Q1 2022 Synovus Financial Corp Earnings Call
Turning to everyone and welcome to our first quarter earnings call the.
The first quarter provides another proof point of our continued focus on growth I'm extremely proud of the way our team members set and kept the pace and focus as we pursued and won new business deepen wallet share enhanced our clients' experiences and made ongoing progress in several areas of investment.
Including mast CIB and wholesale banking.
Our relationship banking approach delivered strong growth this quarter in loans core transaction deposits in core banking fees and are a product of broad based success across our lines of business and client segments. At the same time, we've maintained good expense discipline by leveraging synovus forward initiatives to partially offset the ins.
<unk> expense environment that we have faced while continuing to invest in talent and our longer term initiatives.
The road map that we shared during our Investor day back in February strikes the appropriate balance between core and transformational initiatives here.
During today's call the positive impacts from several initiatives and investments we've outlined in our strategic plan and progress, we're making towards building sustainable top quartile performance.
We continue to make progress on synovus forward with run rate benefits, increasing to $125 million as of March end, and we remain on track to deliver $175 million by year end.
The optimization of our branch network is a significant initiative within the Synovus forward program with nine locations closed in the first quarter and approximately 30 planned for the rest of the year.
We are also continuing to make some promising hires in revenue producing talent and new leadership in key lines in key markets, increasing our wholesale middle market team by 10%. This quarter, while also expanding our specialty lending team and naming new community banking leadership, and our Tampa and Chattanooga.
<unk> markets.
The CIB front are planned to have talent in place by the second quarter remains on track with 15% to 20 team members expected by year end.
Additionally from a digital standpoint, we have continued to successfully migrate to our synovus gateway digital commercial banking platform.
Later this month, we will complete our year long transition of all of our commercial wholesale and small business clients, providing an enhanced and streamline experience also during the first quarter, we launched our mobile virtual commercial card, which will make it even easier for our clients to utilize their credit facilities.
From a consumer perspective, we heightened engagement across our digital platform My Synovus and expanded online account opening with increased product availability and expansion of capabilities and channels and launched phase one of consumer analytics, which is focused on the next best action for our clients. We also.
Continued the measured integration of commercial analytics into how we manage credit events and borrower monitoring most notably within the community and consumer bank lines of business.
Lastly development of our banking as a service platform mast is progressing on schedule with the second quarter pilot plan. We are finalizing the selection process for the <unk>, which we will partner with for this phase as.
As the platform is being built we continue to add talent to our team with two new senior leaders added this quarter, who both have vast experience working with Fintech integrations and technology solutions.
We also have signed a definitive agreement to acquire a 60% interest in <unk> a provider of cloud based platform that combines at payment gateway with robust merchant processing solutions, which will allow merchants and independent software vendors to easily integrate payments into their software.
There are websites. The completion of this investment is subject to the satisfaction or waiver of customary closing conditions, including receipt of necessary regulatory approvals.
Beyond the proposed investment to propel growth in Qual pays core business Synovus has chosen to leverage <unk> payment technology stack as an integral part of mast.
We believe this investment will help to speed up the delivery on mass as well as ongoing enhancements and solution expansion.
Now, let's look at slide three we've included key financial highlights for the quarter.
To begin with loans, which increased $1 $1 billion, excluding PPP or 11% on an annualized basis, our wholesale banking segment had another exceptional quarter.
And we also posted growth in both community and consumer banking client segments, evidenced the momentum we have across the franchise.
Commercial lending continues to be the driver of overall growth with first quarter funded production up 43% year over year.
What is important is that we achieved this robust growth in a diversified fashion, while maintaining our underwriting standards and adhering to our disciplined credit framework.
Quality deposit growth continued in the first quarter driven by an increase in noninterest bearing deposits of $284 million we.
To see growth in core consumer transaction accounts, resulting from both balanced augmentation and account growth our multi year journey focused on remixing, our deposit base into lower cost sticky sources has positioned us well to manage deposit cost in this rising rate environment.
<unk> adjusted for onetime items, and excluding PPP fees was $213 million for the first quarter. This represents a $17 million or 9% increase year over year.
Revenues increased driven both by balance sheet growth as well as continued growth in multiple fee income businesses.
We would be remiss, if we didn't acknowledge the recent geopolitical risk and inflationary economic environment and their potential impacts to our clients both from a consumer and commercial perspective.
Increased prices and supply chain bottlenecks are putting additional pressure on liquidity and business activity in certain segments and may impact margins moving forward.
<unk> the challenges our credit outlook remains positive.
Overall, our strong quarter led to an adjusted EPS of $1 <unk>.
And operating metrics that demonstrate our focus on profitable growth Jamie.
Jamie will now share a more detailed update on the results for this quarter.
Thank you Kevin.
On slide four I'd like to begin with loan growth.
Total loan balances ended the first quarter at $40 billion.
Excluding PPP balances loans grew $1 1 billion led by growth in C&I.
On an annualized basis total loans were up 11%, our third consecutive quarter of annualized double digit loan growth.
And as you can see on slide five C&I loans were up $926 million quarter over quarter, and CRE loans grew $130 million commercial loan.
Loan growth was broad based with 10 of 11 wholesale bank businesses growing balances.
We also continue to see growth in commercial production and line utilization commercial production increased 43% year over year, driven by a 40% increase in C&I.
Line utilization increased to 46, 1% up from 42, 8% in Q4 higher.
Higher utilization from lines existing at the end of the fourth quarter contributed approximately $200 million to loan growth in the first quarter.
Higher utilization levels are reflective of our clients' investment spend inventory level builds and inflationary pressures related to higher input and labor cost among other factors.
Regional economic data indicates performance, which outpaces the nation and showed little effects from the omicron variant of COVID-19 over the course of the first quarter.
Favorable demographic trends continue to give us a cautiously optimistic outlook on the economic health of our footprint in 2022 relative to the rest of the country. This perspective is underscored by conversations with clients and other industry participants within our footprint.
As we turn to slide six we continue to see positive trends within our deposit base, even as deposit growth has slowed from the record pace. We saw in 2020 in 2021.
Our focus remains the same continuing to deliver some of this to our clients in a way that leverages our platform to deepen client relationships.
We saw in the first quarter was consistent with that aim with core noninterest bearing deposits up $284 million and savings deposits growth of $72 million quarter over quarter.
Our consumer banking segment with a notable bright spot in that regard with core transaction deposits up $701 million attributable.
Attributable to a combination of both account growth and balanced augmentation.
Time deposits declined by $143 million as a result of our continued focus on Remixing our deposit base.
Public funds decreased $236 million quarter over quarter, mainly a function of seasonality.
Beyond our core portfolio. We also continue to leverage our broker deposit book as a means to efficiently manage our balance sheet and liquidity position.
As we forecasted on our fourth quarter earnings call. We saw a notable decline in broker deposits, which were down $797 million.
That decline was driven by our efforts to efficiently manage our liquidity position.
However, we do expect a return to growth in that portfolio in the coming quarters as we leverage that funding source as a cost efficient means of complementing our core deposit growth and helping to fund our strong loan growth expectations.
Our average cost of deposits declined one basis point in the first quarter to one 1%.
This was driven by deposit mix optimization and strategic reductions in high cost deposits as previously described.
The first rate hike in March and had very little impact on deposit cost as we were able to limit rate increases across the majority of our products.
We believe that deposit betas will be modest early in the hiking cycle with unexpected beta of approximately 20% for the first 100 basis points of <unk> hikes.
Monetary policy continues to tighten in the FMC reaches a more neutral policy rate, we would expect to see increased betas and as a result, we're expecting cumulative beta is in the mid <unk> through that period.
As shown on slide seven net interest income was $392 million for the quarter consistent with the prior quarter. The first quarter NII was affected by lower PPP fee income as well as the impact of a lower day count. Excluding these impacts NII was up $13 million quarter over quarter.
Year over year, NII was up $36 million, excluding PPP fees. This represents an increase of 10% and was driven by the strong organic growth. We saw in the latter half of 2021, and which carried over into the first quarter.
The net interest margin was 3% an increase of four basis points from the fourth quarter Asics.
As expected lower cash balances helped to support NIM and offset the impact of a continued decline in PPP fees looking.
Looking ahead, we expect to see further NIM expansion in the coming quarters as the benefits of higher rates are realized.
To help further contextualize the impact of rates. We included additional detail on our interest rate asset sensitivity on slide eight.
Balance sheet asset sensitivity benefited from the continued growth in our floating rate loan portfolios, which increased to 59% of our total loan portfolio at quarter end, a 7% increase year over year.
This is due to a robust origination of variable rate C&I loans.
Asset sensitivity also benefited from recent increases in short term interest rates, which reduced the number of loans that they are Florida interest rate.
Several factors offset these benefits to asset sensitivity the increase in expectations for short term interest rates led to an opportunity to lock in the benefit of a rising rate environment. Accordingly during the first quarter.
Added $1 $4 billion in forward starting hedges. We also made a slight increase to our core deposit beta assumptions in the first quarter largely driven by changes in the expected pace of fed tightening those were offset somewhat by positive deposit Remixing dreams.
For purposes of our sensitivity disclosures, we continue to assume a static through the cycle beta in the mid thirties.
Collectively as shown on slide eight the combination of these factors resulted in a fairly stable asset sensitivity position quarter over quarter.
Specifically as it relates to deposit betas, we believe it is likely that betas will start low and increase as <unk> progresses through this tightening cycle, both the amount of tightening and the pace of tightening are expected to impact deposit betas to illustrate how the realized beta may impact our NII profile.
We've included a sensitivity table this quarter as you can see adjusting the beta 10% results in an approximate one 6% change in asset sensitivity.
Slide nine shows total adjusted noninterest revenue of $107 million down.
Down $9 million from the previous quarter and down $6 million year over year.
The quarter over quarter decline is primarily related to the $8 million <unk> gain in the fourth quarter on.
On a year over year basis, non mortgage related fee income increased 12%.
Notable items included an increase in core banking fees of 19% and wealth revenue of 11%.
Growth in core banking fees was attributable to numerous categories, including card revenues and cash management fees, both reflecting our investments in treasury and payment solutions.
In addition, other core banking fees, such as SBA loans and merchant services improved year over year, a result of strong execution in these business lines.
Wealth revenue benefited from strong customer acquisition and growth in assets under management year over year across all of our key business lines.
Our retail financial advisory business managed assets grew 24% year over year, primarily due to strong net inflows.
Synovus family Office grew their family count by 15, or 21% year over year and continues to see opportunity for growth in the coming quarters.
Mortgage revenue of $6 million declined $1 million from the prior quarter and down $16 million from the prior year.
As mortgage rates have increased refinancing volumes have declined which has resulted in reduced mortgage revenue.
Okay.
Slide 10 highlights total adjusted noninterest expense of 279 million.
Down $6 million from the prior quarter and up $14 million year over year.
Adjusted items were led by the onetime gain on sale of our Columbus facilities.
Set by branch related restructuring charges.
The decline in adjusted noninterest expense quarter over quarter as a result of prudent expense management and the normalization of expenses from an unusually high fourth quarter.
Offsetting the expense normalization with seasonally higher employment taxes, and employee benefit costs, which in total increased approximately $10 million from the fourth quarter.
Year over year adjusted expenses increased 5%.
Over 50% of the increase is attributable to incentives and costs associated with elevated performance.
We continue to benefit from the expense saves and discipline that are part of our culture as a result of our synovus forward initiative.
As previously disclosed we plan to significantly reduce our branch count in 2022.
We forecast that by the end of the year the run rate expense benefit from 2022 branch reductions will exceed $15 million.
Some of which will be reinvested in our digital delivery channels.
Despite tight cost controls we are investing in the growth initiatives covered at our Investor day, such as CIB mast and restaurant services and we are fulfilling our strategic commitment to add frontline bankers.
First quarter expenditures on new growth initiatives totaled approximately $3 million and we're forecasting $25 million to $30 million in spend on new growth initiatives for 2022.
Key credit metrics on slide 11 remained stable overall and at very low levels.
NPA and NPL ratios stayed level at 4% and 33% respectively.
Past dues decreased four basis points to one 1% in the criticized and classified percentage of loans remained at two 6%.
The net charge off ratio, which was one 9% for the quarter continued to remain at historically low levels. This quarter, the economic outlook worsened due to heightened inflation concerns and geopolitical tensions because of this our multi scenario economic framework assumes a 64% downward bias.
Relative to the third party baseline scenario, which somewhat lags current conditions.
This increasingly negative economic outlook was more than offset by the strong credit performance of the existing loan portfolio as well as the reduced credit risk profile recent loan growth.
This resulted in an ACL coverage ratio of one 5% a decline of four basis points from the fourth quarter.
While we are excited to deliver strong core loan growth our credit team remains diligent in monitoring our loan portfolio and being judicious in approving new credit risk, we take on our balance sheet as.
As we grow our business, we remain committed to maintaining a well diversified balanced loan portfolio across various industries and asset classes and diligently managing credit risk within our risk appetite.
As noted on slide 12, the common equity tier one ratio remained relatively stable at 947%.
Strong <unk> continues to support organic capital creation with 35 basis points accruing to common equity tier one inclusive of taxes and the provision.
Our focus remains on deploying this capital to our strategic priorities of strong core loan growth and a competitive common dividend, which now stands at 34 cents per share per quarter.
Our capital position remains strong and we continue to actively manage CET, one within our nine 5% to 975% target range and.
In the first quarter, we repurchased $10 million in shares as we outlined at Investor Day in February our approach to capital management, We will continue to prioritize capital deployment that is aimed at supporting client growth paying a stable common dividend and accommodating opportunistic non bank M&A opportunity.
<unk>.
I'll now turn it back to Kevin.
Thank you Jamie I'd now like to share some updates to our guidance for 2022 previously disclosed during fourth quarter earnings.
The updated guidance does not include the impacts of the investment in <unk>, which we currently expect to close in the third quarter and we will have an overall material impact on our financial statements.
As a result of the strong loan growth and increase utilization we saw in the first quarter as well as current pipeline levels, we are raising our loan growth guidance to 6% to 8% for the year.
While the probability of a slower growth environment has increased it is important to note at this time, we have not seen a significant negative impact on client loan demand attributable to either geopolitical risk or an increasing inflationary economic environment.
Adjusted revenue is now expected to be 9% to 11% for the year largely a result of the elevated interest rate environment as well as strong first quarter loan growth Mb.
Embedded in this updated guidance is the forward rate curve as of March 31, which assumes fed funds and the year at approximately two 5%.
Adjusted noninterest expense is expected to be up 3% to 6% for the year, while inflationary pressures certainly play a part and expected expense levels. The increase in our expense range is driven primarily by growth in performance based incentive expectations. In addition, when looking at expense increases year over year.
Approximately 50% of the forecasted increase is attributable to investments in growth initiatives, which we expect to drive revenue growth as we look past 2022, we expect to maintain strong positive operating leverage throughout the year.
Our CET one target range of nine 5% to 975% remains the same and we expect the effective tax rate to be lower for the year than was originally anticipated now between 'twenty, one and 23%.
Lastly, we remain on track to deliver our previously communicated $175 million of pretax synovus forward benefits by the end of this year Synovus forward is a combination of balance sheet, new revenue initiatives and cost savings and we continue to generate benefits in each of these categories.
Before we transition to Q&A I mentioned, our team as I opened the call, but now that we provided details on the financial performance. They helped drive during the quarter I want to once again, thank our team members for their incredible efforts and for their ongoing passion for making synovus truly standout in this crowded and competitive landscape.
We operate and now operator, let's open the call for Q&A.
We will now begin the question answer session to ask a question you May Press Star and then one on your Touchtone phone.
Using a speakerphone please pick up your handset before pressing the case.
Or withdraw your question. Please press Star then.
The interest of time, please limit yourself to one question and one follow up.
This time, we will pause momentarily to assemble our roster.
Our first question today comes from the line of Ebrahim <unk>.
Bank of America.
Ebrahim. Please go ahead with your question.
Hey, good morning.
Good morning, good morning.
I guess I just wanted to follow up a question that came up during the Investor day.
And banking as a service.
So I heard you Kevin the quality acquisition investment is not going to have a meaningful impact to our results. This year.
Now that you had some more time I think since Investor day thinking about the business.
<unk> put us what what the size of this opportunity revenue wise earnings wise as we think about it.
Just give us a sense of what the Optionality that's baked into this and how we should think about it in terms of the investment thesis on the stock would appreciate any color on that.
Well.
It's a great question. We've spent time since February building out the product and as I shared in my remarks earlier that work has been built around a front end that is being provided by <unk> and we have a back end processor our investment in qual pay we felt was important we think they have a technology stack that.
Is superior to what other payment processors are providing it allows for more streamlined operations better reconciliation and quite frankly, it's much more scalable as we look to add new capabilities to the platform. So number one we're happy with our progress we're still on track to be able to deliver a pilot product.
In the second quarter, we're looking at today, three Isps to be able to conduct that but we'll start with one and we'll pilot that product throughout the remainder of 'twenty two and we will have a full rollout in 2003. So I think it's still premature to give any big revenue guidance in out years, because thats what the pilot.
<unk> is all about is to be able to garner what sort of transactions will get from a payment platform. The depository impact and then as you recall phase two of the program was to add a fully embedded finance program, where we would have lending capabilities, but I would tell you since that February date, we remain very confident.
<unk> and our ability to <unk>.
Develop the product, but more importantly, we continue to receive good feedback from those Isps that this sort of product would be something that they would want to use so theres nothing thats changed we do think it can be a meaningful impact and although qual pay is immaterial from a financial standpoint, we think it can be material as it builds as we use that.
Company to build out the mass product.
Got it thanks, Ken I guess, maybe later in the year, maybe better timing to get booked at year end.
One question for EMEA looking at slide 17.
Your innovative hedging portfolio, just talk to us around that.
You hit on managing asset sensitivity, if we do get tight.
Hi.
Baked into the forward curve.
Do you think about neutralizing the balance sheet and defending against that is continuity.
Yeah Ebrahim.
As we think about our hedging strategy you can see that we added $1 $4 billion in hedges in the first quarter.
And the thought process. There is basically we looked at our asset sensitivity it was increasing and it's increasing for a couple of reasons first the percentage of our loans that are floating rate continue continues to increase due to the growth in.
Commercial C&I lending.
That will continue going forward. So our balance sheet is natively asset sensitive and it will continue to get even more asset sensitive as we as we move forward. But then you also had the impact of the first rate hike moving loans off their floors, which was.
Another incremental increase in asset sensitivity and so we basically looked at our sensitivity and managed it through receiving fixed with forward starting derivative and you can think about these are receiving fixed just a shade more than 2%.
That we believe that is prudent.
Get eight rate hikes from here so you're.
Really close to breakeven on these and.
And it's good for US to go ahead and lock in that benefit for that at a higher rate environment and so we will continue to manage our asset sensitivity.
I believe that.
The forward curve is actually fairly likely scenario at this point given.
Add rhetoric, but.
We'll continue to manage that going forward.
Consistent with what you've seen in the past.
Thanks for taking my questions.
Our next question comes from Jonathan <unk> from Chile to guarantee Jennifer Your line is open.
Okay.
Thank you good morning.
Okay.
I noticed you didn't give any guidance on your future net charge offs or credit cost I wonder how youre thinking about that the next few quarters.
Your what youre seeing from client sentiment right.
Hi, Jennifer it's Bob. Thank you for the question and there's no doubt the spot metrics continue to be.
Really good in terms of credit and specifically to your point charge offs, but I think we're kind of range bound right now.
If you look at it over the last several quarters, it's been in that 2025 basis point range.
The intermediate term I would certainly not we don't see anything thats materially affecting our outlook.
Generally speaking.
Thinking through the remainder of this year longer term there'll be some normalization and I know that's a question of how you define that but.
Credit costs can't get much lower so naturally there would be some incremental rise over time, but to jamie's point earlier.
Way, we're reserving our incremental allowance build that would begin to associate with a growing loan portfolio.
Continued downward.
By us on the economics will keep us a little elevated there so from a guidance perspective, I feel like we're kind of in that range at least for the foreseeable future.
Thanks, Bob what what buckets of the loan.
Folio do you think are most vulnerable.
As an up rate environment like this.
Yes, <unk> is a great question, Jennifer and I, certainly think about all of them, but let me highlight just a couple if you think about a weakening consumer.
As a result of the inflation factors and rising rates certainly those industries that have dependency on discretionary spending we are watching very closely I think the way I think about it as I go back to Covid when demand really just fell off the table and we looked at our hotel portfolio restaurant portfolio art.
Entertainment. So I think those industries are still relatively the ones. You would you would want to watch during a slowing consumer demand and I think at least from our perspective.
Really got very diligent in those portfolios we brought in.
Our use of analytics, which is now built into our sort of business as usual platform of underwriting we look at real time cash inflows as we showed you all during the pandemic I think that continues so anything consumer related certainly is on my radar on the commercial portfolio side, specifically C&I.
Small businesses would be something we would watch and for US that portfolio is 1 billion to 1 billion $5 give or take depending on how you define it but those customers to date continue to be able to pass along increasing cost I think over time. They don't have the leverage that our larger counterparts have relative.
To input cost and supplier negotiations. So we could certainly see some margin squeeze there and certainly topline declines. So small business is one that is coming out the good news for our portfolio as over half of that is secured by commercial real estate of some type now which gives us a little comfort in the loss given default scenario, but those.
It would be the ones I would call out.
Thanks, Bob.
Our next question comes from Steven Alexopoulos from Jpmorgan Steven. Please go ahead.
Hi, good morning, everyone.
Good morning, Steve I wanted to I wanted to start how are you guys thinking about that.
That growth.
2022, and what's assumed in the 2022 revenue outlook that you're providing.
So Stephen I'll start and Kevin on the deposit outlook as you've seen in the last year, we've taken our strong liquidity position to continuously remix the book, bringing down our higher cost Cds, bringing down some of our brokered funds and.
As we sit here today at an 83% loan to deposit ratio will continue to strategically remix where it makes sense, where we can bring into lower cost sticky deposits. We've increased the percentage of total deposits being noninterest bearing up to 34% this past quarter and so our strategy going forward would be that.
Those categories that fall under our core transaction deposits will be the area that we continue to focus we think that those categories should grow in line with our client growth, which should be in that 3% to 5% range as we're thinking about continuing to.
Take the growth that the economy gives us, but also taking share from some of our competitors and so if you look at year over year core transaction deposits are actually up 10%. So looking at the rest of the year I think you would see that.
3% to 5% deposit growth it would obviously be far less than what we've seen in previous years as it relates to revenue growth for the rest of the year I'll, let Jamie touch on that and let me jump in a little bit.
More on the deposit side as well because we will use brokered deposits to fund incremental loan growth as we go through the year. Steven So you may see some rebuild of that portfolio, which will be incremental to our core transaction deposit growth that Kevin just kind of just walk through.
On the on the revenue guide.
We increased our guide the 9% to 11%.
We feel good about the growth outlook.
Largely what you see in that revenue guide increase is one an acknowledgment of the strong performance on the loan side in the first quarter.
But also the change in the interest rate outlook and so.
And that is our assumption of deposit betas remaining somewhat lower for the first few hikes, we're assuming an approximate 20% beta for the.
First four hikes and then beta is increasing.
As you go beyond that but that that's really the source for the for the revenue guide update the 9% to 11%.
Okay.
Helpful and then.
Second question on Qual pay could you go into a bit more detail on the functionality of this provides you and what was the thought of acquiring anything was 60% or somewhere around there what was the thought of acquiring a stake in the company what additional benefits will that provide to you.
So they.
They are an ISO Stephen so today, they provide merchant processing for.
Third parties and so we have been the sponsor bank the acquiring bank for them for some time. So we've known them, we think that their technology stack differentiates them in the payment space and so acquiring 60% of the company allows us to help.
Set priorities for their core businesses, which are core business, which will continue to be merchant acquiring business, but leveraging their development team their technology stack to fully embed it into our payments platform that will be math. So they will be the front end to our program. So as we sell merchant processing to these.
Software vendors they will be using the call pay platform that will be brought to them by synovus and so number one it helps us get the product out there more quickly and then two as we're looking at expanding the mass program over time, whether it's through new reporting new new products having that.
Ownership interest allows us to direct investment and capital into the company to allow us to develop new capabilities.
Okay.
Very good thanks for taking my questions.
Thank you.
Our next question comes from Brad <unk> with Piper Sandler your.
Your line is open.
Hey, good morning.
Good morning, Brett.
Jamie or Kevin maybe I wanted to start with the margin just kind of curious if you guys could comment on <unk>.
Commercial loan yields.
Ink that you sort of reached a floor there exclusive.
The rate changes, we've seen and May continue to see just kind of curious what our starting point might be in terms of kind of where your commercial book can start to reprice ups. Just just wanted to hear kind of what youre hearing in terms of those.
Those yields are starting to bottom out.
Yes, Brad it's a good question and we did see the weighted average rate increased quite a bit in first quarter relative to where we were back in fourth quarter actually 40 basis points on the rate front.
We do believe it's still below the portfolio yield, but I do think to your point, we've kind of hit bottom and we will continue to.
Produced new loans at or near where the portfolio rate is which will allow us to start to expand the margin and I don't think that the price competition is going away I, just think credit spreads widened a bit and the environment has gotten to a position with the rate increase where we can actually put on loans that will be at or near.
Where the overall portfolio rate is.
Great very helpful and just as my follow up on Jamie can you kind of talk about that.
Moving parts the balance sheet.
So the size of it it looked like.
The bond portfolio at least on a period end basis was down obviously used that cash to run off those index.
Our brokered money that you had.
Do you still feel good about three basis points for each each rate hike with kind of all the moving part that seems somewhat conservative, but just wanted to see if you could add some color.
Yes, we still think that in the early hike that using three to four basis points per fed move as appropriate.
With the with the beta assumptions I mentioned earlier.
So we do feel good about that as you get further along.
And maybe pass the first 100 basis points, you can see betas increase and you could see that that.
Margin benefit decreased a little bit a little more color, though on that sensitivity is that about 60% of our asset sensitivity to the front end of the curve and so when the three to four basis points is really just that front end impact and so there is a fairly significant impact by the backend of the curve.
And that commentary a three to four basis points I'm, not really assuming a change in long rates.
Okay.
Okay, great. Thank you.
Our next question comes from Brady Preston from Stephens, Inc.
Your line is open.
Hey, good morning, everyone.
Good morning, Brian .
I just wanted to ask on the C&I growth.
It's been obviously, particularly strong in this quarter.
Finally sort of saw a big uptick.
And your utilization rates.
And based on that chart you put in the deck it looks like we're back.
<unk> 19 levels so.
Understanding that some of the revised guidance is due to this this quarters.
But you also mentioned the pipeline I guess.
Should we expect this 46% to kind of hold or is there room for it to expand I guess.
If there isn't room to expand what are kind of some of the key drivers.
What do you expect to be strong C&I growth going forward.
So Brody I'll take that as you saw 300 basis point increase in utilization this quarter to 46%. So that created about $500 million of growth, but I think it's important to dissect that $500 million. When you go back and look at the lines that were on the books the previous quarter the increase draws from those.
Existing lines contributed only 200 or a little less than 200 of that 500 million. So about $300 million of the growth and line utilization came from new commitments and draws that we put on this past quarter now to the question of where is the line utilization going although 46%.
Where we were pre pandemic.
<unk> the line of 50% in the past and when you think about the inflationary environment that we're under as well as the portfolio mix, we're growing our wholesale banking lines of credit at a faster pace, which typically carry a higher utilization rate. We believe that we could see utilization in the 50%.
Range and so if you took that off of today's commitments that could contribute another $500 million worth of growth. If that were to play out now we haven't included that in our 6% to 8% loan growth projections, but we think that there's a likelihood that we could see continued line utilization increases the other thing.
I would just point out on C&I as you noted of the growth this quarter at $926 million, we had 13 industry classifications show growth and eight sub lines of business produce produce growth. So I think about it. It wasn't just a utilization story. It was broad based it was very diverse.
<unk> across many of our businesses and across many industries and that pipeline that you referenced our pipelines are up about 30% from where they were closing out 2021. So we remain confident that the production engine will continue in the second quarter and its not based on the line utilization continuing to go up.
Got it okay. Thank you for that and then.
My last one was just.
On the I appreciate all the interest rate disclosures.
Within the deck, what I wanted to ask a two part question.
On the loan yield side Jamie.
How are you thinking about.
I guess, maybe you look at the floating rate portfolio, obviously, its got the floors, but how are you guys thinking about.
Maybe any attrition in the benefit that you would see from from floating rate loans and your go forward modeling in terms of.
Floating rate loans converting to fixed loans over time, maybe losing some of those from a mix perspective is there any of that factored into your go forward NII sensitivity.
And then secondly.
Just I noticed the big uptick in sulfur based loans and I guess I wanted to ask you.
So for us acting much more like the prime rate than it is LIBOR at least in the market.
So as you think about kind of floating rate loans going forward.
Is there any benefits of pricing so far versus pricing it off of prime.
So good.
Good question.
We think about the loan mix and the impact to the margin a lot of our as Youre well aware when you look at our fee revenue a lot of our floating rate loans, our clients choose to swap them and they hedge those hedge those lows loan exposures and then we kind of pass that through.
But we're not assuming any material mix the mix change around fixed float.
Outside of the growth.
Floating rate lending just in aggregate just given.
The areas of our businesses there were growing so we do expect a continued increase as far as the percentage of loans that are floating rate versus fixed.
But we're not assuming any any mixes within the portfolio at the moment.
And then on the sofa.
As we think about the spread impact of October versus LIBOR.
It is.
Sure.
But we don't we kind of look at that as a push because we think that we.
Given our clients basically that spread difference.
The spread and so it ends up being a net push.
Between where we think it would've bandwidth without more credit based index life like LIBOR.
LIBOR was.
And I would just add Jamie.
Also you asked versus prime we use prime on small business loans, we we've kind of following the industry in terms of what is market and the larger loans. The wholesale banking loans are moving more on the Sofia platform. So we're trying to keep consistent with what the industry is providing in terms of pricing terms and indices.
Got it. Thank you very much for taking my questions everyone I appreciate it.
Thanks, Brian .
Our next question is from Brady Gailey from <unk> Brady Your line is open.
Hey, Thank you good morning, guys.
Good morning Brady.
I wanted to start on the share buyback there wasn't a lot of buybacks in the quarter, which makes sense on a loan growth was pretty robust.
Some capital impact from a OCI, but yes.
With the growth profile looking better now should we expect kind of a minimal.
Out of activity from the buyback this year.
I think the first quarter is a good example of our strategy around capital management and leveraging share buybacks as kind of the last in line for capital management and so when we look at the rest of the year loan growth clearly was very strong in the first quarter.
And that's where we deploy the capital generated through core earnings as we go through the year.
If loan growth were to continue at the same pace than you would expect to see very minimal share repurchases, but we will use those.
Kind of the toggle, we believe the nine 5% common equity tier one is the right place to be in this environment with this uncertainty.
You are right to assume that it likely will assume lower amount of share repurchases than either prior year all overall reservoir.
Sure.
Okay.
Intra quarter, we saw.
One of the kind of southeast banking peers in Tennessee sell through.
The country buyer.
But mostly the consumer back it was that is that an opportunity for service whether it's.
Maybe hiring some new talent or.
Taking some some customer market share.
Obviously Brady anytime there is disruption in the marketplace. We think it presents an opportunity for us and as you know that competitor does have overlap with synovus I think there were some unique elements to that transaction, where there was some incentives paid upfront for retention and so there may be a different tale as it relates to being.
To attract some of the talent, but broadly anytime that we see anyone going through a major conversion or having a headquarter moved out of the southeast we look at that as an opportunity as I've shared with you in the past you have to take it almost as a process theyre going to be opportunities the day, its announced theyre going to be opportunities when the management team.
<unk> switches out and theyre going to be opportunities. When there is actual migration that's going on and so we will have to be smart in each of those elements to make sure that synovus is planting seeds for both talent and clients to be the destination of choice. If they decide they want to move banking relationships. So we'll go at that process similar to how we've done some of the.
Other mergers that have happened that have happened in our footprint.
Okay, great. Thanks, guys.
Thank you.
Our next question comes from the line of Jared Shaw from Wells Fargo. Your line is open.
Hey, good morning.
Good morning, maybe just following up on on the you gave some great long term goals. When we were all down there in February that were based on.
Unchanged utilization rate as you look at as you look at the strength of customer demand and then also the first horizon opportunity.
How does how does that impact that long term.
Our goal as it.
Is it a meaningful opportunity to maybe move that higher or youre sort of expecting some of these things in the background.
As we think about our multi year goal, it's hard to react to just a couple of months of new data.
We clearly believe in the southeast we believe that the opportunity that's in front of us.
Is real and it's something that we capitalize on every day every day when we come into the office and so we.
We are excited about what's in front of US we think that if you look at Q3 Q4 Q1.
Those are just data point of us capitalizing on the opportunity and we expect to continue.
We don't have anything new to say about the longer term outlook and multi year objectives.
But we see what's in front of US we believe that we are uniquely positioned to take advantage of it and that's what we're focused on doing.
Okay.
Okay. Thanks, and then just to follow up on the.
The margin benefit from higher rates, you said, 60% of that is front end loaded since I guess since February we've seen the 10 year up about 100 basis points. If we keep the 10 year near this level could that be additional call. It two to three.
Basis points benefit to margin or.
Do you expect it to be higher from here to get that benefit.
Well when you look at the you can think about where that sensitivity lies lies in our fixed rate assets on our balance sheet in both the securities portfolio and mortgages.
We did see premium amortization come down in the first quarter, but I do believe that it could come down further even if mortgage rates.
Stay where they are today and so you could see a little bit of a tailwind from the long end with where rates are today, but it's not as significant in that it would be if we add a further further.
Rate increase on the long end.
Great. Thank you.
Our next question is from Christopher Christopher <unk> from Janney Montgomery Scott.
Mr. <unk> your line is open.
Thanks, Good morning, Jamie a question for you I don't know if you mentioned this earlier, but how have new loan rates changed in the last 30 45 days have you seen any movement and as the next fed move really going to be the.
Change to engage those.
We have seen.
<unk> seen an increase in Kevin did mentioned this a little bit earlier, but we.
First quarter, we did see an increase.
Of about 40 basis points from the prior quarter.
So we are seeing a benefit and it's coming through in a couple of ways is coming through and new loan origination.
But youre also seeing loans come off of their floors, and so that you can see that in our asset sensitivity table.
But we are getting the benefit now of loans that were floored kind of now theyre not for it anymore and so every rate move impacts them and so we are benefiting from that we still have floored loans, but.
But each move reduces that amount and that's what you've seen kind of come through in the first quarter and we expect that to continue.
As we go forward.
Great. That's helpful. Just wanted to reinforce that thanks, and then on the hedge strategy does that limit the risk on the ASC side at all does that I know some of that's unavoidable just curious if that hedging strategy Tappers aici impact.
It does not.
You could argue that exacerbate the.
The OCI component.
That because that the mark to market does flow through.
On that but I do want to speak to OCI and the impact of tangible.
Because we intentionally take duration risk in our securities portfolio, and our hedge portfolio and you are well aware of our strategies there both the securities book as well as the hedge portfolio are offsets.
Two our asset sensitivity and so we benefit when rates rise.
And this is a partial offset to that.
But when we think about valuation in enterprise value in a higher rate environment, our enterprise value increases now.
When you look solely at Aoc and the evaluation Securities book and the hedge book those go down, but that's just a partial offset to what happens to the company as a whole and so.
When we think about tangible book value.
We think about <unk> is basically a temporary disconnect where you have an.
An immediate reaction to the market value.
These assets, but that goes away over time as the assets mature and so we believe in tangible book value growth, we think that that's an important shareholder value creator and so but when we look at <unk> and that impact we view that as basically a temporary disconnect and so.
That's kind of our holistic thought process around the impact of OCI and.
How that flows through.
Great. Thanks for going deeper there I appreciate it and clearly your deposits are more valuable to us that rates rise. So we look forward to that thanks Jamie.
Thank you.
Our next question comes from Kevin Fitzsimmons from D. A Davidson Kevin Your line is open.
Hey, guys good morning.
Good morning.
Most of my questions have been asked and answered just a few.
Two quick ones within the revenue guide can.
Can you speak a little bit about.
How youre thinking about the revenue. So if you think about the run rate what we saw this quarter.
<unk> capital markets and mortgage declining just generally how to think about that run rate going forward within that that guidance. Thanks.
Kevin It's actually a really good question, because there's lots of assumptions that go into the rest of the year, but.
We believe that for the year NII could be down around 5% and so that would mean that for the rest of the year you would see a fairly flat.
Our quarterly number and there is again some puts and takes on the positive side, we feel very good about the ongoing growth of core banking fees, whether it's on the treasury and payment solutions side or continue to return to pre pandemic levels with card spend and service charges. So that should continue to provide.
A tailwind for us.
Maybe the biggest uncertainty going forward is on the wealth side.
We're putting up a little less than $40 million a quarter, depending on what the market does that will have a big impact on what our fees do we continue to have the opportunity to grow our assets under management as Jamie mentioned in his remarks, we've seen good client acquisition growth, but when you see the type of volatility in the market.
Potentially having a bear market it makes us a little less certain on what those future quarters are going to look like and then you look at mortgage we think we've kind of hit a stable mortgage number for the quarter and we think that will continue as we look into the future just based on volumes and margins and so when you add.
Add up the things that we know that are growing along with mortgage which is fairly stable. The real wildcard will be what happens with wells and if we see a constructive equity market I think we could have some upside on the fee income component.
Okay. Thanks, Kevin.
One quick.
Final question for me is on the Qual pay move and I understand the logic and the rationale for it but.
What does that replace so in other words, if you didn't make the investment in Quad PE.
What would have do you have did you have.
Dysfunctionality that was already going to be in place that this is kind of superseding I'm just wondering what the plan would have been without <unk>.
Well so early on Kevin we evaluate lots of vendors to utilize for the build and which we selected <unk> peso qual pay was already engaged in building out the mass platform. This is nothing more than making an investment in the company to ensure that we can continue to provide the capital that will allow the company to meet today.
<unk> needs, but ultimately the future needs as we grow this product. So they were going to be our partner either way. This just gives us an ownership interest in the company to be able to help shape and drive capital into the growth of the program.
Great Great very clear thanks, Kevin.
This concludes our question and answer session I would like to turn the conference back over to Mr. Kevin Glass any closing remarks. Thank you.
Thank you Emily and thanks, everyone for attending this morning, and your continued interest in Synovus, just a few things I'll mentioned before we close out today's call. We were proud to recently be chosen again as the top workplace are one of the top workplaces in the Atlanta market by the Atlanta Journal Constitution the relevance.
This sort of recognition and one of our biggest markets our fastest growth market is truly significant, especially given our efforts to continue to recruit and retain some of the best and brightest talent in the industry.
So it seems like it's been a very long time, but we are transitioning our team member base back to being fully on site in our workplace in the coming weeks now we will remain flexible as COVID-19 trends continue to ebb and flow and ultimately will have the majority of our organization back on site, but we have defined roles.
That will be able to maintain full remote capabilities and also some hybrid work schedules I just think that's the future of work we also.
Continue to advance our ESG investments and initiatives, especially as we monitor the progress of the proposed SEC rules for climate disclosures beginning as early as next year, we've already completed our scope one and two GH.
GH baseline assessments, and we will continue to evaluate for future carbon reductions like our branch consolidation efforts.
We continue to deliver on the expectations that we set for ourselves and I think it's been a year of acceleration and achievement. Although we're just through one quarter. Our focus is very clear it is on execution and continuing to meet our short term objectives, while expanding and extending our solutions to better meet client needs.
And to deliver sustainable top quartile performance I truly look forward to the next time, we're together to share our progress but for now.
Everyone has a wonderful day and operator, we will close out our call.
Thank you very much. This concludes our call. Thank you everyone for joining US today you may now disconnect your lines.
Yeah.