Synovus Financial Corp
NYSE:SNV
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Synovus Financial Corp
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Good morning, and welcome to the Synovus First Quarter 2022 Earnings Call. All participants will be in listen-only mode. [Operator instructions] Please note this event is being recorded.
I will now turn the call over to Cal Evans, Head of Investor Relations. Please go ahead.
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 able 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 new information, early developments or otherwise, except as may be required by law.
During the call, we will reference non-GAAP financial measures related to the company’s performance. You may see the reconciliation of these measures in the appendix to our presentation.
And now, Kevin Blair, will provide an overview of the quarter.
Thank you, Cal. Good morning everyone and welcome to our first quarter earnings call. The first quarter provides another proof point of our continued focus on growth. I’m extremely proud of the way our team members set and kept the pace and focus as we pursued and won new business, deepened wallet share, enhanced our clients experiences and made ongoing progress in several areas of investment, including Maast, CIB, and Wholesale Banking.
Our relationship banking approach delivered strong growth this quarter in loans, core transaction deposits and core banking fees, and are a product of broad-base success across our lines of business and client segments. At the same time, we’ve maintained good expense discipline by leveraging Synovus Forward initiatives to partially offset the inflationary expense environment that we have faced, while continuing to invest in talent and our longer-term initiatives.
The roadmap that we shared during our Investor Day back in February, strikes the appropriate balance between core and transformational initiatives. You’ll hear during today’s call, the positive impacts from several initiatives and investments we’ve outlined in our strategic plan and progress we are making towards building sustainable top quartile performance.
We continue to make progress on Synovus Forward with run rate benefits increasing to $125 million as of March end, and we remain on track to deliver $175 million by year-end. The optimization of our branch network is a significant initiative within the Synovus Forward program, with 9 locations closed in the first quarter, and approximately 30 planned for the rest of the year.
We are also continuing to make some promising hires and revenue producing talent, and new leadership in key lines and key markets, increasing our wholesale middle market team by 10% this quarter, while also expanding our specialty lending team and naming new community banking leadership in our Tampa and Chattanooga markets.
On the CIB front, our plan to have talent in place by the second quarter remains on track with 15 to 20 team members expected by year-end. Additionally, from a digital standpoint, we have continued to successfully migrate to our Synovus Gateway digital commercial banking platform. Later this month, we’ll complete a year-long transition of all of our commercial, wholesale and small business clients, providing an enhanced and streamlined experience. Also during the first quarter, we launched our mobile virtual commercial card, which will make it even easier for our clients to utilize their credit facilities.
From a consumer perspective, we heightened engagement across our digital platform by Synovus, and expanded online account opening with increased product availability and expansion of capabilities and channels, and launched Phase 1 of consumer analytics, which is focused on the next best action for our clients. We also continued the measured integration of commercial analytics into how we manage credit events and borrower monitoring, most notably within the community and consumer bank lines of business.
Lastly, development of our banking-as-a-service platform, Maast, is progressing on schedule with the second quarter pilot planned. We are finalizing the selection process for the ISV, which we will partner with for this phase. As the platform is being built, we continue to add talent to our team with 2 new senior leaders added this quarter, who both have vast experience working with fintechs, integrations and technology solutions.
We also have signed a definitive agreement to acquire a 60% interest in Qualpay, a provider of cloud-based platform that combines a payment gateway with robust merchant processing solutions, which will allow merchants and independent software vendors to easily integrate payments into their software or websites. The completion of this investment is subject to the satisfaction or waiver of customary closing conditions, including receipt of necessary regulatory approvals.
Beyond the proposed investment to propel growth in Qualpay’s core business, Synovus has chosen to leverage Qualpay’s payment technology stack as an integral part of Maast. We believe this investment will help to speed up the delivery on Maast as well as ongoing enhancements and solution expansion.
Now, let’s look at Slide 3, where we’ve included key financial highlights for the quarter. I’d like to begin with loans, which increased $1.1 billion, excluding PPP, or 11% on an annualized basis. Our Wholesale Banking segment had another exceptional quarter, and we also posted growth in both Community and Consumer Banking client segments, evidencing the momentum we have across the franchise.
Commercial lending continues to be the driver of overall growth with first quarter funded production up 43% year-over-year. What is important is that we’ve achieved this robust growth and a diversified fashion, while maintaining our underwriting standards and adhering to our disciplined credit framework. Quality deposit growth continued in the first quarter, driven by an increase in non-interest bearing deposits of $284 million.
We continue to see growth in core consumer transaction accounts resulting from both balance augmentation and account growth. Our multiyear journey focused on remixing our deposit base into lower costs sticky sources has positioned as well to manage deposit cost in this rising rate environment.
PPNR adjusted for onetime items and excluding PPP fees was $213 million for the first quarter. This represents a $17 million or 9% increase year-over-year. Revenues increased driven both by balance sheet growth as well as continued growth and multiple fee income businesses. We would be remiss if we didn’t acknowledge the recent geopolitical risk and inflationary economic environment and their potential impacts to our clients both from a consumer and commercial perspective.
Increased prices and supply chain bottlenecks are putting additional pressure on liquidity and business activity in certain segments, and may impact margins moving forward. Despite the challenges, our credit outlook remains positive. Overall, our strong quarter led to an adjusted EPS of $1.08, and operating metrics that demonstrate our focus on profitable growth.
Jamie will now share a more detailed update on the results for this quarter.
Thank you, Kevin. Starting with Slide 4, I’d like to begin with loan growth. Total loan balances ended the first quarter at $40 billion. Excluding PPP balances, loans grew $1.1 billion, led by growth in C&I. On an annualized basis, total loans were up 11%, our third consecutive quarter of annualized double-digit loan growth.
As you can see on Slide 5, C&I loans were up $926 million quarter-over-quarter, and CRE loans grew $130 million. Commercial loan growth was broad-based with 10 of 11 wholesale banking businesses growing balances. We also continue to see growth in commercial production and line utilization. Commercial production increased 43% year-over-year, driven by a 40% increase in C&I. Line utilization increased to 46.1%, up from 42.8% in Q4. Higher utilization from lines existing at the end of the fourth quarter contributed approximately $200 million to loan growth in the first quarter. Higher utilization levels are reflective of our clients investment spend, inventory level builds and inflationary pressures related to higher input and labor cost, among other factors.
Regional economic data indicates performance which outpaces the nation, and showed little effects from the Omicron variant of COVID-19 over the course of the first quarter. Favorable demographic trends continue to give us a cautiously optimistic outlook on the economic health of our footprint in 2022 relative to the rest of the country. This perspective is underscored by conversations with clients and other industry participants within our footprint.
As we turn to Slide 6, we continue to see positive trends within our deposit base even as the positive growth is slowed from the record pace we saw in 2020 and 2021. Our focus remains the same continuing to deliver Synovus to our clients in a way that leverages our platform to deepen client relationships. What we saw in the first quarter was consistent with that aim, with core non-interest bearing deposits of $284 million, and savings deposits growth of $72 million quarter-over-quarter.
Our Consumer Banking segment was a notable bright spot in that regard with core transaction deposits of $701 million attributable to a combination of both account growth and balance augmentation. Time deposits declined by $143 million as a result of our continued focus on remixing our deposit base. Public funds decreased $236 million quarter-over-quarter, mainly a function of seasonality.
Beyond our core portfolio, we also continue to leverage our broker deposit book as a means to efficiently manage our balance sheet and liquidity position. As we forecasted on our fourth quarter earnings call, we saw a notable decline in broker deposits, which were down $797 million that decline was driven by our efforts to efficiently manage our liquidity position. However, we do expect a return to growth in that portfolio in the coming quarters as we leverage that funding source as a cost efficient means of complementing our core deposit growth and helping to fund our strong loan growth expectations.
Our average cost of deposits declined 1 basis point in the first quarter to 0.11%. This was driven by deposit mix optimization and strategic reductions in high cost deposits as previously described. The first rate hike in March had very little impact on deposit costs, as we were able to limit rate increases across the majority of our products. We believe the deposit betas will be modest early in the hiking cycle, with an expected beta of approximately 20% for the first 100 basis points of FOMC hikes.
As monetary policy continues to tighten and FOMC reaches a more neutral policy rate, we would expect to see increased betas, and as a result, we’re expecting cumulative betas in the mid-30s through that period.
As shown on Slide 7, net interest income was $392 million for the quarter consistent with the prior quarter. The first quarter NII was affected by lower PPP fee income, as well as the impact of a lower day count. Excluding these impacts, NII was up $13 million quarter-over-quarter. Year-over-year NII was up $36 million, excluding PPP fees. This represents an increase of 10% and was driven by the strong organic growth we saw in the latter half of 2021 and which carried over into the first quarter.
The net interest margin was 3%, an increase of 4 basis points from the fourth quarter. As expected, lower cash balances helped to support NIM and offset the impact of continued decline in PPP fees. Looking ahead, we expect to see further NIM expansion in the coming quarters as the benefits of higher rates are realized.
To help further contextualize the impact of rates, we included additional detail on our interest rate asset sensitivity on Slide 8. Balance sheet asset sensitivity benefited from the continued growth in our floating rate loan portfolios, which increased to 59% of our total loan portfolio at quarter end, a 7% increase year-over-year. This is due to robust origination of variable rate C&I loans. Asset sensitivity also benefited from recent increases in short-term interest rates, which reduced the number of loans at their floored interest rate. Several factors offset these benefits to asset sensitivity.
The increase in expectations for short-term interest rates led to an opportunity to lock in the benefits of a rising rate environment. Accordingly, during the first quarter, we added $1.4 billion in forward starting hedges. We also made a slight increase to our core deposit beta assumptions in the first quarter, largely driven by changes in the expected pace of fed tightening. Those were offset somewhat by positive deposit remixing terms.
For purposes of our sensitivity disclosures, we continue to assume the static through the cycle beta in the mid-30s. Collectively, as shown on Slide 8, the combination of these factors resulted in a fairly stable asset sensitivity positioned quarter-over-quarter. Specifically, as it relates to deposit betas, we believe it is likely to betas will start low and increases the FOMC progresses through this tightening cycle.
Both the amount of tightening and the pace of tightening are expected to impact deposit betas. To illustrate how the realized beta may impact our NII profile, we’ve included a sensitivity table this quarter. As you can see, adjusting the beta 10% results in an approximate 1.6% change in asset sensitivity.
Slide 9 shows total adjusted non-interest revenue of $107 million, down $9 million from the previous quarter and down $6 million year-over-year. The quarter-over-quarter decline is primarily related to the $8 million BOLI gain in the fourth quarter. On a year-over-year basis, non-mortgage related fee income increased 12%. Notable items included an increase in core banking fees of 19% and wealth revenue of 11%.
Growth in core banking fees was attributable to numerous categories, including card revenues and cash management fees, both reflecting our investments in treasury and payment solutions. In addition, other core banking fees such as SBA loans and merchant services improved year-over-year as a result of strong execution in these business lines.
Wealth revenue benefited from strong customer acquisition, and growth and assets under management year-over-year across all of our key wealth business lines. Within our retail financial advisory business, managed assets grew 24% year-over-year primarily due to strong net inflows. Synovus family office grew their family count by 15% or 21% year-over-year and continues to see opportunity for growth in the coming quarters.
Mortgage revenue of $6 million, declined $1 million from the prior quarter and down $16 million from the prior year. As mortgage rates have increased, refinancing volumes have declined which has resulted in reduced mortgage revenue.
Slide 10 highlights total adjusted non-interest expense of $279 million, down $6 million in the prior quarter and up $14 million year-over-year. Adjusted items were led by the onetime gain on sale of our Columbus facilities offset by branch related restructuring charges. The decline in adjusted non-interest expense quarter-over-quarter is a result of prudent expense management and the normalization of expenses from an unusually high fourth quarter. Offsetting the expense normalization was seasonally higher employment taxes and employee benefit costs, which in total increased approximately $10 million from the fourth quarter.
Year-over-year adjusted expenses increased 5%. Over 50% of the increase is attributable to incentives and costs associated with elevated performance. We continue to benefit from the expense saves and discipline that are part of our culture as a result of our Synovus Forward initiative. As previously disclosed, we plan to significantly reduce our branch count in 2022. We forecast that by the end of the year, the run rate expense benefit from 2022 branch reductions will exceed $15 million, some of which will be reinvested in our digital delivery channel.
Despite tight cost controls, we are investing in the growth initiatives covered at our Investor Day such as CIB, Maast, and restaurant services, and we are fulfilling our strategic commitment to add frontline bankers. First quarter expenditures on new growth initiatives totaled approximately $3 million and we are forecasting $25 million to $30 million in spend on new growth initiatives for 2022.
Key credit metrics on Slide 11 remain stable overall, and at very low levels. The NPA and NPL ratios stayed level at 0.4% and 0.33%, respectively. Total past dues decreased 4 basis points to 0.11%, and the criticized and classified percentage of loans remained at 2.6%. The net charge-off ratio, which was 0.19% for the quarter, continued to remain at historically low levels.
This quarter, the economic outlook worsened due to heightened inflation concerns and geopolitical tensions. Because of this, our multi-scenario economic framework assumes a 64% downward bias relative to the third-party baseline scenario, which somewhat lags current conditions. This increasingly negative economic outlook was more than offset by the strong credit performance of the existing loan portfolio, as well as the reduced credit risk profile recent loan growth. This resulted in an ACL coverage ratio of 1.15%, a decline of 4 basis points from the fourth quarter.
While we are excited to deliver strong core loan growth, our credit team remains diligent and monitoring our loan portfolio and being judicious and approving new credit risks we take on our balance sheet. As we grow our business, we remain committed to maintaining a well diversified balanced loan portfolio across various industries and asset classes and diligently managing credit risk within our risk appetite.
As noted on Slide 12, the Common Equity Tier 1 ratio remained relatively stable at 9.47%. Strong PPNR continues to support organic capital creation with 35 basis points accruing to Common Equity Tier 1 inclusive of taxes and the provision. Our focus remains on deploying this capital to our strategic priorities of strong core loan growth and a competitive common dividend, which now stands at $0.34 per share per quarter. Our capital position remains strong and we continue to actively manage CET1 within 9.25% to 9.75% target range. In the first quarter, we repurchased $10 million in shares.
As we outlined at Investor Day in February, our approach to capital management will continue to prioritize capital deployment that is aimed at supporting client growth, paying a stable common dividend and accommodating opportunistic non-bank M&A opportunities.
I’ll now turn it back to Kevin.
Thank you, Jamie. I’d now like to share some updates to our guidance for 2022 previously disclosed during fourth quarter earnings. The updated guidance does not include the impacts of the investment in Qualpay, which we currently expect to close in the third quarter and we’ll have an overall immaterial impact on our financial statements.
As a result of the strong loan growth and increase utilization we saw in the first quarter as well as current pipeline levels. We are raising our loan growth guidance to 6% to 8% for the year, while the probability of a slower growth environment has increased. It is important to note at this time, we have not seen a significant negative impact on client loan demand attributable to either geopolitical risk or an increasing inflationary economic environment.
Adjusted revenue is now expected to be 9% to 11% for the year, largely a result of the elevated interest rate environment as well as strong first quarter loan growth. Embedded in this updated guidance is the forward rate curve as of March 31, which assumes fed funds in the year at approximately 2.5%. Adjusted non-interest expense is expected to be up 3% to 6% for the year, while inflationary pressures certainly play a part in expected expense levels. The increase in our expense range is driven primarily by growth and performance based incentive expectations.
In addition, when looking at an expense increases year-over-year, approximately 50% of the forecasted increase is attributable to investments in growth initiatives, which we expect to drive revenue growth as we look past 2022. We expect to maintain strong positive operating leverage throughout the year. Our CET1 target range of 9.25% to 9.75% remains the same, and we expect the effective tax rate to be lower for the year than was originally anticipated now between 21% and 23%.
Lastly, we remain on track to deliver our previously communicated $175 million of pre-tax Synovus Forward benefits by the end of this year. Synovus Forward is a combination of balance sheet, new revenue initiatives, and cost savings and we continue to generate benefits in each of these categories.
Before we transition to Q&A, I mentioned our team as I open the call, but now that we provided details on the financial performance they helped drive during the quarter. I want to once again thank our team members for their incredible efforts and for their ongoing passion for making Synovus truly stand out in this crowded and competitive landscape we operate.
And now operator, let’s open the call for Q&A.
We will now begin the question-and-answer session. [Operator Instructions] Our first question today comes from the line of Ebrahim Poonawala from Bank of America. Ebrahim, please go ahead with your question.
Hey, good morning.
Good morning.
Good morning.
I guess just wanted to follow up, I think a question that came up during the Investor Day on Maast and banking-as-a-service. So I heard you, Kevin, the Qualpay acquisition or investment not going to have a meaningful impact to result this year. Now that you had some more time, I think, since Investor Day thinking about the business, can you just frame for us what the size of this opportunity, revenue wise, earnings wise, as we think about it, to just give us a sense of what the optionality that’s baked into this and how we should think about it in terms of the investment thesis on the stock? Would appreciate any color on that.
Eb, it’s a great question. We’ve spent time since February building out the product. And as I shared in my remarks earlier, that work has been built around a frontend that has been provided by Qualpay, and we have a backend processor. Our investment in Qualpay, we felt was important, we think they have a technology stack that is superior to what other payment processors are providing, it allows for more streamline operations, better reconciliation, and quite frankly, it’s much more scalable as we look to add new capabilities to the platform.
So number one, we’re happy with our progress, we’re still on track to be able to deliver a pilot product in the second quarter. We’re looking at today 3 ISVs to be able to conduct that, but we’ll start with one. And we’ll pilot that product throughout the remainder of 2022 and we’ll have a full rollout in 2023. So I think it’s still premature to give any big revenue guidance in out years, because that’s what the pilot program is all about is to be able to garner what sort of transactions we’ll get from a payment platform, the depository impact. And then, as you recall, Phase 2 of the program was to add a fully embedded finance program where we would have lending capabilities.
But I would tell you, since that February date, we remain very confident in our ability to develop the product. But more importantly, we continue to receive good feedback from those ISVs that this sort of product would be something that they would want to use. So there’s nothing that’s changed, we do think it can be a meaningful impact. And although Qualpay is immaterial from a financial standpoint, we think it can be material as it builds as we use that company to build out the Maast product.
Got it. Thanks, Kevin. I guess maybe later in the year, might be better timing to get more clarity here. And one question for Jamie, I think looking at Slide 17, where you have your derivative hedging portfolio. Just talk to us around, strategy around managing asset sensitivity, if we do get all the rate hikes that are baked into the forward curve. How do you think about neutralizing the balance sheet and defending against the risk of lower rates down the road?
Yeah, Ebrahim, as we think about our hedging strategy, you can see that we added $1.4 billion in the hedges in the first quarter. And the thought process there is basically we looked at our asset sensitivity, it was increasing and it’s increasing for a couple reasons. First, the percentage of our loans that are floating rate continues to increase due to the growth in commercial C&I lending, and that will continue going forward.
So our balance sheet is natively asset sensitive, and it’ll continue to get even more assets as we move forward. But then you also had the impact of the first rate hike, moving loans off their floors, which was another incremental increase in asset sensitivity. And so, we basically looked at our sensitivity and managed it through receiving fix with forward starting derivatives. And you can think about these as receiving fixed just a shade more than 2% that we believe that is prudent. If you get 8 rate hikes from here, so you’re fairly close to break even on these, and it’s good for us to go ahead and lock in that benefit for that higher rate environment.
And so, we will continue to manage our asset sensitivity, we believe that forward curve is actually a fairly likely scenario at this point given fed rhetoric, but we will continue to manage that going forward and consistent with what you’ve seen in the past.
Got it. Thanks for taking my questions.
Our next question comes from Jennifer Demba from Truist Securities. Jennifer, your line is open.
Thank you. Good morning.
Good morning.
Good morning.
I noticed you didn’t give any guidance on your future net charge-offs or credit costs. I wonder how you’re thinking about that the next few quarters and how you’re – what you’re seeing from client sentiment right now.
Hey, Jennifer, it’s Bob. Thank you for the question. And there’s no doubt that spot metrics continue to be really good in terms of credit, and specifically to your point charge-offs. But I think what kind of range bound right now, if you look at it over the last several quarters, it’s been in that 20, 25 basis point range. In the intermediate term, I would certainly not – we don’t see anything that’s materially affecting our outlook, at least generally speaking through the remainder of this year. Longer term, there’ll be some normalization. And I know, that’s a question of how you define that, but credit costs can’t get much lower. So naturally, there would be some incremental rise over time.
But to Jamie’s point earlier, the way we’re reserving and our incremental allowance build that would begin to associate with a growing loan portfolio continued downward bias on the economics will keep us a little elevated there. So from a guidance perspective, I feel like we’re kind of in that range at least for the foreseeable future.
Thanks, Bob. What buckets of the loan portfolio do you think are most vulnerable in an upright environment like this?
Yeah, that too is a great question, Jennifer. And I certainly think about all of them. But let me highlight just a couple. If you think about a weakening consumer, as a result of the inflation factors and rising rates, certainly those industries that have dependency on discretionary spending, we’re watching very closely. The way I think about as I go back to COVID, when demand really just fell off the table. And we looked at our hotel portfolio, restaurant portfolio, arts [ph] entertainment. So I think those industries are still relatively the ones you would want to watch during a slowing consumer demand.
And I think, at least from our perspective, we really got very diligent in those portfolios. We brought in our use of analytics, which is now built into our sort of business as usual platform of underwriting. We look at real time cash inflows, as we showed you all during the pandemic, I think that continues. So anything consumer related certainly is on my radar. On the commercial portfolio side, specifically C&I small businesses would be something we would watch. And for us, that portfolio is $1 billion to $1.5 billion give or take, depending on how you define it. But those customers today continue to be able to pass along the increasing cost. I think over time, they don’t have the leverage that their larger counterparts have relative to input cost and supplier negotiation.
So we can certainly see some margin squeezed there and certainly top line decline. So small business is one that is coming out, the good news for our portfolio is over half of that is secured by real estate of some type. Now, which gives us a little comfort in the loss given default scenario, but those would be the ones I would call out.
Thanks Bob.
Our next question comes from Steven Alexopoulos from JPMorgan. Steven, please go ahead.
Hi, good morning, everyone.
Good morning.
Good morning, Steve.
I want to start, how are you guys thinking about deposit growth in 2022? And what’s assumed in the 2022 revenue outlook that you’re providing?
So Steven, I’ll start, this is Kevin. On the deposit outlook, as you’ve seen in the last year, we’ve taken our strong liquidity position to continuously remix the book, bringing down higher cost CDs, bringing down some of our brokered funds. And as we sit here today at an 83% loan-to-deposit ratio, we’ll continue to strategically remix where it makes sense where we can bring in to lower costs sticky deposits, we’ve increased the percentage of total deposits being non-interest bearing up to 34% this past quarter.
And so our strategy going forward would be that those categories that fall under our core transaction deposits will be the area that we continue to focus. We think that those categories should grow in line with our client growth, which should be in that 3% to 5% range as we’re thinking about continuing to take the growth that the economy gives us, but also taking share from some of our competitors. And so if you look at year-over-year core transaction deposits are actually up 10%.
So looking at the rest of the year, I think you would see that 3% to 5% deposit growth, it would obviously be far less than what we’ve seen in previous years, as it relates to revenue growth for the rest of the year. I’ll let Jamie touch on that.
Yeah. And let me jump in a little bit more on the deposit side as well, because we will use brokered deposits to fund incremental loan growth as we go through the year, Steven. And so you may see some rebuild of that portfolio, which will be incremental to our core transaction deposit growth that Kevin just kind of – just walk through. On the revenue guide, we increased our guide 9% to 11%. We feel good about the growth outlook. But largely, what you see in that revenue guide increase is one and acknowledgement of the strong performance on the loan side in the first quarter. But also the change in the interest rate outlook, and so embedded in that as our assumption of the positive betas remaining somewhat lower.
For the first few hikes, we’re assuming an approximate 20% beta for the first 4 hikes and then beta is increasing as you go beyond that. But that’s really the source for the revenue guide update the 9% to 11%.
Okay. That’s helpful. And then the second question on Qualpay. Could you go into a bit more detail on the functionality this provides to you? And what was the thought of acquiring thing was 60% or somewhere around there? What was the thought of acquiring the stake in the company? What additional benefits will that provide to you? Thanks.
So they are in ISO, Steven. So today they provide merchant processing for third parties. And so we have been the sponsor bank of the acquiring bank for them for some time. So we’ve known them, we think that their technology stack differentiates them in the payment space. And so acquiring 60% of the company allows us to help set priorities for their core businesses which – the core business which will continue to be merchant acquiring business, but leveraging their development team, their technology stack, to fully embedded into our payments platform that will be masked. So they will be the frontend to our program, so as we sell merchant processing to these software vendors, they will be using the Qualpay platform, that’ll be brought to them by Synovus.
And so number one, it helps us get the product out there more quickly. And then two, as we’re looking at expanding the Maast program over time, whether it’s through new reporting, new products, having that ownership interest allows us to direct investment and capital into the company to allow us to develop new capabilities.
Okay. Very good. Thanks for taking my questions.
Thank you.
Our next question comes from Brad Milsaps with Piper Sandler. Brad, your line is open.
Hey, good morning.
Good morning, Brad.
Good morning.
Jamie or Kevin maybe I’m going to just start with the margin. Just kind of curious if you guys could comment on commercial loan yields. Do you think that, you sort of reached the floor there exclusive of the rate changes we’ve seen and may continue to see just kind of curious what our starting point might be in terms of kind of where your commercial book can start to reprise up from just want to hear kind of what you’re hearing in terms of if those yields are starting to bottom out?
Yeah, Brad, it’s a good question. And we did see the weighted average rate increase quite a bit in first quarter relative to where we were back in fourth quarter up actually 40 basis points on the rate front. So we do believe it’s still below the portfolio yield. But I do think to your point, we’ve kind of hit bottom and we’ll continue to produce new loans at or near where the portfolio rate is, which will allow us to start to expand the margin. And I don’t think that the price competition is going away. I just think credit spreads widen the bid and the environment has gotten to a position with the rate increase, where we can actually put on loans that will be at or near where the overall portfolio rate is.
Great. Very helpful. And just as my follow up on, Jamie, can you kind of talk about the moving parts in the balance sheet maybe to the size of it? It looked like the bond portfolio least on a period-end basis was down some, obviously some cash to run off those index or brokered money that you had. Do you still feel good about 3 basis points for each rate hike with kind of all the moving parts that seems somewhat conservative, but just wanted to see if you could add some color?
Yeah, we still think that in the early hikes, that using 3 to 4 basis points per fed move is appropriate with the beta assumptions I mentioned earlier. And so, we do feel good about that, as you get further along. And maybe past the first 100 basis points, you could see betas increase, and you could see that margin benefit decreased a little bit. A little more color, though, on that sensitivity is that about 60% of our assets sensitivity is to the frontend of the curve. And so when I – the 3 to 4 basis points is really just that front end impact. And so there is a fairly significant impact by the backend of the curve, and that commentary of 3 to 4 basis points, I’m not really assuming a change in loan rates.
Okay, great. Thank you.
Our next question comes from Brody Preston from Stephens Inc. Your line is open.
Hey, good morning, everyone.
Good morning, Brody.
I just wanted to ask on the C&I growth, it’s been obviously particularly strong in this quarter, you finally sort of saw a big uptick in your utilization rates. And based on the chart, you’ve put in the deck, it looks like we’re back to 4Q 2019 levels. So understanding that some of the revised guidance is due to this quarter’s strength, but you also mentioned the pipeline, I guess, should we expect this 46% to kind of hold or is there room for it to expand? And I guess, if there isn’t room for it to expand, what are kind of some of the key drivers of what to expect to be strong C&I growth going forward?
So Brody, I’ll take that. As you saw a 300 basis point increase in utilization this quarter to 46%, so that created about $500 million of growth, but I think it’s important to dissect that $500 million. When you go back and look at the lines that were on the books, the previous quarter, the increased draws from those existing lines contributed only $200 million or a little less than $200 million of that $500 million. So about $300 million of the growth in line utilization came from new commitments and draws that we put on this past quarter.
Now to the question of where’s the line utilization going, although, 46% is where we were pre-pandemic. We’ve touched the line of 50% in the past, and when you think about the inflationary environment that we’re under as well as the portfolio mix, we’re growing our wholesale banking lines of credit at a faster pace, which typically carry a higher utilization rate. We believe that we could see utilization in the 50% range. And so if you took that off of today’s commitments that could contribute another $500 million worth of growth, if that were to play out. Now, we haven’t included that in our 6% to 8% loan growth projections, but we think that there’s a likelihood that we could see continued line utilization increases.
The other thing I would just point out on C&I as you noted, of the growth this quarter $926 million, we had 13 industry classifications show growth, and 8 sub-lines of business produce growth. So I think about it, it wasn’t just the utilization story, it was broad-based, it was very diversified across many of our businesses and across many industries. And that pipeline that you referenced, your pipelines are up about 30% from where they were closing out 2021. So we remain confident that the production engine will continue in the second quarter, and it’s not based on the line utilization continuing to go up.
Got it. Okay, thank you for that. And then the last one was just on the – I appreciate all the interest rate disclosures within the deck. But I wanted to ask, it’s a 2-part question, but it’s on the loan yield side. Jamie, how are you thinking about, I guess, maybe you look at the floating rate portfolio, obviously, it’s got the floors but how are you guys thinking about maybe any attrition and the benefit that you would see from floating rate loans in your go forward modeling in terms of floating rate loans converting to fixed loans over time maybe losing some of those from a mix perspective? Is any of that factored into your go-forward NII sensitivity?
And then secondly, just I noticed the big uptick in SOFR-based loans. And, I guess, I wanted to ask you – SOFR is acting much more like the primary than it is LIBOR, at least in the market. So as you think about kind of floating rate loans going forward – Is there any benefits of pricing on SOFR versus pricing it off of prime?
So Brody, good question. As we think about the loan mix, and the impact to the margin, a lot of our – as you’re well aware, when you look at our fee revenue, a lot of our floating rate loans, our clients choose to swap them, and they had those loan exposures, and then we kind of pass that through. But we’re not assuming any material mix change around fixed float, outside of the growth of floating rate lending, just an aggregate just given the areas of our businesses that were growing. So we do expect to continue to increase as far as the percentage of loans that are floating rate versus fixed. But we’re not assuming any mixes within the portfolio at the moment.
And then on the SOFR, as we think about the spread impact of SOFR versus LIBOR, it is uncertain, but we don’t – we kind of look at that as a push, because we think that – we’re giving our clients basically that spread difference on the spread. And so it ends up being a net push between where we think it would have been with a more credit based index like LIBOR was.
And now just add, Jamie, we also – you asked versus prime. We use prime on small business loans. We’ve kind of fall on the industry in terms of what is market, and the larger loans, the Wholesale Banking loans are moving more on the SOFR platform. So we’re trying to keep consistent with what the industry is providing in terms of pricing terms and indices [ph].
Got it. Thank you very much for taking my questions everyone, I appreciate it.
Thanks, Brody.
Our next question is from Brady Gailey from KBW. Brady, your line is open.
Hey, thank you. Good morning, guys.
Good morning, Brady.
I wanted to start on the share buyback, there wasn’t a lot of buybacks in the quarter, which makes sense on a loan growth was pretty robust. And you had some capital impact from AOCI. But with the growth profile looking better now, should we expect kind of a minimal amount of activity from the buyback this year?
I think the first quarter is a good example of our strategy around capital management and leveraging share buybacks as kind of the last in line for capital management. And so, when we look at the rest of the year, loan growth clearly was very strong in the first quarter. And we – that’s where we deployed the capital generated through core earnings. As we go through the year, if loan growth were to continue at the same pace, and you would expect to see very minimal share repurchases. But we will use those kind of as the toggle; we believe the 9.5% Common Equity Tier 1 is the right place to be in this environment with this uncertainty. But you’re right to assume that it likely will assume lower amount of share repurchases than either prior year or what we’re all across for.
Okay. The entire quarter, we saw one of your kind of Southeast banking peers in Tennessee sell to out-of-country buyer that’s mostly a consumer back. Is that an opportunity for service whether it’s maybe hiring some new talent or taking some customer market share?
Obviously, Brady, anytime there’s disruption in the marketplace, we think it presents an opportunity for us. And as you know that that competitor does have overlap with Synovus, I think there were some unique elements to that transaction where there were some incentives paid up front for retention. And so there may be a different tail as it relates to being able to attract some of the talent. But broadly, anytime that we see anyone going through a major conversion or having a headquarter moved out of the Southeast, we look at that as an opportunity.
So I’ve shared with you in the past you have to take it almost as a process. There are going to be opportunities the day it’s announced, there are going to be opportunities when the management teams, which is out and there are going to be opportunities when there’s actual migration that’s going on. And so we’ll have to be smart in each of those elements to make sure that Synovus is planting seeds for both talent and clients to be the destination of choice if they decide they want to move banking relationships.
So we’ll go at that process similar to how we’ve done some of the other mergers that have happened in our footprint.
Okay, great. Thanks, guys.
Thank you.
Our next question comes from the line of Jared Shaw from Wells Fargo. Jared, your line is open.
Hey, good morning.
Good morning, Jared.
Yeah, maybe just following up on that, you gave me some great long-term goals, when we were all down there in February, that were based on an unchanged utilization rate. As you look at the strength of customer demand, and then also the First Horizon opportunity. How does that impact that long term goal? Is it a meaningful opportunity to maybe move that higher or you were sort of expecting some of these things in the background?
As we think about our multiyear goals, it’s hard to react to just a couple of months of new data. We clearly believe in the Southeast, we believe that the opportunity that’s in front of us is real. And it’s something that we capitalize on every day, every day when we come into the office. And so, we are excited about what’s in front of us. We think that if you look at Q3, Q4, Q1, those are just data points of us capitalizing on the opportunity we expect to continue. We don’t have anything new to say about the longer term outlook and multi-year objectives. But we see what’s in front of us, we believe that we are uniquely positioned to take advantage of it. And that’s what we were focused on doing.
Okay, thanks. And then just to follow-up on the margin benefit from higher rates, you said 60% of that is frontend loaded. I guess, since February, we’ve seen the 10-year up about 100 basis points. If we keep the 10-year near this level, could that be an additional, call it, 2, 3 basis points benefit to margin? Or do you expect it to be higher from here to get that benefit?
Well, when you look at the – you think about where that sensitivity lies. It lies in our fixed rate assets on the balance sheet, and both the securities portfolio and mortgages, and we did see premium amortization come down in the first quarter. But I do believe that it could come down further, even if mortgage rates stay where they are today. And so you could see a little bit of tailwind in the long end with where rates are today. But it’s not as significant that it would be if we had a further rate increase on the long end.
Great. Thank you.
Our next question is from Christopher Marinac from Janney Montgomery Scott. Christopher, your line is open.
Thanks. Good morning. Jamie, a question for you, I don’t know if you mentioned this earlier. But how have new loan rates changed in the last 30, 45 days? Have you seen any movement and is the next fed move really going to be the change to engage those?
We have seen an increase, and Kevin did mention this a little bit earlier. But we – first quarter, we did see an increase of about 40 basis points from the prior quarter. And so we are seeing a benefit and it’s coming through in a couple of ways, it’s coming through in new loan origination. But you’re also seeing loans come off of their fours [ph], and so that you can see that in our assets sensitivity table. But we’re getting the benefit now of loans that were floored, kind of now they’re not floored anymore, and so every rate move impacts them. And so we are benefiting from that. We still have floored loans, but each move reduces that amount. And that’s what you’ve seen kind of come through in the first quarter and we expect that to continue as we go forward.
Great. That’s helpful. Just want to reinforce that. Thanks. And then on the hedge strategy, does that limit the risk on the AOCI side at all? Does I know some of that’s unavoidable, just curious if that hedging strategy tampers AOCI impact.
It does not. And you could argue that it exacerbates the AOCI component of that, because that does, the market does flow through on that. But I do want to speak to AOCI and the impact of tangible, because we intentionally take duration risk in our securities portfolio, and our hedge portfolio, and you’re well aware of our strategies there both the securities book as well as the hedge portfolio are offsets to our assets sensitivity. And so we benefit when rates rise. This is a partial offset to that. But when we think about valuation in enterprise value in a higher rate environment, our enterprise value increases.
Now, when you look solely at AOCI, and the valuation securities book and the hedge book those go down. But that’s just a partial offset to what happens to the company as a whole. And so when we think about tangible book value, we think about AOCI is basically a temporary disconnect where you have, an immediate reaction to the market value of these assets. But that goes away over time as the assets mature. And so we believe in tangible book value growth, we think that that’s an important shareholder value creator. And so – but when we look at AOCI in that impact, we do that as basically a temporary disconnect. And so that’s kind of our holistic thought process around the impact of AOCI and how that flows through.
Great. Thanks for going deeper there. I appreciate it. And clearly your deposits are more valuable too as rates rise. So we look forward to that. Thanks, Jamie. Thank you.
Yeah. Thank you.
Our next question comes from Kevin Fitzsimmons from D.A. Davidson. Kevin, your line is open.
Hey, guys, good morning.
Good morning, Kevin.
Good morning, Kevin.
Most of my questions have been asked and answered just a few quick ones. Within the revenue guide, can you speak a little bit about how you’re thinking about the revenue? So if you think about the run rate, what we saw this quarter? And then we saw capital markets and mortgage declining, just generally how to think about that run rate going forward within that guidance? Thanks.
Yeah, Kevin, it’s actually a really good question, because there’s lots of assumptions that go into the rest of the year. But we believe that for the year, NIR could be down around 5%. And so that would mean that for the rest of the year, you would see a fairly flat NIR quarterly number. And there’s, again, some puts and takes on the positive side, we feel very good about the ongoing growth of core banking fees, whether it’s on the treasury and payment solution side, or continue to return to pre-pandemic levels with card spend and service charges. So that should continue to provide a tailwind for us.
Maybe the biggest uncertainty going forward is on the wealth side, where we’re putting up a little less than $40 million a quarter, depending on what the market does, that will have a big impact on what our fees do. We continue to have the opportunity to grow our assets under management. As Jamie mentioned, in his remarks, we’ve seen good client acquisition growth. But when you see the type of volatility in the market, and just potentially having a bear market, it makes us a little less certain on what those future quarters are going to look like.
And then you’ll look at mortgage, we think we’ve kind of hit a stable mortgage number for the quarter. And we think that will continue as we look into the future, just based on volumes and margins. And so when you add up the things that we know that are growing along with mortgage, which is fairly stable, the real wildcard will be what happens with wealth. And if we see a constructive equity market, I think we could have some upside on the fee income component.
Okay. Thanks, Kevin. One quick final question for me is, on the Qualpay move, and I understand the logic and the rationale for it. But what does that replace? So in other words, if you didn’t make the investment in Qualpay, what would have – did you have this functionality that was already going to be in place that this is kind of superseding? I’m just wondering what the plan would have been without Qualpay.
Well, so early on, Kevin, we evaluated lots of vendors to utilize for the build and which we selected Qualpay. So Qualpay was already engaged in building out the Maast platform. This is nothing more than making an investment in the company to ensure that we can continue to provide the capital that will allow the company to meet today’s needs, but ultimately, the future needs as we grow this product so they were going to be our partner either way. This just gives us an ownership interest in the company to be able to help shape and drive capital into the growth of the programs.
Great. Very clear. Thanks, Kevin.
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.
Thank you, Emily. And thanks everyone for attending this morning and your continued interest in Synovus. Just a few things I’ll mention before we close out today’s call, we were proud to recently be chosen again, as the top workplaces or one of the top workplaces in the Atlanta market by the Atlanta Journal-Constitution. The relevance of this sort of recognition in one of our biggest markets, our fastest growth market is truly significant, especially given our efforts to continue to recruit and retain some of the best and brightest talent in the industry. Also, it seems like it’s been a very long time, but we are transitioning our team member base back to being fully on site in our workplace in the coming weeks, now we will remain flexible as COVID trends continue to ebb and flow. And ultimately, we’ll have the majority of our organization back on site.
But we have defined roles that will be able to maintain full remote capabilities, and also some hybrid work schedules, I just think that’s the future of work. We also continue to advance our ESG investments and initiatives, especially as we monitor the progress of the proposed SEC rules for climate disclosures beginning as early as next year. We’ve already completed our Scope 1 and 2 GHG baseline assessments, and will continue to evaluate for future carbon reductions like our branch consolidation efforts.
We continue to deliver on the expectations that we set for ourselves. And I think it’s been a year of acceleration and achievement, although we’re just through one quarter. Our focus is very clear, it’s on execution, and continuing to meet our short-term objectives while expanding and extending our solutions to better meet client needs and to deliver sustainable top quartile performance. I truly look forward to the next time we’re together to share our progress. But for now, I hope everyone has a wonderful day. And operator, we’ll close out our call.
Thank you very much. This concludes our call. Thank you everyone for joining us today. You may now disconnect your lines.