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spk01: Good morning and welcome to the Synovus Quarter 2022 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. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the call over to Cal Evans, Senior Director of Investor Relations. Please go ahead.
spk05: 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. Kevin Blair, President and Chief Executive Officer, 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.
spk11: Good morning. Thank you, Cal, and welcome everyone to our third quarter earnings call. I'd like to start today by acknowledging the impacts of Hurricane Ian on many within our geographic footprint. Many of you have experienced widespread and long-lasting destruction in the wake of this storm. The individuals and communities impacted by the storm have been in our thoughts, but more importantly, we stand ready and are already working to help with the recovery and rebuilding efforts. As a longstanding southeastern bank, we understand the importance of hurricane preparation to ensure the safety and soundness of our clients, our employees, and ultimately of the bank. To that end, a comprehensive client and employee outreach program, in addition to implementing network and operational safeguards, are the keys to appropriately navigating potential impacts of a storm. As the storm approached and passed, we fully implemented our business continuity plan with no disruptions to client account access throughout the storm. And we've conducted a comprehensive client outreach initiative beginning the day after the storm passed. To date, a low volume of deferrals have been requested by our clients, and we have confidence overall that our customer base has not experienced damage that will produce permanent financial stress, collateral impairment, or long-term business interruption due to the storm. We also continue to care for our team members, clients, and communities impacted by the hurricane. Through generous donations of our team members and company contributions to our Here Matters Disaster Relief Fund, we continue to help affected team members recover. We also made a significant contribution to the Florida Disaster Relief Fund to help with the long-term needs communities will face as they rebuild. Many of the leadership team joined me last week visiting our locations and team members in the Southwest Florida region. The words that resonated the most with me were resilience and perseverance. Everyone is helping one another and displays a passion and commitment to rebuild and return to a level of normalcy. Shifting to our third quarter financial performance, we're extremely proud of the accomplishments and results we released earlier today. This was driven by continued solid loan growth and strong margin expansion coupled with excellent credit metrics and a 50% efficiency ratio. In evaluating year-to-date performance, I believe the third quarter is indicative of the year. Strong loan growth, ongoing deposit pricing discipline, and prudent expense management have resulted in very strong net income and PPNR growth for the year. However, we know there continues to be economic uncertainty ahead. Therefore, we will prioritize and remain resilient around the key safety and soundness components, including capital, liquidity, and credit. Nonetheless, with the continued strong performance of our core businesses, as well as our new initiatives, which will begin to generate income, We feel certain we will perform well through this cycle and reach the other side as a stronger, more diversified company consistent with our longer-term top quartile objectives. Let me provide a brief update on some of our new initiatives, as I know Jamie will cover our core business performance story as he shares the quarterly financials. MAST, our banking as a service platform, continues to progress with beta testing of our first integrated software provider client. In fact, we expect to add a second client to beta testing in the fourth quarter and remain focused on an early 2023 official launch. With a pilot solution in place, we're enhancing testing functionality and capabilities throughout the remainder of the year. While we strengthen the product offering and expand the pilot into other B2B segments, we continue to recruit top talent to prepare for the launch and build out phases two and three of the product offering. We remain committed and confident to this opportunity, and our teams are working diligently to ensure we deliver a differentiated product early next year. In addition, we announced last week we continue to build out our corporate and investment banking team with coverage and credit product leaders onboarded for our healthcare services vertical, as well as our leader for debt capital markets. We've also closed our first transactions in the technology, media, and communications as well as the financial institutions verticals. With all of our vertical leads now in place, we expect to accelerate adding new business in the months and quarters ahead. We continue to make investments in our treasury and payment solutions that will serve as new sources of revenue and will roll out new analytical capabilities in the consumer business in the fourth quarter that will provide opportunities to strengthen and deepen existing relationships. We also continue to be pleased with one of our newest industry verticals, our restaurant specialty group. With $71 million in loan growth this quarter, this brings the portfolio to $545 million. I'm also happy to announce that we raised our base wage to $20 per hour in the third quarter, which we feel will offset some of the inflationary pressures felt by our team members and ensure we have a competitive compensation structure to continue to attract and retain talent. Overall, I believe we continue to execute exceptionally well in our strategic plan. The success is directly attributable to our 5000 plus team members who serve our clients and internal partners with a purpose. This continued focus on execution allows us to perform at a high level, regardless of the underlying economic conditions. I'm truly humbled and proud of what you do every day. Let me turn to slide three and our financial highlights for the quarter. Net income year over year was up 9%, led by total revenue for the third quarter of $582 million, an increase of 16% year over year, and 11% quarter on quarter. The revenue increase was driven by NII growth, a result of continued healthy loan growth, and a 27 basis point expansion in net interest margin. PPNR was $288 million for the quarter, an increase of 24% year over year, representing the highest level seen in over 15 years. This performance led to adjusted EPS of $1.34, return on average assets of 1.39%, and return on tangible common equity of 21.4%, as well as an efficiency ratio of 50%, all representing excellent operating metrics, which serves as validation of the team's continued execution. loans increased 1.4 billion dollars or three percent quarter over quarter with diversified growth across all segments commercial loans again served as the primary driver of growth it is reaffirming to see loan growth in all of our business units again this quarter leading to our fifth consecutive quarter of double digit loan growth deposits decline three percent quarter over quarter driven by balance balance diminishment and rate bearing balances As we have shared previously, our clients continue to maintain average balances that are higher than pre-pandemic levels. However, during the third quarter, we saw a decline in average balances as clients utilized their cash in business-related investments and commercial and consumers sought higher return alternatives. Despite the diminishment, net production has continued to increase, and we remain focused on our efforts to grow deposit relationships over time. Our underlying credit performance continues to trend positively as our NPA, NPL, and criticized classified ratios remain stable, and quarterly charge-offs drop to historically low levels. As we have noted before, the performance of our loan book is a function of portfolio diversification and a strict adherence to our disciplined credit framework. We remain cautiously optimistic on the near-term outlook for credit. Lastly, capital ratios remain consistent quarter over quarter, representing both our strong earnings and our focus on deploying capital to client loan growth. Now I'll turn it over to Jamie to continue the overview of our quarterly results in greater detail. Jamie? Thank you, Kevin.
spk02: I'd like to begin with loan growth, as seen on slide four. Total loan balances ended the third quarter at $43 billion, reflecting growth of $1.4 billion. On an annualized basis, excluding the impact of PPP, this represents a growth rate of 14%, our fifth consecutive quarter of annualized double-digit loan growth. Once again, this growth was broad-based with contributions from wholesale, community, consumer, and CIB business loans. Growth was led by CRE, which increased $785 million quarter-on-quarter. This was a function of loan production paired with a slowdown in payoff velocity. Slower levels of payoffs relative to those experienced in the first half of the year contributed approximately $350 million to CRE growth in the quarter. Growth was once again led by the multifamily and medical property sectors, which represent the highest levels of credit quality within the CRE segment. With regards to CNI, growth was led by the wholesale line of business. In addition, Increased utilization from CNI commitments existing at the end of the second quarter contributed approximately $170 million to quarter-over-quarter growth. Consumer loan balances increased $148 million, driven by mortgage and home equity lending. Third-party consumer loan balances remained flat quarter-over-quarter. As we've communicated previously, we leverage our third-party consumer portfolio as a means to complement our overall balance sheet positioning. And as we look forward, we expect to redirect paydowns within that portfolio to support our core growth opportunities. Turning to slide five, the third quarter saw a continuation of the industry-wide headwinds for deposit growth, with our deposit balances declining 3% quarter-on-quarter. These declines were a result of a host of factors, including the pressure from high rate non-bank alternatives, as well as disciplined deposit pricing. Deposit production remains strong in Q3. Our focus remains on what we can control, and that is continuing to work to grow deposits, both from existing relationships and new business initiatives, which over the long term should be the basis for value creation for all of our stakeholders. As we look at deposit rates, our average cost of deposits increased 23 basis points in the third quarter to 0.38%. That compares to an average of 0.5% for the month of September, which equates to a total deposit beta of approximately 15% for this cycle using average rates for the month of September. This is lower than the 30% total deposit beta we previously estimated in July for a scenario in which policy rates reached current levels. The existing variance appears to be attributable to the recent pace of interest rate hikes and the associated lags in deposit repricing. While this unprecedented tightening cycle is creating an uncertain environment for rates and deposit pricing, if the FOMC continues to tighten to the 4.5% area on policy rates, as is implied by the recent dot plot, we would expect some further upward pressure on total deposit beta for the cycle, placing it in the range of 35 to 40%. Now to slide six. The combination of disciplined deposit pricing continued strong loan growth and interest rate increases in the third quarter served to support significant growth in net interest income, which came in at $478 million, an increase of 24% year-over-year or 12% quarter-over-quarter. The net interest margin was 3.49% in the third quarter, an increase of 27 basis points from the second quarter. As shown in the NEM waterfall, The impact of higher short-term rates boosted loan yields as greater than 60 percent of our loans are now floating rate. Higher loan yields were partially offset by higher deposit and wholesale funding costs. As we look forward, the pace of NII growth will be impacted by the timing of deposit repricing, interest rate policy, and loan growth. We expect NII to be driven primarily by balance sheet expansion and long-end repricing as we move past this rate-hiking cycle. Slide 7 shows total adjusted non-interest revenue of $105 million, up $5 million from the previous quarter and down $9 million year-over-year. Our depth of relationships and stability in core banking fees and wealth revenue act as a source of strength despite volatile capital markets and a continued depressed residential mortgage environment. Notably, wealth revenue grew 5% despite a 17% year-over-year decline in equity markets. This highlights the diversity of the non-bank, non-market-based revenue streams within our wealth segment in areas such as trust and the family office. In addition, wealth revenue was benefited by fees generated from clients' movement into short-term investments such as repos. This is further evidence of the pressure put on deposits in Q3 from non-bank short-term liquidity alternatives. Moving on to expenses, Slide 8 highlights total adjusted non-interest expense of $294 million, up $10 million from the prior quarter and up $27 million year-over-year, which represents a 10% increase. Employment expense increased 9% year-over-year, primarily attributable to the impacts of merit, elevated performance incentives, and team member additions. As mentioned earlier, we increased the minimum wage to $20 per hour, This increase and other related compensation changes will result in additional spend of $2 million in the fourth quarter and an increased annual spend of approximately $9 million. Similar to previous quarters, when segmenting our year-over-year increase in expenses, the majority of the growth is attributable to performance-related costs and investments in new business initiatives such as CIB and MAS. We expect expenses associated with these new growth initiatives and infrastructure investments to increase $6 to $7 million in the fourth quarter. Our third quarter efficiency ratio of 50% is evidence that we are effectively managing our expense base while making these strategic investments. Moving to slide nine on credit quality. Our credit performance and the credit quality of our recent originations remain strong. The NPA and NPL ratios remain stable overall and are at or near historically low levels at 0.32% and 0.29% respectively. The net charge off ratio was 0.04% for the quarter, representing the lowest charge off rate we have seen in recent years. In the second quarter, our ACL was $479 million or 1.13% of loans. Given continued elevated strong loan growth, the ACL increased $21 million quarter on quarter while the ACL ratio remained relatively flat. This ratio reflects the quality of the loan portfolio offset by a more negative economic outlook. Although we do believe that a more challenging economic environment could impact credit performance metrics, we are confident in the composition and strength of our loan portfolio. We have emphasized diversification and specialization across several facets of our commercial lending lines, and we have been targeted and selective in the sectors and industries in which we lend. Lastly, our prime focus conservatively underwritten consumer portfolio is well positioned for a potential downturn. As noted on slide 10, the common equity tier one ratio remained relatively stable at 9.51%. Within the quarter, core earnings supported robust capital generation, which was largely redeployed back into prudent balance sheet growth. I would highlight that this is the fourth consecutive quarter of stable capital ratios near the midpoint of our 9.25 to 9.75% range, a result which is evidence of our focus on diligently managing our capital position consistent with our internally established targets. Looking ahead to the fourth quarter, our focus remains on prioritizing capital deployment toward our core growth opportunities. The slower pace of loan growth expected in Q4 will likely result in a year-end CET1 within the upper half of our 9.25% to 9.75% range. In light of the uncertain economic environment, we believe further supporting our capital position in the upper half of the range makes sense. And similar to this quarter, we do not expect any further share purchases in 2022. I'll now turn it back over to Kevin. Thank you, Jamie.
spk11: I'll now continue with our updated guidance for the quarter, as shown on slide 11. We remain on track to deliver our pledged $175 million of pre-tax and Novus Forward benefits by the end of this year. At the end of the third quarter, our annual revenue run rate stood at over $160 million, and the continued execution of our efficiency and growth initiatives will result in benefits in excess of our stated target. Synovus Forward is now embedded in a continuous improvement mindset that will continue long after this initiative is formally complete, especially as we continue to operate in more volatile economic conditions. As a result of our strong loan growth of 3% in the third quarter, we are raising our total year loan growth ex-PPP guidance to approximately 11%, which implies fourth quarter loan growth tapering a bit from the growth levels delivered in Q3. This loan growth, combined with a Fed funds target rate of 4% to 4.5% by the end of the year, results in total expected annual revenue growth, excluding PPP revenue, of 15% to 16%. And on the expense side, we are expecting year-over-year adjusted expense growth of 7% to 8%, a result of incentives and costs tied to strong performance and targeted business investments. As we stated previously, our employee incentive structures are tightly aligned with overall performance, and as such, the strong forecasted revenue performance this year has resulted in higher incentive expectations. Given the strong positive operating leverage resulting from this year's performance, our expectations for year-over-year adjusted PPNR growth, XPPP, is now 25 to 27 percent. I am pleased with the progress we continue to make as an organization, and remain confident in our ability to deliver sustainable top quartile performance. 2022 is shaping up to be an outstanding year in terms of our financial performance, one that fully exceeded our original and most recent expectations. Reflecting back on our investor day in February, I could not be more pleased with our progress. We stated that we had to increase productivity, deepen client relationships, and deliver ongoing efficiencies while leveraging strategic investments to create an elevated growth profile. We have increased productivity in loans, deposits, and assets under management production during the year, deepened relationships utilizing analytics and good old-fashioned partnerships, managed expense growth by closing 28 branch locations, and maintained progress on our new initiatives. Matching our actions with our promises in a manner our team has in 2022 – is even more impressive given the volatility in the economy and many causes from which it stems. Going forward, we will adjust and alter our path where necessary as we remain agile in navigating the ever-changing economic and competitive landscape. I want to again thank our 5,000-plus team members. You are the secret to our success, and your efforts and contributions are not unnoticed by our leaders, clients, or key stakeholders. And now, Operator, let's open the call for Q&A.
spk01: Thank you. We will now begin the question and answer session. To ask a question, you may press Start, then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press Start, then 2. In the interest of time, please limit yourselves to one question and one follow-up. Our first question for today comes from Brady Gailey from KBW. Brady, your line is now open.
spk03: Good morning, Reddy. Thank you. Good morning. Good morning. So when I look at your capital with the AOCI impact, your TCE continues to move down here. It's now 5.5%. If you look at common equity tier one, it's still at a great level at 9.5%, but there's such a differential between those two ratios. As the TCE continues to move lower, is there any impact to Synovia from that?
spk02: Brady, it's Jamie. Good morning. You know, as we think about our capital ratios, we primarily focus in on CET1. And the reason for that is we look at the impact to tangible common equity of AOCI as basically a timing difference and only a partial story of what's happening as a result of interest rates. As you're well aware, Synovus performs better in a higher rate environment. But when you mark to market components of the balance sheet, like the securities portfolio, you can see there's parts of it where the value declines, whereas there are many more parts where the value increases. And so as we think about capital and how we manage our balance sheet, how we protect the balance sheet, we primarily focus in on CET1 and regulatory capital. And as you can see by our earnings today and our strategy for the rest of the year, It's our intent to build capital through the rest of the year, retain earnings and build capital in dollar form. You can see that we're deploying it to clients, which is our key strategic objective, and we expect to continue that through year end.
spk03: Okay. All right. And then, Jamie, can you give us a little more color on the swaps that Synovus has added over the last year or so? I think as the The end of the second quarter, it was a little over $5 billion received fixed pay floating. Can you just help us think about the impact that those swaps have on earnings and if they have any impact on capital, like from a mark-to-market point of view, and any changes that may have happened in that swap portfolio in 3Q? Sure.
spk02: Yeah, it's a great question. And you did see a little bit of change in the swap portfolio in the third quarter, but it's not what you would normally expect. It was more tied to hedging debt or deposits, broker deposits. And so when I think about the core swap portfolio, swaps against our loan portfolio, it remains stable. And what we have right now is we have about $5.25 billion of exposure that will mature over the next few years and it will be impactful to earnings. It's not impactful to regulatory capital, but it is impactful to what we were just discussing on tangible. When we think about the impact to earnings going forward, unfortunately, the maturities are somewhat lumpy. And so, you know, there'll be some quarters where we have more maturities than others, and, you know, those maturities will be a benefit to the following quarters NII. The biggest The quarter that we have coming up with maturities would be the second quarter, and we have approximately $1 billion of maturities at around 1.4% received fixed rate. And so that will be accretive to NII in 2023 once those mature. But it will be lumpy, and it will come in over the next few years.
spk03: Okay. Great. Thanks for the color.
spk02: Yeah, thanks, Brady.
spk01: Thank you. Our next question comes from Steven Alexopoulos from JP Morgan. Steven, your line is now open.
spk08: Hi. Good morning, everyone.
spk07: Good morning, Steve.
spk08: I wanted to start on the deposit side. So prior to QE, noninterest-bearing deposits were about 25% of the deposit base. Now they're around 35%. How should we think about pressure on noninterest-bearing balances from here? Will it get worse than what we just saw this quarter? And ultimately, are we headed back towards 25%? Hey, Steven.
spk02: This is Jamie. I'll jump in first. We've spent a lot of time thinking about that. And when we think about our NIV as a percent of total deposits, we believe that they will be relatively stable, maybe decline a few percent as we go through this cycle. And the reason we believe that is, one, we've seen strong client growth. And so our relationship managers out in the field are bringing on new clients. They're driving that business. And we believe that over the long term, that will lead to sustained growth. But then on a more technical side, we also looked at prior cycles. And so we looked at the cycle in the early 2000s, 2004, 2007, and And if you look at DDA during that cycle, you did see some declines. It was about 4%. But then when you look at the cycle from 2015 to 2018, DDA as a percent of total deposits did not decline. And so we think that that also gives us a little bit of comfort that, you know, you may see some slight declines in that percentage, but we're not expecting anything outside of those prior cycles.
spk11: And Stephen, I'll just add, you know, interesting enough, when you look at non-interest-bearing deposits relative to core deposits, they actually increased this quarter from 35 to 36. And so as we've seen money market attrition, we've actually had DDA hold on better than some of the rate-seeking clients that have moved to other instruments. To Jamie's point, I think the great opportunity that we have in front of us is what we've been doing for the last three years in terms of investing in treasury payment solutions. So when you ask yourself why would someone keep their money in a non-interest bearing account, they're doing that because they're receiving services from our treasury and payment solutions team and they're offsetting that with their earnings credit rate. But as we continue to grow our commercial business, our ability to win businesses, Jamie suggested, in that commercial space is very high and will actually continue to accelerate. And so as we continue to improve our products and solutions, we have the opportunity to have outsized growth in new production of DDA, which could help to mitigate any diminishment that we would see going forward.
spk08: If we stay with that as my follow-up, so this quarter you saw a very nice NIM expansion, but the question we're asking everybody is, what's the trajectory from here? It seems like for most banks, 4Q is going to be somewhat similar to 3Q, but does your NIM then peak? It sounds like a lot of banks are guiding to them peaking in the first half of next year, and then the wild card is, can you hold it at that level? Or, Jamie, you talked about this pickup and deposit betas with a lag. Does it trend down in the second half? How are you thinking about that from a high level here? Thanks.
spk02: Yeah, Stephen, this is the key question. And as we look at it first, We're really pleased with what the team delivered in the third quarter. I think that our performance on managing deposit calls, managing the balance sheet was strong, and it led to a strong quarter of NII. And so we are really pleased with that. And when we look forward, and this is embedded in our total revenue guide for the full year, the midpoint of that is an expectation that NII will be relatively stable in the fourth quarter from these elevated third quarter levels. And that's a combination of, you know, you'll see some of the impact of prior rate hikes on deposit costs in the fourth quarter. And we're expecting, obviously, further rate hikes from the Federal Reserve. There are potential tailwinds to that, which would be the liquidity environment and what happens outside of the banking industry. But that could also be a headwind. And so we will see as we go through the fourth quarter. But to your real question, Beyond that, we would expect to see an NII and a margin headwind from deposit pricing lags once the Fed tightening cycle is over. And that will be a near-term impact. For us, I believe, as we look forward further out, that will be offset by the benefit of fixed-rate asset repricing. I mentioned derivatives and maturities earlier. Um, also the repricing of the securities portfolio, also the repricing of our mortgage portfolio. I mean, it's a little more than $20 billion of fixed rate exposure, um, that'll, that'll reprice over time. And that'll be a nice tailwind for us. So when I think about NII, uh, you know, we think that the fourth quarter should be relatively stable to the third quarter, but looking out beyond that, when we look at 2023 and we'll give four year guidance in January. But when we look at the longer term, we do believe that the benefit of fixed rate asset repricing will fairly offset the negative impact of deposit lags. And we may see NII in 2023 approximate loan growth year over year. Terrific. Thanks for taking my questions.
spk08: Thank you, Stephen.
spk01: Thank you. Our next question comes from Jennifer Denver of Truist Securities. Jennifer, your line is now open.
spk04: Thank you. Good morning. Good morning. Obviously, your asset quality was terrific this quarter. Can you talk about any signs of normalization you're seeing in any different portfolios?
spk11: Hey, Jennifer, it's Bob. Just real quick, yeah, thanks for the question, but I think where we sit today, you know, we're benefiting from, you know, the liquidity that was in the system through the pandemic. You look at our charge-off ratio over time, go back to maybe 2016 to 2020 when we were in the 20 to 30 basis point range. And then as we went through the pandemic, obviously, it got on a pretty direct slope downward. And, you know, we kind of leveled off here. at fairly low levels, we would anticipate that you would see a return to something in that range as we go forward. My only caveat to that would be if we remain in a restrictive type policy for a longer period of time, certainly we would expect credit costs to continue to perhaps move up to another range or a higher level. As of today, however, we just aren't seeing the migration We aren't seeing the defaults. We aren't seeing significant changes in modification requests, et cetera. So right now my bias is towards stable, but certainly looking ahead we could expect some headwinds there as it relates to credit.
spk04: Okay, great. And, Kevin, could you talk about the CAB business and where it is today versus your expectations today? maybe earlier this year in February during the Investor Day.
spk11: Yeah, Jennifer, I think it's exciting to see now that we have all three of our managing directors that are leading our verticals in place. And with the talent, as we've shared in the past, we've been very excited about the talent we're bringing on and being able to recruit talent from some of the larger institutions. And now we have some credit product specialists, debt capital markets, And we're starting to see deals being booked. And we had two deals, as I mentioned, in the prepared remarks this quarter. Our pipeline is over $100 million. And what's great about that, Jennifer, is it's not just about participating in deals. We have some lead opportunities in front of us. And I give Tom Dierdorf and his team a great deal of credit in that they've been able to attract top talent that have hit the ground running. I'm more optimistic today than I probably was even last quarter, just because we're starting to see traction. We're winning deals. The pipelines are building. Bob has brought in a credit team to support them, which we think has been an incredible help to the team in terms of prospecting. So I'm more optimistic today. You may ask the question, how would we think about it going forward in an economic recession? I wouldn't think differently about it. I think the team we have in place today will continue to provide great credit opportunities and be able to cross sell depository and treasury opportunities even in a economy that's not growing as fast. So for me, I'm just happy we have another lever for our growth engine as we think about the future with the market slowing potentially with a potential recession.
spk04: Can I ask one more question about loan growth? You said it'd be slowing in the fourth quarter. Is that because you're being more selective now with a more uncertain economy, or are you seeing a pipeline slow down from here?
spk11: Yeah, Jennifer, it's a really good question. As we just first talk about this quarter, when you think about $1.4 billion in loan growth, we saw fairly stable production. We also saw payoffs and paydowns slow considerably, predominantly in the CRE space. And so that contributed a little extra growth as we saw the payoff activity slow down. As we look out into the fourth quarter, we are seeing some slowing in activity from our clients. Pipelines are down 15, 20% from where they were in the third quarter. So when you think about just a 20%, 15% reduction in production, that would produce somewhere around a $700 to billion loan growth for the quarter. Now, the variables there will continue to be what happens with the payoff activity. And ultimately, what happens with utilization? This quarter, we saw only 20 basis point increase in utilization, and on the same line, increase about $180 million. So it will slow a bit, but the wild card there is what will happen with payoff activities. But yes, production is slowing just a little bit.
spk04: Thanks so much.
spk01: Thank you. Our next question comes from Brad Millsaps from Piper Sandler. Brad, your line is now open.
spk10: Hey, good morning. Good morning, Brad. Good morning, Brad. Thanks for taking my questions. Jamie, maybe I wanted to start with expenses. I appreciate you guys had a great revenue year and obviously the incentive cop has drifted up. Just curious, because of the great revenue, have you in your mind been able to pull forward any expenses maybe from 2023, make any additional investments that maybe could soften, you know, some of the inflationary pressure that we're seeing, you know, across the industry for, I know you're not giving 2023 guidance. You're just kind of curious if, if you, you know, in your mind kind of brought any of that forward to kind of, you know, ease, you know, maybe 2023.
spk02: You know, it's, it's a great question, but you know, on the expense side, I would say we have two things going and this will be our story for 2023 as well. is we have core expenses, which is how we operate our existing business. And then we have the spend for the future with our strategic growth initiatives. But when you look at our core expense base, it's very well managed. And you see strong performance year over year. You see active management. But we're not stopping or not spending. We're not stopping spending when we need to. Clearly, this is an inflationary environment. You saw we just announced Our minimum wage increasing to $20 an hour. We're actively out there ensuring that we're competitive, that we have the right compensation structures to have the strongest team out there in the southeast. And so we feel really good about what we've been doing on today's expenses. And that's what you should expect to see for us in 2023. you know, active management of what we can control, ensuring that we're doing everything we can to build the best team, maintain the best team. But then also, our strategic plan is made through the cycle. This is clearly an uncertain economic environment, but if you look at our strategic plan, you know, what we laid out on February 8th remains the same as what we're saying today. These are all long-term plans that we believe position us for the future.
spk10: Great. Thank you. And as my follow-up, Jamie, it looked like average long-term debt went from, you know, maybe just under $900 million to $2.7 billion on the average balance sheet. And I know some of these categories are lumped together, but you finished the quarter with almost $4.5 billion of long-term debt. Can you – I know there was a small issuance in August, but just kind of curious what you did there, maybe how it's structured, you know, rate, term, et cetera. Just kind of wanted to know how – kind of the moving parts, make sure I didn't miss something there.
spk02: Yeah, Brad, what you're seeing there is largely home loan bank advances. Now, those are considered long-term, but they're floating rate, cancelable at any time debt. And when you think about those funding costs, I would just think about that as basically a Fed funds funding or a short-term SOFR rate funding.
spk10: Got it. Thank you. I was looking to you since it was a long-term category. Okay. Appreciate the clarity. Thank you. Yep.
spk01: Thank you. Our next question comes from Kevin Fitzsimmons of DA Davidson. Kevin, your line is now open.
spk09: Okay. Good morning, everyone. Just a little on Brad's question there. Just curious, Jamie, how we should – I know there was a question earlier about – about non-interest-bearing deposits, but just your outlook for overall deposit levels going forward. Do we continue to see a modest decline? I'm assuming more modest decline going forward versus third quarter. And then do you continue to offset that with the borrowings you were just referring to? And more broadly, how you feel about that loan-to-deposit ratio, which I think now is gone up to 89% and where that stands relative to where you want to be longer term. Thanks.
spk02: Kevin, as we look forward on deposits, you can see in our loan guide, we're forecasting, as Kevin mentioned earlier, strong growth in the fourth quarter. We are expecting, and this is a highly uncertain environment on the deposit front, But we are expecting to see deposit growth in the fourth quarter. Now, you know, it will be likely slower growth, but we are expecting to see growth in the fourth quarter and expect, you know, that's our current baseline. We've seen growth quarter to date. We expect to maintain that through year end. When you think about the loan to deposit ratio, if you look back over the longer term, We have run for years in the upper 90s, 96% to 98% loan to deposit ratio. It's not our intent to get back to those levels in the medium term, but you should expect to see that increase. We will look to use all of the liquidity levers that we have, but you should expect to see that increase. One of those liquidity levers that I would highlight is our third-party lending portfolio. Clearly, you've seen strong client growth from us for five consecutive quarters. And it is our intent, you know, it has always been our intent to use that third-party portfolio as a source of liquidity. And so you should expect to see that attrite over time given this strong client loan growth.
spk11: And Kevin, given the topic, I told Jamie I'd want to jump in on deposits. Obviously, I think it's important to understand what happened in the third quarter to be able to project what's going to happen in the future. And our team's done a good job of looking at the outflows this quarter. About 35% of our declines, our diminishment this quarter, were a function of just seasonality. We had another 25% where our customers were deploying their liquidity predominantly on the commercial side, investing in new investments, expending their capital. So that leaves about 40% of the decline. And about 20% of that, we were able to move to alternative higher yielding liabilities for them. And that included, we added about $700 million this quarter off balance sheet in our repo products. So that leaves about 20% or $450 million that left the company to pursue higher balances. And so As we go forward, having a good understanding of how we mitigate some of that activity, but our production on the deposit side continues to increase. We saw another quarter, about 25% increase in net production, and that included increased production in DDA, and we've gotten more active back in CD promotions. And so, as we go forward, our actions around deposits will be very consistent. To Jamie's point, we'll continue to focus on generating New deposits will continue to focus on mitigating some of the diminishment that's happening. And our investments over the last several years, as I mentioned earlier, with Treasury will help. We're also looking at some new industries and verticals that will help to supplement some of our asset generation with deposit generation, including money service businesses, which we rolled out last quarter. So our focus internally is understanding some of the diminishment, but continuing to focus on the new production that will allow us to generate growth going forward, to Jamie's point.
spk09: Okay. Thanks, Kevin, and thanks, Jamie. Appreciate all that. One quick follow-up, Jamie. I think you mentioned earlier about what the deposit costs were in September. I was wondering if you happen to have them handy, if you had maybe what the actual margin, what the loan yield deposit costs were for September, and then maybe any color you can provide on betas, like what they were last cycle, what you're assuming this cycle would be great. Thanks.
spk02: Yeah, you know, I'll focus in on the deposit side for the month of September. When you look at interest-bearing deposits for the month of September, it was approximately 72 basis points. Total deposits, approximately 50 basis points as laid out on the deck. When you look at the through the cycle beta through September, from the beginning to September, you have a 15% total deposit beta, 22% interest-bearing deposit beta. And if you were to look at period-to-period, quarter-to-quarter betas, it'd be a 19% interest, I mean, sorry, 25% interest-bearing deposit beta and 18% total deposit beta. As we've said in the past, you know, our expectation was when we thought the Fed might end it, current levels at three and a quarter that are through the cycle, total deposit beta will be around 30%. And as we said in the prepared remarks today, if we assume that the Fed goes to the mid-fours, then we would expect our through the cycle total deposit beta to be somewhere between 35% and 40%. And I want to give a little more color on that range. So the 35% would be what we would consider closer to our base case. And that implies beyond a three and a quarter Fed funds rate, beyond that 30% through the cycle beta to three and a quarter, that you have an incremental 50% total deposit beta. And that would get you to an approximate 35% through the cycle beta with a terminal Fed rate of four and a half. And that would be our current base case. We do believe that through cycle beta could be higher, which is why we gave the range, given what we saw last quarter with non-bank liquidity alternatives, with competition from non-bank alternatives to deposits. And, you know, if that were to continue, if that were to increase, then you could see higher through the cycle betas.
spk09: Okay. I appreciate all that color change. Thank you. Yep.
spk01: Thank you. Our next question comes from Jared Shaw of Wells Fargo. Jared, your line is now open.
spk07: Hi, thanks. Good morning. I guess just one quick follow-up on that. Do you think that we could get to, you know, could we see the faster acceleration to that through the cycle data than we've seen so far, or do you really think that it's just, you know, sort of a continued sort of steady progression higher?
spk02: You know, if you go back and look at prior cycles, then you should expect to see an acceleration. So if you look at the 2004 to 2006 tightening cycle, you definitely see an acceleration the further you get along in the tightening cycle. The same thing happened in 2016 to 2018. And that's what we are expecting. And so when you look at the, you know, quarter on quarter, you have a total deposit beta of 18%. And then we're forecasting that just to continue increasing. And as I just mentioned, you know, getting up to as high as potentially the 50% incremental beta, which leads to a through-the-cycle in the mid-30s. And that's generally what we expect to see happen. But, yes, you should see an acceleration in betas as we go through this.
spk07: Okay, thanks. And then just as my follow-up, you know, could you give a little color on – what the sentiment from your commercial customers is as we're continuing into this period of maybe broader economic uncertainty? Are they still out there talking about growing and investing, or are you seeing them start to become more cautious and maybe pull back a little bit more?
spk11: Jared, I'll start, and I'll ask Bob if he wants to add anything from a credit standpoint. I think in general, it's still cautiously optimistic. I think you have to go back to what we talk about in terms of demographics in the Southeast and the continued outperformance of our footprint in terms of population growth and business starts. And so I think relatively speaking, none of those elements have changed, even though that the economy is looking to slow a bit. So as there is continuing to be economic growth in the footprint, we'll continue to have folks that want to deploy capital. I do think, as I mentioned earlier in the call, pipelines have diminished a bit, and I think that's correlated to the sentiment of our business owners that they do see a slowing going forward. I think part of that has been there's been a bit of a backlog with supply chain and what's been going on post-COVID. But in general, there's still a positive sentiment. We're not seeing people that are overly concerned, but we're seeing a level of prudence, and people are being conservative and Bob mentioned it earlier, they're still carrying a lot of cash on their balance sheets. And so they still have a lot of dry powder if things were to go negative. And quite frankly, with rates rising, they're able to use some of that cash instead of using higher cost debt. But I'm still cautiously optimistic, and I think that's predicated on what we're hearing from them. Bob, would you add anything? Yeah, Jared, the only thing I would add is we started last quarter with a commercial survey and I did it again this quarter, so two surveys in a row. The difference I would highlight in those surveys is we're beginning to see our customers tell us that their input costs are beginning to wane a little bit. So early signs that perhaps inflation might be easing somewhat. The other thing I would point to in those surveys is that our customers still feel, as Kevin said, relatively optimistic about their pipelines and their businesses going forward. not just anecdotal, but the results of that survey. Great. Thank you.
spk01: Thank you. Our final question for today comes from Christopher Marinak of J. Montgomery Scott. Christopher, your line is now open.
spk06: Hey, thanks. Good morning. Kevin, you gave us the update on MAST earlier in the call, and I was just curious, as MAST comes online next year, to what extent can that be a positive contributor to kind of core deposit growth for the Synovus engine in 23 and 24?
spk11: You know, it's a great point because I think we've talked a lot about MAST and its ability to generate fee income through the payments products, but it also can be a big deposit generator. And It would be too early for me to prognosticate what those average balances are going to be, but as we've gone through this pilot with our first ISV, we've onboarded over 800 recurring billers. These are the customers of the ISV. We've also opened up our website from a sales perspective, and we've received 800 unique customers coming to the website, with the click-through rates that are three times the average of what you see in the industry. So as we've talked about in the past, there continues to be a great deal of excitement from these software providers to the product. The other thing is we've been talking to more folks about being able to deliver it in 23. What we're seeing is that the average number of customers per ISV is actually greater than what we had modeled. So I give you all that as background because the only thing I can use to project what it's going to do for us is what's happening with our pilot, the early interest that we're getting from ISVs, and as we've shared on previous calls, it continues to be extremely positive. So I believe that not only is it going to be a generator of fee income, but it's also going to generate deposits that will help our growth in some of the other areas of the bank.
spk06: Great. Thanks for getting into the detail there. And I presume that, relatively speaking, the cost of those funds would be less. It may not be zero, but it would be less than some other funding that you have.
spk11: Yeah, you'll have a DDA account that sweeps the receivables from the payment. But one of the things we'd want to offer is that they could sweep that money into other interest-bearing accounts. So you'd have a little bit of both. You'd have both a non-interest-bearing component as well as interest-bearing. But it would be, I think, overall more attractive than any sort of normal funding or wholesale funding, for example.
spk06: Got it. Great. Jamie, just a quick one. As you think about the level of debt, is there an upper bound to where you don't want it to cross over a certain threshold? I know it's not an exact science, but just kind of curious as you think through the next several quarters.
spk02: As we look forward on the debt side, I guess I would bifurcate the difference between borrowing, collateralized borrowing at the home loan bank and facilities like that than corporate unsecured debt. We have a lot of liquidity, a significant amount of liquidity at hand when you think about the ability to use home loan bank capacity, the ability to use to grow broker deposits from here, the ability to grow core deposits. We have a lot of different levers at hand and we believe that using liquidity sources like the third-party portfolio, allowing that to attrite will benefit us. And we believe that kind of those strategies can help hold off the need to issue any sort of corporate unsecured debt, which is clearly the highest cost of them all.
spk06: Great. Thanks very much for all the information this morning.
spk02: Thank you. Thank you.
spk01: Thank you. This concludes our question and answer session. I would like to turn the conference back over to Mr. Kevin Blair for any closing remarks.
spk11: Well, thank you, Alex. And as we close out today's call, I want to thank you again for your interest in our company. You know, I really believe the results we share today are further proof of our progress in executing on our strategic growth plan. I think most importantly, these results have been driven by our dedicated and hardworking team members here at Synovus. We have an outstanding team and a loyal client base who truly values the relationships we take pride in fostering, along with our exceptional advisory approach to serving our clients' financial needs. I'm proud of the care our team members take to extend to our clients and the communities in which we serve. We have a bright future here at Synovus, but we're not just betting on what is to come. Rather, we continue to deliver in the present. This year, our core business performance and our asset sensitivity has translated into income levels and operating metrics that are some of the best in our company's history. Moving forward, rising rates may be less of a story and economic growth is likely to contract, but we remain optimistic that even in that environment, we will continue to perform in a strong relative fashion. Continued enhancements in productivity, deepening of client relationships, coupled with the traction of our new business initiatives, We will lead growth in loans, deposits, and fee income, and it will put us in a position to deliver positive operating leverage, allowing us to continue to outperform. Again, thanks for joining our call today. We look forward to staying connected to this group as we continue to deliver for our shareholders, our team members, clients, and our communities. With that, Alex, we'll close out today's call.
spk01: Thank you all for joining today's call. You may now disconnect.
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