly focused on accelerating core funding generation through sales activities and product expansion. Adjusted noninterest revenue increased 9% from the prior quarter, primarily from significant growth in capital markets income.
On a year-over-year basis, there was strong growth in commercial sponsorship income from the expansion of card sponsorship business as well as our partnership with GreenSky. Capital Markets and Treasury and Payment Solutions fees also contributed to healthy year-over-year growth.
Adjusted non-interest expense was down 5% sequentially and relatively flat on a year-over-year basis. Our 2023 cost initiatives as well as ongoing diligence have led to a modest core operating expense growth from a year ago, while maintaining a level of strategic investments that position Synovus well from a competitive standpoint in order to drive long-term shareholder value. On the asset quality front, net charge-offs of 32 basis points were 9 basis points lower than the first quarter levels while nonperforming loans declined by 22 basis points.
Lastly, we further bolstered our common equity Tier 1 ratio in the second quarter through solid earnings accretion and balance sheet management while still completing about $91 million of opportunistic share repurchases. Common equity Tier 1 levels are the highest in over 8 years at 10.62% and currently set modestly above our stated range of 10% to 10.5%.
Now I'll turn it over to Jamie to cover the second quarter results in greater detail. Jamie?
Thank you, Kevin. Moving to Slide 4. Period end loans were down $216 million from the prior quarter. Loan production actually rose significantly from the first quarter, but was offset by payoffs, paydowns and continued portfolio rationalization as well as lower utilization from our larger corporate and specialty line clients. We continue to maintain pricing discipline as evidenced by loan spreads on new production, which remain elevated relative to the prior year.
Consistent with our focus on core client relationships, despite utilization headwinds, growth in middle market Commercial, CIB and Specialty lines was $157 million or 5% annualized during the second quarter. During the first half of 2024, we produced 8% annualized growth in these core commercial business lines, which we believe should continue throughout the remainder of the year.
Senior housing loans declined $196 million from the prior quarter. There has been increased strength in the markets as evidenced by higher levels of transaction and refinancing activity over the last few quarters.
That said, we anticipate more stable senior housing balances throughout the remainder of 2024. We also continue to strategically reduce our non-relationship lending within our national accounts portfolio as well as our third-party consumer loans, further positioning our balance sheet for core client growth. These balances were down $223 million in the second quarter.
In the second half of this year, third-party consumer loans should continue to decline and estimated $60 million per quarter, while national account balances should be more stable. We estimate we should see stable to higher total loans in the second half of 2024 with continued growth in our key commercial segments.
Turning to Slide 5. Period-end core deposit balances were relatively flat on a linked-quarter basis with somewhat more stable mix shifts within the quarter. Non-interest bearing deposit balances were down $387 million from the prior quarter. However, average balances were more stable in the second quarter relative to the first quarter. We still see some further pressure on non-interest bearing deposits, though the trends continue to suggest notable slowing in the pace of decline in those balances.
Finally, broker deposits declined $317 million or 6% from the first quarter, which was the fourth consecutive quarter of contraction. Deposit costs were stable in the second quarter, up just 1 basis point from the prior quarter. This equates to a cycle-to-date total deposit cost beta of approximately 49%, which was unchanged compared to the first quarter. As we look at the back half of the year, we expect deposit costs to remain relatively stable and are looking for broad-based deposit growth across our business segments, which should be supported by seasonal tailwinds into the end of the year.
Moving to Slide 6. Net interest income was $435 million in the second quarter, which was an increase of 4% from the first quarter. The second quarter benefited from various drivers, including improving loan yields, the residual impact of first quarter hedge maturities and the securities repositioning in May. As we alluded to in the first quarter, we also witnessed relative stabilization in deposit costs and mix trends, which resulted in a much more modest headwind to interest expense.
As we translate that to the margin, NIM expanded 16 basis points sequentially to 3.2%. This was primarily driven by the same factors which supported net interest income along with a onetime positive impact from our securities held-to-maturity reclassification which served to reduce earning assets.
As we look forward to the third and fourth quarters of 2024, we continue to expect net interest margin expansion, driven by fixed rate asset repricing and fourth quarter hedge maturities as well as a full quarter impact of the securities repositioning, which was completed in May. Kevin will provide further detail on our guidance momentarily, which is based on an FOMC rate cut of 25 basis points in December.
Slide 7 shows total reported non-interest revenue was impacted by the $257 million securities loss related to our securities repositioning in the second quarter. However, adjusted non-interest revenue was $127 million, which is a 9% jump from the previous quarter. Adjusted non-interest revenue was up $17 million or 15% year-over-year.
The majority of the sequential growth was attributable to higher capital markets fees, which surged 128% from the first quarter and are expected to remain elevated in the second half of the year. The growth was driven by syndication finance arranger fees and debt capital markets income.
Also, commercial analysis, treasury and payments solutions fees increased 4%, while core wealth management income increased 2% outside of an expected decline in repo income due to client asset allocation changes. When looking at the year ago quarter, core banking fees increased 4%, supported by growth in treasury and payment solutions, while capital markets fees increased 59% and commercial sponsorship income jumped 188%. We continue to invest in core non-interest revenue streams that deepen client relationships and provide further healthy fee growth in areas such as treasury and payment solutions, capital markets and wealth management.
Moving to expense. Slide 8 highlights our operating cost discipline. Reported and adjusted non-interest expense were both $302 million. Adjusted non-interest expense declined 5% from the first quarter and was flat compared to the year ago quarter. Employment expense fell 4% from the first quarter, largely due to seasonality, partially offset by a full quarter impact of the 2024 merit increases and higher employee incentives.
Turning to other expenses. FDIC premiums declined as a result of the $13 million FDIC special assessment that was accrued in the first quarter and a partial special assessment reversal of $4 million in the second quarter.
Legal expenses increased from the prior quarter primarily due to expenses associated with previously resolved problem loans. Employment expense declined 1% year-over-year, benefited by our 7% year-over-year decline in headcount.
Occupancy and equipment expense increased 8% as a result of ongoing technology investments as well as increased property expense. Importantly, we will remain proactive with disciplined expense management in this growth constrained environment.
Moving to Slides 9 and 10 on credit quality. Provision for credit losses declined 51% from the first quarter to $26 million. Our allowance for credit losses ended the second quarter at $538 million or 1.25%, which is relatively unchanged from the first quarter. Net charge-offs in the second quarter were $34 million or 32 basis points compared to 41 basis points in the first quarter and 38 basis points in the fourth quarter.
Nonperforming loans declined 27% and are now 0.59% of loans, down from 0.81% in the first quarter, primarily from the resolution of a previously charged off credit and slower inflows. The criticized and classified credit ratio declined slightly to 3.7% and remains at very manageable levels.
We have a high degree of confidence in the strength and quality of our loan portfolio, and we will continue to reduce our non-relationship credits and manage the portfolio with a heightened level of diligence in this more uncertain macroeconomic environment.
As seen on Slide 11, our capital position continued to build in the second quarter, with the preliminary common equity Tier 1 ratio reaching 10.62% and total risk-based capital now at 13.59%. A strong quarter of core earnings, coupled with the completion of our previously announced risk-weighted asset optimization exercise helped to support over 80 basis points of capital accretion within the quarter.
Against that, we completed the anticipated available-for-sale securities repositioning, and we executed approximately $91 million in share repurchases. These actions serve to diligently deploy our capital while still ending the quarter near the top end of our targeted CET1 range. More details on the securities repositioning can be found in the appendix of our presentation deck.
As we look to the remainder of the year, we will maintain a disciplined approach to capital management, which balances the uncertain economic environment with prudently managing near the top end of our 10% to 10.5% CET1 range.
As a reminder, our focus remains on prioritizing the deployment of our balance sheet and capital position for core client growth. However, we expect to complement that with share repurchases to effectively manage within our capital management framework.
I'll now turn it back to Kevin to discuss our 2024 guidance.
Thank you, Jamie. I'll continue with our updated guidance for the remainder of 2024. Based on the first half results and our existing pipelines, period-end loan growth is expected to be 0% to 2% in 2024. Growth should be supported by continued success in middle market, corporate and investment banking and specialty lines. Year-to-date headwinds with senior housing and national accounts syndicated lending are expected to subside, but broader commercial real estate payoff activity should increase in the second half of the year.
Our forecast for core deposits now supports growth within the 2% to 4% range, aided by seasonal tailwinds as the year progresses and new core funding growth initiatives. Stable deposit costs should result in a peak total deposit cost beta for this cycle near current levels of approximately 49%. Our outlook now points to adjusted revenue growth in the negative 3% to 0% range.
Importantly, our adjusted revenue guidance now assumes there is 125 basis point rate cut in December 2024 compared to our prior assumption of stable rates as well as the realization of our robust capital markets pipeline in the second half of '24.
We expect more net interest income improvement in the second half of this year as deposit cost stability, combined with fixed rate asset repricing our hedge maturities and the full impact of the securities repositioning benefit or net interest margin.
Adjusted non-interest revenue is now forecasted to grow in the mid-single-digit percentage range this year versus our previous guidance of low to mid-single-digit growth. The previously mentioned capital markets fee pipeline remains strong. We continue to execute on core growth in treasury and payment solutions, and the GreenSky Forward flow program continues to build commercial sponsorship fees.
We remain very focused on disciplined expense control. Excluding the FDIC special assessment, we anticipate our adjusted non-interest expense will be up 1% to 3% this year. This modest increase in expense guidance is due to incremental expenses and infrastructure spend and investments, legal costs primarily associated with resolved credits and higher team member incentives. We continue to closely monitor and manage our loan portfolio for any credit deterioration or systemic themes across industry and markets.
Given current credit migration trends, assuming a relatively stable economic environment and considering the impact of certain large individual losses in late 2023 and early 2024, we expect net charge-offs to be flat to down in the second half of this year compared to 36 basis points in the first half of 2024. Moving to the tax rate. Our current forecast points to an approximately 21% level as compared to 21% to 22% previously.
Finally, our common equity Tier 1 ratio is above our targeted range of 10% to 10.5%. Therefore, we will remain opportunistic with share repurchases to manage overall capital levels at or near the top end of this range. Prudent capital management remains our top priority to ensure we have a strong and liquid balance sheet, which is prioritized towards serving the growth needs of our clients. regardless of the economic environment.
And now operator, this concludes our prepared remarks. Let's open the call for questions.
[Operator Instructions] The first question is from the line of Ebrahim Poonawala with Bank of America.
I guess just around the comments on net interest margin expansion in the back half. If you could unpack that in terms of the drivers of margin expansion, obviously, the full quarter impact on the bond book restructuring should help. But beyond that, just remind us in terms of the back book repricing and how NII evolves in the face of potential for rate cuts starting in September. Maybe if you could start there.
Thanks, Ebrahim. When you look at the margin and the trajectory in the second half of the year, there are a few different moving parts. First, as you mentioned, the securities repositioning, we experienced about half of that benefit in the second quarter, and we'll experience the other half here in the third quarter. And so that's a tailwind to the margin this quarter.
There is, as you know, a little bit of fixed rate asset repricing as well in the third quarter. That's a positive. But then there's a headwind due to average DDA balances. You can see that in the appendix, we put average balances and end of period balances, and there will be a decline in average balances just given the second quarter where that landed. And so that will be a headwind to the margin in the third quarter.
But we expect margin expansion in the third quarter. We expect margin expansion again in the fourth quarter, and we expect to end the year at or approaching a 330 margin given -- with the assumption of a rate cut in December.
Understood. And just incrementally, if we get a series of rate cuts, Jamie, is that a drag to the NIM at least short term?
It does. It does. So for our guidance, we used the Fed dot plot from June. But if you were to pivot to a September rate cut, which is more consistent with the forward curve today, there would be pressure on the margin in the months of September and October.
And so let me just kind of unpack that a little bit because this is an important question as we head into an easing cycle. In the period of time leading up to these, there is NIM pressure, which is minor due to short rates declining in the expectation of an ease. And so asset yields will decline, and there's really not an offsetting benefit to a funding cost. Then once the ease happens, the margin will be pressured further as the majority of floating rate loans repriced down. The full impact of the ease will flow through on the loans almost immediately as the majority of our floating rate loans are 1 month rates are shorter, but that will be partially mitigated by the 13% of floating rate loans that are hedged.
And then when you're post easing, then you will start to see the benefit of reduced liability cost. And so you have the asset repricing, but then the reduced deposit costs, reduce funding costs will come through. And we believe that, that will neutralize the reduction in asset yields over the course of 1 to 2 months.
And so kind of to be more specific around that. If you were to just compare a September and December ease, the forward curve relative to the Fed dot plot, which is a December ease, there's about a $5 million to $7 million margin -- I mean, NII impact between those 2 scenarios, and is split between the second and the third quarter -- I mean, the third and the fourth quarter because it's a September and October impact.
That's extremely helpful. And just the only other follow-up, Jamie, you mentioned stable deposit costs second half. One, if you don't mind, give us an update on the pricing sort of competition in your markets, we had a peer of yours talk about intensity picking up. So would love any color there.
The deposit pricing is playing out like we said in April. As we look at the outlook from here, we expect stable deposit costs through the remainder of the year. We feel good about our positioning here. We feel good about our production pipelines, pricing. What we've seen in the marketplace is not necessarily an increase in competition, but we've seen more coalescing around rates and less volatility between highs and lows. And then it feels to us, like on the promotional rates that concentration around -- if you look at CDs, a concentration around 5%, and you're not seeing a lot of the outliers that we were seeing earlier in the year that were much higher.
And it appears that the banking industry, it appears everybody is preparing for an easing cycle by shortening the duration, which is appropriate. And you've seen that with us as well, where we have 2/3 of our CDs that will mature in 6 months. And so I feel like the industry is preparing for easing. The industry is shortening the duration of time deposits and kind of coalescing around market rates. So it feels competitive but stable to us.
And Ebrahim, just to put a data point behind Jamie's comments, our production rates for the quarter were [ 3 77 ], and we achieved kind of peak rates back in the fourth quarter of '23 at [ 3 82 ]. So we've seen stable production yields quarter-on-quarter and actually a reduction versus where we ended last year.
Our next question is from Steven Alexopoulos with JPMorgan. Please go ahead.
I want to start on the loan growth headwinds. Maybe can you help us better understand what's left in terms of the remaining headwind from rationalization efforts? And then, Kevin, I thought you said that the CRE payoffs would increase in the back half of the year. Maybe if you could quantify that for us. And how far away do you think we are to what these cumulative headwinds are really behind the company in that strategic growth in other areas of growth we're seeing start becoming the total low growth?
Yes, Steven, it's a great question because I think the -- to your point, when you assess the growth of loan outstandings, there's multiple components. And we've talked a lot about our ability to grow predicated on increasing production. But as you mentioned, there's a couple of things that are driving outstanding lower in the current environment.
First and foremost, we've been rationalizing some of our portfolios that either we think have lower returns or have a lower funding profile. And that specifically is senior housing, third-party consumer, our national accounts. And when you look at those portfolios, and we've run off about $2.3 billion in the last 12 months in those portfolios. That is just -- reduced their total percentage of outstandings from 18% to 13%. And that's largely been accomplished.
And so as we look forward, for senior housing national accounts, those balances will stay roughly flat. And when you look at third-party consumer, those are going to continue to decline just because we're not putting on a lot of new production.
So I would say that the headwinds around rationalization and any loan sales, which, as you recall, we did the MOB sale, the medical office sale last year, that's largely done.
So as you look into the future, our production levels are actually increasing. When you look at this quarter alone, we were at $1.3 billion in funded production. That was up 37% quarter-on-quarter, and almost back to the levels we saw back in 2023. So production is picking up. Our pipelines are up 8% quarter-on-quarter. So then the other question mark is the payoff and paydown activity.
This quarter, as Jamie referenced, the payoff activity occurred more on the C&I side. It was the national accounts and senior housing, and we saw about $250 million of lower utilization on C&I. From a CRE perspective, we don't expect the payoffs to really pick up this quarter but rather in the fourth quarter. And that's just based on some of the maturities that we have. And to put it in context, we had about $570 million of payoff and paydown activity this quarter, that number could get as high as $800 million to $900 million. So we're talking about $400 million-ish increase in payoff activity. And those are the headwinds.
Now again, that's predicated on some of the renewals. As we look into 2025, as we've shared in the past, we think a lot of those headwinds are completely abated, and we returned to more of a normalized growth rate pending what the underlying economic environment looks like.
Okay. That's terrific color. Maybe just for my follow-up question. In terms of the non-interest bearing deposits, right, there was a bit of excitement last quarter, when you guys talked about seeing a trough maybe in stability in February, March, April. And then this quarter, the period non-interest bearing came down quite a bit again. Could you walk us through what you ended up seeing there? Because it seems like they trended a bit down.
Yes. It's -- we had a good start to the quarter, and we saw some declines as the quarter progressed, and it was really relegated to our commercial operating accounts. And when you look at the average balance there, we're still running about 20% higher than what the average balances were prior to the pandemic. So it still suggests that there's some sort of excess cash sitting on our commercial client balance sheet. And they're using it as maybe correlated to the reduction in utilization, we continue to see our commercial clients use cash as rates decline as we achieve kind of pre-pandemic levels, which we're getting closer to that, we think that diminishment will continue to decline.
And ultimately, the production and some augmentation that we're starting to see will offset that. So still expect to see some DDA remixing in the second half of the year, but the pace at which it's diminishing continues to decline.
And Steven, one thing I would add to that is, when you break it down, we have -- to Kevin's point on commercial, we've seen stability in retail DDA since the beginning of the year. Commercial -- like smaller commercial clients that is down, but it's only down slightly. And so it's -- I feel like the stability is increasing, but it's going up market as we go through this. And so that's what we're seeing. And we -- one thing that helps us believe that it will diminish in the second half of the year as well.
Our next question from Jared Shaw with Barclays Capital.
Maybe just quickly just following up on the margin discussion. And you mentioned that we have half the benefit of the securities repositioning. What's the spot yield on the securities book at the end of the quarter going into the third quarter?
Jared, I don't have that handy. I mean we were at [ 3.04% ] for the quarter itself. It's about a 40 basis point impact just due to the repositioning. But I don't have the spot yield at quarter end.
Okay. Okay. That's fine. And then looking at credit, if you could give just a little more discussion around that, it's great seeing sort of the confidence there and the bigger trends. When you look at the driver of the lower ACL, is that really loan level performance that you're feeling more comfortable with? Or was there some change to the broader macro model assumptions driving that? And then should we assume that we're sort of stable here at these levels given the broader economic outlook?
Yes. Jared, this is Jamie again. And by the way, there was [ 3.32% ] in June for the securities yield. The allowance when you look at that, the change quarter-on-quarter, it really was due to the macro drivers. You can see the waterfall in the appendix of the change.
Forward-looking, we feel good about the level where we are right now. And when you look at the components of the allowance quarter-on-quarter, the performance in CRE continues to be very strong. And the allowance loan ratio for the quarter life-of-loan loss asset was down, in CRE, and it was up a little bit in C&I. So you see a little bit of shifts within the portfolios.
But altogether, we would expect stability from here given the economic outlook as we continue to look at how the portfolio migrates going into the second half of the year.
I think, Jared, just to your broader question on credit, I think it was a solid quarter on all fronts. When you look at the data, net charge-offs down 9 basis points, NPLs declined 22 basis points. Our FDMs declined $93 million. We only had $62 million of NPL inflows. And to Jamie's point, only $1 million of that was in CRE. And when you talk about the ACL, yet it came down a bit, but our coverage to NPLs increased back to 210%.
So all in all, I think it was a storyline that was broad-based. And as we've been talking about, as we look at the data and the underlying credit metrics, we're not seeing any additional deterioration. In many ways, we're starting to see some improvement in some of the metrics. And so as we look into the next couple of quarters, that's why we feel very comfortable about guiding flat to down in overall charge-offs.
Our next question from Manan Gosalia with Morgan Stanley.
I wanted to ask on the expenses front. Can you expand a little bit on the drivers of the higher expense guide? And the number implies, I think, about $315 million or so of expenses a quarter in the back half. So how do you think about that as a jumping off point into 2025?
Thanks for the question, Manan. I would just start and say the baseline for the second quarter, I would use $306 million, which is adjusted expenses, excluding the FDIC reversal. And we are expecting the third quarter to be in the $310 million area. So not the $315 million you mentioned. We expect that to be driven by increased personnel costs, and that's largely a day count issue.
We do have some infrastructure project spend, some of that's fraud detection, fraud prevention, pricing analytics. And then there are just simply some other inflationary impacts. And so it's about a 1% increase from the second quarter, getting to the $310 million area, and we expect that to hold in the fourth quarter as well.
Got it. And that's a good run rate for 2025?
As we look at 2025, we do think that expense rate will be a little more normalized. We will give an update on 2025 more at the end of the year. But we do expect expenses to be more normalized in 2025. And so 2024 benefited from a lot of the efforts we did in 2023 with Synovus Forward. In the second half of the year in 2023, we had a lot of efficiency efforts that were very successful in reducing cost improving efficiency, reducing headcount. And those benefited this year.
I mean when you think about the full year 2024, we're talking about up 2% if you could use the midpoint of the guide, excluding FDIC. And there are some large drivers in there of expense increases. We have about a 1% impact of -- simply of merit, about a 1% impact the consolidation of Qualpay, about a 1% impact of credit-related expenses from the first half of the year.
And with all of that and every other inflationary impact, we're still guiding to a 2% -- 1% to 3% number, that feels pretty good. But we do expect 2025 to likely be higher than that.
Got it. I appreciate the color. And then maybe separately on capital, your target CET1 is 10% to 10.5%. You're slightly above that. I think you're saying you want to manage to the higher end. What keeps you at the higher end of that 10% to 10.5% target? Is it current uncertainty in the economy? Is it credit? What would drive you to move to the lower end or even below that 10% number?
In isolation, we would drive to be there today. It's just when you look at capital management, stress testing, scenario analysis, there's nothing quantitative that would drive you to the levels where we are now or even to 10% to 10.5%, you would actually likely run below that when we think about capital deterioration in a severe adverse scenario.
But we believe it's prudent to operate with higher capital than the models would suggest just given, one, there is uncertainty in the environment. But again, that wouldn't point you to the levels where we are today; and two, where peers are. And so if we -- one thing we've seen over the past few years and economic uncertainty and market uncertainty, we do believe that relative capital ratios to peers and uncertain times can lead to higher betas. And we think it's prudent to stay closer to peer levels.
And so while it's not quantitative, it's not due to uncertainty in the income statement, it's not due to uncertainty in the balance sheet, we do think it's prudent to run at these higher levels in the current environment.
Our next question is from Brandon King with Tourist Securities.
So capital markets was pretty strong in the quarter. And Jamie, you mentioned how you expect it to stay elevated going forward, I guess, for the rest of the year. So does that mean we'll still see, I guess, close to that $15 million run rate in the back half of the year?
We do expect to see that continue. However, I would just qualify it with, it is uncertain how it will play out quarter-to-quarter. So I feel more confident in the total number in the second half of the year than being able to say it's a stable number quarter-to-quarter because with our client base, with the uncertainty with the economy, with the uncertainty of the election, we do believe that it's likely that there are deals that will wait until the fourth quarter. And so that could back end load the capital markets fee revenue.
So again, we feel good about the total number. I'm just not certain how much will come through in Q3 and how much will come through in Q4.
And Brandon, to add to the reason we feel comfortable with that. As Jamie mentioned, we've been investing in some of the capital market solutions for some time. And if I look back several years, I would say 80% of our revenue, and capital markets came from the derivative side. If I look at this quarter as a stand-alone basis, only 25% of the revenue came from derivatives, almost 30% came from syndications and lead arranger fees. We had almost 1/4 of the revenue from DCM fees, a little over 10% in FX, 10% in SBA.
So it is so broad-based that it gives us the opportunity that we're not over reliant on one particular area, and that's what gives us confidence that we'll be able to continue with this new kind of high water run rate.
Okay. And that was actually my follow-up question is -- if you thought this was kind of a base to grow up flow in 2025 and beyond?
Yes. I think -- and think about this, when we start to see loan production pick up again, the derivative income will pick up with it. So I think there's not only a run rate here, but there's a lot of growth that could come off this space.
Okay. That's helpful. And then lastly, expectations around deposit -- broker deposit runoff, you had a decline in the quarter. Just how are you expecting that to trend in the back half of this year?
As we look at the back half of the year, we would expect to see that stable to declining. We saw some decent declines in the first half of the year. But I think it's -- we'll look to see how loan growth progresses in the second half of the year to really see how broker deposits will play out. But we probably would say stable to down.
Our next question is from Timur Braziler with Wells Fargo.
I guess I was a little bit surprised that the revenue guide -- the top end of the revenue guide was maybe guided down a little bit following the strong NII quarter and the momentum you're seeing on the fee side. I guess maybe just talk us through some of the dynamics that could still net us to that kind of low end at that negative 3% or maybe you have greater confidence given some of the results and expectations for the second half of the year that revenue is going to be more or less flat for the year.
As we look at the second half of the year, the upside drivers to our guidance would be largely loan growth. And so you think about -- we took 1% off the top on loan growth and that helped lead to the reduction of the top end on revenue growth.
But when we look at the rest of the year, high end of our revenue guide would be, one, it could be a flat rate scenario, which would be accretive; two, it would be continued strength in fee revenue that outpaces the mid-single digits that we -- where we've given guidance, which is a possibility; three, it would be increased loan growth.
As Kevin mentioned, that the assumptions in our guide include declines in CRE and that is not something that we've seen year-to-date. It's not something that we expect to see necessarily in the third quarter. And so that could be a tailwind as well. And so I guess I'd point to loan balances being one of the bigger drivers to the high end of the range in NII for the second half of the year.
If you think about the lower end of the range, I would say it would be in fee revenue, it could be deals getting pushed out and pushed into 2025, even though we don't expect that for -- in fee revenue. But it would also be, if there's more aggressive easing than what we have in there, which is the December ease, but as I mentioned earlier, we think that if you just had a September ease, that's only a $5 million to $7 million impact to NII in the second half of the year.
Okay. Great. And as a follow-up, maybe can you just talk us through the strategy of reclassifying your available-for-sale bonds into -- held to maturity during the quarter, especially the -- being longer duration bonds that were moved to HTM kind of locking in that AOCI. Can you just maybe talk through the rationale and that change at this point in the rate cycle?
Yes. Understood. The rationale was, first, these are securities that were unlikely to ever be sold because they're longer duration, they were deeper underwater. And so the marks were large enough that it was unlikely there would be a scenario where we would ever sell these securities.
Second, we do not look at tangible common equity ratios as far as a risk management tool. We use different regulatory capital ratios. We use NII volatility, things like that, to kind of get to what people use tangible common equity for, the ratio of the AOCI impact of that. And -- but we have seen the press and the Street use tangible common equity volatility in AOCI frequently when they're comparing banks, and we thought it was prudent to take a little bit of that volatility off the table.
When we moved them to held to maturity, there is approximately $700 million in unrealized losses associated with that portion of the securities portfolio, and moving that to held to maturity reduced tangible common equity volatility of a 100 basis point rate move down from 75 basis points to around 50 basis points. And so we just think it's prudent to reduce the volatility in that ratio, same thing can be said for CET1, including AOCI, even though we're not held to that standard.
And so that was the general thought that there was very little opportunity costs. These were not securities that we were likely to ever trade and it would just reduce the volatility in TCE as well as CET1, including AOCI.
So our next question is from Catherine Mealor with KBW.
I just wanted to -- just follow back up on the fee income discussion. And can you just kind of help us just broadly, not just capital markets, but broadly think about maybe the run rate that you're expecting in fees in the back half of the year.
If we're kind of -- we're trying to look around your mid-single-digit growth range, then it would imply that your kind of core fee run rate is going back to around the first quarter level, which is a big pullback from what we saw this past quarter. And so just trying to think about, are you being conservative there? Or is there actually a case to be made that we could see closer to high single-digit growth here?
Catherine, as we look at fee revenue growth, the mid-single-digit range, you're right, it's a little bit higher than the first quarter, but we expect the third quarter -- again, the timing of the capital markets piece is the uncertainty. But in the second half of the year, we would expect to see similar fee revenue as what you've kind of seen at or close to what you saw in the second quarter.
Okay. So that is a -- that does make the case, that fee income growth will be much higher than your guidance, which is great. Okay. And then as you think about next year, what kind of longer-term growth rate and fees do you -- would you expect just given some of the momentum you're seeing in capital markets?
I mean, I think -- Catherine, get back to what we're saying earlier, obviously, not giving '25 guidance. But what we've been trying to build is a foundation around some of these core fee income revenue sources that will generate sustainable growth. And to your point, when you look at fee income this past quarter, it was up 15% year-over-year, and that was a function of many different areas, not just capital markets, although capital markets had a strong growth.
We were up in core fees, about 4%. And that's largely a function of our treasury and payment solutions area. We've been growing at about 14% year-over-year in analyzed fee income. We've also had growth in some of our other fee categories like credit cards and other fee income.
Remind you, there's a big headwind going into this year in wealth management. We had both repo revenue down, and that was a product that we were selling to a large municipality that no longer was using that solution. And that was providing just a $4 million -- it's a total of $4 million headwind for the quarter and we divested of our money management from GLOBALT, and that was about $2.3 million.
So when you think about our results today, you add in those headwinds along with a change in our underlying consumer account structure that minimizes insufficient funds, which also has a headwind. When you look out to '25, you're not going to have those. You're not going to have a headwind with NSF fees. You're not going to have repo headwinds. GLOBALT will be fully off the books, and there'll be no comparability.
So when we continue to have the performance in core banking fees, capital markets, and we get some of the growth in wealth again, I think you could see a growth rate that is even higher than this year, depending on the underlying economic environment.
Great. That's super helpful. And then I just [indiscernible] for one more follow-up. Just the other line that's been about $18 million in the past couple of quarters. Is there anything kind of onetime that you see in that? Or do you think that's also a good run rate for the back half of the year?
There were some onetime benefits from some OREO properties where we took some fee income from that. So that was elevated a little bit this past quarter. So I think other will come down a little bit and may be made up in some other categories.
Our next question is from Michael Rose with Raymond James.
Okay, can you guys hear me now?
Yes.
All right. Perfect. Catherine actually just asked my question. But just maybe one on the -- I know it's minor, but you did have an inflection in criticized and classified. Can you just talk about broadly what that's composed of by category? And if you're starting to see migration maybe more into C&I-type credits where I think we're seeing an increased number of bankruptcies versus some of the earlier migration, and I assume office, and I know you talked about transportation in the past, things like that. Are you seeing a broadening or shifting of any sort of migration there?
Michael, it's Bob. I'll just have a couple of comments on that. But the inflection was really on our past due ratio. We had a past due credit that settled and resolved and came off the list the first week of July. So that cleared. So that's the bulk of a spike in past dues.
In terms of criticized and classified, we were relatively stable overall, around 3.7%. So again, that's a little bit of a moving target as you think about loans moving in and out of your watch list, in and out of criticized category. So there can be some volatility in that, but the general thought from our perspective is that the portfolio is accurately rated. The migration that was negative is still -- maybe perhaps slightly negative [ by us ], but I would say it's showing signs of stability that gives us a lot of comfort in terms of our guidance.
And then to your point, as it relates to C&I and CRE, there's no question that we've seen -- the C&I stress come through -- again, within our expectations, but the C&I stress come through, which is a function quite frankly, just rates being this high for longer and the general inflation pressures on some of these leveraged corporate credits. From my perspective, the good news is that, that list of challenges continues to get smaller. And you couple that with -- to your point around CRE, we haven't seen the defaults there. We certainly have had 1 or 2 here or there, and we expect that over time. But quite frankly, to date, held up fairly well to Kevin's point earlier.
And then finally, our senior housing portfolio, which gave us some dings and scratches earlier on, those macro figures in that industry continue to improve. Occupancy is better, rents are better, labor costs have stabilized to some degree as well.
So we kind of do all that calculus and we come up and feel pretty good about where we are and feel pretty confident in guiding to flat to slightly down in charge-offs and feel pretty good about the position of the portfolio.
The risk is the unknowns in C&I. And if we stay -- rates stay higher for longer, but it looks like that risk potentially may be beginning to come off the table as well. So we're getting a little more optimistic.
That's great color, Bob. And maybe just to follow up and then your last point kind of leads into it. If we do get a couple of rate cuts, I would assume that -- probably too early to call kind of a peak in criticized classified NPAs, things like that, but you could definitely make the case, I would think, right, that we would have peaked with a few rate cuts barring the economy not getting really any worse. Is that fair?
Yes. I think that's generally fair, Michael. I would -- a little bit of caution there would be -- criticized classified, that's $1.5 billion, right? So it takes a fair amount to kind of move that number. You get in NPLs and we're sitting at 59 basis points today. There's some chunky credits in there. So you could have a quarter where it moves up or moves down.
Obviously, last quarter, we had a big NPL that we spoke about on this call. So we're back down to levels that we feel pretty good about. And we, quite frankly, look ahead and don't see those chunks, as I mentioned, being quite as big. So that gives us some comfort. But you could still have some movement there, but the general trend line we think, particularly to your point, as rates come down, should be positive for us.
Our next question is from Christopher Marinac with Janney Montgomery Scott.
Bob, just to continue your answer from the last question. Do you see restructurings and CRE as possible solutions? Or is it a little early for those? I'm just curious about other ways to see further progress on a criticized number.
Yes, Chris, thanks for the question. Yes, I do. I mean, we certainly -- as we've said before, I mean, our intention is to work with our clients on coming up with solutions if it needs to be restructured, then we certainly want to work towards a mutually agreeable structure. So I think that's -- in a broad sense, certainly one of the tools in the toolbox, we will do that. We've done that. It's not an extend and pretend to whatever the common phrases you hear are. From our perspective, it's "let's come up with the right solution."
I think it's a little early to your point, probably to make any kind of prediction on that specifically as it relates to office. We have -- Chris, we have 1 office loan on nonaccrual today. So I mean we've got a few that are challenged and that are rated certainly and 1 or 2 that we're working through modifications on. And again, that will give us some chunkiness in our FDM categories, et cetera. But for the most part, I think you're dealing with a handful of credits, and we feel good about being able to work through them. And -- but I do think it's a little early to say that's a play that equals a certain amount of dollars for us.
Okay. Great. And then the charge-off guidance has been very consistent for quite a while. I'm just curious if you see any risk to that as we head into the next few quarters, next year, et cetera?
Chris, we spend a lot of time forecasting. I feel good about our forecast. I think we're not -- there's a lot of calculus that goes into being comfortable to tell you that we think charge-offs will be flat to slightly down. So we feel good about that.
And again, the reasons why as we spoke about before, the list of corporate credits continues to get smaller. Senior housing continues to improve, although we've still got 1 or 2 we're working through, but the macros are good there.
In commercial real estate, to your earlier point, continues to hold up well and probably -- comes out over a longer period of time. You do all that math, add it all up, that kind of equals where we think we'll be and why we're comfortable with that type of guidance. The risk to that is you don't know what you don't know.
And if rates stay up longer and particularly in C&I, you could continue to see some pockets of stress, but I think they're isolated. I don't think they're in any particular industry, just the general stress of higher rates being higher for longer, could -- certainly could give you a surprise or two, but we feel pretty good about where we are right now.
Our next question is from Samuel Varga with UBS.
Are you able to hear me now?
Yes. I can hear you.
Perfect. Awesome. I'm sorry, I'm not sure what happened there. So I just wanted to circle back on the fee income and go specifically to MAAST. It's been a long road for the project. And I wanted to get an update from you just about the strategic direction. Should we be still thinking about MAAST as a revenue -- sort of a meaningful revenue driver? Or is it -- has it become a client acquisition tool and that's how we should frame that for the story moving forward?
Yes, Samuel. I think it's still a meaningful revenue opportunity. What we've done over the last, really, 6 months is we've taken a step back, we had users on the platform. We had a very active pipeline. And what we tried to evaluate is, are our products that we're offering through the solution of the class that will allow us to continue to expand and have a scalable product. And so we kind of took a step back, and we're rebuilding some of the underlying functionality and capabilities within MAAST.
We also are positioning it not as many clients and prospects. So we had 46 names in the pipeline. We're going to try to onboard far fewer and focus on larger clients and not just focus on the ISV segment, but also the ISO segment.
And so you'll hear more in the coming quarters as we relaunch the product with maybe a more surgical view of who the target audience is, but we still think it's going to be a viable solution that will not only allow us to generate fee income but will also generate core deposits.
So we'll talk more about it, but we're back kind of in the basement, working on the products and solutions, and we'll be back out in the market later this year.
And let me jump back in on the fee revenue. And Catherine, you asked the question about the run rate for the second half of the year. And I said flat to the second quarter. I mean, flat to the second quarter. It's flat to the first half of the year.
Great. And then just a quick follow-up on capital. I guess you mentioned that, obviously, buybacks are firmly on the table as they were this past quarter. Could you just share your thought process around the trade-off between doing more buybacks versus perhaps another smaller restructure on the bond portfolio?
Well, when you look at further restructuring of the bond portfolio, the payback just gets longer and longer. We did -- the first one we did was about a 3-year payback and the second one was about a 5-year payback. And it's just not that attractive to us at that duration when you get beyond there. The one we just did was attracted just because of the capital generated from the risk-weighted asset optimization efforts.
And so it's unlikely that we will do another repositioning of the securities portfolio. And we're very confident with capital ratios where they are. They're near our target of the high end of the range of 10% to 10.5% in but you should expect to see us continue doing what we've done in the past, which is prioritize client growth, be ready for client growth when it comes and grow the balance sheet. And if we're sitting here with excess capital, you should see us use share repurchases to balance it out.
Thank you very much. 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. As we close out today's call, I'd like to thank you all for your attendance and your continued interest in Synovus. I'd also like to thank and recognize all of our team members who are listening in today. Our financial results that we presented this morning are a direct result of what you do daily to serve our clients and differentiate us from our competitors.
During the second quarter, we did continue to receive national recognition for our work environment and service excellence. We are in a Great Place to Work Certification for the fourth year in a row. Our family office won 2 awards from the Family Wealth Report. Our customer care center and team members were awarded several Best of the Best awards by Customer Contact Week. I am proud of our teams and the recognition of their efforts and the impact it has on delivering on our purpose to help people achieve their full potential.
As we look forward in 2024 and we approach 2025, I am confident that we will sustain our momentum and see key improvement in our financial performance. This confidence is driven by the following facts. Our net interest margin and our net interest income troughed in the first quarter, with deposit prices peaking and future NIM expansion fully supported by our actions.
Our credit cost and our credit outlook have improved. Our fee income has hit a new high watermark due to the broad-based success and execution. Expenses have been well contained with flat year-over-year growth and with an adjusted efficiency ratio of 53% this quarter, we continue to outperform our peers.
In addition, our efforts to optimize the balance sheet to better position us for growth is largely complete. The benefits derived from risk-weighted optimization efforts allowed us in the second quarter to restructure the bond portfolio, which increased yields by roughly 50 basis points.
Our loan portfolio optimization efforts around third-party medical office, national syndications and senior housing have resulted in a reduction of $2.3 billion in outstandings over the last 12 months, reducing the percentage of loans in these categories from 18% to 13%. Our capital levels are 8-year highs, and these strong levels provide for additional flexibility and fuel for future growth.
And lastly, we remain well situated in a great footprint. Whatever the economic forecast is for the foreseeable future, we have the opportunity for relative outperformance, look no further than the recently released Atlanta Fed research titled Poised for More Growth, the Southeastern economy is outperforming the U.S. So yes, I'm optimistic about our future and our ability to drive meaningful and sustainable growth and improve profitability. And I look forward to future earnings calls to provide updates on our progress.
In the meantime, we look forward to seeing many of our investors in upcoming meetings and scheduled conferences. So for now, Ezra, that concludes our second quarter 2024 earnings call.
Thank you very much, everyone, for joining. This concludes today's call. You may now disconnect your lines.