Synovus Financial Corp
NYSE:SNV
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Synovus Financial Corp
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Good morning. And welcome to the Synovus Fourth Quarter 2021 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [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 we 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, and good morning, everyone. Thank you for joining our fourth quarter earnings call. I want to take a moment to officially recognize Cal Evans in his new role as Investor Relations and Market Intelligence Senior Director.
Cal’s expanded role in our company became official shortly after last quarter’s call when Kevin Brown, who led IR for the past two years, shifted to our Corporate Treasury team. Kevin has done a great job interfacing with our analyst and investor community, but his latest move will help with his development and career aspirations.
Cal has hit the ground running and brings a lot to the table given his credit and market intelligence background. The transition is going well and I know you will enjoy working with and getting to know Cal.
Now let’s shift into the overview of 2021, with the fourth quarter placing an exclamation point on the year. 2021 was again wrought with challenges and uncertainties, but our teams were able to navigate the difficult environment to support our clients, contribute to our communities and deliver for our shareholders.
I want to thank our team for your hard work, dedication and commitment. As you will hear today, we accomplished a lot even as the pandemic continued to impact the operations of our clients and of our company.
Our team is capable and understands the assignment when it comes to meeting the challenge from the unexpected and anticipating opportunities with and for our clients. Our strong fourth quarter and year-end report is an absolute testament to your talents and passions for the inspired and purpose-driven work we do that enables people to achieve their full potential.
What you will see today is a story of execution and follow-through of doing what we said we could and would do and in many areas doing even more. As we began 2021, we focused on five core business objectives.
Number one, to regain growth momentum, two, to enhance the client experience by making it even easier to do business with Synovus, number three, to provide seamless delivery of our solutions across all of our lines of business, leading to a deeper wallet share and client relationships, four, to better leverage analytics in order to provide more informed and proactive advice, and five, the development and attraction of talent to support our growth initiatives. We have made significant progress in all five core areas and our success in 2021 was largely driven by our execution of these business objectives.
Moving to slide three, let’s review the year. Our lines of business succeeded in delivering core performance via solid loan, deposit and fee income growth. While client loan demand was muted in the first half of 2021, in the second half, we saw double-digit broad-based commercial loan growth driven primarily by our wholesale bank with all 10 wholesale sublines of business posting growth for the year.
2021 funded commercial loan production increased 50% versus 2020 and was up 40% versus 2019, with significant productivity gains across our community and wholesale teams. We expect this momentum to continue into 2022 given the pipelines and activities of our bankers, as well as the incremental growth that will be provided by our key 2021 investments and talent in the middle-market, restaurant services, and corporate and investment banking teams.
Deposit growth was driven by continued balance augmentation, as well as an ongoing sales focus on core operating accounts. As a result, core transaction balances have increased 57% in the past two years.
We have strategically allowed higher cost, lower value deposits to a TRAI [ph], with an overarching goal of remixing our funding profile to optimize lower cost deposit composition during this period of excess liquidity. At year-end, 77% of total deposits were core transaction deposits versus 70 % at year-end 2020.
Ex security gains, non-interest revenues grew 5%, led by increases in core banking fees and income from various wealth businesses. This was the seventh consecutive quarter of increases in wealth fees. Drivers of this growth include a strong equity market, as well as net new assets under management from client growth including the onboarding of 12 new family office clients during the year.
In 2021, we continue to make significant progress with our Synovus Forward initiatives. As of year-end, we have achieved $110 million in pre-tax run rate benefit, ahead of our original projections. Evidence of success includes reducing real estate expenses, lowering headcount and a reduction of third-party spend, all of which resulted in adjusted 2021 expenses being flat versus 2020.
The Synovus Forward savings allowed us to make strategic and impactful investments in every area while managing overall expenses. This year, we will transition our Synovus Forward efforts into our overall strategic plan, but remain committed and on pace to achieve the $175 million Synovus Forward target.
As part of our focus on innovation, we launched several new digital solutions and services, including enhanced deposit online account origination; Accelerate AR, our integrated receivable suite; and Gateway, our commercial banking digital platform. These investments have enhanced capabilities and functionality, and is leading to a better overall client experience.
We also implemented the smart commercial analytics tool that is giving our bankers better insights into solutions our clients need, early warning on client attrition and proactive risk monitoring.
In 2021, we also invested in people, in particular, those who have experience and expertise to expand our advisory services and to build strong relationship value. We grew our treasury and payments team, which had another record breaking year growing sales by almost 40% and added to specialty banking in our middle-market talent and our high growth Central and West Florida regions.
We also continue to emphasize the development of our existing team members with the launch of two new leadership development tracks for emerging and senior leaders. Despite the challenges associated with the pandemic, our recent Voice of the Team Member Survey indicated that 84% of our team members were actively engaged, which is top quartile relative to the financial services benchmark and we were designated a Great Place to Work by the Great Place to Work Institute.
We also have made measured progress in our diversity, equity and inclusion efforts by meeting our short-term, ethnicity and gender based goals in the Leadership Ranks in 2021. So, overall, a productive and rewarding year, and one that carries a tremendous amount of momentum into 2022.
Now let me shift the highlights from the fourth quarter. Let’s start on slide four with loan growth, which increased $1.4 billion or an annualized 14% excluding PPP. The growth this quarter resulted from our second consecutive quarter of record funded commercial loan production at $3.2 billion. This represented a 30% increase from the third quarter.
The quality of growth as measured by risk ratings and underwriting metrics is consistent with the existing portfolio, which continues to perform well and is supported by reversal of credit losses of $55 million this quarter. It’s a similar story on the other side of the balance sheet, with core transaction deposit growth of $1.3 billion or 4% versus the third quarter.
Approximately, 30% of this quarter’s increase came from non-interest-bearing deposits. The combination of balance augmentation and new account origination continues to be the drivers of growth.
Net interest income growth was also strong this quarter, as we delivered $1.7 billion in earning asset growth. Net interest income increased $16 million from the third quarter or 4%, excluding the reduction in PPP fees. The net interest margin declined 5 basis points in the quarter, largely due to lower PPP income. But the NIM before PPP fees actually increased 1 basis point as earning asset yields were fairly stable and we continue to lower deposit rates during the quarter.
From a fee income perspective, we continue to be pleased with overall performance as the fourth quarter totaled $117 million. Core banking fees have returned and exceed pre-pandemic levels in the fourth quarter, as card and cash management income have more than offset reductions and NSF income, and our core strategic segments, such as wealth management continue to generate growth through AUM expansion.
Diluted earnings per share were a $1.31 or a $1.35 on an adjusted basis, an increase from $0.96 or a $1.08 adjusted per share from the same period in 2020.
During the fourth quarter, we successfully completed our capital plan with $33 million of share repurchases. For the full year, we balanced core client loan growth, a common dividend and $200 million in share repurchases to achieve our target CET1 ratio of 9.5% at year-end, which represents the middle of our operating range target for the upcoming year.
Jamie will now share greater detail on the key initiatives and financial results for the quarter.
Thank you, Kevin. I will begin on slide five. We ended the year with total assets of $57.3 billion and loans of $39.3 billion. In the fourth quarter, total loans excluding PPP balances were up $1.4 billion or 4% from the prior quarter, bolstered by strong commercial loan growth.
The commercial growth was broad-based across businesses, asset classes and margins, and included robust production in several of our key business lines, such as structured finance, senior housing, national accounts and commercial banking.
The positive momentum was also evident in CRE, driven by healthy industry fundamentals in our footprint. We achieved this growth while adhering to our prudent underwriting standards and disciplined approach to portfolio management.
Benefits from strategic growth initiatives are being realized and we are excited about the potential of the corporate and investment banking team being led by Tom Dierdorff, an industry veteran who joined the team in November.
Growth momentum in Q4 was also supported by reduced pay-offs and increased C&I line utilization, which increased approximately 340 basis points to 43%. This is the first quarter where we have seen clear evidence of an inflection towards increased utilization.
We also saw continued growth in commitments, up 4.4% or $512 million, which positions us well for economic expansion, particularly in the Southeast where growth is expected to exceed national averages. A continued normalization of C&I line utilization on today’s balance sheet would result in over $350 million in funded balances, which should occur over time as liquidity subsides.
Within our core consumer portfolio, the trend remains somewhat mixed with growth in card and other consumer products being more than offset by continued declines in mortgage. In aggregate, core consumer balances declined $20 million in the quarter.
Looking outside of our core lending activities, we did see a modest decline in our third-party portfolio in Q4 as purchases were more than offset by elevated pay down activity. Additionally, our securities portfolio ended the quarter at $11 million, up $400 million from the prior quarter, so that growth generally dragged out the overall balance sheet and remained at 19% of total assets. These portfolios will remain central to our overall balance sheet management efforts and will continue to leverage both as a means to manage our capital and our liquidity positions.
Slide six highlights the deposit trends for the fourth quarter, as well as for the full year 2021. As you can see, it was another very strong year for growth, led by core transaction account balances, which were up $1.3 billion or 4% in the fourth quarter and up $5.1 billion or 16% for the full year.
Notably, the majority of the growth for the year was in non-interest-bearing deposits, while we have seen continued strategic declines in time deposits. For Q4, our total cost of deposits continued to decline to 12 basis points, which was down one basis point from the third quarter.
The fourth quarter also experienced seasonal inflows related to public funds, while broker deposits were relatively stable. Both of these portfolios experienced declines versus one year ago and we expect further declines in the first quarter as seasonal balances normalize and as we further reduce broker balances. In the first quarter, we expect broker deposits to decline by approximately $1 billion to $1.5 billion as we efficiently manage our significant liquidity position.
Slide seven shows total net interest income of $392 million in the fourth quarter or $380 million excluding the impact of the Paycheck Protection Program. NII growth larger resulted from strong earning asset growth, which began late in the third quarter and continued through the fourth quarter.
The net interest margin for the fourth quarter ended at 2.96%, a decline of 5 basis points from the prior quarter. As expected, the wind down of the Paycheck Protection Program is serving as a notable NII headwind, excluding the impact of PPP, the margin was stable in the quarter.
Our portfolio remains asset sensitive and stands to benefit from increases in rates across the yield curve. To that end, I would note that much of the loan production we saw in the second half of 2021 was variable rate. The portion of our portfolio that is floating rate now stands at 58%, which helps to support our NII sensitivity, estimated at an increase of 6.5% for a 1% immediate increase in rates.
Adjusted non-interest revenue of $116 million is highlighted on slide eight, up $2 million from the prior quarter. This includes a one-time $8 million increase of BOLI income that offsets a $4 million reduction in mortgage income.
Wealth management continued to see an increase in fee revenue and assets under management, recording their seventh consecutive quarter of growth. This growth is driven by continued strong client acquisition and asset inflows.
From a capital markets perspective, we recorded another strong quarter, despite overcoming headwinds from a large one-time Arranger fee in the third quarter that was not expected to repeat. As our commercial segments continue their robust growth, we should expect to see continued strength from Arranger fees and swap income that will drive this line item.
On a full year basis, NIR excluding security gains increased 5%, despite headwinds driven by the normalization of mortgage revenues. Drivers of this growth included wealth management and core banking fees, which increased 24% and 20% year-over-year, respectively.
Within core banking fees, commercial cash management revenue increased $10 million or 34% year-over-year. This growth represents the momentum within our commercial segment, including the deep deposit relationships we have with our core customers.
Slide nine highlights total adjusted non-interest expense of $286 million, up $19 million from the prior quarter. This change included both recurring expense increases and other notable expenses that we do not believe will repeat in future quarters.
Recurring expense increases totaled $9 million and were driven by several factors, including growth initiatives related to Synovus Forward, investments in tech and risk infrastructure, additional FDIC expense, and expenses related to normalized travel and entertainment spend.
Other notable expense increases totaled $10 million and consisted of $4 million of incremental performance-based management bonuses, a $4 million seed gift into a newly established donor advised fund and a $2 million increase in health insurance expense, driven by seasonal and pandemic-related factors.
In spite of an elevated quarter of expenses, we were able to manage to flat year-over-year adjusted expenses, resulting in positive operating leverage in 2021. Benefits from the successful implementation of Synovus Forward initiatives can be seen in comparison for key areas from 2020 to 2021, particularly in base salaries, third-party spend and real estate spend. These reductions have helped lay the groundwork for future strategic growth initiatives.
The credit metrics on slide 10 show continuing improvement in all key categories. The net charge-off ratio fell 11 basis points to 0.11%, while criticizing classified loans declined 16%. The NPA ratio declined 5 basis points to 0.40% and the NPL ratio declined 8 basis points to 0.33%. Past dues dropped 1 basis point to 0.14%, excluding the increase from Paycheck Protection Program loans.
There was a reversal of provision for credit losses of $55 million in the fourth quarter as further improvement in the economic outlook was partially offset by significant loan growth. The ACL ratio excluding PPP loans declined 21 basis points to 1.21%.
On slide 11 is a recap of our capital management efforts through 2021. In the fourth quarter, we executed the remaining $33 million of our 2021 authorization, and in doing so, we ended the quarter with our CET1 ratio at 9.5%. For the year, we retired 4.4 million shares or approximately 3% of the common shares outstanding from the end of the prior year.
Our ongoing capital management efforts have helped maintain strong and stable capital ratios, which along with core PPNR positions us well for continued balance sheet growth in 2022. For 2022, our capital plan continues the privatization of capital for client growth, while returning an appropriate amount to our shareholders in the form of a dividend. That includes an increase in the quarterly common shareholder dividend by $0.01 to $0.34, which would first be payable in April.
While our 2022 plan also includes the authorization from the $300 million in share repurchases, our capital priorities are focused on supporting core client growth and managing our CET1 ratio around the target level of 9.5%.
As we look ahead, we believe this focus on maintaining a strong capital position and prioritizing core growth is not only in the best interest of our shareholders but also our clients, our communities and our broader set of stakeholders.
I will turn it back to Kevin for greater detail that includes our 2022 outlook.
Thanks, Jamie. Excluding the impact of $400 million and remaining PPP balances, we expect loan growth of 4% to 7% in 2022. This growth assumes continued strong production in commercial lending, some curtailment of prepayment activity particularly in the CRE portfolio and relatively stable line utilization.
The adjusted revenue outlook of 4% to 7% largely aligns with the current rate expectations assuming three FOMC rate hikes and excludes the impact of PPP-related revenue. Overall fee income growth will be muted due to the industry-wide reduction in secondary mortgage revenue. However, we expect continued growth in strategic fee categories including core banking fees and wealth management.
Our adjusted expense outlook of 2% to 5% incorporates increases in compensation, a return to pre-pandemic travel and business development levels, and includes our strategic investments in talent and technology.
Ex PPP, we expect to continue to generate positive operating leverage in 2022, while building out the bank of the future. Benefits from Synovus Forward initiatives will continue to offset increased inflationary pressures, and will remain disciplined and agile in terms of managing expense growth throughout the year. One significant efficiency initiative that is underway is the closing of an additional 15% of our branch locations, with an estimated run rate savings of approximately $12 million by year end.
Moving to capital, as Jamie shared earlier, we extended the upper range of our targeted CET1 ratio by 25 basis points, providing a new range of 9.25% to 9.75%. This range will continue to support our strategic growth objectives, while maintaining more than adequate protection against significant adverse conditions if they were to arise. And in terms of capital, core relationship growth remains our top priority for capital deployment, while whole bank M&A is not a priority.
We believe these expectations for 2022 support our continued progress towards becoming a sustained top quartile performer. We have a tremendous amount of momentum in our core businesses and the team is performing at a very high level.
Given the heightened levels of inflation, it appears the interest rate environment will serve as a tailwind in 2022 as we continue to position the balance sheet for asset sensitivity. We also believe that our strategic investments will begin to drive topline growth during the year.
We are making good progress on the build out of our banking-as-a-service product called BaaS and are seeing strong talent pipelines for the corporate and investment banking build out. For all of these reasons, my confidence in delivering on our 2022 business and financial objectives is very high and I know our team is poised and ready to win.
Operator, we are now ready to begin Q&A.
Thank you. [Operator Instructions] Our first question comes from Steven Alexopoulos from JPMorgan. Please go ahead.
Hi. Good morning, everyone.
Good morning, Steve.
Good morning.
I wanted to start, so on slide five, the 30% increase in productive -- production is almost off the charts when you look at that chart. Could you give more color on the increase, was it tied to existing customers getting more active or was this share gains coming through in the quarter?
Yeah. Steven, so it’s a little bit of both and when you look at the 30%, you can look at it both a significant increase in CRE. And when you look at the asset classes that we were able to increase production, it led to growth in eight sub-asset classes. So we saw growth in warehouses. We saw growth in the hospitality, shopping, senior housing and so it was really across the Board.
Now in terms of new clients versus the existing book, it came from both. So we continue to take share from other competitors. At the same time, we have seen our existing clients become a little more active from a demand standpoint.
Similar story on the C&I side, strong growth there as well. And if you look at it from a NAICS codes perspective, you would see that five of the NAICS codes that we cover grew greater than $100 million.
So very broad based, again, new clients, as well as existing customers. Line utilization actually increased about $230 million during the quarter in C&I. So it was about 2 percentage points, and obviously, that would have largely come from existing clients.
Okay. That’s helpful color. And then to follow up, so if we look at the outlook for 47% loan growth in 2022 without PPP, I see you are calling for line utilization to hold about flat, but prepayment activity to normalize. So, help me understand this, the improved outlook for 2022 tied to increased expectations for new client onboarding or is this because you think pre-payment levels are going to decline quite a bit in 2022?
More the former. So as we look out into our forecast and our pipelines, we think production levels will remain elevated as we onboard some of our new team members that will add additional incremental production to what we are already doing. So it’s much more of a production story.
I think when you start breaking down the balance sheet next year, just look at the commercial side. We think we can grow mid-to-high single-digit commercial loan growth next year. We are keeping the third-party consumer portfolio flat and the core consumer portfolio may shrink a little bit just based on some of the churn that’s happening there.
So the -- we mentioned the pay-off activity, because the last two quarters, we have seen about $2 billion of pay-off activity. We generally have averaged over the last nine quarters about $1.5 billion. So it was elevated by about $0.5 billion.
We think over the year that will continue to decline. We saw a lot of activity especially on the CRE front given lower cap rates. So we think that will subside. But the bigger driver around loan growth in the mid-to-high single-digit commercial loan growth is around production.
Production. Okay. That’s really helpful. Maybe, Kevin, if I could squeeze one more in. So, you covered a lot in terms of what the company accomplished this year and I know the Investor Day, actually, 2021, but the Investor Day is around the corner. Just from a revenue perspective, maybe give us a bit of a teaser on the Investor Day, like, what initiatives are you most excited about for 2022 on the revenue side? Thanks.
Well, look, I think, obviously, the asset sensitivity that we are putting ourselves in a position to be able to drive NII. But from a revenue standpoint, the initiatives, I will start with mass. We talked a lot about how the industry is changing, especially around small business.
I think that mass is going to give us a platform to provide the software providers a very flexible, configurable, brandable embedded finance platform. And as we have talked with those software vendors, they haven’t had an offering that combines both a banking-as-a-service platform with a payments-as-a-service platform.
So when we look at the uniqueness of what we are providing and the timing to be able to rollout our pilot in second quarter, I think, it has a tremendous opportunity to start to drive revenue next year.
Now, Jamie mentioned in his comments that, we are planning to invest in 2022 and that’s about $25 million worth of expense. We think even on those initiatives, we will be able to record revenues that cover almost $20 million of revenue during the year. So we are not looking for large paybacks, but the benefit of those new initiatives will continue to build through 2022 into 2023.
The second, I would mention is just our corporate and investment bank. We have made great progress in just the short 50 days that Tom Dierdorff has been with us. He is building pipelines and already starting to line up talent. We expect to onboard as many as 15 team members in the second quarter of this year and those individuals will hit the ground running and also start to provide revenue.
Okay. Terrific. Thanks for taking my questions.
Thank you, Steven.
Our next question comes from Michael Rose from Raymond James. Please go ahead.
Good morning, Michael.
Hey. Good morning, guys. How are you?
Good morning. Well.
Good. So, obviously, the outlook includes some rate hikes here. Just wanted to get a sense for how we should think about further build in the securities portfolio, assuming we do get those rates and just remind us again where the comfort level is with the size of that portfolio? Thanks.
Yeah. Michael, that’s a great question. As we look forward into 2022, we do expect to build or grow the security portfolio on the margin. We are at 19% of assets today and we could see getting up to 20%. But we are going to be very prudent in that and really it’s a reaction to all the other movements on the balance sheet.
As Kevin mentioned, we are forecasting strong client loan growth. We expect that to continue. We expect deposit growth to allow us to continue to look at the mix of deposits, but all of those considerations play together. But in our base case forecast we do expect some marginal growth in the portfolio.
Okay. That’s helpful. And then just back to loans, so the range is somewhat wide, which is understandable. Can you just help us appreciate what factors would drive you towards the upper end versus lower end? I assume it’s a combination of pay-offs and pay-downs and utilization assumptions and things like that, but if you can put a finer point on it, I’d appreciate it? Thanks.
Yeah. Michael, I think, you nailed it. I think the -- we feel very confident in the production levels and we are going into 2022 assuming it’s going to be a very constructive economic environment. Obviously, there are challenges still in front of us as it relates to supply chain and potentially we don’t know the impact of any other pandemic influences and so we kept the range a little wider. I think we were being conservative knowing that there are some things there that continue to present some challenges.
And more importantly, I would tell you that we kept the third parties at zero and that -- and this year represented significant growth. And if we see the same liquidity positioning that we have we had in 2021, we also know that can flex up and we haven’t assumed that in the forecast.
But it’s more so just some of the unknown variables that we kept the range that line. But we are very confident, as I mentioned, in the commercial lending side, we saw a tremendous momentum in the fourth quarter and we think that’s going to carry over in the first quarter throughout this year.
Very helpful. And If I could just squeeze one last then, you mentioned the $300 million authorization, but I don’t get the sense that, you guys are going to be really active with the buyback this year, obviously, given some of the investments that you are making, is that the right way to think about it? Thanks.
That is the right way to think about it. I think the fourth quarter is a really good example of how we plan to deploy capital, if the environment remains as we expect in 2022. If you look at our capital generation, keeping our capital generation of 46 basis points and you net out the dividend, you have an accretion in the mid-30s and that’s exactly what we deployed to risk-weighted asset, the core client loan growth in the fourth quarter.
Now that’s a pretty high growth rate. But that’s the context of how we will look to manage it, is to deploy the capital we generate through earnings to our clients on balance sheet. And then we will use share repurchases as a toggle on the back end to manage our capital CET1 ratios to the target.
Very helpful. Thanks for taking my questions.
Thank you.
Thank you, Michael.
Our next question comes from Ebrahim Poonawala from Bank of America.
Good morning.
Good morning.
Good morning.
I guess, just on loan growth and maybe it’s just me but, in a world where like nominal GDP is going to be maybe 7% to 8% in 2022, things are reopening. Shouldn’t loans growth be much stronger given all the investments you made, given the franchise exposure to Atlanta and Florida? Just talk to us in terms of upside risks. And also, if you could remind us what normalization and line utilization implies for our loan balances. I know it’s not baked into your forecast, but it will be a good net number to have in terms of what loan balances could look like if things actually normalized?
Ebrahim, I will start with that. And with the slight increase that we saw in the fourth quarter, if things normalize back into that mid-40% range, we are talking about another $500 million plus in outstandings and we are not including that in our forecast. So back to your point in terms of, if we sold 7% GDP growth, I think, you would see line utilization increase, and again, not included in our assumptions.
We went into our forecasting for next year, assuming GDP in the 3% to 4% range and we think that if the economy is stronger than that, obviously, to your point, there could be upside. I just mentioned that there’s upside if we decide to deploy additional capital and liquidity into the third-party partnership loans and our bankers have continued to produce at a higher level than what we thought. So the real driver there is the productivity level of our bankers.
And you are right, we have markets that are performing very well, Atlanta continues to perform very well and we are bringing on new talent in Florida, in our corporate and investment banking world. And so the faster that those individuals onboard additional talent and we built budget for that, the faster the loan growth will come.
And so there are a lot of variables. We wanted to see and forecast what we see in front of us based on the economic forecast that we have and based on the team members and the expectations for those folks. But, obviously, there’s an opportunity to outperform if we hit on all those cylinders.
That’s helpful, Kevin. Thank you. And just on a separate question, I feel adjusted revenue guidance, but if you can just unpack on the fee revenue outlook. Obviously, you are building out the investment bank. Give us a sense of the puts and takes around the fee revenue. Is that going to outperform, underperform that adjusted revenue guidance and what the puts and takes are?
Yeah. Ebrahim, as we look forward into 2022 on the -- on fee revenue, we do expect fee revenue to be down year-over-year. And the reason for that is, there are headwinds in mortgage, as you look at the normalization of mortgage, you still have those strong quarters in early 2021.
So expect mortgage revenue to be down. Higher interest rates will impact production there. But then we also had benefits in fee revenue in both BOLI income, as well as equity gains in 2021 that we are not expecting to recur in 2022.
So those are more environmental headwinds, but I wouldn’t -- I don’t want that to take away from the broad-based growth that we expect to see in really every other line item outside of NFF as we look forward into 2022.
I mean, our core banking fees, the deposit service charge, card fees, we are expecting broad-based growth across the Board outside of those both unique to 2021 headwinds and the mortgage normalization.
Got it. And if I can just sneak in one follow-up on that investment bank build out, I am assuming you have some of this saved for the Investor Day, but just give us a sense of the ramp up in terms of hiring that you are doing right now and are there any certain verticals that you are particularly focused on as you build that out?
Yeah. Ebrahim, so, we are focusing on three initial verticals, tech and media communications, healthcare and the financial institutions grew. And one of the things that, we have asked Tom to do is, to time this such that, as you know, the time of the year, we are not recruiting people to come in today. We are waiting for them to finish out their year and receive their bonus payments from their previous institution.
And so, you would expect to see probably, as I said, 15 folks join us in the second quarter, maybe even early third quarter from a timing standpoint. And so, we are looking for teams of individuals to fit those specific industry verticals.
And to your point on fee income, I think, what you are going to see in the beginning is, a lot of coverage banking. So you are going to see the traditional lending capabilities with our syndicated finance, opportunity to offload some of those outstanding. You are going to see the depository and treasury business first.
Now, over time, we will continue to build out some of the capital market solutions that those size clients need and so it would be an increased debt capital markets capability. It may be things like securitizations. But originally, these guys are going to focus on just the coverage banking side. So you will see it more on the NII side than what you will see on the fee income side to begin with.
Got it. And I assume that some of this hiring is baked into your expense guide for the year that you provided?
It always. And so, as I mentioned earlier, we have included about $25 million for all of our investments in the 2022 expense guidance and that includes things like CIB, it includes mass, but it also includes building out our middle-market teams in Florida.
So, our guidance that we provided you would be inclusive of all of those investments. As I mentioned earlier, we think that $25 million could generate as much as $20 million of revenue next year. So you can see it’s a fairly quick payback period when we make those investments.
That’s helpful. Thank you.
The next question comes from Brad Milsaps from Piper Sandler. Please go ahead.
Hey. Good morning.
Good morning, Brad.
Thanks for taking my questions. Jamie, I was just curious if you could offer maybe a little more color around just how asset sensitive you are, I know you give the interest rate table in the deck. But I was curious if you could maybe define just maybe in basis points kind of what you feel like each rate increase would have in terms of impacting on NIM? And then how much are rates apart, I know you have three in there, but maybe on a percentage basis, what percentage of that of your revenue guidance in 2022 that would be related to rates?
Yeah. So, first off, as you can look at our core balance sheet and you look at the ratio of floating rate loans to total loans, you can see that increasing over time. So our native asset sensitivity is increased and we are pleased with that given our outlook for interest rate.
Further, the exposure -- relative exposure to define the curve will increase as long-term rates increase and premium memorization decline. So you will see that happening as we have these increases and longer term interest rates that we are seeing.
But as of the -- as of year-end and that’s what our metrics are in the earnings deck, our relative exposure between the short and long end of the curve was relatively balanced when you assume a 35 beta and that’s our through the cycle estimate that’s embedded in our NII sensitivity tables.
But we believe it’s likely depending on the velocity and the magnitude of rate moves that the deposit beta is lower in the initial stages of a fed tightening cycle. And so if you were to isolate that sensitivity to the front end of the curve and hold the back end of the curve constant and use 20 beta, for example, and that’s what consistent with our revenue guidance, we would have margin to expand approximately 3 basis points in the first rate move and 4 basis points thereafter.
And to your question around the total impact as far as our guidance of 4% to 7% revenue growth, our expectations for rate moves are April, August, December. So, obviously, December does not have much of an impact for this year, but you can think about the partial year impact of April and August and is less than 1% of that total revenue.
Great. Thank you. And then, just as my follow-up, just on the credit side of the equation, you guys were around 21 basis points of charge-offs for the year. I think that’s pretty well in line with your 20 basis points to 25 basis points. Any change in the way you are thinking about that in 2022? And I mean it looks like you have kind of exhausted most of your ability to take down the reserve, but just any comments around that would be helpful as well.
No changes in our outlook -- medium-term outlook for charge-offs. You are right the low 20s area is a good baseline as we look forward to 2022. With regards to the allowance in our life of loan estimates in our CECL calculations. If the economic outlook continues to improve and uncertainty declines in the outlook, then we do still expect to see the ACL to loan ratio to decline to approximately the day one levels. For us that was 1.06%. Obviously, loan makes it a little bit different today than it was back a couple of years ago. But we do believe that day one levels are an appropriate outlook for the medium-term.
Great. Thank you.
Thank you.
The next question comes from Jennifer Demba from Truist Securities. Please go ahead.
Thanks. Good morning. Back to the topic…
Good morning.
Back to the topic of CIB, Kevin, how much loan and fee income growth you think this can represent Synovus over the next few years? Can you kind of size the opportunity for us?
Yeah. Yeah. Jennifer, I think, what we have said is that, we think in the first three years this can contribute upwards of $3 billion of loans from a commitment standpoint. But all of that is predicated on the fact that we recruit the teams that we are targeting and we bring them in within the timeframes that we have established.
But this can be a meaningful impact to our overall balance sheet. But based on the size of our balance sheet, you can see that, it’s obviously going to be less than 10% of total loans. But from a fee income standpoint, as I mentioned earlier, it’s going to start-off as being a relatively more of an NII story just based on the coverage nature of these bankers.
But over time, we will continue to add capabilities and just the size of their business from a treasury standpoint, there will be fee income that’s generated there. But we haven’t shared at this point, because it’s such a tough number to be able to provide without knowing the timing and the size of the teams that we will be able to onboard.
How are you finding the recruiting environment for this effort in this -- in today’s landscape given we are seeing so much wage inflation right now?
Just in CIB, Jennifer?
Yeah. And otherwise if you want to cover that?
Yeah. Yeah. Well, look, I think, the way in which you recruit in environment like this, number one, is you have to offer a platform -- you have to offer up a platform for which bankers want to come in and work at. And one of the reasons that Tom Dierdorff came here and he’s going to be at our Investor Day so you will get a chance to meet him, was the attraction of being able to come to a bank that is of our size that has the capabilities and functionality that we have, but provides an environment that allows those bankers to really serve their clients. And so our platform is very attractive to those bankers especially from a corporate and investment banking side.
Two, salary is obviously important and you will hear that from us as we look at our expense guidance, we recognize the changing landscape around salary inflation. But I don’t think that’s the most important thing. We have to provide an incentive plan that is -- that allows individuals to be paid for their success and we are building that as we speak and then that will attract folks here.
And then, lastly, I would tell you that, the people like Tom, who are well-respected leaders in the industry, they attract people, because they know that these individuals have -- that Tom has a great track record of success and that they want to come work for folks like him. So you have the right leaders, you have the right comp packages and you give them the right platform, you can attract top talent from around the industry.
Thanks so much.
The next question comes from Brody Preston from Stephens, Inc. Please go ahead.
Hey. Good morning, everyone.
Good morning, Brody.
Hey. So I wanted to follow-up on the fee income comment, Jamie. You said you expect it to be down this year and I know that includes some securities, gains and some one-time as BOLI. But I guess if we strip all of that out, I have you guys like $109 million in core fee income this quarter. And so, just given the pipeline on mass, given all the investments you have made on the fee income side of the house, maybe setting CIB side, because I know that’s a longer tail on that revenue source. But, I guess, I am struggling to see why the revenue guide would be down from here, because it would kind of imply that that $109 million is what you are expecting for the run rate for next year at least on a core basis. And so, maybe just some greater clarity there, setting aside kind of a one-time item should be helpful?
Yeah. Good question. And to dive into that a little bit. I mean, we still -- if you look at the growth in wealth management fees, I mean, it’s a sustained growth rate. If you look at our core banking fees, we feel really good about the sustained growth rate of those businesses.
And even core banking fees that had a really strong 2021, we are expecting those to continue increasing in the high-single digits in 2022 and so we do expect to see this broad-based growth continue.
And the headwinds, though, are fairly significant. I mean, you have approximately a $10 million year-over-year change in BOLI income. You have a little less than $10 million on gains on equity investments and then you have normalization of mortgage.
And in percentage terms, these are large headwinds and they have nothing to do with our core business performance of what we are doing. But they are headwinds when you have -- when you are comparing year-over-year.
And so we believe that initiatives like mass, we believe that initiatives like CIB when you think about the fee revenue in that business, we believe those will all be tailwinds to NII growth. But as Kevin just mentioned, that’s likely to be a little delayed than just coming in and having a full year 2022 benefit.
And so, we will speak more to the financial statement impact longer term in a couple of weeks when we have Investor Day. But that we believe that we have a platform that’s actually proven to have sustainable strong fee revenue growth and we are going to augment that with these strategic initiatives. Unfortunately, in 2022, we have this headwind of mortgage normalization and then these other one-offs in equity investments and BOLI. So that’s kind of a little deeper dive into the full story.
Okay. Got it. And then maybe just on the expense front. So, if I strip out all the one-time items, including the donation that you all set up, I have got core expenses running about $282 million or so. And so, looking at the guidance slide and looking at fourth quarter results, it kind of implies that, you would expect expenses to be flattish from this fourth quarter level on average throughout the rest of the year, just taken the midpoint of the guidance. Is that an accurate assessment, and I guess, is there anything beyond the branch closures you noted earlier, Kevin, that are driving that?
Yeah. That’s a fair assumption and another way to look at that is, if you roll forward from the third quarter and then add what we define as recurring expenses, the $9 million in our presentation, you get to the mid-270s. And what you should expect to see in the first quarter is the normal seasonal employment expenses, approximately $7 million and you add that on.
And so to your point, that gets you into the low 280s. And we believe that beyond the first quarter, that’s when you all start to see the normal inflationary pressures that come from employment expense, merit increases, et cetera.
But also, I would just -- included in that guidance, as Kevin mentioned, is approximately $25 million to spend on these growth initiatives. So what you see in there is, growth initiative spend, normal personnel expense increases rolling forward from the end of this year.
And I would just add, Brody, from the Synovus Forward standpoint, we have in the appendix slide there that you can see we have another $15 million to $20 million of savings that will come in throughout the year. We referenced the $12 million on branch. We have other savings as it relates to third-party spend and smaller items that add up to that number.
But to be very clear, as Jamie mentioned, we are going to be monitoring the expenses throughout the year. I think we have proven this year was being able to go through a year and have our expenses flat.
And so when you take our guidance for next year and this year over a two-year period, that’s seen some of the highest inflation that I have seen in my time in banking. We will be able to keep our total expense growth over that two years into that 2% to 5% growth range.
So we will continue to pull the levers we have to pull. We have been very, I think, forthright in some of the initiatives that we have already executed on that’s delivered $55 million in expense reductions. Our headcount is down 5% year-over-year.
And so we know that we have to look at the environment and every dollar that we can generate a new efficiency initiative from, it allows us to either drop into the bottomline or invest more in some of these strategic initiatives that we have established.
Got it. Thank you for that. And if I could sneak just a quick one in, can you remind me what the effect of duration on the securities portfolio? And then, do you happen to know what percent of the securities portfolio is floating rate?
The duration of the securities portfolio is just under four years, approximately 3.7 years. The -- I don’t have the percent that’s floating rate top of hand, but we will get back to you.
All right. Thank you very much.
Our next question comes from Jared Shaw from Wells Fargo Securities. Please go ahead.
Hey. Good morning.
Good morning.
Good morning.
Just following up on the growth targets, how do you expect, what’s your view for funding on that in terms of the expectation for deposit growth, as well as cash deployment into those loan categories? And looking at some of those more optional areas you talked about, like, the third-party originators, is that really more going to be dependent upon liquidity than anything else?
Yeah. As we look at funding the loan growth, we are in a very strong liquidity position. And so, we do expect there to be a deposit growth tailwind that continues in 2022. But we believe that even with this growth outlook and how we are thinking about asset growth in 2022, including the securities growth that we will still have the opportunity to improve our deposit mix.
And so, what you should expect to see from us is, core transaction deposit growth being net with a continued reduction in broker deposits, continued reduction in time deposits as we manage that mix. And so, we believe that we have plenty of flexibility to do that and that’s our outlook for funding the loan growth.
With regards to the third-party portfolio, we do view that as a surrogate for the investment portfolio and we will look to deploy assets into the third-party loans as appropriate. You can see in the third quarter, I mean, in the fourth quarter that portfolio was down quarter-on-quarter, but that’s largely due to the fact that we didn’t feel compelled to invest and chase assets in that portfolio when we had such strong client loan growth, which is our priority.
Okay. Thanks. And then just on the expense savings coming from the branch optimization, should we expect that that’s equally spread throughout the year or is that really more back end loaded?
That’s right. We evenly spread throughout the year.
Great. Thank you.
The next question comes from Kevin Fitzsimmons from D.A. Davidson. Please go ahead.
Hey. Good morning, everyone.
Good morning, Kevin.
Good morning.
Most of my questions have been asked, but one thing that’s I am just curious about, when thinking about the franchise, Kevin, looking, I know this year the focus is really on finalizing or getting the finished savings from Synovus Forward and these investments and CIB and other areas. But when you -- and I appreciate your comment about M&A, that’s really not a focus for you all, but when you think about the prospect of bolting on certain markets, say, in North Carolina, maybe that’s not an opportunity for this year, maybe it’s more next year. If you don’t go about it or do you want to avoid M&A, is it on the radar at all to look to do lift-outs of teams in certain metro markets in North Carolina into those seem like they would be very attractive markets for you to add from a banking perspective, but maybe the investments are really or the opportunity for investing is spoken for in 2022, maybe this is more of a 2023 or beyond item. But just wondering how you think of that long-term of that prospect? Thanks.
Yeah. Kevin, it’s a great question, because I think that, as we transform back into this growth orientation, there’s a lot of opportunities to expand our talent. We actually do have a small loan production office in Charlotte today, but it’s not a meaningful portfolio.
My belief is that, I would rather go out and build industry expertise through some of our specialty verticals and have those individuals not be limited by geography, so that technically they can be national in their portfolio versus constraining a new LPO in a North Carolina market.
Because I think that, it’s very difficult I believe to go in with a generalist banker in a marketplace where you don’t have a strong brand and generate the type of value that I think we are generating with some of this specialty industry vertical hires that we have been able to make.
So, although, I would never say never, it would be low on my priorities, I think we have a tremendous opportunity, first and foremost, to continue to invest in the five state footprint that we serve. We continue to be able to pick up great talent from other institutions that are creating growth in our existing markets. We have announced recently two great hires in the middle-market space in Florida.
So we are going to focus inside our footprint. We are going to continue to add some specialty skill set around the industry verticals and then, down the road never say never but it’s just not a top priority.
Got it. Great. Thanks very much, guys.
Thank you.
[Operator Instructions] Our next question comes from Christopher Marinac from Janney Montgomery Scott. Please go ahead.
…all the information this morning. Kevin, just want to ask about the pipeline in the wealth management space, you mentioned the family office growth in 2021. Just curious kind of what the pipeline looks like for the next several quarters?
Yeah. I mean, phenomenal growth there, Chris. So when you look at the 12 -- our Synovus family office has an asset under management portfolio of about $10 billion. So I think that their -- execution that they had this past year is indicative of the type of skill set we have in that team, but it also is a function of the way in which they go to market.
They are not just asset managers. These are -- our offering there is a business that goes out into these generational families and provides full service. And I think it is a unique value proposition and we have won a lot of awards for being recognized for being unique.
So I think you will continue to see that business grow. Our leader there, Katherine maybe set out a plan several years ago to double the size of her business and she’s well on track in being able to deliver on that.
So we are confident that she will continue to grow that business and it will be something that will continue to provide not only growth on the fee side, but also on the assets under management side.
Great. Kevin, thanks for that. And my quick follow-up just has to do with the really receivable business. I guess I am curious is that something that’s digitizing what already exists in Synovus Forward or is it a brand new product offering?
Hey. I missed the first part, Chris.
For the receiver -- for the new receivable business…
Oh!
… I know we are going to get into detail in a couple of weeks.
Yeah.
But just curious if that’s digitizing something that already exists or is it brand new?
That’s right. No. It’s brand new. So, we would -- what we are providing is a suite of products for our clients to better manage their receivable process. So, imagine today you have a clerk who’s matching invoices with payments.
And the product that we provide provides artificial intelligence that allows that process to happen behind the scene, so it makes our clients much more efficient and not needing clerks to do that and makes it obviously a quicker process in general.
So we built a really strong pipeline with that product and we are out selling it to our clients today. The really exciting part is we will have a similar product for the accounts payable side that will roll out in the latter half of 2022 that will provide a similar functionality for commercial payments platforms.
Great. So, over time, that’s going to lead to additional load of business, in addition additional fees as this gets executed, right?
Absolutely. I think we said last quarter our pipeline with the Accelerated AR was right around $6 million in product revenue. And so, over time, those will continue to grow and that’s what’s going to fuel a lot of our treasury growth going forward.
To this point, Katherine Weislogel and her team have done a great job of deepening the wallet share within treasury. We now are starting to expand with these new businesses where she’s getting a new sandbox to play in, but she’s also adding new solutions that will also add to that revenue line. So it’s really the three-legged stool, cross-sell into the existing book, expand through new segments and industries, and three, bring on new solutions and products.
Great. Thanks for the background, Kevin. Appreciate it.
Great.
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.
Well, thank you, and I really thank everyone for your questions and your continued interest in Synovus. I also want to thank all of our team members who are on the call today. It’s an extremely exciting time to be part of this company and it’s an honor to lead this passionate and high performing team.
I recently shared our four strategic pillars of transformation that will build out our bank of the future. I think this roadmap is well-balanced between continuing to drive productivity and market share gains in our core businesses, while folding in and extending new businesses and solutions to generate new sources of revenue.
As we reposition our businesses for advantage, simplify and streamline, leverage a high-tech, high-touch approach to banking, we will also continue to invest in our team and new talent. Execution in these areas will continue to enhance our client experience and it’s going to generate outsized growth.
We have also received some good media coverage over the past few weeks as we have continued to onboard some expert talent, our new Head of Analytics joined us. But we have also taken meaningful steps forward in the crypto space, where we joined the USDF Consortium and we announced an investment along with other banks and the JAM FINTOP fintech fund.
We hope, as Jamie mentioned earlier, you will join us for our 2022 Investor Day on February 8th to hear more about the work that we are doing and how this work will fuel sustainable growth and allow us to deliver on our purpose.
You also have an opportunity to hear from many of our executive leadership team on how we have coordinated this effort and how we are collectively executing on our strategies and we will also share some of our long-term financial targets at that event.
So, as we close again, thank you for joining today. Thanks for your interest in Synovus, and Operator, with that, we will conclude today’s call.
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.