Q3 2022 Synovus Financial Corp Earnings Call
Rebuilding efforts.
As a longstanding southeastern bank, we understand the importance of hurricane preparation to ensure the safety and soundness of our clients our employees and ultimately of the bank to that end, our comprehensive client and employee outreach program. In addition to implementing network and operational safeguards are the keys to <unk>.
Appropriately navigating potential impacts of the storm.
As the storm approached and passed we fully implemented our business continuity plan with no disruptions to client account access throughout the storm.
And we've conducted a comprehensive client outreach initiative beginning the day after the storm passed.
To date, a low volume of deferrals have been requested by our clients and we have confidence overall that our customer base has not experienced damage that will produce permanent financial stress collateral impairment or long term business interruption due to the storm.
We also continue to care for our team members clients and communities impacted by the Hurricane.
Through generous donations of our team members and company contributions to our here matters disaster relief fund, we continue to help affected team members recover.
We also made a significant contribution to the Florida disaster relief fund to help with the long term needs communities will face as they rebuild.
Many of the leadership team join me last week visiting our locations and team members in the southwest Florida region. The words that resonated the most with me where resilience and perseverance, everyone is helping one another and displays a passion and commitment to rebuild and return to a level of normalcy.
Shifting to our third quarter financial performance, we're extremely proud of the accomplishments and results. We released earlier today. This was driven by continued solid loan growth and strong margin expansion, coupled with excellent credit metrics and a 50% efficiency ratio.
In evaluating year to date performance I believe the third quarter is indicative of the year strong loan growth ongoing deposit pricing discipline and prudent expense management have resulted in very strong net income and <unk> growth for the year.
However, we know there continues to be economic uncertainty ahead. Therefore, we will prioritize and remain resilient around the key safety and soundness components, including capital liquidity and credit.
Nonetheless, with the continued strong performance of our core businesses as well as our new initiatives, which will begin to generate income we feel certain we will perform well through this cycle and reached the other side as a stronger more diversified company consistent with our longer term top quartile objectives.
Let me provide a brief update on some of our new initiatives as I know Jamie will cover our core business performance story as he shares the quarterly financials.
Mast our banking as a service platform continues to progress with beta testing of our first integrated software provider client.
In fact, we expect to add a second client to beta testing in the fourth quarter and remain focused on in early 2023 official launch.
With our pilot solution in place, we're enhancing testing functionality and capabilities throughout the remainder of the year, while we strengthen our product offering and expand the pilot and the other <unk> segments. We continue to recruit top talent to prepare for the launch and build out phases, two and three of the product offerings, we remain committed and.
Confident to this opportunity and our teams are working diligently to ensure we deliver a differentiated product early next year.
In addition, we announced last week, we continue to build out our corporate and investment banking team with coverage and credit product leaders onboard it for our health care services vertical as well as our leader for debt capital markets. We've also closed our first transactions in the technology media and communications as well as the financial institutions.
Verticals with all of our vertical leads now in place, we expect to accelerate adding new business in the months and quarters ahead.
Continue to make investments in our treasury and payment solutions that will serve as new sources of revenue and will roll out new analytical capabilities and the consumer business in the fourth quarter that will provide opportunities to strengthen and deepen existing relationships.
We also continue to be pleased with one of our newest industry verticals, our restaurants specialty group with $71 million in loan growth. This quarter. This brings the portfolio to $545 million.
I'm also happy to announce that we raised our base wage to $20 per hour in the third quarter, which we feel will offset some of the inflationary pressures felt by our team members and ensure we have a competitive compensation structure to continue to attract and retain talent.
Overall, I believe we continue to execute exceptionally well on our strategic plan. The success is directly attributable to our 5000 plus team members, who serve our clients and internal partners with a purpose. This continued focus on execution allows us to perform at a high level, regardless of the underlying economic conditions I am truly humble.
And proud of what you do every day.
Let me turn to slide three and our financial highlights for the quarter.
Net income year over year was up 9% led by total revenue for the third quarter of $582 million, an increase of 16% year over year and 11% quarter on quarter.
The revenue increase was driven by NII growth. A result of continued healthy loan growth and a 27 basis point expansion in net interest margin.
<unk> was $288 million for the quarter, an increase of 24% year over year, representing the highest level seen in over 15 years.
This performance led to adjusted EPS of $1 34 return on average assets of 139% and return on tangible common equity of 21, 4% as well as an efficiency ratio of 50% all representing excellent operating metrics, which serves as validation of the team's continued.
<unk>.
Loans increased $1 4 billion or 3% quarter over quarter with diversified growth across all segments.
Commercial loans again served as the primary driver of growth. It is reaffirming to see loan growth in all of our business units again, this quarter, leading to our fifth consecutive quarter of double digit loan growth.
Deposits declined 3% quarter over quarter, driven by balanced balance diminishment and rate bearing balances as we have shared previously our clients continued to maintain average balances that are higher than pre pandemic levels. However, during the third quarter. We saw a decline in average balances as clients utilize their cash in business related <unk>.
<unk> and commercial and consumer salt higher return alternatives. Despite the diminishment net production has continued to increase and we remain focused on our efforts to grow deposit relationships overtime, our underlying credit performance continues to trend positively as our NPA NPL and criticized.
<unk> ratios remained stable in quarterly charge offs dropped to historically low levels. As we have noted before the performance of our loan book is a function of portfolio diversification and a strict adherence to our disciplined credit framework, we remain cautiously optimistic on the near term outlook for credit.
Lastly, capital ratios remained consistent quarter over quarter, representing both our strong earnings and our focus on deploying capital to client loan growth now I will turn it over to Jamie to continue the overview of our quarterly results in greater detail Jamie.
Thank you Kevin.
To begin with loan growth as seen on slide four.
Total loan balances ended the quarter third quarter at 43 billion.
Reflecting growth of one 4 billion.
On an annualized basis, excluding the impact of PPP.
This represents a growth rate of 14% our fifth consecutive quarter of annualized double digit loan growth.
Once again this growth was broad based with contributions from wholesale community consumer and CRB business loans.
Growth was led by CRE, which increased $785 million quarter on quarter.
This was a function of loan production paired with a slowdown in payoff velocity.
Slower levels of pay offs relative to those experienced in the first half of the year contributed approximately $350 million to CRE growth in the quarter.
Growth was once again led by the multifamily and medical property sectors, which represent the highest levels of credit quality within the CRE segment.
With regards to C&I growth was led by the wholesale line of business. In addition increased utilization from C&I commitments existing at the end of the second quarter contributed approximately $170 million quarter over quarter growth.
Consumer loan balances increased $148 million drill.
Driven by mortgage and home equity lending.
Third party consumer loan balances remained flat quarter over quarter.
As we've communicated previously we leverage our third party consumer portfolio as a means to complement our overall balance sheet positioning and as we look forward, we expect to redirect paydowns within that portfolio to support our core growth opportunities.
Turning to slide five the third quarter saw a continuation of the industry wide headwinds for deposit growth.
With our deposit balances declining 3% quarter on quarter.
These declines were the result of a host of factors, including the pressure from high rate nonbank alternatives as well as disciplined deposit pricing.
Production remained strong in Q3.
Our focus remains on what we can control and that is continuing to work to grow deposits, both from existing relationships and new business initiatives, which over the long term should be the basis for value creation for all of our stakeholders as we look at deposit rates and our average cost of deposits increased 23 basis points in the third quarter to <unk> 300.
8%.
That compares to an average of 5% for the month of September which equates to a total deposit beta of approximately 15% for this cycle using average rates for the month of September .
This is lower than the 30% total deposit beta we previously estimated in July for a scenario in which policy rates reached current levels.
The existing variance appears to be attributable to the recent pace of interest rate hikes and the associated lag in deposit repricing.
While this unprecedented tightening cycle is creating an uncertain environment for rates and deposit pricing.
<unk> continues to tighten to the four 5% area on policy rates as is implied by the recent dot plot. We would expect some further upward pressure on total deposit beta for the cycle, placing it in the range of 35% to 40%.
Now to slide six the combination of disciplined deposit pricing continued strong loan growth and interest rate increases in the third quarter serve to support significant growth in net interest income, which came in at $478 million, an increase of 24% year over year.
<unk>, 12% quarter over quarter.
The net interest margin was 349% in the third quarter, an increase of 27 basis points from the second quarter as shown in the NIM waterfall the impact of higher short term rates boosted loan yields is greater than 60% of our loans are now floating rate.
Higher loan yields were partially offset by higher deposit and wholesale funding cost.
As we look forward the pace of NII growth will be impacted by the timing of deposit repricing interest rate policy and loan growth.
We expect NII to be driven primarily by balance sheet expansion and long and repricing as we move past this rate hiking cycle.
Slide seven shows total adjusted noninterest revenue of $105 million.
$5 million from the previous quarter and down $9 million year over year our.
Our depth of relationships and stability in core banking fees and wealth revenue Act as a source of strength, despite volatile capital markets and the continued depressed residential mortgage environment.
Notably wealth revenue grew 5% despite.
Despite a 17% year over year decline in the equity markets.
This highlights the diversity of the non bank non market based revenue streams within our wealth segment in areas such as trust in the family office.
In addition wealth.
<unk> revenue was benefited by fees generated from clients movement into short term investments such as repos. This is further evidence of the pressure put on deposits in Q3 from nonbank short term liquidity alternatives.
Moving onto expenses slide eight highlights total adjusted noninterest expense of $294 million up $10 million from the prior quarter and up $27 million year over year, which represents a 10% increase in.
<unk> expense increased 9% year over year, primarily attributable to the impacts of merit elevated performance incentives and team member additions as mentioned earlier, we increased our minimum wage to $20 per hour. This increase and other related compensation changes will result in additional spin.
<unk> of $2 million in the fourth quarter, and an increased annual spend of approximately $9 million.
Similar to previous quarters, when segmenting our year over year increase in expenses. The majority of the growth is attributable to performance related costs and investments in new business initiatives, such as CIB mast.
We expect expenses associated with these new growth initiatives and infrastructure investments to increase 6% to $7 million in the fourth quarter.
Our third quarter efficiency ratio of 50% is evidenced that we are effectively managing our expense base, while making the strategic investments.
Moving to slide nine on credit quality, our credit performance in the credit quality of our recent originations remained strong the NPA and NPL ratios remained stable overall.
And are at or near historically low levels at <unk>, 32% and 9% respectively.
The net charge off ratio was 0.0% to 4% for the quarter, representing the lowest charge off rate we have seen in recent years.
In the second quarter.
Our ACL was $479 million or one 1% 3% of loans.
Given continued elevated strong loan growth the ACL increased $21 million quarter on quarter, while the ACL ratio remained relatively flat.
This ratio reflects the quality of the loan portfolio offset by a more negative economic outlook.
Although we do believe that a more challenging economic environment could impact credit performance metrics. We are confident in the composition and strength of our loan portfolio, we have emphasized diversification and specialization across several facets of our commercial lending lines and we have been targeted and selective in the sectors and industries in which.
We learned.
Lastly, our prime focus conservatively underwritten consumer portfolio is well positioned for a potential downturn.
As noted on slide 10, the common equity tier one ratio remained relatively stable at $9 five 1%.
Within the quarter core earnings supported robust capital generation, which was largely redeployed back into prudent balance sheet growth.
I would highlight that this is the fourth consecutive quarter of stable capital ratios near the midpoint of our nine 5% to 975% range.
Salt, which is evidence of our focus on diligently managing our capital position consistent with our internally established targets.
Looking ahead to the fourth quarter, our focus remains on prioritizing capital deployment toward our core growth opportunities.
The slower pace of loan growth expected in Q4 will likely result in a year end CET one within the upper half of our nine 5% to 975% range.
In light of the uncertain economic environment, we believe further supporting our capital position in the upper half of the range makes sense.
And similar to this quarter, we do not expect any further share repurchases in 2022.
I'll now turn it back over to Kevin.
Thank you Jamie I'll now continue with our updated guidance for the quarter as shown on slide 11.
We remain on track to deliver our pledged $175 million of pretax synovus forward benefits by the end of this year at.
At the end of the third quarter, our annual revenue run rate stood at over $160 million and the continued execution of our efficiency and growth initiatives will result in benefits in excess of our stated target Synovus forward is now embedded in a continuous improvement mindset that will continue long after this initiative.
It's formally complete, especially as we continue to operate in more volatile economic conditions.
As a result of our strong loan growth of 3% in the third quarter, we are raising our total year loan growth ex PPP guidance to approximately 11%, which implies fourth quarter loan growth tapering a bit from the growth levels delivered in Q3.
This loan growth combined with the fed funds target rate of four to four 5% by the end of the year results in total expected annual revenue growth, excluding PPP revenue of 15% to 16%.
And on the expense side, we are expecting year over year adjusted expense growth of 7% to 8% a result of incentives and cost tied to strong performance and targeted business investments.
As we've stated previously our employee incentive structures are tightly aligned with overall performance and as such the strong forecast that revenue performance. This year has resulted in higher incentive expectations.
Given the strong positive operating leverage resulting from this year's performance our expectations for year over year adjusted P. PNR growth ex PPP is now 25% to 27% I am pleased with the progress we continue to make as an organization and remain confident in our ability to deliver sustainable top core.
<unk> performance 2022 is shaping up to be an outstanding year in terms of our financial performance one that fully exceeded our original and most recent expectations, reflecting back on our Investor day in February I could not be more pleased with our progress. We stated that we had to increase productivity deepen client.
Relationships and deliver ongoing efficiencies, while leveraging strategic investments to create an elevated growth profile.
We have increased productivity in loans deposits and assets under management production during the year deepened relationships utilizing analytics and good old fashion partnerships managed expense growth by closing 28 branch locations and maintained progress on our new initiatives matching our actions with our promises in a manner.
Our team has in 2022 is even more impressive given the volatility in the economy and many causes from which it stems going forward, we will adjust and alter our path where necessary as we remain agile and navigating the ever changing economic and competitive landscape.
Want to again, thank our 5000 plus team members, who are the secret to our success and your efforts and contributions are not unnoticed by our leaders clients, our key stakeholders and now operator, let's open the call for Q&A.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
We are using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two in the interest of time, please limit yourselves to one question and one follow up.
Our first question flip stay comes from Brady Gailey from <unk>. Your line is now open.
Good morning, Thank you good morning.
Good morning.
So when I look at your capital.
Ci impact your TCE continues to move down here. It's now five 5%. If you look at common equity tier one it's still at a great level at 95%, but.
Such a differential between those two ratios.
As the team continues to move lower is there any impact.
From that.
Right.
Thanks, Jamie and good morning.
As we think about our capital ratios.
Really focus in on CET, one and the reason for that is we look at the impact to tangible common equity of OCI.
A timing difference and only a partial story of what's happening as a result of interest rates.
As youre, well aware synovus performs better in a higher rate environment, but when you mark to market components of the balance sheet like the securities portfolio, you can see there's parts of it where the value declines, whereas there are many more parks, where the value increases and so as we think about capital and how we manage our.
Balance sheet, we protect the balance sheet, we primarily focus on on CET one.
Regulatory capital and as you can see by our.
Earnings today and on our strategy for the rest of the year, it's our attempt to build capital through the rest of the year retained earnings.
And build capital in dollar form you can see that we're deploying it to clients, which is our key strategic objective and we expect to continue that through year end.
Okay, Alright, and then Jamie can you give us a little more color on.
The swaps the synovus has added over the last year or so I think there is.
At the end of the second quarter, it was a little over $5 billion.
<unk> fixed pay floating.
Can you just help us think about the impact that those swaps.
<unk> earnings and if they have any impact on capital from a mark to market point of view and any changes that may happen.
And that swap portfolio in <unk>.
Yeah. It's a great question and you did see a little bit of change in the swap portfolio in the third quarter, but but it's not what you would normally expect it was more tied to hedging.
That ore deposits broker deposits and so when I think about the core swap portfolio swaps against our loan portfolio.
It remains stable.
And what we have right now is we have about five and a quarter billion of exposure that will mature over the next few years.
And it will be.
Tactful to earnings.
Not impactful to regulatory capital, but it is impactful to what we were just discussion on tangible.
When we think about the impact to earnings going forward. Unfortunately, the maturities are somewhat lumpy.
And so there'll be some quarters, where we have more maturities than others.
Those maturities will be a benefit to the following quarters NII the biggest.
The quarter that we have coming up with maturities would be the second quarter and we have.
Approximately $1 billion of maturities at around a one 4%.
Mercy of fixed rate and so that will be accretive to NII in 2023, once those mature, but it will be lumpy and it will come in over the next few years.
Okay, great. Thanks for the color.
Yes, Thanks, Brian .
Thanks Jay.
Our next question comes from Steven Alexopoulos from Jpmorgan, Steven Your line is open.
Hi, good morning, everyone.
Good morning, Steve.
Wanted to start on the deposit side. So prior to QE noninterest bearing deposits are about 25% of the deposit base now is around 35% how should we think about pressure on noninterest bearing balances from here right will get worse than what we just saw this quarter and ultimately are we headed back towards 25%.
Hey, Steven.
Jamie I'll jump in first we spent a lot of time thinking about that and when we think about our.
<unk> as a percent of total deposits.
We believe that they will be relatively stable maybe decline.
A few percent as we go through this cycle.
And the reason we believe that is one we've seen strong client growth and so on.
Our relationship managers out in the field are bringing on new clients. They are driving that business and we believe that over the long term that will lead to sustained growth.
But then on a more technical side, we also looked at prior cycles and so we looked at the cycle in the early two thousands 2004 2007.
And if you look at DDA during that cycle, you did see some declines.
About 4%, but then when you look at the cycle from 2015 to 2018.
DDA as a percent of total deposits did not decline and so we think that that also gives us a little bit of comfort.
You may see some slight declines in that percentage, but we're not expecting anything outside of those prior cycles and Steven I'll just add interesting enough. When you look at noninterest bearing deposits relative to core deposits. They actually increased this quarter from 35% to 36, and so as we've seen money market attrition.
We've actually had DDA hold on better than some of the rate seeking clients that have moved to other instruments to Jamie's point I think the great opportunity that we have in front of US is what we've been doing for the last three years in terms of investing in treasury and payment solutions. So when you ask yourself why would someone keep there.
Money in a noninterest bearing account, they're doing that because theyre receiving services from our treasury and payment solutions team and Theyre offsetting that with their earnings credit rate, but as we continue to grow our commercial business our ability to win business as Jamie.
Suggested in that commercial space is very high and we will actually continue to accelerate and so as we continue to improve our products and solutions. We have the opportunity to have outsize growth in new production of DDA, which could help to mitigate any diminishment that we would see going forward.
If we stay with that as my follow up so this quarter you saw very nice NIM expansion.
I mean the question, we're asking everybody is whats the trajectory from here. It seems like for most banks <unk> is going to be somewhat similar to <unk>.
But does your NIM then.
Peak it sounds like a lot of banks are guiding to NIM, peaking in the first half of next year and then the wildcard is can you hold it at that level or.
Jamie you talked about this pickup in deposit betas with a lag.
Does it trend down in the second half how are you thinking about that from a high level here. Thanks.
Yes Stephen.
Yes. This is this is the key question and as we look at it first we're really pleased with what the team delivered in the third quarter.
Think that our performance on managing deposit costs, managing the balance sheet was strong and led to a strong quarter of NII.
We are really pleased with that and when we look forward and this is embedded in that in our total revenue guide for the full year the.
The mid point of that is an expectation that NII will be relatively stable in the fourth quarter from these elevated third quarter levels.
And Thats a combination of.
Youll see some of the impact of.
Prior rate hikes on deposit costs in the fourth quarter.
And we're expecting obviously further further rate hikes from the from the Federal Reserve.
There are potential tailwind to that which would be at the liquidity environment and what happens outside of the banking industry, but that could also be a headwind and so we will see as we go through the fourth quarter, but to your to your real question beyond that we would expect to see in NII and the margin headwind from.
Deposit pricing lags once the fed tightening cycle is over.
And that will be a near term impact for us I believe as we look forward further out that will be offset by the benefit of fixed rate asset repricing I mentioned derivatives maturities earlier.
Also the repricing of the Securities portfolio also the repricing of our mortgage portfolio I mean, it's a little more than $20 billion of fixed rate exposure.
That will reprice over time and that'll be a nice tailwind for us so when I think about NII.
We think that the fourth quarter should be relatively stable to the third quarter, but looking out beyond that when we look at 2023, and we will give full year guidance in January but when we look at the longer term, we do believe that the benefit.
Fixed rate asset repricing will fairly offset the negative impact that deposit lag.
And we May see NII in 2023 approximate loan growth.
Year over year.
Terrific. Thanks for taking my questions.
Thank you Steven.
Thank you next question comes from Jonathan <unk> of <unk> Securities. Jonathan Your line is now open.
Thank you good morning.
Good morning.
Yes.
Obviously your asset quality with terrific. This quarter can you talk about any signs of normalization you're seeing.
Sure.
Any different portfolios.
Hi, Jennifer as Bob just real quick yes, thanks for the question.
I think where we sit today, we're benefiting from.
The liquidity that within the system through the pandemic.
You look at our charge off ratio over time.
Go back to maybe 2016 2000 to 2020, when we were in the 20 to 30 basis point range and then as we went through the pandemic obviously.
Got it on a pretty <unk>.
Direct sloped downward and we kind of leveling off here at fairly low levels. We would anticipate that you would see a return to something in that range. As we go forward my only caveat to that would be if we remain.
And our restricted type policy for a longer period of time, certainly we would expect credit cost to continue to perhaps move up toward two another range or a higher level as of today. However, we just arent seeing migration, we aren't seeing the defaults, we aren't seeing significant changes in modification request et cetera.
So right now.
<unk> towards stable, but certainly looking ahead, we could expect some headwinds there as it relates to credit.
Okay, Great and Kevin could you talk about.
The <unk> business and where it is today versus your expectations.
Maybe earlier this year in February during the Investor day.
Okay.
Yes, Jennifer I think it.
It's exciting to see now that we have all three of our managing directors that are leading our verticals.
In place and.
The talent as we've shared in the past we've been very excited about the talent, we're bringing on and being able to recruit talent from some of the larger institutions and now we have some credit product specialist debt capital markets and we're starting to see deals being booked and we had to deal with as I mentioned in the prepared remarks this quarter our pipeline is.
Over $100 million and what's great about that Jennifer is it's not just about participating in deals we have some lead opportunities in front of us and I give Tom deardorff and his team a great deal of credit.
<unk> been able to attract top talent that have hit the ground running so I'm more optimistic today than I, probably was even last quarter, just because we're starting to see traction we're winning deals. The pipelines are building Bob has brought in a credit team to support them, which we think has been incredible.
To the team in terms of prospecting. So I'm more optimistic today you may ask the question how would we think about it going forward in an economic recession.
I don't I wouldn't think differently about it I think the team we have in place today will continue to provide great credit opportunities and being able to cross sell depository and treasury opportunities.
Even in a economy that is not growing as fast so for me I'm just happy we have another lever.
For our growth engine as we think about the future with the market slowing potentially with.
A potential recession.
Can I ask one more question about loan growth slowing in the fall.
Quarter is that because youre being more selective now are the more important economy are you seeing the pipeline.
Hi, Dan.
Yes, Jennifer it's a really good question.
As we first talked about this quarter when you think about $1 four and loan growth we saw fairly stable production.
Also saw payoffs and paydowns slow considerably predominantly in the CRE space and so that contributed a little extra growth as we saw the payoff activity slowdown as we look out into the fourth quarter. We are seeing some slowing in activity from our clients pipeline pipelines are down 15%, 20% from where they were in the third quarter.
You think about just a 20% 15% reduction in production that would produce somewhere around 702 billion dollar loan growth for the quarter now the variables. There will continue to be what happens with the payoff activity and ultimately what happens with the utilization. This quarter. We saw only 20 basis point increase in utilization.
<unk> and on the same line increase about $180 million so.
It will slow a bit but the wildcard there is what will happen with pay off activities, but yes production is slowing just a little bit.
Thank you Max.
Thank you.
Question comes from Brian Millsaps from Piper Sandler Brian Your line is now open.
Hey, good morning, good morning, Brad.
Good morning, Brett.
Thanks for taking my questions, Jamie maybe I wanted to start with expenses.
You guys had a great revenue year, and obviously the incentive comp has drifted up.
Just curious because of the great revenue have you been able to pull forward any expenses, maybe from 2023 make any additional investments that maybe you could soften some of the inflationary pressure that we're seeing.
Across the industry for I know youre, not giving 2023 guidance. We're just kind of curious if you in your mind kind of brought any of that for to kind of.
Yes.
Maybe 2023.
It's a great question, but.
On the expense side I would say, we have two things going and this will be our story for 2023 as well.
As we have core expenses, which is how we operate our existing business and then we have the spend for the future with our strategic growth initiatives, but when you look at our core expense base.
It's very well managed and you say.
Long performance year over year, you see active management.
But we're not stopping or.
We're not spending we're not stopping spending when we need to clearly this is an inflationary environment.
Thought, we just announced our minimum wage increasing to $20 an hour.
We're actively out there ensuring that we're competitive.
We have the right compensation structure is to have the strongest.
Team out there in the southeast and so we feel really good about what we've been doing on today's expenses and that's what you should expect to see for US in 2023 active management of what we can control ensuring that we're doing everything we can to build the best team maintain the best team, but then also our strategic plan is.
Made for the through the cycle. This is clearly an uncertain economic environment, but if you look at our strategic plan.
What we laid out on February 8th remains the same as what we're saying today. These are all long term plans that we believe position us for the future.
Great. Thank you.
As my follow up Jamie it looked like.
Average long term debt went from maybe just under $900 million.
$2 7 billion on the average balance sheet.
I know some of these categories are lumped together, but you finished the quarter with almost $4 5 billion of long term debt can you.
I know there was a small issuance in August , but just kind of curious what you did there maybe how its structured right term et cetera, just kind of wondering about.
Kind of the moving parts make sure I didn't miss something there.
Yes, Brian what Youre seeing there is largely home loan bank advances.
Now those are considered long term.
But their floating rate counts level at any time.
And when you think about those funding costs.
I would just think about that as basically a fed funds funding or a sofa or short term sofa rate funding.
Got it. Thank you I was looking to use it there in the long term got it okay. I appreciate the clarity. Thank you.
Yes.
Thank you thanks.
Next question comes from Kevin Fitzsimmons of D. A Davidson Kevin Your line is now open.
Hey, good morning, everyone.
Just.
A little on Brad's question, there just curious.
Jamie how we should I know there was a question earlier about.
About noninterest bearing deposits, but just your outlook for overall deposit levels going forward do we.
Can you just see a modest.
Decline and.
Im assuming more modest decline going forward versus third quarter, and then do you.
To supplement the offset that with the borrowings you were just referring to.
More broadly.
Do you feel about that loan to deposit ratio, which I think now has gone up to 89% were where that stands relative to where you want to be longer term. Thanks.
Yes, Kevin.
As we look forward on deposits and this you can see in our loan guide.
We're forecasting as Kevin mentioned earlier strong growth in the fourth quarter.
And we are expecting and look this is a highly uncertain environment on the deposit front, but we are expecting to see deposit growth in the fourth quarter.
Now.
It will be likely slow or slower growth, but we are expecting to see growth.
In the fourth quarter.
And expecting.
That's our current current baseline we've seen growth quarter to date.
We expect to maintain that through year end.
When you think about the loan to deposit ratio, if you look back over the longer term.
Ron for years.
In the upper Ninety's, 96% to 98%.
Loan to deposit ratio, it's not our intent to get back to those levels.
And in the medium term, but you should expect to see that increase.
And so we will look to use all of the liquidity levers that we have.
But you should expect to see that increase.
One of those liquidity levers that I would highlight.
As our third party lending portfolio.
Clearly you've seen strong client growth from us for for five consecutive quarters and it is our intent.
It has always been our intent to use that third party portfolio as a source of liquidity and so you should expect to see that attrite over time, given the strong client loan growth and Kevin given given the topic adult Jamie I would want to jump in on deposits. Obviously I think it's important to understand what happened in the third quarter to be able to project.
What's going to happen in the future and our team has done a good job of looking at the outflows this quarter about 35% of our declines are diminishment. This quarter were a function of just seasonality, we had another 25% where our customers were deploying their liquidity predominantly on the commercial side investing.
And.
New investments you're expanding their capital so that leaves about 40% of the decline and about 20% of that we were able to move to alternative.
Higher yielding.
Our liabilities for them and that include it we added about $700 million this quarter off balance sheet in our repo products. So that leaves about 20% or $450 million that left the company to pursue higher balances and so as we go forward, having a good understanding of how we mitigate some of that activity, but ARX <unk>.
<unk> on the deposit side continues to increase we saw another quarter of about 25% increase in net production and that included increased production in DDA and we have gotten more active back in CD promotions and so as we go forward.
Our actions around deposits will be very consistent to Jamie's point, we'll continue to focus on generating new deposits will continue to focus on mitigating some of the diminishment, that's happening and our investments over the last several years as I mentioned earlier with Treasury will help. We're also looking at some new industries and verticals that will help to supplement some of our asset generation.
Deposit generation, including money service businesses, which we rolled out last quarter. So our focus internally is understanding some of the diminishment, but continuing to focus on the new production that will allow us to generate growth going forward to jamie's point.
Okay.
Thanks, Kevin and thanks, Jamie I appreciate all of that one quick follow up Jamie I think you mentioned earlier about.
What the deposit costs were in September I was wondering if you happen to have them handy.
Maybe what the actual margin what the loan yields deposit costs work for September and then maybe any color you can provide on betas like what they are.
Our last cycle, what youre assuming.
This cycle would be great. Thanks.
Yes.
I'll focus in on the deposit side for the month of September .
When you look at interest bearing deposits for the month of September it was.
Approximately 72 basis points total deposits approximately 50 basis points as laid out in the deck.
When you look at the through the cycle beta.
Through September from the beginning of September .
A 15% total deposit beta of 22% interest bearing deposit beta.
And if you were to look at.
Period to period quarter to quarter.
It would be at 19%.
Interest I'm, sorry, 25% interest bearing deposit beta and 18%.
Total deposit beta.
As we've said in the past.
Our expectation was when we thought that that might end at current levels at three in a quarter.
Our through the cycle deposit beta will be around 30%.
And as we said on the prepared remarks today.
If we assume that the fed goes to the mid fours than we would expect our through the cycle deposit beta to be.
Somewhere between 35%, 40% and I want to give a little more color on that range. So the 35% would be what we would consider closer to our base case and that is that.
Lies beyond a three and a quarter fed funds rate beyond that 30% through the cycle beta to three in a quarter you have an incremental 50% total deposit beta and that would get you to an approximately 35% through the cycle beta with the terminal fed rate of 445, and Thats kind of.
That would be our current base case, we do believe that through cycle beta could be higher which is why we gave the range given what we saw last quarter with non bank liquidity alternatives with competition from.
From nonbank alternatives to deposits and if that were to continue if that were to increase then you could see higher through the cycle basis.
Okay I appreciate all that color James Thank you.
Yes.
Thank you next question comes from Jonathan Shaw of Wells Fargo. Jonathan Your line is now open.
Hi, Thanks, good morning.
Good morning, guys. Just one quick follow up one quick follow up on that do you.
Think that we could get to could we see the faster acceleration to that through the cycle data.
Than we than we've seen so far or do you really think that it's just sort of continue.
Continued sort of steady steady.
Progression higher.
The.
If you go back and look at prior cycles, then you should expect to see an acceleration. So if you look at the 2004 to 2006 tightening cycle you definitely see an acceleration of the further you get along in the tightening cycle. The same thing happened in 2016 to 2018 and Thats, what we are expecting and so when you.
Look at the.
Quarter on quarter, you have a total deposit beta.
Of 18% and then we're forecasting that just to continue increasing that I, just mentioned getting up to as high as potentially the 50% incremental beta.
Which leads to a through the cycle in the mid thirties.
That's generally what we expect to see happen, but yes, you should see.
You should see an acceleration.
In betas as we go through this.
Okay. Thanks, and then just as my follow up could you give a little color on.
What the sentiment from your commercial customers is as we're as we're continuing into this period of maybe broader economic uncertainty are they still out there.
Talking about growing and investing or are you seeing them start to become more cautious and maybe pull back.
Back a little bit more.
Jared I'll start and I'll ask Bob if he wants to add anything from a credit standpoint, I think in general it's still cautiously optimistic I think you have to go back to what we've talked about in terms of demographics in the southeast and the.
<unk> outperformance of our footprint in terms of population growth and business starts and so I think relatively speaking none of those elements have changed even though that.
The economy is looking to slow a bit so.
There is continuing to be economic growth and the footprint will continue to have folks that want to deploy capital I do think as I mentioned earlier in the call pipelines have diminished a bit and I think that's correlated to the sentiment of our business owners that they do see a slowing going forward I think part of that has been.
There has been a bit of a backlog with supply chain and what's been going on post COVID-19, but in general there is still a positive sentiment we're not seeing people that are overly concerned, but we're seeing a level of prudence and people are being conservative.
I've mentioned it earlier, there is still carrying a lot of cash on their balance sheets and so they still have a lot of dry powder. If things were to go negative and quite frankly with rates rising they are able to use some of that cash instead of using higher cost debt, but I'm still cautiously optimistic and I think thats predicated on what were hearing from them. Bob would you add anything yes, Jerry the only thing I would add is we.
We started last quarter.
Commercial survey and.
Did it again this quarter. So two surveys in a row the different color highlighting those surveys as we're beginning to see our customers tell us that.
Input costs are beginning to wane, a little bit and so early signs that perhaps inflation might be easing somewhat.
The other thing I would point to in those surveys that our customers still feel as Kevin said relatively optimistic about their pipelines and their businesses going forward.
Not just anecdotal, but the results of that survey.
Great. Thank you.
Yes.
Thank you.
Anil question for today comes from Christopher <unk> of Janney Montgomery Scott Christopher Your line is now open.
Hey, Thanks, Good morning, Kevin you gave us the update on mast earlier in the call and I was just curious as <unk> comes online next year to what extent can that be a positive contributor to kind of core deposit growth for the <unk> engine in 'twenty, three and 'twenty four.
It's a great point, because I think we've talked a lot about mask and its ability to generate fee income through the payments.
Products, but it also it can be a big deposit generator.
It would be too early for me to prognosticate, what those average balances are going to be but as we've gone through this pilot with our first ISP, we've onboard at over 800 recurring biller.
Are the customers of the ISP. We've also opened up our website from a sales perspective, and we received 800 unique customers coming to the website with the click through rates that are three times. The average of what you see in the industry. So as we've talked about in the past there continues to be a great deal of excitement from these.
Software providers to the product. The other thing is we've been talking to more folks about being able to deliver it in 'twenty three what we're seeing is that the average number of customers per ISP is actually greater than what we had modeled so I'd give you all that as background because the only thing I can use.
To project, what it's going to do for US is what's happening with our pilot. The early interest that we're getting from Isps and as we've shared on previous calls it continues to be extremely positive. So I believe that not only is it going to be a generator of fee income, but its also going to generate deposits that will help our growth in some of the other areas of the bank.
Great. Thanks for getting into the detail there and I presume that all relatively speaking the cost of those funds would be less.
Maybe I'll be zero, but it would be less than some other funded that yet.
Yes, you could have youll have a DDA account that sweeps the receivables from the payment, but one of the things we'd want to offer is that they could sweep that money into other interest bearing accounts. So you'd have a little bit about you would have both a noninterest bearing component as well as interest bearing but it would be I think overall more attractive than any sort of nor.
Normal funding our wholesale funding for example.
Got it great and Jamie just a quick one.
As you think about the level of debt is there an upper bound to kind of where you don't want to cross over a certain threshold I know its an exact science, but just kind of curious as you think through the next several quarters.
As we look forward.
That side.
Yes, I would bifurcate the difference between.
Borrowing collateralized borrowing at the home loan bank and facilities like that then.
And then corporate unsecured debt, we have a lot of liquidity a significant amount of liquidity.
At hand, when you think about the ability to use home loan bank capacity the ability to use.
The grow broker deposits from here the ability to grow core deposits and so we have a lot of different levers at hand, and we believe that.
Using liquidity sources like the third party portfolio, allowing that to attrite I will benefit us.
And we believe that those strategies can help.
Hold off.
The need to issue any sort of corporate unsecured debt, which is clearly.
The highest cost of them all.
Great. Thanks, very much for all the information this morning.
Thank you. Thank you.
Thank you. This concludes our question answer session I would like to turn the conference back over to Mr. Kevin Glass any closing remarks.
Well, thank you Alex and as we close out today's call I want to thank you again for your interest in our company.
I really believe the results. We shared today are further proof of our progress in executing on our strategic growth plan I think most importantly, these results have been driven by our dedicated and hard working team members here at Synovus, we have an outstanding team and a loyal client base.
Truly value the relationships, we take pride in fostering along with our exceptional advisory approach to serving our clients financial needs.
Proud of the care of our team members take to extend to our clients and the communities in which we serve.
Yes, we have a bright future here at synovus, but we're not just betting on what is to come rather we continue to deliver in the present this year, our core business performance and our asset sensitivity has translated into income levels and operating metrics that are some of the best in our company's history moving.
Moving forward rising rates may be less of a story in economic growth is likely to contract, but we remain optimistic that even in that environment. We will continue to perform in a strong relative fashion continued enhancements in productivity deepening of client relationships, coupled with the traction of our new business initiatives.
He will lead.
In loans deposits and fee income and it will put us in a position to deliver positive operating leverage, allowing us to continue to outperform.
Again, thanks for joining our call today, we look forward to staying connected to this group as we continue to deliver for our shareholders. Our team members clients and our communities with that Alex will close out today's call.
Thank you all for joining sounds cool you may now disconnect.
Okay.
Yes.