Q2 2023 Synovus Financial Corp Earnings Call
Speaker 1: Good morning and welcome to the Synovus Second Quarter 2023 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions.
Speaker 1: To ask a question you may press star then 1 on your touchtone phone. To withdraw your question, please press star then 2. Please note this event is being recorded. I'll now turn the call over to Cal Evans Head of Investor Relations. Please go ahead.
Speaker 2: Thank you and good morning. During today's call, we will reference the slides and press release that are available within the investor relations section of our website, Synovus.com. Chairman, 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.
Speaker 2: which are available on our website.
Speaker 2: 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.
Speaker 2: And now, Kevin Blair will provide an overview of the quarter.
Speaker 2: Thank you, Cal. Good morning, everyone, and thank you for joining us for our second quarter 2023 earnings call. Before we get into our results, I'd like to sincerely thank Cal for his tremendous contributions over the last two years serving in his investor relations role. Cal's been instrumental as we've all navigated through the economic highs and lows.
Speaker 2: with his strong background in market analytics and credit. He's guided us well, worked hard to strengthen relationships, and built even greater trust with all of you who cover us and the investors you stand for.
Speaker 2: We are thrilled to welcome Jennifer Demba to the team, bringing her vast industry knowledge and sell-side perspective into our strategy setting and shareholder activities. Her extensive financial services background will be incredibly valuable as we move through the current cycle, as well as execute on our strategic plan. So thank you, Cal, and officially welcome, Jennifer.
Speaker 2: We couldn't be in better hands with the two of you in your new roles for our company.
Speaker 2: What you'll see today is financial performance that remains quite strong with PPNR up 8% year over year and an adjusted return on tangible common equity of 18%. Despite a slowing economic environment and tighter liquidity market, which led to another quarter of contraction in our net interest margin.
Speaker 2: We continue to see evidence that our relationship-based model serves as a strong platform to attract and retain talent as well as clients. Our team member turnover is the lowest it has been in many years, engagement levels are high, and we continue to add talent and key revenue-producing in corporate services areas.
Speaker 2: From a client perspective, deposit production remains strong with second-quarter levels over 130 percent higher compared to the same period last year. While loan production remains muted versus last year, commitment levels increased 4 percent versus last quarter, and second-quarter adjusted fee income is up 10 percent versus the previous year.
Speaker 2: And while you'll see shifts in some of our expectations for the year to adjust to the trends we're seeing internally and externally, we also still strongly believe our success to date, as well as our path forward, is the result of our intentional approach to expand our business, diversify our client base, and gain share of wallet.
Speaker 2: all while increasing our investments and innovative solutions to further enhance the client experience and sources of revenue.
Speaker 2: We have also quickly responded to the changing economic environment and the recent industry headwinds to better manage the emerging risk.
Speaker 2: Over the course of the year, we have increased our CET1 ratio by approximately 20 basis points, reduce the percentage of deposits that are uninsured, increase contingent funding sources to $26 billion, and reduce the midpoint of our expense guidance for the year by 3 percentage points, excluding the impact of the QualPay transaction.
Speaker 2: Our bank has made significant strides in recent years, paving a path forward towards achieving our long-term financial goals. While pursuing growth opportunities and maximizing profitability in this environment, we remain committed to optimizing our overall risk profile. By implementing robust risk management practices, we can make a difference.
Speaker 2: closely monitoring market trends and adapting to regulatory changes, we aim to ensure the stability and resilience of our operations. Our dedicated teams strive to strike a balance between growth and risk management, fostering a culture of prudence and innovation that sets us on a trajectory of sustainable success.
Speaker 2: Now, let's move to slide 3 for the quarterly financial highlights. When looking at the same period in the previous year, revenue and PP&R grew at high single-digit rates supported by strong operating metrics, which linked quarter saw revenue and PP&R headwinds as a result of increased deposit costs.
Speaker 2: and NIB remixing, leading to margin contraction. Loans increased $309 million, or 1%, quarter over quarter. As we saw in the first quarter, this growth rate declined from prior year levels as we continued to experience lower loan production due to client demand and our increased emphasis on returns and relationship-based lending.
Speaker 2: After seasonal tax-related outflows in April , core deposits increased modestly and ended the quarter roughly flat with the first quarter. Much like the rest of the industry, we continue to see pressures from non-interest-bearing deposit remixing, as clients have increased their use of their operating funds, thereby further reducing average balance per account.
Speaker 2: Our underlying credit performance remains solid, and although our credit metrics are experiencing some expected increases as a result of the current environment, overall credit trends are healthy, and we have not seen meaningful change in the underlying performance of our borrowing base or stress focused in any particular industry or asset class.
Speaker 2: Lastly, as I've stated previously, we continue to focus on maintaining a strong capital position as we navigate through the uncertain environment. With the CET1 position ending the quarter at 9.85%, we are well in sight of achieving our objective of exceeding 10% CET1 by the end of the year.
Speaker 2: Now I'll turn it over to Jamie to cover the second quarter results in greater detail. Jamie?
Speaker 3: Thank you, Kevin.
Speaker 2: I'd like to begin with loan growth, as seen on slide 4. Total loan balances ended the second quarter at $44 billion, reflecting growth of $309 million.
Speaker 3: As Kevin mentioned, new production and overall growth have slowed as new fundings are focused on customers with more broad-based relationships.
Speaker 3: Similar to previous quarters, CRE growth was a function of draws related to existing multifamily commitments and a low level of payoffs.
Speaker 3: On the CNI side, the slight decline in balances was driven by lower utilization and exit of certain syndicated loan-only relationships.
Speaker 3: Lower CNI utilization is a positive credit signal reflective of the health of our overall boring base.
Speaker 3: In the current environment, we are rationalizing growth in areas that have a lower return profile or don't meet our strategic relationship objectives. On that note, in July , we signed an agreement to sell a $1.3 billion medical office CRE portfolio. This transaction is expected to result in a one-time negative net income impact of approximately $25 million.
Speaker 3: And despite a more tempered outlook, we continue to expect deposit growth through the remainder of the year.
Speaker 3: Supporting this growth are seasonal tailwinds along with targeted deposit efforts, including deposit specialist hires and focused industry vertical initiatives.
Speaker 3: Looking at the composition of the quarterly change in balances, non-interest-bearing deposits were down $1 billion quarter over quarter, a byproduct of the aforementioned seasonality from tax payments, cash deployment of excess funds, and continued pressures from the higher rate environment.
Speaker 3: As in the first quarter, the decline in MMA was largely impacted by a shift to other products, in particular to CDs within our consumer customer base.
Speaker 3: As we look at deposit rates, our average cost of deposits increased 51 basis points in the second quarter to 1.95%, which equates to a cycle today total deposit rate of 37% through Q2.
Speaker 3: Our deposit costs and betas were impacted by the anticipated pricing lags on core interest-bearing deposits as well as the decline in non-interest-bearing deposits.
Speaker 3: We expect those same dynamics to play out in Q3, with deposit pricing lags continuing, albeit at a slower pace given the FOMC's slower pace of tightening, and with some further decline in non-interest-bearing deposits as a percent of total deposits. The result is further pressure on our expectations for through the summer.
Speaker 3: have been updated and are available in the appendix to this presentation.
Speaker 3: Now to slide six. Net interest income was $456 million in the second quarter, an increase of 7% versus the like quarter one year ago, and a decline of 5% from the first quarter, in line with our previously disclosed expectations.
Speaker 3: The asset side of our balance sheet continue to benefit from both higher balances and rates.
Speaker 3: Though, as in the first quarter, higher deposit pricing and remixing within our NIB deposit portfolio offset those gains resulting in overall NIM compression.
Speaker 3: As we look forward, we expect Q3 NIMS to continue to contract at a pace similar to that in Q2, followed by some relative stabilization thereafter as deposit pricing lags in NIB remixing slow.
Speaker 3: Against those diminishing headwinds should be the gradual benefit which accrues to the margin from fixed rate repricing, which has a compounding effect and should support the margin through time assuming this higher rate environment remains.
Speaker 3: Flight 7 shows total adjusted non-interest revenue of 111 million dollars.
Speaker 3: down $7 million from a previous quarter and up $10 million a year over year. The primary variance in quarter on quarter fee income was due to the extremely strong first quarter for capital markets which normalized as expected.
Speaker 3: That said, despite lower overall industry-wide transaction volume, the current level of capital markets income reflects the benefit of strategic investments in our CAB and middle market banking platforms. As we step back and look at the overall levels of durable core client fee income, excluding mortgageURE
Speaker 3: The investments across our franchise and production services continue to bear fruit. Over the last four years, we have compounded core client fee income at nearly a double-digit pace as we continue to invest in valuable revenue streams such as treasury and payment solutions, capital markets, and wealth management.
Speaker 3: Also of note in the second quarter is the closing of our QualPay investment, which we announced last year. The go-forward impact is expected to have an immaterial impact to consolidated net income and is reflected in our guidance for the full year.
Speaker 3: Moving to expenses.
Speaker 3: Slide 8 highlights total adjusted non-interest expense of $301 million. Down $4 million in the prior quarter, and up $17 million a year over a year, representing a 6% increase. We are very proud of the team for our prudent expense management in a challenging operating environment.
Speaker 3: Where production volumes have declined, we have implemented headcount reduction strategies, and discretionary spend has been reduced across the organization.
Speaker 3: In addition, as we have said before, our incentive plan alignment allows for expense flexibility in times when revenues are under pressure.
Speaker 3: We will continue to operate with heightened expense discipline in the near term and adapt our expense base to maintain a competitive overall efficiency ratio.
Speaker 3: continue to operate with heightened expense discipline in the near term and adapt our expense base to maintain a competitive overall efficiency ratio. Moving to slide 9 on credit quality.
Speaker 3: Overall, credit performance continues to perform in line with expectations, as evidenced by the relatively stable life of loan loss expectations in the allowance calculation.
Speaker 3: As we saw last quarter, the two basis points increase in the allowance was a result of modest deterioration in the forecasted economic outlook.
Speaker 3: The quality of our originations remain strong and the impact of a few credit downgrades were all set by improvements in the performance of the aggregate loan portfolio.
Speaker 3: As we look to the second half of 2023, we expect credit calls to remain manageable with expected four-year charge also 25 to 30 basis points, reflecting a second half charge of range of 30 to 40 basis points. We continue to have confidence in the strength and quality of our portfolio.
Speaker 3: We do not see any specific industry or sector stress within our loan book, and we will continue to apply our conservative underwriting practices and advanced market analytics to both new loan originations and portfolio monitoring and management.
As seen on slide 10, our capital position continued to grow in the second quarter, with the Common Equity Tier 1 ratio reaching 9.85% and with total risk-based capital now at 12.79%.
Our organic earnings profile supported capital accretion in Q2, which, along with a somewhat slower pace of loan growth, was more than sufficient to all set marginal headwinds from the consolidation of our QAPA investment. As we look ahead, we remain focused on eclipsing the 10% CT1 threshold. At which time we intend to reassess the broader macroeconomic environment.
and consider what actions, if any, may be prudent as we diligently manage our capital position to the interests of all stakeholders.
I'll now turn it back to Kevin to discuss our guidance.
Thank you, Jamie. Now I'll continue with our updated guidance for the quarter. Before we review the details, it's worth noting that outside of loan growth, the ranges provided do not reflect the impact of the impending FDIC special assessment, nor the impact of the medical office theory sale as the transaction is yet to be settled.
As you can see on slide 11, the changes in the operating environment that have impacted the industry over the last 90 days are reflected and are revised guidance.
Lone growth is now expected to be 0 to 2% for the year. This reduced guidance is due to lower anticipated production volume as well as the impact of the expected medical office CRE sale. Despite lower demand and a higher hurdle rate for new business, we continue to have growth oriented lines of business such as middle market and CIV, which we expect to produce strong second half growth.
We expect core deposit growth to increase 1 to 4% driven by the previously mentioned seasonal tailwinds and new growth initiatives.
The adjusted revenue growth outlook of 0 to 3% aligns with an FOMC that reaches a target rate of 5.5% and holds through the end of the year.
Changes to the revenue guidance are the result of lower loan growth expectations and overall deposit betas which are now expected to reach 46 to 48% by year end.
We expect 4% to 6% expense growth in 2023. While the environment has resulted in some strategic shifts and priorities, we remain confident in our growth strategies including mass and CIB, but have applied additional discipline across the entire expense base to better manage levels of growth. Over the course of the year, we have significantly reduced our guidance range and when adjusting for new growth initiatives as well as on-
and we intend to continue to build capital levels through year end through the retention of organic capital generation and slowing balance sheet growth. Lastly, we expect our full year tax rate to be near the midpoint of our previous guidance range of 21 to 23 percent, supported by new federal tax investments, which will go into effect in the second half of the year.
Our commitment to agility and responsiveness will be instrumental in navigating the ever evolving landscape. As we continue to focus on growing tangible book value, we also recognize an opportunity to right size our balance sheet for sustainable, profitable growth. Our Medical Office Transaction Announce This Quarter is an example of diligent balance sheet management optimization efforts.
Where we free up capital and liquidity to pursue higher returning, more expandable relationships.
As we move forward, we remain steadfast in our dedication to managing expenses and leveraging other strategic measures to perform optimally in the current environment. By staying adaptable and resilient, we are confident in our ability to achieve sustainable growth and to deliver value to our shareholders, customers, and communities alike.
And now operator, let's open up the call for Q&A. Okay.
Thank you. We will now begin the question and answer session. To ask a question you may press start then one on your touch tone phone. If you're using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press start then two. In the interest of time, please limit yourself to one question and one follow up.
A morning on stage, start on the update of revenue guide.
Hi. So the environment's tough. I don't know if it's that much tougher than we thought it was a quarter ago. What's really changed to drive the revenue outlook moving down to the zero to 3% range?
Yes, David and this Jamie. Thanks for the question. As we look at the revenue outlook for 2023 compared to what we said in April , it's really two different components. On the asset side, you have a couple, some positives, we expect spread revenue to remain high and going on spreads to remain at these elevated levels.
But we do have the impact of lower loan growth and some of that's environmental due to the economy and part of it's due to the sale of that medical office, CRE portfolio. On the liability side of the balance sheet, you have the impact of further deposit and mix headwinds and that's really due to the...
decline and non-inspiring deposits that's above above prior expectations.
Got it. OK. And then Jamie, to follow up on that, so basically indicating them down about the same amount of the third quarter, but then leveling out. So should we think about this really the nim should bottom in the third quarter, then maybe be flat to up past that? And what are you assuming?
for non-interest bearing, is that mix shift basically done once we get past the third quarter also? Thanks. We do expect, as you said, the margin to decline in the third quarter a little less than what we saw here in the second quarter. And that does include continued remixing of the deposit base.
trillions of dollars in stimulus and the in a GDP growth environment and we so we try to look at history and Determine where it's going to go
Unfortunately, the prior tightening cycles don't give us a lot of insight. The mid-2000s is probably best, but it still wouldn't imply declines like what we're seeing right now. And I think a lot of that has to do with diminishment. When we look at the cash flows of our clients and using the same analysis that we've spoken about in the past, about credit, we see that our client spend is the growth in
high, a little more decline, maybe another percent in 2024, but that's how we are thinking about that mix, but it's probably one of the more uncertain pieces of the model as we look for. But we're just trying to be conservative and how we look at it, make sure that the guide we give is pretty clear in that regard.
Got it. So even with a sustained remixing, there's not a benefit coming from the fixed assets repricing that NIM should be relatively stable in 4Q.
That's right. That's right. And let me talk about that for a second. As we look at the margin, you'll see the decline in the third quarter, and then you're right. We do expect relative stability, but the benefit of fixed rate asset or exposure repricing will come through. And here in 2023, it'll likely be offset.
to pay off or pay down. And when you look at the impact of that as you go forward,
looking forward about a year, there's about an 11 basis point impact to the margin a year from now. Just due to the fixed rate loans.
repricing and that's more or just plus commercial loans So we have that tailwind and that's that's excluding the benefit of securities which have a little bit slower Paydown and hedges and we have another billion dollars of hedges than mature in the in the first quarter as well So you're right to point out that that is a tailwind
And that's what we'll start to see in 2024. And we believe that that's gonna be the platform for growth as we look at revenue going forward.
Thanks for all the color. Yep. Our next question comes from the line of Brady Gailey with KBW. Brady please go ahead, your line is now open.
Got it. Thanks for all the color. Yep. Our next question comes from the line of Brady Gailey with KBW. Brady, please go ahead. Your line is now open. Thank you. Good morning, guys.
Morning, Brady. So maybe just a little more color on why you guys are exiting the medical office space. And I heard the comments on the call about how it's a low return business. Maybe just a little more color on what made that a low return business for all.
this portfolio, the medical offers CRE portfolio, was evident really throughout the diligence process and it led to the strong pricing that we have on this portfolio.
But to your point, this portfolio performed exactly as designed. And it was a great asset for the bank in a zero interest rate environment where a high single digit ROE was accretive.
But in this environment with much higher interest rates, our return requirements are a lot higher. And as a part of all of our more broad balance sheet optimization efforts, we determined that this portfolio was one that was not as core of a fit.
given that it has very low relationship value, even though it's pristine credit, but a high single digit ROE.
And so it helped us achieve a few of our key strategic objectives. First, it accelerates the timing to our capital objectives that we believe position us really well for growth going forward.
Second, it improves our liquidity profile and it helps increase our core deposit funding percentages.
Third, these capital and liquidity benefits will really give us the platform for growth going forward and it also reduces our CRE office exposure.
The cost of this, I mentioned high single digit ROE, it's really about a 2% spread is the way to think about it. And that'll be a headwind to us in the near term, but longer term, we're convicted that we can go and build and grow core clients.
islams.
Yeah, Brady, that'll we will put all that out there at closing, but you're right to think that that's a net number. And so we do feel good about it is a little less than the two and a half percent you mentioned, but it's a it's a net number and we will put out all the details of the economics at closing.
Okay, and then just finally it's great to see quale pay close. I know that it's beneficial to mask it. Can you just remind us the benefit that that has on mask? And with that business now closed, is your outlook for mass change at all?
You know, Brady, QualPay is the front end for our payment facilitation platform so that we can process payments through the MAS platform. And so we've been very clear that having a majority ownership interest in QualPay allows us to ensure that the capital that's available to us is available to us.
provide it to our platform is their number one priority. So it is great to have it closed. It has a minimal impact to our P&L, but it's a big impact as we continue to expand the capabilities and functionalities of MAST. When we started this program a little over a year ago, what we said is we would get into networks subbit rex ???om to our userization meeting. From now we are members from the 17 of our solutions and decision bother on that issue. We are members from the 17 of our solutions and decision bother on that issue.
2023 and we would start to pilot with a couple software vendors. Well, we're up to three partners that are on board today and we also have five others that have signed on. So we'll have a total of eight that will be on the platform with five additional software vendors.
in the contract phase today. So that could take us to as many as 13 software vendors that are signing onto the platform. So I think we've confirmed our initial hypothesis that MAS would be a product that is highly desirable by the software vendors, just based on the interests and the individuals that have signed up to this point.
But I think it's premature to talk about what the revenues going to be from those software vendors because we're still finalizing the MVP product. And that will be rolled out more broad base at the end of this quarter to all of those eight software vendors that have signed up. And then the final stage, which will determine how fast the revenue grows, will be the end user adoption. So those clients that are using the software, will they leave deposits on the platform, will they sign up for the money movement capabilities and eventually the lending capabilities. But having qual pay.
finalized ensures that a big component of the capabilities within the platform we have control over not only what's there today but the ultimate advancement and development on that platform.
Okay, got it. Thanks for the color. Thanks, ready?
Our next question comes from the line of Steven Scatterman with Piper Sandler. Steven, please go ahead, your line is now open.
Thank you.
Thanks guys, good morning.
I just wanted to follow up on the earlier conversation about kind of balance sheet trends around the non-interest bearing. I know that's really hard to predict in this environment, but you did note that average balances have declined a little bit. I'm curious if you have some more detail around that, what those average balances look like now, maybe to pre-COVID and kind of how we can think about the room for potential normalization there.
Just even, it's a great point to Jamie's point. There's so many variables that go into determining what the terminal level is going to be with non-interest bearing. If you look at our consumer operating accounts, the average balance declined about 9% quarter on quarter, and that puts it back at about 10% higher than where it was prior to COVID. And if you think about those balances on an inflation adjusted basis, it would lead you to believe.
that the average deposit to increase. Two, I think our clients are carrying extra cash, especially as we enter uncertainty in this economic environment. So some of that will stick. But three, it would lead you to believe there's probably still a little excess cash that's sitting on our commercial operating account balances, and you could continue to see some diminishment there. And that's why I think...
you guys as you think about your business.
You know, how things changed, maybe at a high level, if there's one or two things you could highlight since February , I mean, obviously we know there's tons of funding pressure and sustaining your clients is different. But, you know, we get all these questions about, oh, regional banks won't be able to make any money, the whole business model is dead. Can you kind of give us some color to why that's not true and kind of what has changed or what hasn't?
Well look, I'll tell you what hasn't changed is our value proposition to our clients and you know Steven, when you go back to last quarter and we talk about being recognized by J.D. Power as being the number one bank in the southeast for client service and trust, I think it gets back to the heart of why clients choose banks and the primacy that we bring to the table. They want folks that provide great service and they want advice and we're going to continue to provide that. To learn more, visit actors. quadruple.com 6 bows www. complaints
I think what gets lost in all of this is what's happening today is just contraction and margin. And unfortunately in our business we're not like manufacturing. When we get an increased cost for our cost of goods we can't just pass that on to the clients. A lot of our loans are already on the balance sheet and so having a little bit of margin contraction is not something that's new to this industry. It's been happening over the last really 20 years.
And so I don't think there's anything out of the ordinary. I don't think regional banks are experiencing any greater margin contraction. Obviously, the big banks have a little bit of an advantage as it relates to scale and funding. But I think when we get through this next quarter, as Jamie just talked about, and margins stabilize, we're right back to where we started, which is
who's gonna win market share, who's gonna grow? It's those banks that are providing the best level of service, that are providing the client experience and are winning market share. And I think we were doing that before and I think we'll do it again on the other side. And the contraction story will be one that's kind of one of history. The other question mark that I think's out there is credit. So when we get to the other side of whatever this cycle is and we prove out the credit cycle, and I've said from day one that I feel like there's gonna be winners and losers in this environment based on where your portfolio sets, what you.
I'll do that.
Our next question comes from the line of Kevin Fisselens with DA David Sen. Kevin, please go ahead, your line is open.
Hey, good morning everyone. Good morning, Ted. I was just hoping one thing I noticed was in your prior guidance slide, you addressed PPR growth and you don't have that in this slide, is that?
simply because it's sort of implied that that's going down with the revenue guidance, or did you want to address that?
That's right, that's right. I mean, by giving the expense guide, the revenue guide, it's implied, and also it's just, you know, there's so many different iterations of what can happen between those two line items that we didn't think it was as useful as it was last quarter.
And so we started cutting back on our initiatives, cutting back on our spend, and that led to the reduction in the guide last quarter, and then you see the reduction in the guide this quarter. When I say reduction, it looks like it's the same, but we're also including...
the approximate 10 million impact of of qual pay to the expense line this quarter that was not in the guide last quarter. So we feel good about that component of our guide especially when you take into account that about 5% of expense growth comes from growth initiatives.
and then other environmental calls like the FDIC increase this year and help care calls. And so that's something that we spend a lot of time on, working on our expense phase being efficient. And I think that's an important part of the story when you think about PPRR year-to-year.
So Jamie, when you're saying that 46% is saying the same, but this bullet point over and this assumption over to the right of the new initiatives at the ICO and healthcare costs and these other coroverative sentences were...
were not necessarily in the prior guide but they're finding ways to offset it. No, no, no, I'm saying that what was not in the prior guide is the 1% impact of QALPE. The other growth initiatives were in the guide in January as well as the guide in April . But what I would say on the growth initiatives is those initiatives have been
trimmed down a little bit individually and in various ways as we progress through this environment. And so the spend on both MAST and CIB is a little bit less than what we guided to in January . But the only change in those...
Spans from April was really just the quality edition. Understood. Okay, and one quick follow on it. You know, some banks are talking about, or that there are evaluating potential bond transactions where you would take some kind of upfront loss, but then we would.
be able to put those proceeds to work at higher rates and to work pay down debt. I would suspect that with your goal of getting to the 10% to ET1, maybe that's not something that's near term and you get to that point, but is that something you guys are evaluating?
and over what timeframe. Thanks. You know, it's a great question. As we look at our bond portfolio, first off, in aggregate, the duration and the payback's too long to consider a transaction like that. And you're right, and you can see this through our MOB transaction.
It's our intent to accrete capital at the moment. We remain really excited about the opportunity that's in front of us in the southeast to drive client growth, and that's our highest and best use of capital. And so we're not that interested in realizing a loss in the securities portfolio to mark the yield to market at the moment. Okay, thanks very much.
the participation in the medical office. Is that the end of loan sales?
At this point and what are the uses of our new cities from the proceeds there? Should we just assume that the wholesale FHRB is paid down or what's what's used to find FHRB?
We're not anticipating further loan sales. Truthfully, that's not something that we would anticipate in normal course of business outside of the third-party portfolio. Typically, especially in an environment like this, the best course of action for a business that may have a lower return than what you're, you know, targeting would be just to let it attrite and that would be a normal course of business is let the
let the loans pay off at par and move on and pre-op the balance sheet that way. And that's the traditional way to exit a high performing business like the medical office. That was just a unique one that the credit quality was so pristine that we were able to get what we believe was a very fair price for that portfolio. And with regards to the use of funds, you're right. It'll go to pay down just more expensive funding, whether that's FHLB or broker deposits, it'll likely be one of those two.
And that's $25 million you call out. That's the net of the paydowns, or that's just the $25 million hit from losing it own. And then we could see an offset on the funding.
Mark, that's the mark. That's the price mark effectively on the loan sale.
Got it, got it, okay. And then on Charlotte.
You know, as we look at the trends with the expectation for higher net charge offs going into the end of the year, what's driving that higher levels of expected loss and as we, as we serve quickly, the calendar and the 24 is that trend, do you expect that trend to increase and continue growing the net year? Yeah, hey Jared, this is Bob. Just.
As Jamie mentioned, I mean, you're going to see a slight drift up in charge-offs and in credit metrics in general. And again, we would expect that. The drivers are not anything systemic. It's just a pressure that our clients continue to feel, and some of them with more leverage are certainly feeling it more than others, but that will push charge-offs and non-accruals slightly up. We certainly increased this quarter. That was just a couple of credits.
in the third and fourth quarter. We've done a lot of deep dives into these portfolios and really feel good about our guide of sort of 30 to 40 in the back half of the year coming off a very low, pretty low base in the first half. Still lands us in that sort of high 20s, 30 basis points or so for the year. As far as 24 is concerned, we'll get more specific on that in January as we.
talk about our guidance, but I mean the general feel is, you know, overall is kind of more the same at least in the near term.
Okay. All right. Thanks. And when you look at that allowance ratio tied in with that, going up a couple of business points this quarter, still is that still sort of marching higher or.
Given the broader economic expectations today, that's maybe a stable level. As we look forward, clearly we think we're adequately reserved today, feel good about the allowance. I would point out that embedded in the allowance this quarter, we do have a 20% weighting to that.
stagflation scenario, which is pretty onerous. We don't show 2025 economic data for that forecast, but unemployment rate starts to approach 9% at the end of that forecast, which is a pretty high, pretty high number. And so that's embedded in our allowance this quarter as we look forward.
Could we see it continue to increase slightly? I think that that's fair, but it could also remain at current levels and it would just be dependent on the economic outlook and the portfolio performance.
Thank you. Our next question comes from Manan Ghazaliar with Morgan Stanley . Please go ahead Manan, your line is now open. Hi, good morning. I had more of...
balance sheets and you know what do you think their appetite is to absorb these interest costs as rates stay higher for longer through 2024.
Yeah, thanks for the question, Managhi. This is Bob again. Overall, we do a commercial client survey, and I'll point to that first. We've been doing that for several quarters now, and that survey gives us a lot of good data points. What it's generally telling us is that our clients are starting to feel...
marginally worse about the future expectations of their business, but not materially. So it's in keeping with this inflation rate being higher, it's in keeping with their cost and input costs being higher longer, and some potential pressure on their revenue line. But so we certainly are tracking that. That matches up with what Cal and his team are doing.
with our cash inflows and outflow analysis and that algorithm. So, we've got a lot of data points. Generally speaking, we think there is some pressure, particularly on smaller businesses, as they just don't have the access to the capital that a larger credit would. As it relates to middle market, I mean, certainly it's.
It depends, you know, certainly on the industry and the effects of COVID or the longer term effects of what COVID may have on those industries. But overall, it's just general margin pressure that we continue to see, you know, in a slightly worsening environment that we expect to kind of continue as long as we stay at these levels. That's what our surveys.
like the reduction in demand that we saw in the first quarter has stabilized. And you think about some of our clients who have been able to pass on that higher cost onto their clients. And that's what we've seen through much of this cycle. The challenge becomes, to Bob's point, is when you have increased input costs and you no longer can pass that price increase onto your clients. And given where inflation has been and given the consumer and the health of the Bigfoot
Got it. And then separately, I know you don't fall in the category of banks that regulators are most focused on for new regulation, but I'm assuming that the supervision process will get tied up for banks of all asset sizes. So, you know, I noted your loan sale this quarter and your comments that you…
that Kevin has built here, it's there, you know, the leadership team, especially in the corporate services, there's a lot of large bank history. And you think about what's coming down the pipeline to a hundred billion and higher banks. Most people here have lived that, breathed it, and we know what it takes. And so it's already part of our nature as part of how we...
manage the bank when we look at scenario analysis, we look at risk management, is how we manage our day-to-day. So for us, that's not, you know, regardless of the change officially, it's not a big change in how we operate day-to-day. The only thing that I would say that is a debate for us and it doesn't impact us is...
is the potential impact of AOCI on capital for the banks over $100 billion. It'll be interesting to see how that plays out, but if indeed how the maturity is excluded from that, then that's something that we will have to consider is how do we leverage the held maturity designation because it's not something that we use today.
Great, thank you. Our next question comes from Brandon King with Cura Securities. Brandon, please go ahead, your line is open.
Good morning. Good morning, Brandon. So, I wanted to talk about the Core Deposit Guide and just wanted to get your expectations as far as what kind of percentage contribution you expect from seasonal benefits versus the new deposit initiatives.
Well, look, you know, it's true, Brandon, that when you look at the fourth quarter specifically, there's usually seasonal inflows, both on the public fund side as well as generally the commercial side. So I think it's 50 50. Yeah, what we've what we said to this point is.
that we've been focusing on new deposit production. Our production on a year-to-date basis is up 183% over where it was in 2022. We believe that will continue. And yes, some of that has come in our CD promotions and the like, but it's really up across all of our lines of business. Number two, we continue to focus on the blocking and tackling, which just means that we're using our
We've onboarded a new liquidity product specialist who will focus in kind of a large corporate middle market space and bringing in larger deposit opportunities. And we'll continue with some of our promotions that we have out there today. So seasonality is something that we are counting on, but it's not the only reason that we're growing. We think that.
you know, the other half of the story is really around the production that will continue into the second half of the year. Got it. And with the new deposit initiatives, just could you give us kind of a big picture of you strategically of how you think that will play into potentially next year as far as being able to drive the project growth maybe higher than what it's been.
Well look, it'll definitely be higher than it was this last year, I can tell you that. Because with all the diminishment that we've had that Jamie talked about earlier, our story is not one of production, it's been a story of diminishment. And with all these excess balances sitting on the balance sheet, it's hard to overcome the reduction in the average balances. And I think as we've talked about...
that abating, the production will obviously be much more impactful in terms of growing deposits. And so what we'd love to be able to see coming out of the other side of the diminishment story is a production level that closely mirrors that of loan production. So to Jamie's point, we believe that we can reduce our wholesale funding in the coming quarters and we feel very good about our loan to deposit ratio today, which is under 90%. And going forward, if we match our deposit growth with our loan growth, we feel very good about not only the
the margin impact of that, but ultimately our ability to continue to fund our growth story as we look into 24 and 25. Got it. That's all I had. Thanks for taking my questions. Thank you.
Our next question comes from the line of Brody Preston with UBS. Brody please go ahead your line is now open. Hey good morning everyone. I wanted just to ask on the, Jamie could you help me on the derivative hedge portfolio?
The 182 rate that's been pretty consistent for the last several quarters, is that a net rate? I guess is that net of what you're paying on the floating and receiving on the fixed? Can you help me better understand the moving parts there?
That is the received fixed rate versus, so we will be receiving fixed at 182.
And then we pay on the index on the other side. So historically that would have been we're only at floating rate, liberal and other stuff.
Got it. Okay, so that's probably so for I guess at this point.
Okay, cool. And then just on, I appreciated the slide, I think it was slide six or so, I think you did Alden.
tucked in the re-pricing dynamics on the fixed rate portfolio. I just wanted to focus in on the non-mortgage portion. That 2.3 year duration, is that a good cadence to use in terms of even re-pricing from the fixed rate loan perspective or is there any kind of chunky period?
I just wanted to sneak in one last one. Just on the deposit outlook, I think on one of the slides you said that you expected.
we had multiple banks that had CD promotions that were higher than the brokered rates. And I won't mention the names, you know who they are. So that did drive up the cost of promotional CD production. Number two, when you look at the change in the standard rates for just money market, both on the consumer and on the commercial side, we saw on average
about a 90 to 95 basis point increase in standard rates in the second quarter. If you compare that to the first quarter where we actually saw more rate hikes, it was only up about 45 basis points. So what we saw in the competitive landscape was a 2x movement on standard rates in the second quarter and I think that's what's driving a lot of
the deposit beta discussion, but I'll let Jamie talk about our forecast. A big piece of that is the NIB remix. That's right, that's right. I mean, as we think about deposit cost movements from the month of June that you see in our presentation to the end of the year, we do expect to see a fairly steady just monthly step down in the rate of increase of total deposit.
That's the 250 million that we have each month that is maturing or paying down this repricing. Got it, thank you very much guys, I really appreciate it. Yep. This concludes our question and answer session. I would like to turn the conference back over to Mr. Kevin Blair for any closing remarks.
Thank you. As we close today's call, let me thank everyone for their attendance and obviously your interest in our company. I am pleased with our bank's performance and it remains very strong despite the challenges posed by the slowing economic environment, higher cost of funding, and the tighter liquidity market.
I think we've demonstrated resilience and adaptability in the face of these headwinds, and we're proactively adjusting and fine-tuning our activities to navigate the evolving landscape. To ensure we have sustained growth, we've undertaken some short-term balance sheet optimization measures, reduced our expenses, and grown our capital levels.
all of which will enable us to return to our strong growth story over the long run. We also continue to show the health and strength of our borrower base, as our credit performance to date and our view into the future reinforces my belief that our diversification, our prudent underwriting, and our strong footprint will differentiate us in this cycle. While we acknowledge the current market conditions and the subsequent contraction in our margin,
we want to emphasize that the underlying growth story of our bank has not changed. We firmly believe in the long-term potential and value that this institution offers not only to our customers but also to our clients and our shareholders. We understand that our team members are driving force behind our success and that their dedication and enthusiasm are crucial to delivering our exceptional service to our clients.
As such, I was extremely proud of the results of our voice of the team member survey that we received just this week, which revealed a team member engagement and favorability that ranks us in the top 5% of the industry. That statistic reaffirms our commitment to fostering a workplace that attracts and retains top talent. And as I shared last quarter, our client service levels remain best in class, with services like JD Power and Greenwich affirming as much with their recent awards. The client experiences and the result of trusting relationships that are created.
translate into sources of growth as we deepen the wallet share of our existing clients and it serves as a referral source to attract new ones. As we navigate through the current environment, we remain focused on taking actions that will mitigate the pressures on returns while maintaining our commitment to our customers, our shareholders, and our employees.
We will continue to prioritize prudent risk management, operational excellence, and strategic investments to drive future growth. I am confident in our ability to continue to differentiate ourselves in the competitive landscape, but also in the long-term growth potential of the bank, and remain committed to delivering value to all of our stakeholders. Thank you again for your continued support.
and we look forward to the future with confidence. And with that operator, we'll close today's call. Thank you. This now concludes the Synovus Second Quarter 2023 Earnings Call. You may now disconnect.