Q1 2023 Synovus Financial Corp Earnings Call
CEO and President Kevin Blair will begin the call. He will be followed by Jamie Gregory Chief Financial Officer, and they will be available to answer your questions at the end of the call.
Our comments include forward looking statements. These statements are subject to risks and uncertainties and the actual results could vary materially. We list. These factors that might cause results to differ materially in our press release and in our SEC filings, which are available on our website.
We do not assume any obligation to update any forward looking statements because of new information early developments or otherwise, except as may be required by law.
During the call we will reference non-GAAP financial measures related to the company's performance you may see the reconciliation of these measures in the appendix to our presentation and now Kevin Blair will provide an overview of the quarter.
Thank you Ken good morning, everyone and thank you for joining our first quarter 2023 earnings call. This last quarter has proven to be a challenging operating environment for the banking industry. However, once again, we've seen the value and viability of main street banks like ours, who operate on our relationship based client model.
Spite the media narrative deposit outflows were ramp it and regional banks are core deposit balances were up in the first quarter and stable in the month of March a testament to the value of our client base and our team members who serve as trusted advisors in both good and challenging times.
We have a long and proven track record of success in recent years, we've taken a deliberate approach to expanding our business diversifying our client base and leveraging technology and new solutions to improve the client experience and deepen our share of wallet, but.
But we have never lost sight of the value of building strong trusted client relationships Trust is a two way street and is often tested during times of stress. This last quarter serves as an added proof point of the importance of client loyalty and the engagement of the team member base that was instrumental in efficiently executing a multifaceted.
<unk> to the turbulence in our industry.
As a result of our team members' efforts. We're pleased to report strong financial results for the first quarter with net income up 19% year over year.
We also received industry wide recognition, including ranking number one for customer satisfaction and trust in the southeast. According to J D. Power's most recent U S. Retail banking satisfaction study and received 20, Greenwich Excellence and Best brand awards for small business and middle market banking, while we're proud of these.
Results were mindful of the challenges and uncertainties, but also the opportunities that lie ahead. The recent bank failures in industry wide pressures on liquidity serve as a reminder of the importance of strong deposit production, maintaining a strong capital position managing risk carefully and remaining vigilant in an ever changing.
Tori environment we.
We increased our core deposit production significantly this quarter, but also fortified our liquidity position out of abundance of caution through the addition of broker deposits and <unk> borrowings and we currently maintain over $25 billion in incremental contingent liquidity.
So we continue to accrete capital consistent with our strategy over the last several quarters.
Finally in the middle of the market upheaval seen in March we kept our eye on the ball and continued to execute our strategic plan in a cost effective manner that provides the maximum value for our shareholders. One noteworthy event was the regulatory approval of the <unk> investment, which is a supporting component and the delivery of our banking as a service platform.
This quarter's results reinforce the strength of our balance sheet with growth in deposits cash balances as well as other contingent sources of liquidity. Moreover, our Aoc improved net charge offs remain at historically low levels and we grew our tangible book value per share before we transition to the next slide in our financial highlights.
I would like to thank our entire team for their tireless efforts since early March and thank our clients for the trust you continue to place in us.
Now, let's move to slide four for the quarterly financial highlights net income available to common shareholders and EPS were up 19% and 21, respectively year over year.
<unk> earnings growth was supported by 23% year over year growth in NII and 19% growth from core client fee income. This revenue growth combined with year over year positive operating leverage led to strong performance metrics with our TCE of 21, 9% return on average assets of 136.
6% and an efficiency ratio of 52, 3%.
Loans increased $329 million or 1% quarter over quarter core commercial loans again serve as the primary driver of growth offset by run off of third party consumer loans and a previously disclosed move of third party loans to held for sale loan growth ex third parties move to held for sale was 700.
$53 million or 2% quarter over quarter overall deposits grew 2% quarter over quarter, including growth in core deposits of $133 million core deposits remained stable through the month of March and we saw minimal outflows related to the industry narratives.
Our deposit origination engine remains strong as we once again saw record levels of deposit production, despite headwinds associated with noninterest bearing deposit remixing and higher costs associated with core interest bearing deposits deposit rates have tracked reasonably in line with our expectations, though current dynamics are presenting some upward pressure.
<unk> relative to our previously guided range, our underlying credit performance remains strong and while we are seeing movement away from historically low levels, we have not seen a meaningful change in the underlying performance of our borrower base or positive portfolio performance as reflected in continued low levels of charge offs as well as our other performance metrics.
Such as delinquencies and nonperforming ratios the ACL ratio increased slightly this quarter predominantly due to higher weightings to downside economic scenarios Lastly, CET one grew to $9, 76%. A result of strong organic capital generation and our decision to continue to retain and grow capital and.
In this uncertain environment now I'll turn it over to Jamie to continue the overview of our quarterly results in greater detail Jamie.
Thank you Kevin.
It began with loan growth as seen on slide five total loan balances ended the first quarter at 44 billion.
<unk> growth of $329 million or $753 million when excluding the previously mentioned move to held for sale.
Growth was again led by our commercial businesses with CRE, and C&I growth of $346 million and $534 million respectively.
Similar to last quarter CRE growth was a function of draws related to existing commitments and low level of payoffs.
Ni growth was diversified across multiple industries and business lines.
When examining our C&I utilization rate quarter over quarter. The increase is a function of higher utilization associated with newly originated credits rather than an increase from existing customers. When looking out over a longer period are increasing C&I utilization rate is a function of our changing lending mix, which has shifted to larger clients.
We did not see any meaningful changes in utilization or emergency draws as a result of the recent market disruption.
We are judiciously originating new credit to serve our core clients and also to gain market share in our most attractive commercial business.
We are also mindful of ensuring new loans are originated at attractive risk adjusted returns as shown through our spreads to index, which remain elevated relative to 2022 levels.
Overall pipelines and activity remained muted due to lower transaction activity and as Kevin will describe later, we expect the pace of core loan growth to decline as the year progresses.
Turning to slide six core deposit balances grew $133 million quarter over quarter, and we saw a continued increase in deposit production with both commercial and consumer business lines contributing to the growth.
While the current approach to monetary policy continued to pressure balances and the events of March created uncertainty in the banking environment, our relationship banking model proved to be resilient.
Looking at the composition of the quarterly change imbalances.
Noninterest bearing deposits were down $997 million quarter over quarter.
A byproduct of commercial seasonality normal cash deployment and to a lesser extent the continued pressures from the higher rate environment.
The decline in MMA and increase in Cds are interrelated as consumers shifted excess liquidity between the two account types.
Our increase in broker deposits was primarily the result of our conservative approach to proactively source additional funding late in the quarter, which I will touch on in a moment.
As we look at deposit rates, our average cost of deposits increased 56 basis points in the first quarter to 144%, which equates to a cycle to date total deposit beta of approximately 30% through Q1.
The deposit costs and betas were impacted by the decline in DDA as well as anticipated pricing lags on core interest bearing deposit costs.
To date deposit pricing is generally evolved in a manner consistent with our expectations. However, recent remixing trends along with the <unk> that appears to be biased to hold at or above 5% will likely result in through the cycle betas, which track in the low 40% area.
Moving to slide seven.
Picking a closer look into deposit balance trends within the quarter as Kevin mentioned previously our core deposit balances remained relatively stable throughout the month of March.
However, we did take precautionary measures in early March and built up our cash balances through increased use of broker deposits and federal home loan bank borrowings.
To further augment contingent liquidity sources, we continue to proactively pledge additional collateral to the federal home loan bank and the Federal reserve and as of April 17th. We currently maintain over $25 billion of contingent liquidity across a diverse set of sources, which includes immediately available.
Funds as well as funds, we expect to be available within a short notice.
And as we flip to slides eight and nine you can see we added additional details around the composition of our core deposit base, which highlights our relationship centric portfolio and which supports the stability we experienced in recent weeks.
Looking through the key characteristics of our deposits you can see both the diversity of our balances across commercial and consumer client types as well as the long tenure of our relationships.
And given the industry focus around uninsured deposits I would simply highlight that over 70% of our deposits are either uninsured collateralized or could be ensured by switching to an ics account to existing capacity.
Now to slide two.
Net interest income was $481 million in the first quarter, an increase of 23% versus like quarter, one year ago, and a decline of 4% from Q4.
The year over year increase was supported by the benefits of our asset sensitive balance sheet as well as substantial loan growth over the last 12 months.
When looking at quarter over quarter, NII was negatively impacted by approximately $9 million associated with lower day count.
The asset side of our balance sheet continued to benefit from both higher balances and rates. However, as I spoke previously the cyclical lags in deposit pricing combined with the remixing within our deposit portfolio.
<unk> is a notable headwind for the quarter.
Those same dynamics were evident as we look back at the margin for Q1.
With higher cash balances also serving to weigh on them by approximately two basis points during the quarter.
And as the environment has stabilized we are working toward more normalized cash balances and thus the associated impact to know should reverse in the coming quarters.
Looking forward to Q2, we expect NII to continue to be pressured specifically, we will see a full quarter impact of the deposit mix shift that occurred in the first quarter as well as the continued headwind, resulting from deposit price lags.
The combination of these headwinds is expected to lead to NII declines in Q2.
Followed by relatively stability for the remainder of the year consistent with our full year guidance.
Slide 11 shows total adjusted noninterest revenue of $118 million up $17 million from the previous quarter and up $11 million year over year.
This quarter's adjusted fee income performance is the highest in recent history, even accounting for the elevated mortgage environment, we experienced in 2020 in 2021.
The performance speaks to the investments we have made across our franchise with core client fee income, excluding mortgage increasing 19% year over year.
Our wealth management franchise grew 22% year over year, despite what continues to be a challenging equity market.
<unk> of our wealth revenue streams, including short term liquidity management products continues to drive strong growth.
Capital markets also recognized its strongest quarter on record with a revenue of $14 million.
151% increase year over year.
Syndication fees as well as interest rate management products drove the strong quarter further signs that our commercial franchise continues to grow through enhanced product offerings and the expansion of our middle market lineup business.
As we look to the remainder of 2023, we do expect core client fee income to decline from Q1 levels as slower economic activity will impact capital market fees and we also began to implement changes to our consumer checking products.
Total noninterest revenue for Q1 was impacted by a $13 million one time benefit associated with the regulatory approval of our quality investment.
Moving on to expenses slide.
Slide 12 highlights total adjusted noninterest expense of $304 million down $3 million from the prior quarter and up $25 million year over year, representing a 9% increase.
As we look quarter over quarter adjusted expenses were well managed increases and seasonal personnel expense and planned increases in FDIC and health care costs were offset by lower performance related expenses and control core operating cost.
When segmenting our year over year increase in expenses.
The growth is attributable to the three buckets, we provided in our guidance for the year.
<unk>, new business initiatives, such as masks and CIB.
Core operating expenses, including investments in an expansion of our workforce and third costs associated with our FDIC assessment rate and health care costs, our first quarter adjusted efficiency ratio of 55% continues to highlight that these expense increases are supported through our growing revenue.
This.
Total noninterest expense was negatively impacted by a $17 million loss associated with the move of third party loans to held for sale.
Moving to slide 13 on credit quality.
Overall credit performance and the credit quality of our recent originations remained strong the NPL ratio moved to four 1% net charge off ratio to <unk>, 7% and criticized and classified ratio finished the quarter at 247% of total loans.
In the first quarter, our ACL was $514 million or one 7% of loans, a modest increase of two basis points from the fourth quarter.
The deterioration in the forecasted economic scenarios in 2023, and 2024 negatively impacted ACL ratio offset by the continuing strong performance of the overall portfolio.
While we do expect additional pressure on credit metrics due to the economic environment, we continue to have confidence in the strength and quality of our portfolio.
We continue to be vigilant, while monitoring the more recession sensitive components of our loan book and we utilize rigorous underwriting parameters and exhaustive market and portfolio analysis, not only for the sectors, but for the entirety of the loan portfolio.
Given the increased interest in the office sector. We have included additional color on our office portfolio in the appendix.
You will see is an office book with low maturity and lease rollover risk that is primarily medical secured by modern properties and reflective of our footprints superior market trends.
As noted on slide 14, the common equity tier one ratio increased to $9 seven 6%.
Within the quarter core earnings supported robust capital generation, which was more than sufficient to meet what continued to be solid core balance sheet growth.
We had no share repurchase activity in the first quarter and in light of the uncertain economic and regulatory environment, We believe that continuing to grow our CET one ratio is prudent.
As we've done for the last several quarters in the near term, we will continue to focus on retaining capital generated through earnings to support our core growth, while bolstering our balance sheet position.
While not a metric that we manage to given the current environment. It is worth acknowledging the improvement in our TCE ratio, which increased 28 basis points from Q4 and ended the quarter at six 1%, 2% dip.
Declining market rates benefited OCI associated with Hff's portfolio, and hedges and continued growth in our primary capital levels from earnings retention also provided.
I'll now turn it back over to Kevin.
Thanks, Jamie I'll now continue to our updated guidance for the quarter as shown on slide 15, given the ongoing volatility in the economic environment. We continue to utilize wider ranges for our full year 2023 guidance.
We expect loan growth of 4% to 8% this reduced range accounts for the acceleration of the rundown and our third party portfolio as well as the diminishing demand associated with the economic environment. These effects will be partially offset by low payoff levels and growth from our newer business lines, such as CIB and <unk>.
<unk> and verticals, such as commercial and middle market.
The adjusted revenue growth outlook of 4% to 7% aligns with NFL Lindsay that reaches five 5% in the second quarter changes to the midpoint of our previous guidance are a result of slightly lower loan growth expectations and deposit remixing as well as overall deposit betas, which as Jamie mentioned are expected to be in the low <unk>.
<unk> area.
Our expense outlook has been adjusted downward to 4% to 6% with efforts taken to better align with the new revenue guidance. We are prudently managing expenses in this environment, while continuing to ensure we do not sacrifice critical investments that will support our long term success and shareholder value.
The result of our revised revenue and expense guidance is forecasted <unk> growth of 4% to 8%. Despite a more challenging environment. We are still committed to year over year, <unk> growth and generating attractive returns for our shareholders.
Moving to capital as we have previously communicated we are targeting a CET one ratio above our previous guidance of $9 two 5% to 975% at this time, we believe it is prudent to build a larger capital buffer given the uncertain regulatory and economic environment I believe the forecast represents the resilience and adaptability of our business model.
As well as the power of building strong and loyal client relationships are strong financial results. This quarter reflect the hard work and dedication of our team as well as our commitment to supporting our clients and communities through these difficult times.
Looking ahead as we see many opportunities for profitable growth and success, while continuing to improve our overall risk profile through increased liquidity and capital and well managed credit cost our strategic investments coupled with our client centric approach will continue to differentiate us from our competitors and position us for long term success.
At the same time as a main street bank, we remain committed to being a trusted partner to our clients providing them with the tools and resources they need to achieve their financial goals and now operator, let's open the call for Q&A.
Thank you we will now begin the question and answer session.
I'll ask a question today, you May press star followed by one or no touchtone phone. If you were using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press star followed by two in the.
Interest of time, please limit yourselves to one question and one follow up per person.
At this time, we will pause momentarily to assemble our roster.
Okay.
Our first question today comes from Brad Millsaps from Piper Sandler. Your line is open. Please go ahead.
Good morning, guys.
Good morning, Thanks for taking my call and thanks for taking my questions and for all the detail in the deck I did when you start with credit.
I appreciate all the details I was curious I know you guys are constantly running sort of internal stress on different pieces of the CRE book, just kind of curious how that's evolved maybe over the last 90 days kind of given all that's transpired.
Also I think in here you would note that maybe only about little less than 15% of the office book rollover. This year would that sort of hold for the rest of the CRE book and would just be curious for any color on conversations you are having.
As these loans matures with borrowers kind of kind of what youre doing to ensure them up and just kind of how those conversations are going as we think about credit going forward.
Yeah, Hey, Brad this is Bob.
Comment or two and Jamie and Kevin can certainly kick in but.
From a CRA from an overall perspective.
Match up on the maturity.
Risk if you will is similar.
And then in terms of you've got some duration there there's probably three years plus for the most part I do want to make sure that I touch on office for you because I know that's what a lot of folks are looking at but just a couple of points number one.
In addition to the data we're showing.
You would think about office and the spot metrics today, they're very clean average size of that office portfolio loan is less than $10 million literally no charge offs and very low non accruals and even the criticized classified levels today would be in the 5% range now with that said.
Obviously, we are.
Doing a deep dive into that portfolio, we've looked at approximately 70% coverage of loans, all loans greater than $7 $5 million.
And the result of that which gives us sort of a watch list. If you will of credits.
Somewhere somewhere around 10% to 15% of the office book that we would have some level of concern about.
I would say some level of future concerned about these loans are still performing.
Still got it.
Good good commitment by the sponsors et cetera. So when you start narrowing it down it's a fairly small.
Quantifiable percentage of the loan book of the office book that we think potentially we will need to think through as time goes on now again thats strictly property performance based on potential lease exploration et cetera. So from my perspective, even when you dig back into the portfolio the potential problems.
In terms of amounts are fairly manageable. So I did want to give that out we arent seeing a whole lot of softness in other asset classes, Brad multifamily continues to be a good asset class, albeit with rent rates certainly beginning to move back but they were so hot for a year or two they've got.
Some cushion there and thats market specific warehouse, we feel good about as well there in retail seems to be holding fine.
And you know the hotel story as we ran through the pandemic, there and they seem to be improving so all in all our CRE book is in good shape. The office story will play out over several quarters, but we feel like we're well positioned for it.
The only thing I would add to that as Bob talked about our internal evaluation, but you also have to go back and look at the southeast I mean, the southeast continues to perform very well. We believe you have seen some distress in certain asset classes, but it's been very geographical if you look at the southeast we continue to have rent growth higher than the national average.
When you look at specifically our office portfolio, our criticized and classified ratios are far lower than what some others have shared part of that is due to the fact that we have 50% of our book in medical office and the remaining portion of that traditional office book as newer properties in markets that in the southeast haven't seen the same work at home impact so.
In general our update is that although we expect credit metrics to continue to move off of all time historical lows, we're not seeing anything systemically, including office that gives us greater concerns on the C&I front.
Look at our cash inflows every month and every quarter, we havent seen any overall deterioration of any specific industries any NPL inflows that we've had at this point have been onesie twosies and so we still remain cautiously optimistic and to your point, Bob and his team are trying to look at it every.
A different way they can and ring fence anything that gives us any concerns.
And Brad I'll, just jump in from the allowance perspective.
Everything Bob as Bob mentioned, we've done deep dive on all of these portfolios and looked at all loans of any any real size and all of that is embedded in our allowance calculation and so as Bob mentioned that 10% to 15% of the watch list on our non medical office.
That is included in the allowance calculation and what you've seen is on aggregate the quality of the loan portfolio has led to a reduced life of loan loss estimate for the past couple of quarters and sort of the aggregate portfolio has increased in the first quarter. We did increase the allowance based on the CRE portfolio.
A little less than $20 million and thats embedded in the move from the $1 15 to $1 17.
Our ratio.
Got it and I guess, just as my follow up you guys covered a lot there, but you mentioned you can move up in loan side. You also feel like Youre moving up sort of the quality of borrower can you just kind of give us a little sense of kind of maybe some of the drivers behind the loan growth I think you mention.
A couple of times that.
Are seeing maybe larger exposures, but certainly in line with as you become a larger bank that's pretty natural just just curious any additional color there.
Yes.
We've talked about it in terms of how we continue to grow our balance sheet actually allows us to derisk. The overall balance sheet and it's just based on the fact that as we're booking more middle market credits as we moved into corporate and investment bank, where more investment grade credits and so when you look at it from our expected loss through our provisioning or just through our <unk>.
Risk rating process. It would suggest that the production that we're putting on today and we put on in previous quarters is in effect, reducing the overall expected loss of the portfolio moving away from as you suggest that some of these smaller credits that have a little more volatility and less cushions of protection and so this quarter our loan growth obviously.
On the CRE front was more of a function of fund ups on our construction lines on multifamily, but on the C&I side. Most of the growth came from middle market, which was about 50% of the growth which is for US we think right down the middle credits that are going to perform at a very high level. So that's been <unk>.
Our plan in terms of growth as we've shifted to some of these new specialties and moved up market that not only are we getting good growth, but we're also de risking the portfolio at the same time.
Great. Thank you guys I appreciate the color.
Thanks, Brad.
The next question is from Ebrahim <unk> from Bank of America him. Your line is open. Please go ahead.
Hey, good morning.
Good morning, Good morning, I guess.
And Jamie just wanted to follow up.
On your comment around I guess decline in <unk> and then.
Visibility in the back half just talk to us in terms of the dynamics that you expect from their round one.
Depreciation of deposit repricing, if let's say if the fed is done after the me hike like how do you expect deposit costs and beat us.
At what point do desktop advertising and remind us of just the assets, but I think that you expect.
Back half into next year.
Yeah.
Ebrahim as we look forward, we do expect to see continued increases in deposit costs as we kind of get to the end of this tightening cycle.
When we think about the timing just like what we said in January we do expect the first quarter to be our highest quarterly increase.
Total deposit costs and when you look at that you can look at the months of December to March where our costs increased 55 basis point.
But.
Thinking about those monthly increases, which we think is probably a better way to look at it a little higher frequency data prior to March we saw a steady trend that was right in line with what we had modeled in what we discussed in January we saw.
Monthly deposit cost, increasing and those increases, peaking in November and December and then in January and February we saw steady declines in the rate of increase of total deposit costs along the lines of what we expected now clearly March was a little bit of a different story when we saw the disruption.
And so we did see.
An increase there that was actually kind of similar to what we saw in November and December but the movements that we saw the rollover from year end into early Q1 gives us confidence in our modeling and our expectations going forward and so we do believe that.
We will start to see that trend resume from here of slower increases monthly increases in total deposit calls, but the March disruption does shift our through the cycle beta higher into the low forties.
And so as we look at the second quarter, we do expect to see total deposit cost increase a little less than 50 basis points.
What's left in the first quarter.
And about a 30 basis point increase from the month of March numbers, and so that's where we expect to see in the near term and then beyond that we'll continue to see some marginal increase in deposit costs, but in the second half the rate of increase.
Client.
Precipitously on the asset side of the balance sheet in the first quarter you saw our loan beta with a little more than 60%. We expect that to continue as we mentioned in our forecast we expect another 25 basis points.
And we would expect somewhere in the low 60 percents as far as loan beta on that and then progressing through the year, we think that the pressures from increased deposit costs and the benefits from fixed rate asset repricing will be fairly well balanced in the second half of the year and then beyond that we think there will be just the benefit of.
Fixed rate asset repricing, moving forward, which we have tailwind of NII and the margin.
Got it thank you for talking to that end.
Just a separate question. So you gave great detail on CRE I'm, just wondering maybe global Kevin anywhere else within just the loan book, where you are seeing any signs of stress.
And as you think about the back half of the year.
And the cumulative impact from the fed hikes, I mean, where do you see the weakness within your loan portfolio, where you expect to be.
Davis of delinquencies and losses.
Yes. This is Bob.
I'll start.
Nothing specific I wouldn't call out a specific industry or category right now, we certainly been watching our small business portfolio as we've mentioned in quarters past and we've seen some marginal negative migration. There. So we continue to watch that on the C&I front no industry specific.
I would call out certainly we're doing the similar a similar deep dive into our leverage book, which is fairly small.
We did in our CRE book, So I don't think we are.
We're really seeing any specific industries in terms of C&I.
In terms of CRE. In addition to office, obviously multifamily is very market specific we've got it.
Deep market analytics team that does an awful lot of analysis, and that's probably going to be more market specific but we still have a lot of strong economic sort of tailwind of migration and lack of housing supply, particularly in our markets that are still kind of providing <unk> to the multifamily.
Book, So I don't see it there I think it will be sporadic.
And dependent upon those companies that are still struggling with input cost and labor cost and <unk>.
Great answer by Bob I, just it's interesting when we look at any of the troubled credits that we've seen in the last several quarters. What to me is the only commonality as most of these these businesses had challenges prior to the pandemic and in many ways some of the cash around PPP and.
The ability to manage through the last several years kind of bottom time, but as they come out of the other side, they're returning to some tough business models or they're having some challenges and so instead of new.
Credit issues arising I think what we're seeing are some of these companies have struggled in the past that we're able to make it with the additional liquidity back to struggling again that seems like thats a common theme.
Got it thank you.
The next question is from Steven Alexopoulos from Jpmorgan, Steve. Your line is open. Please go ahead.
Hi, everyone. This is Anthony Elian on for Steve.
My first question on Slide nine you provided great detail into the composition of the deposit base I am curious early on in March what were the conversations like behind the scenes with your largest uninsured depositors. After the two bank failures in March was there much concern or panic. Among these depositors for what they saw happen to soybeans.
Signature.
Hello.
Tony it's hard to understand or gauge what their panic was I think there was a lot of false narratives happening around the industry trying to understand whether this was a bank crisis or whether there were three banks that they had an individual prices and I don't think that those three banks that failed constitute an overall bank prices, but those.
Conversations led to a lot of calls to our bankers and in many situations our outreach to some of our largest depositors and the conversations we're trying to understand how that impacted us and.
From our standpoint, our first goal was to explain that we are very different than the three institutions that failed. We have a very diverse granular deposit base as you can see in the deck were not homogeneous as it relates to.
Where we were funding the balance sheet and so having those conversations and most importantly.
The long term relationships that we've had with these clients you can see that not only is our average tenure for our top 100 depositors 20 years, but if you look at the entire book. The dollar weighted average is 18 years. So we've developed long term relationships built on trust and so when we had those discussions we were able to.
Keep our.
Our deposits on balance sheet, we do have a product that you've heard about the insured cash suite product that we've offered prior to this little mini crisis, and we had a whopping total of about 60 clients for less than $500 million move into that product. So I think that serves as a testament that people didn't feel compelled that they had to move their deposits into.
Sweep arrangement and that they were very comfortable with synovus continuing to safeguard their liquidity, but.
In many ways.
We're good fruitful discussions and if I had to gauge how much we lost from that I'd say less than a $100 million in deposits.
That's good color and a follow up to that I mean on an overall basis do you feel like the situation has stabilized and it's back to business now right. I mean, we've seen a handful of regional banks or earnings so far this week.
And we haven't seen the widespread deposit outflows to money center banks or elsewhere that the media or others are portrayed.
Yeah, I think the questions around liquidity are abating and the questions around profitability are becoming front and center. So.
What we have to do going forward is make sure that as we continue to grow our asset side of the balance sheet is that we're conscious of not just growing deposit, but what deposits, but also what's the cost of that funding and so that's where we're all focused and I think thats, where youll see the industry turned their attention and I think youll also see more conversations around.
Balance sheet optimization are there asset classes, there that are not self funded that now in this environment with a prolonged higher rate interest rate environment that arent returning the levels of capital to hurdle rates that you require so I think it will turn more to profitability and balance sheet optimization and less about.
Liquidity and concerns of of losing liquidity now I will tell you that I think that there as you've heard from other banks. There's still a question Mark in terms of how much shift will continue to occur from niv into interest bearing.
All can try to model that what we're excited about is that we continue to be very successful in our treasury and payment solutions area. Our production was up 40% again in the first quarter versus the first quarter of last year and I think thats about the best vehicle, we have to be able to preserve and grow noninterest bearing deposits and that's where we're focused.
Great. Thank you.
Yeah.
The next question is from Brady Gailey from <unk> <unk>. Please go ahead. Your line is open.
Hey, Thanks, good morning, guys.
I wanted to start with fee income I heard Jamie you talked about.
Being down on a linked quarter basis into Q.
Based off.
The income or is that adjusting for the $13 million.
One time, one timer and fees I know you mentioned some changes in your consumer.
Checking fees service charges and any way to quantify the impact that that.
On fee income.
Yeah, Brian .
The decline that we expect in the second quarter is based on the adjusted number and it's really a function of a slowing economy and slower loan growth leading to less capital market fees. The first quarter was a big success for us in capital market fees, a record quarter of $14 million, that's something that as <unk>.
Head into a likely recession that we don't expect to be sustainable now clearly it's a big success. Because this is an area where we've been investing for some period of time in our commercial businesses and so we love to see that but theres just going to be a headwind on growth in that area just due to the economy and so that's what's largely driving that.
Decline I would put the second quarter <unk> adjusted and somewhere between 105, and 108 is probably a good range and that's how we're thinking about that.
You are right that as we look forward longer term changes in our deposit offerings will lead to a headwind on NII growth.
One way to think about that would be approximately $10 million annualized, but thats something that the.
The timing is still to be determined and we'll give more updates on that as we proceed through the year.
Alright, that's helpful. And then I know a lot has changed from your Investor day last year, but.
I know during that Investor day, you laid out some targets for 2024 of a one three to one four or ROA.
And a 16% to 17% ROTC.
I think the street has you closer to a 1% ROA next year, so any comment or update on how youre thinking about those kind of profitability goals given today's backdrop.
I'll, let Jamie talk about kind of the numbers already but I'll take you back to that February Investor day, and when we put those out there. We said look these these absolute numbers that we'll share with you are based on todays rates and based on what we see over the next three years and so as of that period. Those numbers were at were not only accurate for a forecast, but they are also accurate.
And that we felt that they would be top quartile, but what we left with that day was look we can't pre.
The future, but what we can say is that our focus is going to be continuing to generate.
Improvements in our financial performance that will allow us to be top quartile if rates are higher and that means that the returns need to be higher inefficiency ratio may be lower then so be it but our ultimate goal. There was to just say relatively speaking we want to be in the top 25% and the numbers will play out as they play out in that timeframe based on what we're dealing with now that may mean.
That you reset the bar and you look at some different numbers, but Jamie how would you think about the actual forecast.
It's a very interesting thought exercise because when we laid out our multiyear outlook on February eight of last year, we had fed pons approaching 3% three years out and Ironically, if you were to look at the forward curve today fed funds is approaching 3% three years out but in a very different way.
So.
As Kevin mentioned our.
Our performance metrics really are to be top quartile versus peers, we will pivot as we need given the environment and so while the while we may end up back at 3% fed funds in the medium to longer term, we believe that we have a franchise model here.
Poised to remain in the top quartile long term and so we will react to that our priorities right. Now are ensuring that we are positioned to take care of our clients here in the southeast because we still believe that the opportunity here is unique and big and so we are positioning our balance sheet.
For that positioning our team for that and we believe that we will win in that regard, but were also convicted on making sure that we do it in a prudent manner and defending the balance sheet and you see that in our capital strategy as you see it in our liquidity strategies and you see it in our NII sensitivity hedging just making sure that we protect.
Now the income statement and variable and various outlooks and so.
That's our strategy, we are committed to long term top quartile and we will adjust as needed.
Yes that makes sense thanks, guys.
Thank you.
The next question comes from Michael Rose from Raymond James Your line is open. Please go ahead.
Hey, good morning, everyone. Thanks for taking my question.
Just wanted to get a sense for your willingness to maybe actually accelerate some of your hiring effort and some of the business build out.
Obviously, you laid out at Investor day.
Bank. The other day that basically said the hiring opportunities are greater than they could remember in recent times.
Given that lenders seem to be kind of idled.
As demand slows and banks kind of pull back just wonder if you could.
Date on maybe some of those initiatives.
Would you actually consider actually accelerating some of that.
At the expense of near term profits, but to position yourselves better on kind of the other side of whatever sort of cycle, we're going to have.
Yeah, Michael obviously, there's disruption in the marketplace and that presents opportunities and that hasnt changed over the last several years and you can see from our rest of year guidance, we're continuing to grow expenses and we think that that will given our revenue guidance still allow us to present positive operating leverage, but we want to make sure that we're opportunistic.
We are leaning in we believe that in times of crisis or in times like this is when share shifts shifts hands and we want to make sure that we take advantage of that.
And that means that were out there still attracting top talent, we've been adding middle market talent. We have three additional CIB team members that will be joining us in the next several months when they are finished with their garden leave across our commercial segment, we're adding talent in our high growth markets.
The only thing Thats changing there is we want to make sure that we're putting up a higher bar on the individuals that we're hiring and I would love to be able to do.
Just not individually, but to bring over teams, but when we look at the payback period of a new relationship manager or a new private wealth advisor, we want to make sure that given that there is probably an economic downturn in our near future that we are expecting higher levels of talent and that that NPV is not going to be.
<unk>, because we are bringing in actually better talent and they're going to perform within our within our expectation. So yes. We do think that's an opportunity you won't see us trying to shrink our way to prosperity, we think theres a tremendous opportunity in the southeast and we think talent is a big piece of that.
Helpful. And then maybe just one on the loan growth guidance.
The change really just a function of moving the consumer loans.
Hff's I'm, sorry, if I missed that but just wanted to get a sense for.
What the Delta is because it does seem like you had good kind of.
Momentum utilization rates up kind of et cetera.
Obviously, Michael that's $450 million, we moved over there. So that's a component of it but we also have seen softening on the on the demand side, our pipelines are off.
About 25% when you look at it across the board and that's us being prudent on one side, where CRE pipelines are off 95% versus last year. The growth that we're seeing there as I mentioned earlier really fund ups of our construction lines, but not a lot of new production. So the pipelines are declining we still think.
That will be able to grow in that mid single digit level, just because we have so many business units that are fairly new whether its expansion of our middle market team, where we've increased our RMS 50% over the last couple of years, our CIB, which grew another $40 million. This past quarter. So the difference for us is that on the C&I front, we have.
A lot of new initiatives and new talent that will continue to produce despite the fact that overall pipelines are diminishing of it.
Thanks for taking my questions guys.
The next question comes from Jared Shaw from Wells Fargo charge. Your line is <unk>. Please go ahead.
Hey, guys good morning.
Good morning.
And maybe just.
When we look at the update for higher levels of CET one.
The higher liquidity, that's on the balance sheet, how long should we be thinking you want to retain higher liquidity and capital I know you said.
A lot of it is due to the current.
The immediacy of the crisis, but.
Should we think that as we go into 'twenty four.
We're more normalized levels of liquidity and that that CET, one ratio could come back down below 10% or.
Do you feel this could be a new normal for a little longer.
As we think about capital ratios is largely dependent on the environment and so it depends on the stability of the outlook and where the economy is where the banking industry is that there are a lot of components that are outside of the risk inherent in our balance sheet.
So that's how we think about it we think that getting to 10% or higher in the near term makes sense and it's probably safe to think about that as the next year or so and then we're constantly reassessing, but that's.
Thats generally how we think about it and thats not a new strategy for us the last quarter that our deposits or our dollars of CET. One decline was the third quarter of 2019 and since then every quarter, we have accreted dollars of CET one.
Created $1 4 billion.
CET one over that time period.
And we've deployed that to clients.
Here in the southeast and so as we think about that strategy, it's really nothing new for us and that's our intent going forward and we grew <unk> 13 basis points. This quarter, we expect to continue growing that ratio as we get to the 10% area.
But longer term when we look at our stress testing, our modeling and a severe adverse scenario, there's nothing that points us to the magical 10.
10% number or math would tell us that you could run with a CET one lower than that and so we'll assess where we are where the economic outlook, where peers are as we go forward, but right now we're comfortable.
Creating up to the 10% we think that's the prudent thing to do.
Okay.
Thanks, and then.
Just as a follow up you mentioned that you use a higher weighting on in a more adverse scenario for seasonal if you hadn't done that would we have actually seen.
Neither dollars of of ACL decline or a ratio decline and I guess, what what is that weighting to the more adverse scenario now.
Yes, so when you youre right that we did adjust our weighting as you can see that in our table on slide 17, the weighting change.
Basically our our outlook right now continues to align to that slow growth scenario and it's really low to no growth on average for the next couple of years and so that's that.
Basically the base case scenario when you take the weightings consensus baseline would be a positive to the allowance but.
We're really aligned to our slow to no growth scenario for the allowance.
Okay. Thanks, a lot.
The next question comes from Kevin Fitzsimmons from D. A Davidson Kevin Your line is open. Please go ahead.
Hey, guys good morning.
Good morning, guys.
I know we've had a few questions on credit just more general in top level, but I just wanted to if this has been addressed already I apologize, but there was a linked quarter increase in non performers and it looks like also special mention and substandard and I'm just.
Im wondering if theres any kind of common thread to that is that is that just more what's happening.
And the environment is it more of a proactive.
So I know Kevin earlier, you mentioned about.
Some of the problem credits are ones that were challenged before and just.
Some.
Lifelines thrown out from the government now, they're still challenged but just a little more color on.
Any color on what segments are driving that.
Deterioration that we saw linked quarter.
Hey, Kevin This is Bob Thanks for the question.
As far as Npls go moved up to 41 basis points, it's really a handful of credits that we already had rated.
That kind of moved into non accrual status at the same time again I would point to the level of criticized and classified accruing loans behind that as being fair.
Fairly manageable with no specific industry or.
Concentration if you will geographically speaking to speak of so a few credits that were a little bit larger and then you had just normal migration due to the economic environment and sort of our smaller business and consumer books. So when you do the math on that throw into larger ones. It pushes you still 41 basis points about where we were.
A few quarters back so.
Not not significantly higher but certainly migrating up as we had mentioned the bias is still probably for negative migration, although it's certainly within our expectations and in terms of charge offs and I kind of felt like Thats, what youre asking is where we're going forward. Those will eventually that will work their way back up to some level of.
You may call normalization I tend to think that.
If you go back pre pandemic and we were in the 25% to 30 basis point range. If you will.
That probably feels okay, although its certainly subject to quarterly swings, particularly if you have some larger credits, but but all in all that's what's driving the slight increase in those numbers Kevin.
Okay, great great. Thanks.
Quick follow up.
There was.
A lot of focus.
A number of weeks ago on underlying losses within held to maturity you guys have had.
Been pretty exclusively I think exclusively available for sale and just maybe if you can touch on the <unk>.
Trade offs in.
And that approach and whether that may.
Whether that could or would change going forward.
As you are right, we are a 100% available for sale as we've thought about the use of held to maturity.
We believe that it really had more negatives than positives, where it limits your ability to trade the securities and all you get is a change in the accounting treatment and so there is no economic benefit.
Outside of the appearance of a OCI.
On the balance sheet and tangible common equity and <unk>.
So we did not choose or elect to put any securities and held to maturity.
It has been an interesting time over the past quarter as this has become a focus.
Looking at <unk> in comparing.
The unrealized losses with them without held to maturity.
For us as we reflect on the on the use of it we still believe that it is an accounting treatment that doesn't really change anything but it does provide a limitation on your ability to manage your balance sheet and so it's not that attractive.
When it becomes attractive would be if there was a change in the regulatory environment, where you had to include a OCI in regulatory capital ratios and if that happened and held to maturity securities were excluded from that and that would materially change the.
New around the benefits of.
Using the held to maturity designation.
Clearly there is no clarity around what will happen there and how that will play out but thats generally how we think about it but to date, we're very comfortable with where we are with our securities portfolio are very comfortable with the unrealized.
Losses in that portfolio, you saw some improvement quarter on quarter.
And that and we will await to see if there are any changes on the regulatory side to the treatment of OCI.
But Jamie do you think that given given all of that pension that was unhealthy mature do you think data ever make that change.
Doing it for a OCI, but not for held to maturity.
[laughter].
Al.
That's that's beyond beyond me I can't opine on the direction. They would they would go with US to me logically. If you. If your view is that you want to look at long duration risk on the balance sheet.
And you want to focus in on Securities.
And then you should probably include everything, but I can opine on what the right.
<unk> will be in the future and Kevin you know this but that's a very surgical way to think about it because nobody's mark in the deposit side on the other side of the ledger. So when you look at it from a <unk> perspective, you could argue that you are only looking at one component of it and if you mark the liabilities you'd be in a very different position.
That is.
Fair point very fair point, Okay. Thank you guys.
Thank you. Thank you.
The next question comes from Christopher <unk> from Janney Montgomery Scott Christopher Your line is open. Please go ahead.
Thanks, very much Kevin and I was just going to ask you. The same point about marketing deposit. So thank you for covering that.
My other question was on the <unk> increase was that due to the overall line or in or did you have to pledge more collateral this quarter.
That is.
That is due to pledging more collateral as we we've always felt comfortable with our.
Liquidity profile and contingent liquidity sources.
But.
In the past month, there have been new metrics that people that the press and analysts have focused in on like contingent liquidity relative to uninsured deposits in and ratios like that and so we spent a lot of time over the past few weeks looking at our loans that were not pledged anywhere and we had almost 30 billion.
Of Unpledged loans, and so we spent time looking at those data tapes, sending them to the online bank, sending them to the federal reserve and increasing our contingent liquidity.
At those at those locations and clearly that doesn't cost us anything its just an effort.
<unk> getting loan tapes to those to those places and making sure that they're accepted and so that was a little bit of work that we went through over the last month, we think that that's a prudent thing to do we do not intend to use that capacity, but it's there for us in a severe adverse or an unexpected situations and Jimmy Chris maybe I thought I heard you say.
The draw we took this quarter was done out of an abundance of caution just to have extra liquidity in case, we were to see some outflows and we didn't need extra collateral for that draw we had capacity what Jamie was talking about was the incremental capacity that we added during the quarter just to have additional contingent funding available if we needed it.
No that all makes sense and for whatever future episodes occur in the marketplace, you're that much more prepared so that makes a lot of sense.
Thank you for all the information today is very helpful.
Thank you very much growth.
The next question comes from some Johan <unk> from UBS. Your line is open. Please go ahead.
Good morning.
Good morning, Sam.
I wanted to start just.
One more question on credits with the with the shift of the part of the consumer book into held for sale or that.
Specifically just on kind of what the thought process was behind that.
And then <unk>.
So I guess are you seeing any sort of.
Underlying trends that made you more cautious on that particular book that you move.
Yes, I'll start and maybe Jamie can cover the held for sale. Sam This is Bob but from a credit perspective.
The move of <unk> that was a third party move and just Simplistically stated, we built that third party book during the excess liquidity period, what we ran during the pandemic.
When we go in the other direction with liquidity. So it was viewed as an investment alternative as a surrogate to the investment portfolio and a good a good yielding move for us with now taken a whole lot of duration risk and some limited what I would call limited credit risk and now we're just kind of exiting that position and again I think validating that there wasn't a whole lot of credit.
Risks there.
As we took a $6 million charge to make that transfer.
From the underlying consumer credit quality and I would include small business loans in that category Sam since we do a lot of that through our retail network.
We've seen moderate migration in credit metrics moderate deterioration most of our mortgage portfolio is private wealth and position. So it's holding up fairly well, we do have an affordable program that we're actually very proud of that we use to support lower income in LMI district.
And we have seen some deterioration there, but again, we think we're working with those borrowers have great programs and assistance programs that we provide and are proud to do that in our markets actually so overall credit in the consumer books kind of stable with some slight deterioration in small business and Jamie on the accounting side.
As we think about that portfolio.
The auto portfolio, we moved to held for sale.
We began talking about it and I believe in October after third quarter earnings.
<unk> that we've been proceeding down.
We moved into held for sale and then the month of March happened and there's just more uncertainty out there and so it's our intent to sell that portfolio as Bob mentioned, the credit is performing very well.
They are also shorter duration assets and so there are assets that we like we think that there is a good profile good risk adjusted return, but given the last month I would say that it's a little more uncertain out there the environment to sell loans like this but we continue to intend to sell it.
And we will we will continually reassess as we see where the market is on that.
Got it I appreciate the color and then if I can just have one more in there.
Jimmy I appreciate the color you gave on the.
The deposit beta assumptions in there how those are moving around but I guess what would be.
The mix.
His impact on that would you be able to give some specific color on the interest bearing deposit beta.
As you're talking about interest bearing deposit beta we were at 43 in the first quarter and as I mentioned the month of March a little bit higher in interest bearing deposit cost that gets you to a through the cycle interest bearing deposit cost of 47.
It's.
The mix is really important when you think about what happens from here as we get later in the cycle, but we could see that.
<unk>, 60% as you get out into the into the third quarter.
Okay.
Got it Thats very helpful. Thanks for taking my question.
Yes, Thank you Sam.
This concludes our question and answer session I would like to turn the conference back over to Mr. Kevin <unk> for any closing remarks. Thank you.
Thank you Adam and as we wrap up our call today I just want to reiterate how proud I am of our results to date and for the agility, we're showing to adapt to an ever changing marketplace, while continuing to make progress in executing on our strategic plan. Our team continues to work tirelessly to deliver the highest quality.
<unk> of service and advice to our clients, while addressing the uncertainty and anxiety caused by a few bank failures that were idiosyncratic in nature. Despite these challenges we delivered strong financial results. We continued to grow our client base. We further derisked the balance sheet and we adjusted our forward plans to produce mid to high single digit.
<unk> growth for the year and we are delivering on these results in the face of either a prolonged economic slowdown or an actual recession.
The awards and the recognition that we referenced today, coupled with others that we did not mentioned such as being recognized as a top workplace in Atlanta serve as further proof points that our clients and our team members trust and value our company and the services, we provide and you can rest assured that we're not satisfied with this recognition, but rather our focus will be.
Remain on incremental improvements as well as investing in our teams and empowering them to deliver the best possible experience to our clients. We believe that our success is not just measured on financial performance, but also by the impact we have on our communities. That's why we remain dedicated to supporting the 55 msas that we support in our phosphate.
As we recently announced our 'twenty three financial commitment to more than 300 organizations that do amazing work across our footprint.
We move forward, we will continue to prioritize relationship banking values of team work excellence and integrity. We know that these values are what builds trust and sets us apart and enables us to deliver for our clients. Our team members and also our shareholders on behalf of the entire synovus team I want to thank you for your continued support and trust we remain.
Excited about our future and look forward to continuing to deliver in the quarters and years to come with that Adam will close today's call.
This does conclude today's call. Thank you all very much for your attendance you may now disconnect your lines.