Q2 2022 Synovus Financial Corp Earnings Call

Speaker 1: our functionality and capabilities throughout the rest of the year. We are targeting four to five additional software providers to pilot the solution by year end with a focus across various B2B segments. A broader rollout of the solution is targeted for first quarter 2023 with the $100 million revenue target still considered to be very achievable based upon the continued feedback and interest we are receiving. Second, the build out of our corporate and investment banking team has continued this.

Speaker 1: According to MAST and CIB, we have a number of initiatives underway aimed at deepening relationships and serving as new sources of growth. In this vein, I am pleased that we have completed the final migration of our commercial clients to Gateway, our new commercial digital platform. We also have continued to add new treasury and payment solutions. International and FX capabilities, card services, and integrated receivables functionality are all being significantly enhanced.

Speaker 1: and we have a roadmap of new functionality that will complement our already robust set of offerings in the quarters to come.

Speaker 1: We are also enhancing our online account origination capabilities and adding analytics to better support our consumer bankers and proactively addressing the needs of our clients. And proactively addressing the needs of our clients.

Speaker 1: Within our wholesale banking segment, we continue to be an attractive platform for new middle market bankers. Over the last two quarters, we have added five new middle market bankers in Florida, and this quarter we also added new leadership in the Nashville market. In addition, we continue to see traction in our restaurant specialty group with $200 million in loan growth this quarter, and our recently built agent bank capability generated approximately $2 million in new fee income this quarter across multiple sub-lines of business.

Speaker 1: Overall, the momentum in our core businesses is generating growth and strong financial performance. This success helps to fund and support the ongoing investment in new business initiatives which will deliver incremental financial benefits in the quarters and years to come.

Speaker 1: Let me now transition to financial highlights for the quarter. Total revenue for the second quarter was $523 million, an increase of 7% year-over-year. When adjusted for PPP fees, total revenue increased 11% year-over-year. The increase was driven by NII growth, a result of continued strong loan growth as well as margin expansion resulting from higher interest rates. Loans increased $1.2 billion, excluding PPP, or 12% on an annualized

Speaker 1: positively, our underlying credit performance, as evidenced by our credit metrics, continues to trend positively. Our NPA, NPO, and Criticized and Classified ratios represent some of the lowest levels that we've experienced in some time. The performance of the loan book is largely a function of better diversification, high underwriting standards, and adherence to our disciplined credit framework.

Speaker 1: It is also worth noting that at this point, we remain cautiously optimistic on the short-term credit outlook and see that our clients are carrying unprecedented levels of liquidity into this more challenging economic environment.

Speaker 1: Speaking of liquidity, continued balance augmentation combined with account growth led to quality non-interest bearing deposit growth of $254 million in the second quarter. Over the last three years, we have grown non-interest bearing deposits from 25% to 35% of our core deposit base.

Speaker 1: This ongoing remix will continue to pay dividends in the coming quarters as rates continue to rise.

Speaker 1: Our net interest margin expanded 22 basis points in the second quarter with increases in short-term interest rates driving increases in loan yields while prudent deposit pricing led to lower than expected deposit betas on a cycle-to-date basis. Our strong second quarter financial performance with adjusted earnings per share of $1.17 return on average assets of 1.27 percent return on tangible common equity of 19 percent.

Speaker 1: and an efficiency ratio of 53.4% serves as validation that the team's continued strong execution and our success in meeting the needs of our clients is leading to profitable growth. Overall, we're very pleased with the current results, our continued momentum, and our ability to focus on our longer-term plans and objectives. Now I'll turn it over to Jamie to continue the overview of our quarter results in greater detail. Jamie?

Speaker 1: Thank you, Kevin. I'd like to begin with loan growth as seen on slide 4.

Speaker 1: Total loan balances ended the second quarter at $41 billion, excluding PPP balances loans grew $1.2 billion.

Speaker 1: For an annualized basis, this represents a growth rate of 12%.

Speaker 1: Our fourth consecutive quarter of annualized double-digit long growth.

Speaker 1: C&I loans were up $542 million quarter-eval quarter, and CRE loans grew $358 million.

Speaker 1: commercial loan growth was brought based as ten of eleven wholesale bank sub businesses and the community bank grew balances in the second quarter

Speaker 1: The diversity of growth continues to be the hallmark of our commercial loan growth story.

Speaker 1: This diversity brings consistency to our growth plan and also mitigates credit risk as we head into what could be a challenging economic environment in the second half of the year.

Speaker 1: Growth within CRE loans was led by the multifamily sector as well as our specialty healthcare group which focuses on lending to larger medical practice groups.

Speaker 1: We also continue to see growth in commercial production and line utilization.

Speaker 1: Commercial production increased 41% year over year, and line utilization increased to 47.1%, up from 46.1% in Q1.

Speaker 1: Higher utilization from lines existing at the end of the first quarter contributed approximately $185 million to loan growth in the second quarter.

Speaker 1: As we have previously noted, higher utilization levels are reflective of a client's investment spend and inflationary pressures related to higher input and labor cost among other factors. Among other factors. Among other factors.

Speaker 1: Consumer loan balances increase $252 million.

Speaker 1: This growth was diversified across multiple consumer products, including mortgage and home equity lending.

Speaker 1: Third party consumer loan balances remain flat quarter to quarter.

Speaker 1: This is reflective of our priority to allocate growth capital first to our core client base which experience grow boss growth over the quarter.

Speaker 1: While the residual effects of COVID and the recent tightening in monetary policy present notable macroeconomic headwinds, we remain confident that our geographic footprint puts us in a position to perform well relative to the rest of the country, and we remain optimistic about our continued strong performance over the remainder of 2022.

Speaker 1: As we turn to slide five, we continue to see positive trends within our deposit base, despite industry headwinds and a more challenging backdrop relative to the record pace we saw in 2020 and 2021.

Speaker 1: Regardless of the environment, our focus remains on serving our clients in a way that leverages our platform to deepen relationships, both with deposits as well as across other financial products.

Speaker 1: The results of these efforts are evident as core non-interest bearing deposits increased $254 million quarter over quarter.

Speaker 1: This marks the 10th consecutive quarter of consistent NIB growth.

Speaker 1: At 35% of court deposits, NIB is a meaningful component of our overall funding strategy and will help manage overall funding calls in a rising rate environment.

Speaker 1: Money market balance has declined $804 million quarter over quarter.

Speaker 1: In assessing the underlying drivers of the decline, there were multiple factors including seasonal tax payments as well as relatively normal deployment of liquidity by clients.

Speaker 1: Additionally, we saw impacts from the interest rate environment where certain higher cost funds moved out the banking system and into higher yielding non-bank alternatives.

Speaker 1: And many answers as we were able to facilitate the reallocation of client funds, and despite losing the deposit, we continued to manage the client's assets.

Speaker 1: Beyond our core portfolio, we also continue to use the broker deposit market as a means to manage our balance sheet and liquidity position in a cost effective manner relative to other non-core funding sources.

Speaker 1: Year to date, we have grown broker deposits by $788 million.

Speaker 1: Following a $797 million dollar decline in the first quarter, Broker Deposit Screw $1.59 billion in the second quarter.

Speaker 1: Going forward, we will continue to prioritize core relationship deposit growth while continuing to use broker deposits as a secondary tool to manage our balance sheet.

Speaker 1: With regards to deposit rates, our average cost of deposits increased four basis points in the second quarter to 0.15%.

Speaker 1: As expected, the initial hikes in March and May had a modest impact on deposit costs as we were able to limit rate increases across the majority of our products.

Speaker 1: However, given the FOMC's most recent 75 base point hike in June , as well as expected additional near-term increases, we are seeing some upward pressure on deposit costs, as would be reasonably expected for this phase of the tightening cycle.

Speaker 1: Moving to slide six, you can see that within June , the average increase in the FOMC's target rate was 113 basis points from the fourth quarter of 2021.

Speaker 1: And against that increase, our cycle deposit beta through June on interest bearing non-matured deposits was 12% and infertile deposits to the 7%

Speaker 1: This is lower than the 20% we previously estimated for interest-bearing non-maturity deposits for the first 100 base points and short rate increases.

Speaker 1: However, we expect much of that variance to be attributable to the timing of reprising.

Speaker 1: And we still believe that our mid-30s interest-bearing non-maternity deposit beta is a reasonable estimate for an FOMC policy rate that is tightening to neutral. Surprise bellied car

Speaker 1: This would translate to an approximate 30% beta for total deposits. With that said, we acknowledge that the FOMC has communicated the prospects for hiking rates beyond a neutral posture.

Speaker 1: When coupled with their policy on managing the Federal Reserve's balance sheet, this could put upward pressure on our assumed cyclical beta.

Speaker 1: In such a scenario, we remain well positioned with an asset since the balance sheet, which can withstand some further pressurum betas and still benefit from increases in long-term rates.

Speaker 1: It is worth noting that approximately two thirds of our reported assets and stifty is attributable to short rates. And as shown previously, a 10% change in beta assumptions would impact our NII sensitivity by approximately 1.5%. The NII sensitivity by approximately 1.5%.

Speaker 1: We believe maintaining an asset-sensitive position in the current environment is warranted, particularly given the uncertainty around Fed policy.

Speaker 1: As we look forward, the continued growth in floating rate loans, hedge maturities, as well as fixed rate repricing will support our asset-sensitive profile even as marginal betas increase past our through-the-cycle beta expectations.

Speaker 1: Moving to slide seven, the combination of strong loan growth I alluded to previously, couple with the recent move higher in interest rates, served to support significant growth in net interest income in the second quarter, which came in at $425 million, an increase of $44 million or 11% year over year. An increase of $44 million or 11% year over year.

Speaker 1: When adjusted for the headwinds from slower PPP fee accretion, that represents an additional $60 million, or a 17% increase, versus the light quarter one year ago.

Speaker 1: I would note that with less than $100 million in PPP loan balances and approximately $3 million in unearned fees outstanding as of QN, the NII and NIM impact from PPP should be relatively immaterial going forward.

Speaker 1: The net interest margin was 3.22% in the second quarter, an increase of 22 basis points from the first quarter.

Speaker 1: As shown in the NIM waterfall, the impact of higher short-term rates helped us sport loan yields.

Speaker 1: with some offset through higher calls and more on interest bearing deposits.

Speaker 1: The combination of these two factors supported the margin by approximately 13 basis points and was the primary driver of NIM expansion in the second quarter.

Speaker 1: Additionally, the impact of higher long-term rates and our continued efforts to efficiently manage our liquidity position supported the margin in the quarter.

Speaker 1: with the latter contributing approximately five bases points to the margin through a quarterly reduction in average cash balances.

Speaker 1: Looking ahead, while the pace of FOMC rate increases and the timing of deposit repricing makes quarterly NIMG all it guidance challenging.

Speaker 1: We continue to expect further expansion in the coming quarters.

Speaker 1: The wider margin is expected to be driven by the benefits of higher short-term rates, which are realized fairly quickly and the benefits of higher long-term rates where fixed rate, reprising serves to gradually support the matters enters margin.

Speaker 1: Slide 8 shows total adjusted non-interest revenue of $101 million, down $6 million from the previous quarter, and down $5 million year over year.

Speaker 1: The quarter over quarter decline is primarily related to a decline in mortgage revenue.

Speaker 1: Lower SBA income and a write down of a minority Fintech investment.

Speaker 1: Offsetting these declines was an increase in wealth revenue, card fees, and capital markets income.

Speaker 1: As you can see on the slide, these same categories also grew year over year and are a key indicator of growth within our core client base.

Speaker 1: Wealth revenue grew year over year despite headwinds from a decline in the equity markets of 11%.

Speaker 1: This highlights the diversity of the revenue streams within our wealth segment in areas such as trust and family office, which continue to grow client count. Overall, approximately 40% of wealth revenues are not directly impacted by changes in market valuation.

Speaker 1: Core banking fees continue to benefit from card fees, which increase 21% year-to-year. A result of account growth as well as higher levels of both consumer and commercial spend activity. Control Book over conventional future payment, and optimism. A result of?? That full pay is on ourjd of KEL fik and Em? ? s x x x x x x x x x x x x x x x x x x x x x y x x x x x x x x y x x x x x x y x x consumer and commercial spend activity.

Speaker 1: And on the capital market side, in Q2, we saw broad-based contribution within our wholesale bank with multiple sub-business line generated agent bank fees. The company's multiple sub-business line generated agent bank fees.

Speaker 1: Moving on to expenses, slide 9 highlights total adjusted non-interest expense of $284 million, up $4 million from the prior quarter, and up $15 million year-over-year, which represents a 6% increase.

Speaker 1: Employment expense increased only 3% year-over-year, primarily attributable to the impacts of merit and elevated performance incentives.

Speaker 1: As a result of some of the forward initiatives, we have been able to hold overall headcount flat year over year while adding headcount in areas associated with strategic revenue growth.

Speaker 1: On that note, when segmenting our year-over-year increase in expenses, approximately 60% is attributable to performance-related costs and investments in new business initiatives covered at investor day, such as CIB, MAST, and the build-out of our middle market banking segment.

Speaker 1: As we look over the remainder of the year, we expect expenses associated with these new initiatives as well as other technology and operations related calls to increase.

Speaker 1: Overall, increases in our expense base are oriented towards performance and growth, which we believe will reward shareholders over time.

Speaker 2: Moving to slide 10 on credit quality.

Speaker 2: Our credit performance and the credit quality of our recent originations remain strong. Key credit ratios remain stable to improving overall, and at historically low levels. Key credit ratios remain stable to improving overall, and at historically low levels. Key credit ratios remain stable to improving overall, and at historically low levels.

Speaker 2: The NPA and NPL ratios decline to 0.33% and 0.26% respectively. The lowest we have seen in over 20 years. Total past dues remain low at 0.14% and the criticizing classified percentage of loans decreased to 2.2%.

Speaker 2: The net charge offer ratio is 0.16% for the quarter.

Speaker 2: In the second quarter, our ACL was $458 million, or 1.11% of loans.

Speaker 2: Despite our continued elevated weightings to adverse scenarios, the ACL declined $4 million quarter on quarter.

Speaker 2: This is largely a result of the strong credit performance, including the dark decline in NPL.

Speaker 2: Our credit and relationship management teams are main diligent in monitoring our loan portfolio through portfolio reviews and the use of early warning indicators, such as our analytical risk management tool.

Speaker 2: These support proactive engagement with clients.

Speaker 2: We see that our clients are well positioned for volatility with significant levels of liquidity and a resiliency that has been tested most recently during the pandemic.

Speaker 2: The vast majority of our relationships are with long tenured counterparties who understand how to navigate the current environment. We are also being judicious in approving new credit risks we take on our balance sheet.

Speaker 2: Our loan portfolio has been built to better weather a downturn with greater diversification across industries, asset classes, geographies, and credit metrics that support the strength of the borrowers as well as the collateral held.

Speaker 2: On the consumer side, our loan portfolio has an average FICO score of 774, and we expect prime borrowers to be resilient through a downturn.

Speaker 2: Our CRE portfolio has been constructed in a manner that is weighted towards sectors with a positive outlook such as multi-family, warehouse, and medical officers. The CRE portfolio has been constructed in a manner that is weighted towards sectors with a positive outlook

Speaker 2: Rent growth and occupancy metrics and our footprint outperform the nation. And we feel confident that will continue to be the case. And we feel confident that will continue to be the case.

Speaker 2: Strong Demand has allowed our clients to partially offset the impacts of inflationary pressures.

Speaker 2: We are actively engaged with these clients so that we can react to any changes related to the current economic environment.

Speaker 2: As noted on slide 11, the Common Equity Tier 1 ratio remained relatively stable at 9.46%.

Speaker 2: During the second quarter, we repurchased a modest $3 million in shares, as organic capricration was used primarily to support client loan growth.

Speaker 2: Our capital position remains strong and we continue to actively manage CET1 within our 9.25 to 9.75 percent target range.

Speaker 2: Going forward, our commitment remains to allocate internally generated capital toward our strategic priority of client loan growth while also maintaining a strong and efficient capital position.

Speaker 2: Based on our current forecast for client loan growth and given the uncertain economic environment, we will retain the capital generated through earnings rather than repurchase shares through the remainder of 2022.

Speaker 2: I'll now turn it back to Kevin.

Speaker 1: Thank you, Jamie. There are a lot of moving pieces, but due to the hard work of so many team members, this is another very successful quarter. Our engaged team members focused on meeting the needs of our loyal client base helped to deliver profitable growth.

Speaker 1: Helping our clients to reach their full potential is our stated purpose. And I'm so proud of how we are living up to that promise on a daily basis.

Speaker 1: For reflecting back on our financial performance, we remain on track to deliver our previously communicated $175 million of pre-tax and NOVA's forward benefits by the end of this year. Many of the benefits in 2022 have been revenue focused, but one large expense initiative within the program was the closing of approximately 15% of our branch network.

Speaker 1: In Q2, we closed 11 branches, bringing our 2022 total to 20 locations. We expect to close a similar amount in the second half of the year to complete the large-scale branch optimization program.

Speaker 1: As a result of our strong loan growth of 6% through the second quarter, excluding PPP loans, we expect to be at or above the upper end of our previous guidance of 6% to 8% for the full year, despite the uncertainty and the economic outlook.

Speaker 1: As a result of strong loan growth and the current forward rate environment in which Fed funds reaches a target rate of approximately 3 percent by the end of the year, total revenue growth, excluding PPP revenue, is forecasted to be considerably above the upper end of our communicated range of 9 to 11 percent.

Speaker 1: And on the expense side, we are currently forecasting to be at or slightly above the upper end of our 3 to 6 percent expense guidance, largely as a result of our strong performance and target its strategic business investments. Our employee incentive structures are tightly aligned with overall performance and as such, the strong forecasted revenue performance this year has resulted in higher incentive expectations.

Speaker 1: Also, as we shared earlier, our investments in our new business initiatives will accelerate throughout the remainder of 2022, which puts us in a great position to begin to generate incremental revenue in the quarter and years to come.

Speaker 1: Given the strong positive operating leverage and considering all of the updates to our full year guidance, our expectations for the year-over-year PP&R growth has now increased to the mid 20% range excluding PPP income. I am pleased with the progress we continue to make as an organization and remain confident in our ability to deliver sustainable top quartile performance.

Speaker 1: The effects of the current inflationary environment are impacting our team members, clients, and more broadly the communities we serve. However, we continue to rise to the occasion to provide a source of confidence and trust in a period of uncertainty. I want to thank, again, our 5,000-plus team members, you are the secret to our success, and your efforts and contributions are not going unnoticed by our leaders, our clients, and our key stakeholders.

Speaker 1: And now operator, let's open the call for Q&A.

Speaker 3: Thank you. We will now begin the question and answer session.

Speaker 3: To ask a question, you may press star then one on your touch tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys.

Speaker 3: To withdraw your question, please press star then two. In interest of time, please limit yourselves to one question and one follow up.

Speaker 3: Our first question today comes from the line of Jared Shaw from Wells Fargo Securities. Please go ahead, your line is now open.

Speaker 4: Hi, good morning.

Speaker 5: Good morning, everybody.

Speaker 4: I guess maybe just starting with a bigger picture question, you reference the uncertainty of an economic slowdown about your long growth is great, your deposit growth is great, your credit is really good. How do you think an economic slowdown would actually impact, impact your business should be, is that there's more variability on long growth and that the utilization rates may come down or there's a bigger question around, maybe credit costs as, as,

Speaker 4: you know this blows through I mean because right now things are pretty good.

Speaker 1: You know, Jared, I think this is Kevin. Very good question. You nailed, I think where I would start is, the biggest uncertainty going forward will be just on client demand. And we shared in the prepared remarks that we believe given our strong growth year to date that we would be at or above the upper end of our loan range for the year. And the real question there is, will there be economic slowdowns that result in a slower demand for lending?

Speaker 1: I think as we've proven out, our productivity continues to increase, and this quarter, I would tell you, loan growth was probably more diversified than we've had it even in the previous three quarters. So we remain very confident in our ability to generate loans, but the demand side of that will drive the ultimate growth story there. The other areas I would point to, you mentioned credit costs. Obviously, we pointed to the fact that we've had some of the best credit metrics we've had in some time, so in the short run, we don't see accelerated credit costs.

Speaker 1: As you noted, that could change given the environment. And third, I would point to a couple of the NIR categories, whether it's wealth and just looking at equity markets and the pressure we get with assets on our management there. And just looking at overall core client fees that as people spend less IE on the credit card side, we could see some headwinds on the interchange piece. So there's lots of variables and lots of impacts to different revenue items. But as we said here today, we remain cautiously up.

Speaker 1: was up about 100% over where it was in the previous quarter. And that was primarily in two categories, multifamily and medical office. So where we've continued to grow is in some of our specialty areas. It's not across all of the asset classes. We've actually seen slightly elevated payoff activity continuing. We're still about $200 to $300 million over what we would consider the three-year payoff average, but demand is still there. I think as cap rates start to increase, we expect to see payoffs and paydowns.

Speaker 1: subsided that just because that churn was elevated over the last couple years just with Developers taking money off the table, but productivity's been very high and by anything you'd add on your side? Yeah, yeah, Jared. Hey, this is Bob We clearly are beginning to see some some slowing of demand as the economics of these projects.

Speaker 1: you know, harder to make work given the higher input costs, labor costs, etc. So we would expect that to have, you know, a headwind to real estate growth. As Kevin mentioned, the payoffs, you know, have abated a little bit, but there's still ample capital out there to take, to pay us off once these loans get stabilized. So all in all, I think it will slow, but I do think, you know, commercial real estate from a credit perspective has performed well. Our leverage attached points here are really good.

Speaker 1: London Vagel, London Cost are really good. We're dealing with a good group of clients we've banked for a long time. So we still feel good about the credit quality, but the velocity of growth should temper, certainly every time as we go full.

Speaker 2: Good, Jared. This is Jane E. So let me add one more thing to this. You mentioned the credit calls in a slower growth environment. In the appendix, we put our waiting to scenarios for our allowance calculation.

Speaker 2: And in there you can see that one of the scenarios is a slow growth scenario. So to give you a little bit of context, that slow growth scenario has approximately 1.6% annualized GDP for the next four years, has unemployment rising above 5%. And as you're aware, we use a multi-scenario framework, but if we only used a single scenario, and if that slow growth scenario was the single scenario, kind of like what you described in your question, our allowance would be very similar to where it is today.

Speaker 4: Great, thanks for that, Keller.

Speaker 6: Yep.

Speaker 7: Thank you.

Speaker 3: The next question today comes from the line of Kevin Simmons from DA Davidson. Please go ahead, your line is now open.

Speaker 8: Hey, good morning everyone.

Speaker 5: Morning, Kevin.

Speaker 9: Just um...

Speaker 9: on the topic of growing net interest income. So are we kind of in a situation where... So are we kind of in a situation where...

Speaker 9: It's going to be the percentage margin growing it you were clear that you expect that to continue to expand But I'm interested what what you think about average earning assets the average balance sheet will that be flattish in other words

Speaker 9: Will you, you know, if it's long growth stays where it is or slows a bit and we see deposits continue to decline will you continue to step in with the broker. Will you continue to step in with the broker.

Speaker 9: to keep that balance growing or you you confident enough in the margin that you can just keep that flat.

Speaker 9: or slightly up and still grow net interest income.

Speaker 9: and the balance of the yet cabinet.

Speaker 2: Yeah, got it. As we look forward, there are a few questions embedded in that. And as we look at the balance sheet, you should expect to see the balance sheet grow similar to the rate of growth of the loan book. And that's what you saw in the second quarter. That's what you should see in the future. The funding choice we make on that is purely economical. And so there are plenty of alternatives, as you're aware. We have a lot of liquidity options over.

Speaker 2: We have over 20% of total assets available to us when you add up cash on balance sheet, home loan bank advances, and unencumbered securities. And obviously we have deposit avenues as well that we can grow. So you should expect to see the balance sheet grow at the rate of growth of the loan portfolio.

Speaker 2: With regards to NII, it's a very interesting time period for NII and the outlook for NII going forward because the pace of Fed rate increases is quick enough that it is going faster than the rate of pace of deposit cost increases. There's a timing lag between the two. And so that timing lag is highly accretive to NII to the point that...

Speaker 2: you know when we look at the third quarter n i i we would expect to see uh... n i i grow somewhere between nine to ten percent in the third quarter based on you know the timing lag continuing uh... and the market outlook for rate increases uh... from the fed here in the third quarter uh... that being said that rate of growth that that's not a sustainable uh... rate of growth beyond that because

Speaker 2: you have two things happening. One, that timing lag does not benefit you forever. As a matter of fact, when the Fed stops raising interest rates, it'll be a short-term headwind. But our expectation is once you get beyond that and excluding that impact of the headwind of timing lags when the Fed is done with this tightening cycle, we would expect to see NII grow at the rate of loan growth plus, uh,

Speaker 9: plus a little bit because of the benefit of fixed rate asset reprising. Okay, great. Thanks, Jamie. One quick follow up, Kevin, this is more of a big picture question. Like we've mentioned, you know, we've been through a lot of detail on the growth initiatives and you guys have made clear that the expenses are going up for that in the back half of the year. But we've also talked about the uncertain environment and I'm just curious.

Speaker 9: you know, was there any contemplation about delaying or slowing those growth initiatives and that spending for when the environment gets a little more certain or were these things really locked in and there was no way to consider doing that. Thanks.

Speaker 1: Yeah, Kevin, when you think about what we're spending, it really gets bucketed in a couple different categories. First, mass, and we believe that being a first mover in our banking as a service platform is going to be very important, and quite frankly, opening up that channel to small businesses as we look towards the future environments can be very important. So although we could have slowed it, we just didn't feel like that was prudent, and we're continuing to move forward with our beta product, and we'll, again, roll it out next year, and the full product in 23.

Speaker 1: When you think about corporate and investment banking, that's another area where I believe right now is an opportunity to not only gain talent from some of these larger institutions, but you've seen from some of the larger peers this earning cycle that a lot of growth on the balance sheet has come out of the capital markets and back on to commercial banking balance sheets. And that's one of the areas we think we can play in the space, whether it's in the FIG, TMC, or healthcare space we feel like.

Speaker 1: We can play in that lower market, the CISB area where the clients need to use the customer's balance sheets.

Speaker 1: And so we decided to again accelerate that initiative. The others, when you look at this expense that's really around treasury products and it's around analytics, and I just think that if you're not investing in new solutions and products and you're not investing in data and analytics, you're going to get behind your competition. And so in reality, we had discussions around expense management, but I just think it makes a lot of sense given the returns on investment on these projects.

Speaker 1: We looked at this whole year, and if you think about those investments, they represent about 2% of our expense growth. So when you think about the 6% were up, they represent about 2%. But I look out into 23 and see that those same investments are gonna represent two to 3% of our PPNR, and you look out into 24, they're gonna represent six to 10% of our PPNR. So we feel very,

Speaker 1: convicted to continue to invest there. And we've seen success in not only the talent front, but also in mass and building out the product.

Speaker 6: Hi.

Speaker 9: Okay, great. Thanks, Kevin.

Speaker 10: Thank you.

Speaker 3: Thank you.

Speaker 3: The next question today comes from the line of Brady Galee from KBW. Please go ahead, your line is now open.

Speaker 11: Hey, thanks for the warm up guys.

Speaker 12: Good morning, Brady.

Speaker 11: So I just wanted to ask a question on capital or balance sheet optimization. I heard Jamie say no more buybacks, which totally makes sense given y'all's growth. But I mean, if you look at common equity tier one, you're kind of right in the middle of your range.

Speaker 11: Your seeing good growth opportunity, is there anything to consider on the balance sheet optimization side that could give you a little more room to continue book on this robust growth?

Speaker 2: You know, that's a great question, Brady. You're right. For the remainder of 2022, we expect to retain capital generated through earnings. We believe that there are opportunities on balance sheet to serve our clients. We see the uncertainty in the economic outlook, and so we think that's the prudent thing to do. But you're right that there could be opportunities on the balance sheet for balance sheet optimization, and you're well aware of our third party portfolio, how we think about that as a solution.

Speaker 2: you know, there are possibilities that we use that portfolio to, you know, as a surrogate, you know, for the Sherries book and can look at deploying that capital through our clients.

Speaker 11: So Jamie, you think by utilizing the retained earnings.

Speaker 11: you know, optimizing the balance sheet, y'all can kind of self-fund this growth that there would be no need to, you know, raise any sort of additional debt or preferred or anything to support the growth.

Speaker 2: Well, on the capital side, we do believe that our earnings will generate more than enough capital to support our client growth. You heard our outlook on client growth getting to the high end of our range, out or above the high end of our range of 6 to 8%. Client earnings should be plenty to cover the capital of that loan growth and build capital truthfully.

Speaker 2: When you think about debt, that's a different story and it's liquidity, you know, both at the holdco and at the bank. And you know, we just manage that the same way we always have. And we will continue to look at holdco liquidity and bank liquidity and make sure that we, you know, are well within our coverage ratios.

Speaker 11: All right, and then finally for me, you have to reserve down to 1.1%. You guys are seeing good growth. It feels like the provision has to go higher here. It's not a bad thing, it's growth related, but it feels like the provision should be going higher here, right? Should be going higher here, right?

Speaker 2: You know, as we look forward with the allowance, we would expect it to grow, commit through it with loan growth. I mean, and you know that our growth, if you look at the marginal growth that we're putting on balance sheet, it is lower risk than the average of our balance sheet. And so it's a positive or actually will reduce the allowance alone ratio, you know, all things constant. But you're right to expect that the allowance will grow with loan growth, assuming the economy.

Speaker 13: Good morning. I guess just wanted to follow up on deposits and liquidity.

Speaker 13: Jamie means one. Just talk to us. So you talked about mid 30s deposit data for non-missurity and then 30 basis points for total deposits, which I assume includes CDs and NIVA. So is your sense that if the Fed stops, and you mention something about neutral versus above neutral, just saying to make sure we get the right message. If the Fed stops,

Speaker 13: Hiking at somewhere around 3.5% would that be neutral? And in that world, do you expect total deposit beta to be in the mid-30s? Or would you expect that to be higher? Or would you expect that to be higher?

Speaker 2: When we think about neutral, we are defining that if you look at the Fed dot plot, looking at the long term expectations for Fed funds rate, which is in the low twos, if you were to assume that the Fed tightens to the low to mid threes, it would add approximately five to 10% to the beta through the cycle beta that we laid out.

Speaker 13: Please let us know in the comments section below for additional updates on how we will implement it. F you

Speaker 13: Three pandemic, the loan to deposit ratio was closer to, in the 95, 100% change, do we see it going there? And what's the outlook on third party loans? Does that portfolio shrink from here, or do you expect to continue to buy into that?

Speaker 2: So we do expect to see the loan to deposit ratio increase. However, we believe that's more of an output of balance sheet strategy than a target or an expectation. And we'll continue to use the various sources of liquidity as we see value. And so we compare broker deposits, we compare Hunland bank advances as we think about how to fund incremental growth.

Speaker 2: beyond core client deposit growth. And so that's really how we think about it. When we look forward in 2022, we do believe that core client deposits will grow. We believe that we'll see 1 to 2% client deposit growth in the second half of the year. And if you think about loan growth, that is approximately what we have to get to the 8% high end of the range on guidance. And so,

Speaker 2: That's our current outlook. There's a lot of uncertainty in 2022 in the second half of the year on that. You saw the flows in the second quarter. And so that's our expectation here in the near term.

Speaker 2: with the Russian third party portfolio.

Speaker 2: That portfolio, as I mentioned earlier, is basically a surrogate for the investment portfolio, but one difference is, is that we do have some flow arrangements and we have partnerships embedded in there that are not things you just turn on and turn off. And so those continue, we're really pleased with those partnerships. We believe those are creative to the shareholder through the cycle. And so we feel really good about those. But there are also portfolios that we purchase. You're aware of the auto portfolio that we purchased.

Speaker 2: We like that profile because of a couple things. One, it's up in credit to the collateral values are strong, and three, it has a shorter duration profile. And so what we like about it is that it amortizes quickly. And so that portfolio is expected to amortize down, approximately 40% in a given year. And so that's not something we would look to replace in this environment of uncertainty. And so.

Speaker 2: That's our philosophy at the moment. I would say that the flow arrangements are core partnerships that we have, and then any portfolio purchases are really similar to SteerDee's portfolio and more non-core.

Speaker 1: And hey, Ebrahim, can I just add one thing back on the deposit side? Jamie's 100% right. But we talk about building an elevated growth profile. It isn't just on the lending side. We're focused on building an elevated growth profile on the liquidity side as well. And so, do you think about some of our core businesses where we're growing today and commercial? We have an equal focus on generating operating deposit accounts. And you saw this quarter, another quarter of strong DDA growth.

Speaker 1: You look at overall production for deposits, this past quarter we were up 30% over the first quarter. And so we are focused on generating new deposit relationships. We also have businesses that we think over time are gonna help supplement that growth. Mast will be a good deposit generator for us. We have a money service business that we just launched on the treasury side that we think will provide good core deposits. And so when we talk about growth, we talk about growth.

Speaker 1: It's about balance growth. It's growing the asset side and the liability side. And over time, we think that the growth from the new clients we'll get in these businesses will help to feed some of the low-cost deposit growth that we'll need to be able to fund it.

Speaker 1: it's growing the asset side and the liability side. And over time, we think that the growth from the new clients we'll get in these businesses will help to feed some of the low cost deposit growth that we'll need to be able to fund it. Thank you both.

Speaker 7: Thank you.

Speaker 3: The next question today comes from the line of Brad Millsat from Piper Sandler. Please go ahead, your line is now open.

Speaker 14: Hey, good morning.

Speaker 5: Good morning. Good morning, Brad. Good morning.

Speaker 14: Kevin, maybe just a bigger picture question. I appreciate all the near term guidance. It sounds like everything is going better than you initially expected. The longer term pieces that you laid out back in February , although seemingly a short time ago, a lot has happened. If you had to kind of pick areas of that, maybe where you're most concerned, or on the flip side, areas where you think you might get there more quickly, it seems rates are going to be higher than you initially thought.

Speaker 14: You know, maybe the market has some concern over growth. Obviously you've got a lot of initiatives going, but just kind of curious if you could hit those targets, maybe more quickly than you originally thought, or just kind of you're thinking around those.

Speaker 1: Yeah, Brad, the real wild card there is just what would happen from an economic standpoint, and although the rates are providing a strong tailwind, will we see certain headwinds from slower economic growth that would slow our growth in certain areas? As it relates to our core businesses, we always talk about the new business initiatives, but our core businesses are performing at a very high level. When you look at just loan growth this quarter, we had 13% growth in CRE, 11% growth in CNI, 12% growth in consumer.

Speaker 1: very balanced growth across all of our segments, across our lines of business. And so that gives me a lot of confidence that the core businesses will continue to perform that allow us to fund some of these new initiatives.

Speaker 1: The new initiatives, we said that we would have a product available to test in MAS by the end of the second quarter. We are testing an MVP product with a service provider or a software provider. We're excited to get feedback from that beta testing. As we said, we'll add four to five new ISPs this year to be able to continue to test it. And we're actually accelerating some work on MAS to add new functionality and capabilities outside of the payments and depository products.

Speaker 1: that were gonna be some of the first that we rolled out. So we actually could accelerate that and add new functionality. On CIB, I feel like the talent that Tom Deardorff has been able to bring in in a short period of time has been extraordinary. I'm excited to have those guys in their seats in the third quarter, and I think you'll start to see that we're starting to book some business there. We actually feel that our long-term targets in CIB based on the talent we're bringing in, we actually will be able to accelerate when we achieve some of those balance sheet targets.

Speaker 14: One, I was curious if you had maybe the net interest margin for the month of June . And then secondly, within fees, I know other fees can bounce around. A lot falls in that category. Only two million is quarter. I know there was a $7 million investment right down, but just kind of curious anything else that might have fallen in that line item that might bounce back for you over the near time. It is a banked Fund to a foreign funds approval. More stands for cash financial funds and the Which stands for Um bitida S barber dentist within

Speaker 2: Yeah, Brad, the margin for the month of June was materially higher than the quarter. But before kind of getting into that, I just want to caveat that it benefits from the timing lag I described earlier. So I don't want to read too much into a one month margin because there are the benefits of deposit pricing being slower than loan repricing.

Speaker 2: For the month of June , the margin was $3.35. I just with the caveats that I just described. On fee revenue, you're right, we had the $7 million right down of the investment, which is largely due to market valuation swings and software service companies.

Speaker 2: But there's really not a whole lot in the revenue that I would point to that's more idiosyncratic to the quarter. I would say as you can see on the slide, we laid out our core kind of client fee growth excluding mortgage, which we believe is a very important part of the story, up 10 million year every year, and then within mortgage. I mean, we do feel good about the growth there. Production remains strong in mortgage, and we believe that we could see some bounce back there from the 4 million in the second.

Speaker 1: Yeah, Jennifer, the pipelines remain strong. They're down a little bit from where we were entering the second quarter, but not by a material amount. So we are remaining optimistic on the third quarter of production. Could they end in double digits? I mean, it's potentially they could, given that we've grown each quarter by roughly 3%. I think the wild card there is just the uncertainty in the environment and what will happen with client loan demand. Bob mentioned earlier in their credit meetings, they're starting to see some slowing and just CRE activity. Bye.

Speaker 1: We remain fairly optimistic for the reasons I mentioned earlier. When you look at this quarter, we had very diversified loan growth and growing our three main asset classes. When you break it down on the CNI side, we had 14 NAICS codes that had growth and five categories that had over $50 million of growth. When you look at it by market of our 47 markets, we serve 65% of those markets had growth this quarter. So for me, what gives me optimism in being able to continue to grow the book.

Speaker 1: is just the level of diversification and the fact that we're getting it from so many different asset classes and so many different businesses and geographies that I think you'll continue to see it. Being able to call what the ultimate growth for the year is, it's just so hard not knowing what's going to happen from an economic headwind perspective. But I don't want you to interpret our message today that we've seen a major shift in the customer sentiment for loans, but we do know that there's some uncertainty that's in the future. Thanks so much.

Speaker 9: Thank you. The next question today comes from the line of Michael Rose from Raymond James. Please go ahead. Your line is now open. Hey, good morning, guys. Thanks for taking my question. Just as we're thinking kind of longer term, just going back to investor day, which seems like eons ago at this point. I remember the day of investment day or investor day, the targets that you guys laid out were essentially in line with where consensus was at the time. But those working sentences now is kind of come in versus where those targets are. I know you guys are committed to

Speaker 9: kind of top quartile performance. But I guess if you were to do the investor day today, maybe if you could answer for us, both strategically and from a target point of view, what you would potentially change. Thanks.

Speaker 1: I'll start strategically and I'll ask Jamie to add on any targets, but Michael, as I said earlier, I'm not sure we would change anything within our strategy. I actually felt like our plan was built with some level of uncertainty and the ability to make modifications along that three-year journey. And so the investments that we're making today, I think we're doubling down on those investments in an interesting way going into an economic downturn. I think that's the time you really do invest. And it gives you an opportunity to...

Speaker 1: come out of the other side of whatever this downturn is a stronger uh... more diversified more agile company so on the strategic side uh... i don't think there's anything we would change uh... when you think about the targets and you said this and and i'll get me provide any absolute points that he wants to make but the important part there is we gave you some numbers based on those forward curves and based on those forecast but the important part is to know that what we committed to was top court how growth so

Speaker 1: Regardless of what the absolute numbers are in those categories, we want to make sure we're in the upper 25% of our peer group in those metrics. And I think whether it's in a prolonged economic downturn or whether this is a short, shallow recession that recovers quickly and we're back to high levels of growth, whatever those absolute numbers end up being, we wanna make sure that relatively speaking, we're in the top 25%. Yeah, really not too much to add from my perspective. Obviously the straight environment.

Speaker 2: initiatives. We believe that the decisions we're making today in this uncertain environment will position us for shareholder value over the long term. And so we're moving forward with our plan.

Speaker 9: All right, great. Thanks for taking my question. Appreciate it, guys.

Speaker 9: Great, thanks for taking my question. Appreciate it, guys. Thank you, Michael.

Speaker 3: Thank you. The final question today comes from the line of Christopher Mamrilak from J Montgomery Scott. Please go ahead, your line is now open.

Speaker 2: Hey, thanks good morning. Kevin and Jamie had a question on credit as it became to see an I book and as we play through the cycle was the 25 basis points or so charge office quarters and emblematic of what we should expect over time. I know the book is a lot different than it was in past cycles. I just kind of want to relate that to how that could play out.

Speaker 2: Hey Chris, for this Bob, just a comment or two on that. I appreciate the question. I think Charleston General, and this is certainly true for the CNI book as well. We're kind of range bound right now in the short run. I mean, all of our early warning indicators are still green, pastus are low, NPLs are low, as Jamie spoke of, down to historically low levels almost. So specific to the CNI book, I think we're kind of in that range. We don't see anything specific that causes us concern right now.

Speaker 2: you know from that perspective remember we do have a third party book that kind of gives us a quarterly.

Speaker 1: You know some quarterly charge offs and then we have a small business book that we've that we're following closely that hasn't seen Really any deterioration, but you know certainly was a benefactor of P3 loans and is that pulls back and liquidity pulls back inflation pressures hit We we would expect some there but quite frankly our past due levels and and new non-accruals Just continue to be to be solid and we're having to kind of counter that if you will with a you know heavier downward bias on

Speaker 1: on our economic scenarios. So, and I would just add to that, you know, Chris, the charge loss, any particular quarter, you can see in any of these asset classes and spikes, but Bob and I were talking, the level of inflows that we're seeing from an NPL's perspective are at some of the lowest levels. So, although you may see a 24 basis point charge off and see a nine one quarter, but in general, what we see from an inflow perspective has been very low. So we would expect there, as we said earlier, on the short term, for cautiously optimistic on the credit profile.

Speaker 2: Great, that's helpful. And then I guess as utilization continues to ramp up, because that's what a bump up to reserve allocation there, just somewhat over time.

Speaker 2: It does, and you saw that in the second quarter. The utilization impact on the allowance was $3 million increase in the second quarter.

Speaker 2: Great, thank you all, I appreciate it.

Speaker 8: Great. Thank you all. Appreciate it. Thank you.

Speaker 3: Thank you. This concludes our question and answer session. I would like to turn the conference back over to Mr. Kevin Blair for any closing remarks. Thank you. Thank you.

Speaker 1: All right, thank you Bailey. As we close out today's call, I want again, thank you for your attendance. Our goal as a leadership team is to continue to be extremely transparent around our actions as well as our objectives and our results.

Speaker 1: I believe our growth story is becoming more clear each quarter, despite the changes in the economic environment. I want to thank our wholesale, our community, Treasury and Payment Solutions, FMS and Consumer for the line of business teams.

Speaker 1: Your execution and your expertise are leading to growth in loans, operating deposits, and fee income across our markets and our client segments.

Speaker 1: And none of that growth would be possible without the support of all of our corporate service team members across our bank. Our success is because of the whole team. We win together as one Synovus.

Speaker 1: Now, today's presentation and the Q&A portion focused a lot on the granular aspects of our business and the financials. For all this information, we are currently available to potentials.

Speaker 1: whether it's NEM, betas, allowance, or run rates.

Speaker 1: As passionate as we are to provide the detail and answers to those questions, we are even more passionate about wowing our clients and growing the company, with a laser focus on execution and investments that drive long-term shareholder value.

Speaker 1: Innovation is becoming an even more central part of our strategy as we expand our solutions and the services we offer. We were recently recognized by the Technology Association of Georgia as a Top 40 Innovative Technology Company.

Speaker 1: Tag named Synovus is one of Georgia's 10 most innovative companies.

Speaker 1: As the only financial institution included on that top 40 list, this award speaks volumes about our team's strategic efforts to build the bank of the future and to stand out as an innovator in the competitive landscapes of banking, finance, and technology.

Speaker 1: Finally, I'm proud of our continued investments in our communities, including our recent contribution to junior achievement from our Hear Matters community fund. This partnership with J.A. will bring relevant hands-on financial education and career programming to more than 2,000 Title I students across the five-state footprint. I can't think of a better way to leverage our time and resources to make a difference.

Speaker 1: by investing in our youth and helping to reduce income inequality.

Speaker 1: Again, thank you for your continued interest and your confidence in our company. We look forward to navigating with you through the challenges ahead while also continuing to deliver strong performance for our clients, our team members, and our shareholders.

Speaker 1: With that, Bailey, we'll close today's call.

Speaker 3: Thank you. This concludes today's conference call. Thank you all for your participation. You may now disconnect your lines.

Speaker 6: The.