Synovus Financial Corp. (NYSE:SNV) Q1 2023 Earnings Call Transcript

Synovus Financial Corp. (NYSE:SNV) Q1 2023 Earnings Call Transcript April 20, 2023

Synovus Financial Corp. beats earnings expectations. Reported EPS is $1.33, expectations were $1.22.

Operator Good morning and welcome to the Synovus First Quarter 2023 Earnings Call. My name is Adam and I will be your operator today. All participants will be in listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask a questions. [Operator Instructions]. Please note, this event this event is being recorded. I would now turn the call over to Cal Evans, Head of Investor Relations to begin. Sir, please go ahead when you are ready. Cal Evans 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.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.Kevin Blair Thank you, Cal. Good morning everyone and thank you for joining our first quarter 2023 earnings call.

This last quarter has proven to be a challenging operating environment for the banking industry. However, once again we have seen the value and viability of mainstream banks like our who operate on a relationship base client model. Despite the media narrative that deposit outflows were rampant in regional banks, our core deposit balances were up in the first quarter and stable in the month of March, a testament to the value of our client base and our team members who serve as trusted advisors in both good and challenging times. We have a long and proven track record of success. In recent years we have taken a deliberate approach to expanding our business, diversifying our client base, and leveraging technology and new solutions to improve the client experience and deepen our share wallet.

But we have never lost sight of the value of building strong trusted client relationships. Trust is a two-way street and is often tested during times of stress. This last quarter serves as an added proof point of the importance of client loyalty and the engagement of team member base that was instrumental and efficiently executing a multifaceted response to the turbulence in our industry. As a result of our team members efforts, we’re pleased to report strong financial results for the first quarter with net income up 19% year-over-year. We also received industrywide recognition, including ranking number one for customer satisfaction and trust in the Southeast according to JD Powers most recent U.S. Retail Banking Satisfaction Study and received 20 Greenwich Excellence and Best Brand awards for small business and middle market banking.

While we’re proud of these results, we’re mindful of the challenges and uncertainties, but also the opportunities that lie ahead. The recent bank failures and industry wide pressures on liquidity serve as a reminder of the importance of strong deposit production, maintaining a strong capital position, managing risk carefully, and remaining vigilant in an ever changing regulatory environment.We increased our core deposit production significantly this quarter, but also fortified our liquidity position out of abundance of caution through the addition of broker deposits and FHOB borrowings. And we currently maintain over $25 billion in incremental contingent liquidity. Also, we continue to accrete capital consistent with our strategy over the last several quarters.Finally, in the middle of the market upheaval seen in March, we kept our eye on the ball and continued to execute our strategic plan in a cost effective manner that provides the maximum value for our shareholders.

One noteworthy event was the regulatory approval of the Qualpay investment, which is a supporting component in the delivery of our banking as a service platform. This quarter’s results reinforced the strength of our balance sheet with growth in deposits, cash balances as well as other contingent sources of liquidity. Moreover, our AOCI improved, net charge offs remained at historically low levels, and we grew our tangible book value per share. Before we transition to the next slide and our financial highlights, I would like to thank our entire team for their tireless efforts since early March and thank our clients for the trust you continue to place in us. Now let’s move to Slide 4 for the quarterly financial highlights. Net income available to common shareholders and EPS were up 19% and $0.21 respectively year-over-year.

Strong earnings growth was supported by 23% year-over-year growth in NII and 19% growth from core client fee income. This revenue growth combined with year-over-year positive operating leverage led to strong performance metrics with ROATCE of 21.9%, return on average assets of 1.36%, and an efficiency ratio of 52.3%. Loans increased 329 million or 1% quarter-over-quarter. Core commercial loans again served as the primary driver of growth offset by runoff of third party consumer loans and a previously disclosed move of third party loans to held for sale. Loan growth ex-third parties moved to held for sale was $753 million or 2% quarter-over-quarter. Overall deposits grew 2% quarter-over-quarter, including growth in core deposits of $133 million.

Core deposits remained stable through the month of March and we saw minimal outflows related to the industry narratives. Our deposit origination engine remained strong as we once again saw record levels of deposit production. Despite headwinds associated with non-interest bearing deposit remixing and higher costs associated with core interest bearing deposits, deposit rates have tracked reasonably in line with our expectations, though current dynamics are presenting some upward pressures relative to our previously guided range.Our underlying credit performance remains strong and while we are seeing movement away from historically low levels, we have not seen a meaningful change in the underlying performance of our borrower base. Our positive portfolio performance is reflected in continued low levels of charge offs as well as our other performance metrics such as delinquencies and non-performing ratios.

The ACL ratio increased slightly this quarter predominantly due to higher weightings to downside economic scenarios. Lastly, CET1 grew to 9.76%, a result of strong organic capital generation and our decision to continue to retain and grow capital in this uncertain environment. Now I’ll turn it over to Jamie to continue the overview of our quarterly results in greater detail. Jamie.Jamie Gregory Thank you, Kevin. I would like to begin with loan growth as seen on Slide 5. Total loan balances ended the first quarter at $44 billion, reflecting growth of $329 million or $753 million when excluding the previously mentioned move to held for sale. Growth was again led by our commercial businesses with CRE and C&I growth of $346 million and $534 million respectively.

Similar to last quarter CRE growth was a function of draws related to existing commitments and low level of payoffs, while C&I growth was diversified across multiple industries and business lines. When examining our C&I utilization rate quarter-over-quarter, the increase is a function of higher utilization associated with newly originated credits rather than an increase from existing customers. When looking out over a longer period, our increasing C&I utilization rate is a function of our changing lending mix, which has shifted to larger clients. We did not see any meaningful changes in utilization or emergency draws as a result of the recent market disruption. We are judiciously originating new credit to serve our core clients and also to gain market share in our most attractive commercial business lines.

We are also mindful of ensuring new loans are originated at attractive risk adjusted returns as shown through our spreads to index which remain elevated relative to 2022 levels. Overall pipelines and activity remain muted due to lower transaction activity and as Kevin will describe later, we expect the pace of core loan growth to decline as the year progresses. Turning to Slide 6. Core deposit balances grew $133 million quarter-over-quarter and we saw a continued increase in deposit production with both commercial and consumer business lines contributing to the growth. While the current approach to monetary policy continued to pressure balances and the events of March created uncertainty in the banking environment, our relationship banking model proved to be resilient.

Looking at the composition of the quarterly change in balances, non-interest bearing deposits were down $997 million quarter-over-quarter, a byproduct of commercial seasonality, normal cash deployment, and to a lesser extent the continued pressures from the higher rate environment. The decline in M&A and an increase in CD’s were interrelated as consumers shifted excess liquidity between the two account types. Our increase in broker deposits was primarily the result of a conservative approach to proactively source additional funding late in the quarter, which I will touch on in a moment. As we look at deposit rates, our average cost of deposits increased 56 basis points in the first quarter to 1.44%, which equates to a cycle to date total deposit beta of approximately 30% through Q1.

Our deposit costs and betas were impacted by the decline in DDA as well as anticipated pricing lags on core interest bearing deposit costs. To date deposit pricing is generally evolved in a manner consistent with our expectations. However, recent remixing trends along with an FOMC that appears to be biased to hold at or above 5% will likely result in through the cycle betas which track in the low 40% area. Moving to Slide 7, taking a closer look into deposit balance trends within the quarter, as Kevin mentioned previously, our core deposit balances remain relatively stable throughout the month of March. However, we did take precautionary measures in early March and built up our cash balances through increased use of broker deposits and federal homeland bank borrowings.

To further augment contingent liquidity sources we continue to proactively pledge additional collateral to the Federal Home Loan Bank and the Federal Reserve and as of April 17th, we currently maintain over $25 billion of contingent liquidity across a diverse set of sources, which includes immediately available funds as well as funds we expect to be available within short notice. And as we split up the slides 8 and 9, you can see we added additional details around the composition of our core deposit base which highlights our relationship centric portfolio and which supports the stability we experienced in recent weeks. Looking through the key characteristics of our deposits, you can see both the diversity of our balances across commercial and consumer client types as well as the long tenure of our of our relationships.

And given the industry focus around uninsured deposits, I would simply highlight that over 70% of our deposits are either insured, collateralized, or could be insured by switching to an ICS account to existing capacity. Now to Slide 10. Net interest income was $481 million in the first quarter, an increase of 23% versus the like quarter one year ago and a decline of 4% from Q4. The year-over-year increase was supported by the benefits of our asset sensitive balance sheet as well as substantial loan growth of the last 12 months. When looking at quarter-over-quarter, NII was negatively impacted by approximately $9 million associated with lower day count. The asset side of our balance sheet continued to benefit from both higher balances and rates.

However, as I spoke previously the cyclical lags in deposit pricing combined with the remixing within our NIB deposit portfolio served as a notable headwind for the quarter. Those same dynamics were evident as we looked back at the margin for Q1, with higher cash balances also serving to weigh on them by approximately two basis points during the quarter. And as the environment is stabilized, we are working towards more normalized cash balances and thus the associated impact to NIM should reverse in the coming quarters. Looking forward to Q2, we expect NII to continue to be pressured. Specifically, we will see a full quarter impact of the deposit mix shift that occurred in the first quarter as well as the continued headwind resulting from deposit price lags.

The combination of these headwinds is expected to lead to NII declines in Q2 followed by relative stability for the remainder of the year consistent with our full year guidance. Slide 11 shows total adjusted non-interest revenue of $118 million, up $17 million from the previous quarter and up $11 million year-over-year. This quarter’s adjusted fee income performance is the highest in recent history, even accounting for the elevated mortgage environment we experienced in 2020 and 2021. The performance speaks to the investments we have made across our franchise with core client fee income excluding mortgage increasing 19% year-over-year. Our wealth management franchise grew 22% year-over-year despite what continues to be a challenging equity market.

The diversity of our wealth revenue streams including short term liquidity management products continues to drive strong growth.Capital markets also recognize this strongest quarter on record with a revenue of $14 million, a 151% increase year-over-year. Syndication fees as well as interest rate management products drove the strong quarter. Further signs that our commercial franchise continues to grow through enhanced product offerings and the expansion of our middle market line of business. As we look through the remainder of 2023 we do expect core client fee income to decline from Q1 levels as slower economic activity will impact capital market fees and we also begin to implement changes to our consumer checking products. Total non-interest revenue for Q1 was impacted by a $13 million onetime benefit associated with the regulatory approval of our Qualpay investment.

Moving on to expenses. Slide 12 highlights total adjusted noninterest expense of $304 million, down $3 million from the prior quarter and up $25 million year-over-year, representing a 9% increase. As we look quarter-over-quarter, adjusted expenses were well managed. Increases in seasonal personnel expense and planned increases in FDIC and healthcare costs were offset by lower performance-related expenses and controlled core operating costs. When segmenting our year-over-year increase in expenses, the growth is attributable to the three buckets we provided in our guidance for the year: first, new business initiatives such as mass and CIB; second, core operating expenses, including investments in and expansion of our workforce; and third, costs associated with our FDIC assessment rate and healthcare costs.

Our first quarter adjusted efficiency ratio of 50.5% continues to highlight that these expense increases are supported through our growing revenue base. Total non-interest expense was negatively impacted by a $17 million loss associated with the move of third-party loans to held for sale.Moving to Slide 13 on credit quality. Overall, credit performance and the credit quality of our recent originations remained strong. The NPL ratio moved to 0.41%, net charge-off ratio to 0.17%, and criticized and classified ratio finished the quarter at 2.47% of total loans. In the first quarter, our ACL was $514 million or 1.17% of loans, a modest increase of two basis points from the fourth quarter. The deterioration in the forecasted economic scenarios in 2023 and 2024 negatively impacted the ACL ratio, offset by the continuing strong performance of the overall portfolio.While we do expect additional pressure on credit metrics due to the economic environment, we continue to have confidence in the strength and quality of our portfolio.

We continue to be vigilant while monitoring the more recession-sensitive components of our loan book and we utilize rigorous underwriting parameters and exhaustive market and portfolio analysis, not only for these sector, but for the entirety of the loan portfolio. Given the increased interest in the office sector, we have included additional color on our office portfolio in the appendix. What you will see is an office book with low maturity and lease rollover risks that is primarily medical, secured by modern properties and reflective of our footprint’s superior market trends.As noted on Slide 14, the common equity Tier 1 ratio increased to 9.76%. Within the quarter, core earnings supported robust capital generation, which was more than sufficient to meet what continued to be solid core balance sheet growth.

We had no share repurchase activity in the first quarter and in light of the uncertain economic and regulatory environment, we believe that continuing to grow our CET1 ratio is prudent. As we’ve done for the last several quarters, in the near term we will continue to focus on retaining capital generated through earnings to support our core growth while bolstering our balance sheet position. While not a metric that we manage to, given the current environment it is worth acknowledging the improvement in our TCE ratio, which increased 28 basis points from Q4 and ended the quarter at 6.12%. Declining market rates benefited OCI associated with the AFS portfolio and hedges and continued growth in our primary capital levels from earnings retention also provided support.

I’ll now turn it back over to Kevin.Kevin Blair Thanks, Jamie. I’ll now continue to our updated guidance for the quarter as shown on Slide 15. Given the ongoing volatility in the economic environment, we continue to utilize wider ranges for our full year 2023 guidance. We expect loan growth of 4% to 8%. This reduced range accounts for the acceleration of the rundown in our third-party portfolio as well as the diminishing demand associated with the economic environment. These effects will be partially offset by low payoff levels and growth from our newer business lines such as CIB and expansion in verticals such as commercial middle market.The adjusted revenue growth outlook of 4% to 7% aligns with an FOMC that reaches 5.25% in the second quarter.

Changes to the midpoint of our previous guidance are a result of slightly lower loan growth expectations and deposit remixing as well as overall deposit betas, which, as Jamie mentioned are expected to be in the low 40s area. Our expense outlook has been adjusted downward to 4% to 6% with efforts taken to better align with the new revenue guidance. We are prudently managing expenses in this environment while continuing to ensure we do not sacrifice critical investments that will support our long-term success and shareholder value. The result of our revised revenue and expense guidance has forecasted PPNR growth of 4% to 8%. Despite a more challenging environment, we are still committed to year-over-year PPNR growth and generating attractive returns for our shareholders.Moving to capital.

As we have previously communicated, we are targeting a CET1 ratio above our previous guidance of 9.25% to 9.75%. At this time, we believe it is prudent to build a larger capital buffer given the uncertain regulatory and economic environment. I believe the forecast represents the resilience and adaptability of our business model as well as the power of building strong and loyal client relationships. Our strong financial results this quarter reflect the hard work and dedication of our team as well as our commitment to supporting our clients and communities through these difficult times.Looking ahead, as we see many opportunities for profitable growth and success while continuing to improve our overall risk profile through increased liquidity and capital and well-managed credit costs.

Our strategic investments, coupled with our client-centric approach, will continue to differentiate us from our competitors and position us for long-term success. At the same time, as a main street bank, we remain committed to being a trusted partner to our clients, providing them with the tools and resources they need to achieve their financial goals. And now operator, let’s open the call for Q&A.

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Question-and-Answer Session Operator Thank you. [Operator Instructions].

Our first question today comes from Brad Milsaps from Piper Sandler. Brad, your line is open. Please go ahead. Bradley Milsaps Good morning guys. Thanks for taking my questions and for all the details in the deck. Maybe I did want to start with credit. I appreciate all the details.

I was curious, I know you guys are constantly running sort of internal stress on different pieces of the CRE book. Just kind of curious how that’s evolved maybe over the last 90-days kind of given all that’s transpired, also, I think here you note that maybe only about a little less than 15% of the office book rolls over this year. Would that sort of hold for the rest of the CRE book and would just be curious for any color on conversations you are having as these loans mature with borrower’s kind of what you’re doing to shore them up and just kind of how those conversations are going as we think about credit going forward?Robert Derrick Yes, hi Brad, this is Bob. I’ll comment or two, and Jamie and Kevin can certainly kick in. But from a CRE — from an overall perspective, the match up on the maturity risk if you will is similar.

And in terms of you’ve got some duration there, there’s probably three years plus for the most part. I do want to make sure that I touch on office for you because I know that’s what a lot of folks are looking at, but just a couple of points. Number one, in addition to the data we’re showing when you think about office and the spot metrics, today, they’re very clean. Average size of that office portfolio loan is less than $10 million, little to no charge-offs in — low nonaccruals, and even the criticized classified levels today would be in the 5% range.Now with that said, obviously, we’re doing a deep dive into that portfolio. We’ve looked at approximately 70% coverage of loans — all loans greater than $7.5 million. And the result of that, which gives us sort of a watch list, if you will, of credits of somewhere around 10% to 15% of the office book that we would have some level of concern about and I would say some level of future concern about.

These loans are still performing, still got good commitment by the sponsors, etcetera. So when you start narrowing it down, it’s a fairly small quantifiable percentage of the loan book — of the office book that we think potentially we’ll need to think through as time goes on.Now again, that’s strictly property performance based on potential lease expiration, etcetera. So from our perspective, even when you dig back into the portfolio, the potential problems in terms of amounts are fairly manageable. So I did want to get that out. We aren’t seeing a whole lot of softness in other asset classes, Brad. Multifamily continues to be a good asset class, albeit with rent rates certainly beginning to move back, but they were so hot for a year or two.

They’ve got some cushion there. And that’s market-specific. Warehouse, we feel good about as well there, and retail seems to be holding fine. And you know the hotel story as we ran through the pandemic there, and they seem to be improving. So all in all, our CRE book is in good shape. The office story will play out over several quarters, but we feel like we’re well positioned for it.Kevin Blair And Brad, the only thing I would add to that is, Bob talked about our internal evaluation, but you also have to go back and look at the Southeast. I mean, the Southeast continues to perform very well. We believe you’ve seen some distress in certain asset classes, but it’s been very geographical. If you look at the Southeast, we continue to have rent growth higher than the national average.

When you look at specifically our office portfolio, our criticized and classified ratios are far lower than what some others have shared. Part of that is due to the fact that we have 50% of our book in medical office. And the remaining portion of that traditional office book is newer properties in markets that in the Southeast haven’t seen the same work-at-home impact.So in general, our update is that although we expect credit metrics to continue to move off of all-time historical lows, we’re not seeing anything systemically, including office, that gives us greater concerns. On the C&I front, we look at our cash inflows every month and every quarter. We haven’t seen any overall deterioration of any specific industries. Any NPL inflows that we’ve had at this point have been onesie, twosies.

And so we still remain cautiously optimistic. And to your point, Bob and his team are trying to look at every different way they can and ring-fence anything that gives us any concerns.Jamie Gregory Yes. And Brad, I’ll just jump in from the allowance perspective. And everything Bob — as Bob mentioned, we’ve done a deep dive on all these portfolios and looked at all loans of any real size and all of that is embedded in our allowance calculation. And so as Bob mentioned, the 10% to 15%, the watch list on our non-medical office, that is included in the allowance calculation. And what you’ve seen is on aggregate, the quality of the loan portfolio has led to a reduced life of loan loss estimate for the past couple of quarters. And so the aggregate portfolio has increased.

In the first quarter, we did increase the allowance based on the CRE portfolio by a little less than $20 million, and that’s embedded in the move from the 1.15 to the 1.17 ACL ratio.Bradley Milsaps Got it. And I guess this is my follow-up. You guys covered a lot there. But you mentioned as you move up in loan size, you also feel like you’re moving up sort of in quality of borrower. Can you just kind of give us a little sense of kind of maybe some of the drivers behind the loan growth, I think you mentioned a couple of times that are seeing maybe larger exposures but certainly in line with — as you become a larger bank, that’s pretty natural. Just curious on any additional color there.Kevin Blair Yes. So it’s — we’ve talked about it in terms of how we continue to grow our balance sheet actually allows us to de-risk the overall balance sheet.

And it’s just based on the fact that as we’re booking more middle-market credits as we moved into corporate and investment bank, we’re more investment-grade credits. And so when you look at it from an expected loss through our provisioning or just through our risk rating process, it would suggest that the production that we’re putting on today and we put on in previous quarters is in effect, reducing the overall expected loss of the portfolio, moving away from, as you suggested, some of these smaller credits that have a little more volatility and less cushions of protection. And so this quarter, our loan growth, obviously, on the CRE front was more of a function of fund ups on our construction lines on multifamily. But on the C&I side, most of the growth came from middle market, which was about 50% of the growth, which is for us, we think right down the middle of credits that are going to perform at a very high level.

So that’s been our plan in terms of growth as we’ve shifted to some of these new specialties and moved up market that not only are we getting good growth, but we’re also derisking the portfolio at the same time.Bradley Milsaps Great, thank you guys. I appreciate the color.Kevin Blair Thanks Brad.Operator The next question is from Ebrahim Poonawala from Bank of America. Ebrahim, your line is open. Please go ahead. Ebrahim Poonawala Hey, good morning. I guess on NII, Jamie, just wanted to follow up on your comments around, I guess, a decline in 2Q and then relative stability in the back half. Just talk to us in terms of dynamics that you expect from there around, one, the pace of deposit repricing if, let’s say, if the Fed is done after the May hike, like how do you expect deposit costs and betas — at what point do they stop rising?

And remind us of just the asset repricing that you expect back half into next year?Jamie Gregory Yes. Ebrahim, as we look forward we do expect to see continued increases in deposit costs as we kind of get to the end of this tightening cycle. When we think about the timing, just like what we said in January, we do expect the first quarter to be our highest quarterly increase in total deposit costs. And when you look at that, you can look at the months of December to March where our costs increased 55 basis points. But thinking about those monthly increases, which we think is probably a better way to look at a little higher frequency data, prior to March we saw a steady trend that was right in line with what we had modeled and what we discussed in January.

We saw monthly deposit cost increasing and those increases peaking in November and December. And then in January and February, we saw steady declines in the rate of increase of total deposit costs along the lines of what we expected.Now clearly March was a little bit of a different story when we saw the disruption and so we did see an increase there. That was actually kind of similar to what we saw in November and December. But the movements that we saw the rollover from year-end into early Q1 gives us confidence in our modeling and our expectations going forward. And so we do believe that we will start to see that trend resume from here of slower increases — monthly increases in total deposit costs, but the March disruption does shift our through-the-cycle beta higher into the low 40s.

And so as we look at the second quarter, we do expect to see total deposit cost increase a little less than 50 basis points. That’s less than the first quarter and about a 30 basis point increase from the month of March numbers. And so that’s what we expect to see in the near term. Then beyond that, we’ll continue to see some marginal increase in deposit costs but in the second half, the rate of increase declined pretty precipitously.On the asset side of the balance sheet, in the first quarter you saw our loan beta was a little more than 60%. We expect that to continue. As we mentioned in our forecast, we expect another 25 basis points from the Fed, and we would expect somewhere in the low 60s as far as loan beta on that. And then progressing through the year, we think that the pressures from increased deposit costs and the benefits from fixed rate asset repricing will be fairly well balanced in the second half of the year.

And then beyond that, we think there will be just the benefit of fixed rate asset repricing moving forward, which will be a tailwind to both NII and the margin.Ebrahim Poonawala Got it, thank you for talking through that. And just a separate question, so you gave great detail on CRE. I’m just wondering maybe, Bob or Kevin, anywhere else within just the loan book where you’re seeing any signs of stress or pain and as you think about the back half of the year and the cumulative impact from the Fed hikes, like where do you see the weakness within your loan portfolio where you expect to be drivers of delinquencies and losses?Robert Derrick Yes, EP, this is Bob. I’ll start. Nothing specific. I wouldn’t call out a specific industry or category right now.

We’ve certainly been watching our small business portfolio as we mentioned in quarters past, and we’ve seen some marginal negative migration there. So we continue to watch that. On the C&I front, no industry specific that I would call out. Certainly, we’re doing a similar deep dive into our leverage book, which is fairly small, like we did in our CRE book. So I don’t think we’re really seeing any specific industries in terms of C&I.In terms of CRE in addition to office, obviously, multifamily is very market specific. We’ve got a deep market analytics team that does an awful lot of analysis. And that’s probably going to be more market-specific. But we still have a lot of strong economic sort of tailwinds of migration and lack of housing supply, particularly in our markets that are still kind of providing a little buoyance to the multifamily book.

So I don’t see it there. I think it will be sporadic and dependent upon those companies that are still struggling with input cost and labor costs.Kevin Blair And EP — great answer, Bob. I just — it’s interesting when we look at any of the troubled credits that we’ve seen in the last several quarters, what to me is the only commonality is most of these businesses had challenges prior to the pandemic. And in many ways, some of the cash around PPP and the ability to manage through the last several year’s kind of bought them time, but as they come out of the other side, they’re returning to some tough business models or they’re having some challenges. And so instead of new credit issues arising, I think what we’re seeing are some of these companies that struggled in the past that were able to make it with the additional liquidity are back to struggling again.

That seems like that’s a common theme.Ebrahim Poonawala Got it, thank you. Operator The next question is from Steve Alexopoulos from J.P. Morgan. Steve, your line is open. Please go ahead. Anthony Elian Hi, everyone. This is Anthony Elian on for Steve. My first question on Slide 9, you provided a great detail into the composition of the deposit base. I’m curious, early on in March, what were the conversations like behind the scenes with your largest uninsured depositors, after the two bank failures in March, was there much concern or panic among these depositors after what they saw happened to SVB and Signature?Kevin Blair Well, Tony, it’s hard to understand or gauge what their panic was. I think there was a lot of false narratives happening around the industry trying to understand whether this was a bank crisis or whether there were three banks that they had an individual crisis.

And I don’t think that those three banks that failed constitute an overall bank crisis, but those conversations led to a lot of calls to our bankers and in many situations are outreached to some of our largest depositors. And the conversations we are trying to understand how that impacted us. And from our standpoint, our first goal was to explain that we are very different than the three institutions that failed. We have a very diverse granular deposit base, as you can see in the deck. We’re not homogeneous as it relates to where we were funding the balance sheet. And so having those conversations and most importantly, the long-term relationships that we’ve had with these clients, you can see that not only is our average tenure for our top 100 depositors 20 years, but if you look at the entire book, the dollar weighted average is 18 years.

So we’ve developed long-term relationships built on trust and so when we had those discussions, we were able to keep our deposits on balance sheet. We do have a product that you’ve heard about, the insured cash suite product that we’ve offered prior to this little mini crisis. And we had a whopping total of about 60 clients for less than $500 million move into that product. So I think that serves as a testament that people didn’t feel compelled that they had to move their deposits into that sweep arrangement and that they were very comfortable with Synovus continuing to safeguard their liquidity. But in many ways, they were good, fruitful discussions. And if I had to gauge how much we lost from that, I’d say less than $100 million in deposits.Anthony Elian That’s good color.

And a follow-up to that. I mean, on an overall basis, do you feel like the situation has stabilized and it’s back to business now, right, I mean we’ve seen a handful of regional banks report earnings so far this week. And we haven’t seen the widespread deposit outflows to money center banks or elsewhere that the media or others have portrayed?Kevin Blair Yes, I think the questions around liquidity are abating, and the questions around profitability are becoming front and center. So what we have to do going forward is make sure that as we continue to grow our assets out of the balance sheet is that we’re conscious of not just growing deposit but what — deposits but also what’s the cost of that funding. And so that’s where we’re all focused and I think that’s where you’ll see the industry turn their attention.

And I think you’ll also see more conversations around balance sheet optimization. Are there asset classes there that are not self-funded that now in this environment with a prolonged higher rate interest rate environment that aren’t returning the levels of capital to hurdle rates that you require. So I think it will turn more to profitability and balance sheet optimization and less about liquidity and concerns of losing liquidity. Now I will tell you that I think that there — as you’ve heard from other banks, there’s still a question mark in terms of how much shift will continue to occur from NIB in interest-bearing. We all can try to model that. What we’re excited about is that we continue to be very successful in our treasury and payment solutions area.

Our production was up 40% again in the first quarter versus the first quarter of last year. And I think that’s about the best vehicle we have to be able to preserve and grow non-interest-bearing deposits, and that’s where we’re focused.Anthony Elian Great, thank you. Operator The next question is from Brady Gailey from KBW. Brady, please go ahead. Your line is open. Brady Gailey Hey, thanks. Good morning guys. I wanted to start with fee income. I heard Jamie talk about fees being down on a linked-quarter basis in 2Q. Is that based off the reported fee income or is that adjusting for that $13 million one timer? And in fees, I know you mentioned some changes in your consumer checking fees, so service charges, any way to quantify the impact that, that could have on fee income?Jamie Gregory Yes, Brady.

The decline that we expect in the second quarter is based on the adjusted number. And it’s really a function of a slowing economy and slower loan growth leading to less capital markets fees. The first quarter was a big success for us in capital market fees, a record quarter of $14 million. That’s something that as we head into a likely recession that we don’t expect to be sustainable. Now clearly, it’s a big success because this is an area where we’ve been investing for some period of time in our commercial businesses. And so we love to see that. But there’s just going to be a headwind on growth in that area just due to the economy. And so that’s what’s largely driving the decline. I would put the second quarter NII adjusted in somewhere between 105 and 108 is probably a good range.

And that’s how we are thinking about that. You’re right that as we look forward longer term, changes in our deposit offerings will lead to a headwind on NIR growth. One way to think about that would be approximately $10 million annualized, but that’s something that the timing is still to be determined, and we’ll give more updates on that as we proceed through the year.Brady Gailey Alright, that’s helpful. And then I know a lot has changed from Investor Day last year. But I know during that Investor Day, you laid out some targets for 2024 of a 1.3 to 1.4 [ph] ROA and a 16% to 17% ROTCE. I think The Street has you close to a 1% ROA next year. So any comment or update on how you’re thinking about those kind of profitability goals given today’s backdrop?Kevin Blair I’ll let Jamie talk about kind of the numbers, Brady, but I’ll take you back to that February Investor Day.

And when we put those out there, we said, look, these absolute numbers that we’ll share with you are based on today’s rates and based on what we see over the next three years. And so as of that period, those numbers were not only accurate for our forecast, but they are also accurate and that we felt that they would be top quartile. But what we left with that day was, look, we can’t predict the future. But what we can say is that our focus is going to be continuing to generate improvements in our financial performance that will allow us to be top quartile. If rates are higher, and that means that the returns need to be higher and efficiency ratio may be lower, then so be it. But our ultimate goal there was to just say, relatively speaking, we want to be in the top 25%, and the numbers will play out as they play out in that time frame.

Based on what we’re dealing with now, that may mean that you reset the bar, and you look at some different numbers. But Jamie, how would you think about the actual forecast?Jamie Gregory It’s a very interesting thought exercise because when we laid out our multiyear outlook on February 8th of last year, we had Fed funds approaching 3% three years out. And ironically, if you were to look at the forward curve today, Fed funds is approaching 3% three years out but in a very different way. And so as Kevin mentioned, our performance metrics really are to be top quartile versus peers. And we will pivot as we need given the environment. And so while the — while we may end up back at 3% Fed funds in the medium to longer term, we believe that we have a franchise model here that’s poised to remain and be top quartile long term.

And so we will react to that.Our priorities right now are ensuring that we are positioned to take care of our clients here in the Southeast because we still believe that the opportunity here is unique and big. And so we are positioning our balance sheet for that, positioning our team for that. And we believe that we will win in that regard. But we’re also convicted on making sure that we do it in a prudent manner and defending the balance sheet. And you see that in our capital strategy, you see it in our liquidity strategies, and you see it in our NII sensitivity hedging, just making sure that we protect the income statement in various outlooks. And so that’s our strategy. We’re committed to long-term top quartile, and we will adjust as needed.Brady Gailey Yeah, that makes sense.

Thanks guys. Operator The next question comes from Michael Rose from Raymond James. Michael, your line is open. Please go ahead. Michael Rose Hey, good morning everyone. Thanks for taking my questions. Just wanted to get a sense for your willingness to maybe actually accelerate some of your hiring efforts and some of the business build-outs that you’ve obviously laid out at Investor Day. There’s a bank the other day that basically said the hiring opportunities are greater than they could remember in recent times, just given that lenders seem to be kind of idled as demand slows and then banks kind of pull back. Just wanted to get an update on maybe some of those initiatives and would you actually consider actually accelerating some of that at the expense of near-term profits but to position yourselves better on kind of the other side of whatever sort of cycle we’re going to have?

Thanks.Kevin Blair Yes, Michael, obviously, there’s disruption in the marketplace and that presents opportunities, and that hasn’t changed over the last several years. And you can see from our rest of year guidance, we’re continuing to grow expenses. And we think that, that will, given our revenue guidance, still allow us to present positive operating leverage. But we want to make sure that we’re opportunistic. We’re leaning in. We believe that in times of crisis or in times like this is when share shifts hands, and we want to make sure that we take advantage of that. And that means that we’re out there still attracting top talent. We’ve been adding middle market talent. We have three additional CIB team members that will be joining us in the next several months when they’re finished with their garden weave.

Across our commercial segment, we’re adding talent in our high-growth markets. And the only thing that’s changing there is we want to make sure that we’re putting a higher bar on the individuals that we’re hiring. And I would love to be able to do just not individuals, but to bring over teams.But when we look at the payback period of a new relationship manager or a new private wealth adviser, we want to make sure that given that there is probably an economic downturn in our near future that we are expecting higher levels of talent and that, that NPV is not going to be impacted because we’re bringing in actually better talent, and they’re going to perform within our expectations. So yes, we do think that’s an opportunity. You won’t see us trying to shrink our way to prosperity.

We think there’s a tremendous opportunity in the Southeast, and we think talent is a big piece of that.Michael Rose Helpful. And then maybe just one on the loan growth guidance. Is the change really just a function of moving the consumer loans to HFS, I’m sorry if I missed that, but just wanted to get a sense for kind of what the delta is because it does seem like we have good kind of momentum, utilization rates up, kind of, etcetera? Thanks. Kevin Blair Obviously, Michael, that’s $450 million we moved over there. So that’s a component of it. But we also have seen softening on the demand side. Our pipelines are off about 25% when you look at it across the board. And that’s us being prudent on one side where CRE pipelines were up [ph] 95% versus last year.

The growth that we’re seeing there, as I mentioned earlier, really fund ups of our construction lines but not a lot of new production.So the pipelines are declining. We still think that we’ll be able to grow in that mid-single-digit level just because we have so many business units that are fairly new, whether it’s expansion of our middle market team where we’ve increased our RMs 50% over the last couple of years, our CIB, which grew another $40 million this past quarter. So the difference for us is that on the C&I front, we have a lot of new initiatives and new talent that will continue to produce despite the fact that overall pipelines are diminishing a bit.Michael Rose Thanks for taking my questions guys. Operator The next question comes from Jared Shaw from Wells Fargo.

Jared, your line is open. Please go ahead. Jared Shaw Hey guys, good morning. Maybe just when we look at the update for higher levels of CET1 and the higher liquidity that’s on the balance sheet, how long should we be thinking you want to retain higher liquidity and capital, I know you said a lot of it is due to the current immediacy of the crisis but should we think that as we go into 2024 were more normalized levels of liquidity and that, that CET1 ratio could come back down below 10% or do you feel this could be a new normal for a little longer?Jamie Gregory As we think about capital ratios is largely dependent on the environment. And so it depends on the stability of the outlook and where the economy is, where the banking industry is. There are a lot of components that are outside of the risk inherent on our balance sheet.

And so that’s how we think about it. We think that getting to 10% or higher in the near term makes sense. And it’s probably safe to think about that as the next year or so, and then we’re constantly reassessing. But that’s generally how we think about it, and that’s not a new strategy for us. The last quarter that our deposits, that our dollars of CET1 declined was the third quarter of 2019. And since then every quarter, we have accreted dollars of CET1. We’ve accreted $1.4 billion of CET1 over that time period. And we’ve deployed that to clients here in the Southeast. And so as we think about that strategy, it’s really nothing new for us. And that’s our intent going forward. We grew CET1 13 basis points this quarter. We expect it to continue growing that ratio as we get to the 10% area.But longer term, when we look at our stress testing, our modeling in a severe adverse scenario, there’s nothing that points us to the magical 10% number.

Our math would tell us that you could run with a CET1 lower than that. And so we’ll assess where we are, where the economic outlook, where peers are as we go forward. But right now, we’re comfortable accreting up to the 10%. We think that’s the prudent thing to do.Jared Shaw Okay, thanks. And then just as a follow-up, you mentioned that you used a higher weighting on a more adverse scenario for CECL. If you hadn’t done that, would we have actually seen either dollars of ACL decline or a ratio decline? And I guess what is that weighting to the more adverse scenario now?Jamie Gregory Yes. So when you — you’re right that we did adjust our weightings. You can see that in our table on Slide 17, the weighting change. Basically, our outlook right now continues to align to that slow growth scenario.

And it’s really low to no growth on average for the next couple of years. And so that’s the — basically the base case scenario when you take the weightings, consensus baseline would be positive to the allowance. But we’re really aligned to a slow to no-growth scenario for the allowance.Jared Shaw Okay, thanks a lot. Operator The next question comes from Kevin Fitzsimmons from D.A. Davidson. Kevin, your line is open. Please go ahead. Kevin Fitzsimmons Hey guys, good morning. I just — I know we’ve had a few questions on credit just more general and top level, but I just wanted to — if this has been addressed already, I apologize, but there was a linked quarter increase in nonperformers, and it looks like also special mention and substandard.

And I’m just wondering if there’s any kind of common thread to that, is that just more what’s happening in the environment, is it more of a proactive stance? I know, Kevin, earlier, you mentioned about some of the problem credits are ones that were challenged before and just have had some lifelines thrown out from the government, and now they’re still challenged. But just a little more color on — any color on what segments are driving that deterioration that we saw linked quarter? Thanks. Robert Derrick Hey Kevin, this is Bob. Thanks for the question. As far as NPLs go moved up to 41 basis points, it’s really a handful of credits that we already had rated that kind of moved into nonaccrual status at the same time. Again, I would point to the level of criticized and classified accruing loans behind that as being fairly manageable with no specific industry or concentration, if you will, geographically speaking to speak of.

So a few credits that were a little bit larger, and then you had just normal migration due to the economic environment in sort of our smaller business and consumer books. So when you do the math on that, throw in the larger ones, it pushes you up, still 41 basis points about where we were a few quarters back. So not significantly higher, but certainly migrating up. As we had mentioned, the bias is still probably for negative migration although it’s certainly within our expectations. In terms of charge-offs, I kind of felt like that’s what you’re asking as we were going forward. Those will eventually — they will work their way back up to some level of what you may call normalization. I tend to think that if you go back pre-pandemic, and we were in the 25 to 30 basis point range, if you will, that probably feels okay, although it’s certainly subject to quarterly swings, particularly if you have some larger credits.

But all in all, that’s what’s driving the slight increase in those numbers, Kevin.Kevin Fitzsimmons Okay, great, great. Thanks. One quick follow-up, just there was a lot of focus a number of weeks ago on underlying losses within held to maturity. You guys have been pretty exclusively, I think, exclusively available for sale. And just maybe if you can touch on the trade-offs in that approach and whether that may — whether that could or would change going forward?Jamie Gregory You’re right. We’re 100% available for sale. As we thought about the use of held to maturity, we believe that it really had more negatives than positives where it limits your ability to trade the securities, and all you get is a change in the accounting treatment. And so there’s no economic benefit outside of the appearance of AOCI on the balance sheet and in tangible common equity.

And so we did not choose or elect to put any securities in held to maturity. It has been an interesting time over the past quarter as this has become a focus and looking at AOCI and comparing the unrealized losses with and without held to maturity. For us, as we reflect on the use of it, we still believe that it is an accounting treatment that doesn’t really change anything, but it does provide a limitation on your ability to manage your balance sheet. And so it’s not that attractive.When it becomes attractive would be if there was a change in the regulatory environment where you had to include AOCI in regulatory capital ratios. And if that happened and held to maturity securities were excluded from that, then that would materially change the view around the benefits of using the held to maturity designation.

Clearly, there’s no clarity around that — what will happen there and how that will play out. But that’s generally how we think about it. But to date, we’re very comfortable with where we are with our securities portfolio, very comfortable with the unrealized losses in that portfolio. You saw some improvement quarter-on-quarter in that, and we will wait to see if there are any changes on the regulatory side to the treatment of AOCI.Kevin Fitzsimmons But Jamie, do you think that given all that attention that was on held to maturity, you think they’d never make that change of doing it for AOCI but not for held to maturity?Jamie Gregory That’s beyond me. I can’t opine on the direction they would go with this. To me, logically, if your view is that you want to look at long duration risk on the balance sheet and you want to focus in on securities, then you should probably include everything.

But I can’t opine on what the regulations will be in the future.Kevin Blair And Kevin, you know this, but that’s a very surgical way to think about it because nobody is marking the deposit side on the other side of the ledger. So when you look at it from an EVE perspective, you could argue that you’re only looking at one component of it. And if you mark the liabilities, you’d be in a very different position.Kevin Fitzsimmons That is a very fair point. Okay, thank you guys. Kevin Blair Thank you Kevin.Operator The next question comes from Christopher Marinac from Janney Montgomery Scott. Christopher, your line is open. Please go ahead. Christopher Marinac Thanks very much. Kevin, I was just going to ask you the same point about marketing deposits, so thank you for covering that.

My other question was on the FHLB increase. Was that due to the overall line or did you have to pledge more collateral this quarter?Jamie Gregory That is due to pledging more collateral as we’ve always felt comfortable with our liquidity profile and contingent liquidity sources. But this — in the past month, there have been new metrics that people, that the press and analysts have focused in on like contingent liquidity relative to uninsured deposits and ratios like that. And so we spent a lot of time over the past few weeks looking at our loans that were not pledged anywhere. And we had almost $30 billion of unpledged loans. And so we spent time looking at those data tapes, sending them to the home loan bank, sending them to the Federal Reserve and increasing our contingent liquidity at those locations.

And clearly, that doesn’t cost us anything. It’s just an effort of getting loan tapes to those places and making sure that they’re accepted. And so that was a little bit of work that we went through over the last month. We think that, that’s a prudent thing to do. We do not intend to use that capacity, but it’s there for us in a severe, adverse or an unexpected situation.Kevin Blair And Jamie, Chris, maybe I thought I heard you say the draw we took this quarter was done out of an abundance of caution, just to have extra liquidity in case we were to see some outflows, and we didn’t need extra collateral for that draw. We had capacity, what Jamie was talking about was the incremental capacity that we added during the quarter just to have additional contingent funding available if we needed it.Christopher Marinac No, that all makes sense.

And for whatever future episodes occur in the marketplace, you’re that much more prepared. So that makes a lot of sense. Thank you for all the information. It is very helpful.Kevin Blair Thanks Chris. Operator The next question comes from Samuel Varga from UBS. Samuel, your line is open. Please go ahead. Samuel Varga Good morning. Kevin Blair Good morning Sam.Samuel Varga I wanted to start just one more question on credit. With the shift of the part of the consumer book in the held for sale, I wanted to ask specifically just on kind of what the thought process was behind that? And then converse, I guess, are you seeing any sort of underlying trends that made you more cautious on that particular book that you moved?Robert Derrick Yes, I’ll start, and maybe Jamie can cover the held for sale.

Sam, this is Bob. But from a credit perspective, the move of — that was a third-party move and just simplistically stated, we built that third-party book during the excess liquidity period that we were in during the pandemic and when we were going the other direction with liquidity. So it was viewed as an investment alternative as a surrogate to the investment portfolio and a good yielding move for us on — without taking a whole lot of duration risk and some limited, what I would call limited credit risk. And now we’re just kind of exiting that position. And again, I think validating that there wasn’t a whole lot of credit risk there as we took a $6 million charge to make that transfer.But from the underlying consumer credit quality, and I would include small business loans in that category, Sam, since we do a lot of that through our retail network, we’ve seen moderate migration in credit metrics or moderate deterioration.

Most of our mortgage portfolio is private wealth in possession [ph]. So it’s holding up fairly well. We do have an affordable program that we’re actually very proud of that we use to support lower income in LMI districts. And we have seen some deterioration there. But again, we think we’re working with those borrowers have great programs and assistance programs that we provide and proud to do that in our markets actually. So overall credit in the consumer book is kind of stable with some slight deterioration in small business. And Jamie, on the accounting side?Jamie Gregory Yes. As we think about that portfolio, the auto portfolio we moved to held for sale, that’s something we began talking about in, I believe, in October after third quarter earnings and a process that we’ve been proceeding down.

And we moved into held for sale, and then the month of March happened and there’s just more uncertainty out there. And so it’s our intent to sell that portfolio. As Bob mentioned, the credit is performing very well. They are also shorter duration assets and so there are assets that we like. We think that there’s a good profile, good risk-adjusted return. But given the last month, I would say that it’s a little more uncertain out there, the environment to sell loans like this. But what we would continue to intend to sell it, and we’ll continually reassess as we see where the market is on that.Samuel Varga Got it. I appreciate the color. And then if I could just have one more in there. Jamie, I appreciate the color you gave on the deposit beta assumptions and how those are moving around and I guess, what the mix impact on that.

Would you be able to give some specific color on the interest-bearing deposit beta?Jamie Gregory As you think about interest-bearing deposit beta, we were at 43 in the first quarter. And as I mentioned, in the month of March, a little bit higher in interest-bearing deposit costs. That gets you to the cycle interest-bearing deposit costs of 47. It’s — the mix is really important when you think about what happens from here as we get later in the cycle. But we could see that approach 60% as you get out into the third quarter.Samuel Varga Got it, it’s very helpful. Thanks for taking my questions. Operator 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.Kevin Blair Thank you, Adam.

And as we wrap up our call today, I just want to reiterate how proud I am of our results to date and for the agility we’re showing to adapt to an ever-changing marketplace while continuing to make progress and executing on our strategic plan. Our team continues to work tirelessly to deliver the highest quality of service and advice to our clients while addressing the uncertainty and anxiety caused by a few bank failures that were idiosyncratic in nature. Despite these challenges, we delivered strong financial results. We continue to grow our client base. We further de-risked the balance sheet, and we adjusted our forward plans to produce mid to high single-digit PPNR growth for the year. And we’re delivering on these results in the face of either a prolonged economic slowdown or an actual recession.

The awards and the recognition that we referenced today, coupled with others that we did not mention such as being recognized as the top workplace in Atlanta, serve as further proof points that our clients and our team members trust and value our company and the services we provide.And you can rest assured that we’re not satisfied with this recognition, but rather, our focus will remain on incremental improvements as well as investing in our teams and empowering them to deliver the best possible experience to our clients. We believe that our success is not just measured on financial performance, but also by the impact we have on our communities. That’s why we remain dedicated to supporting the 55 MSAs that we support in our five-state footprint.

As we recently announced our 2023 financial commitment to more than 300 organizations that do amazing work across our footprint.As we move forward, we will continue to prioritize relationship, banking values, of teamwork, excellence, and integrity. We know that these values are what builds trust and sets us apart and enables us to deliver for our clients, our team members, and also our shareholders. On behalf of the entire Synovus team, I want to thank you for your continued support and trust. We remain excited about our future, and look forward to continuing to deliver in the quarters and years to come. With that, Adam, we’ll close today’s call.Operator This does conclude today’s call. Thank you all very much for your attendance. You may now disconnect your lines.