Synovus Financial Company (SNV Q3 2022 Earnings Conference Call October 20, 2022 8:30 AM ET
Company Participants
Kevin Blair – President, Chief Executive Officer
Jamie Gregory – Chief Financial Officer
Robert Derrick – Chief Credit Officer
Cal Evans – Senior Director, Investor Relations
Conference Call Participants
Brady Gailey – KBW
Steven Alexopoulos – JP Morgan
Jennifer Demba – Truist Securities
Brad Milsaps – Piper Sandler
Kevin Fitzsimmons – DA Davidson
Jared Shaw – Wells Fargo
Christopher Marinac – Janney Montgomery Scott
Operator
Good morning and welcome to the Synovus third quarter 2022 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today’s presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two.
Please note this event is being recorded.
I would now like to turn the call over to Cal Evans, Senior Director of Investor Relations. Please go ahead.
Cal Evans
Thank you and good morning. During today’s call, we will reference the slides and press release that are available within the Investor Relations section of our website, synovus.com. Kevin Blair, President and Chief Executive Officer will begin the call. He will be followed by Jamie Gregory, Chief Financial Officer, and they will be available to answer your questions at the end of the call.
Our comments include forward-looking statements. These statements are subject to risks and uncertainties and the actual results could vary materially. We list these factors that might cause results to differ materially in our press release and in our SEC filings, which are available on our website. We do not assume any obligation to update any forward-looking statements because of new information, early developments or otherwise, except as may be required by law.
During the call, we will reference non-GAAP financial measures related to the company’s performance. You may see the reconciliation of these measures in the appendix to our presentation.
Now Kevin Blair will provide an overview of the quarter.
Kevin Blair
Good morning. Thank you Cal, and welcome everyone to our third quarter earnings call.
I’d like to start today by acknowledging the impacts of Hurricane Ian on many within our geographic footprint. Many of you have experienced widespread and long lasting destruction in the wake of this storm. The individuals and communities impacted by the storm have been in our thoughts, but more importantly we stand ready and are already working to help with the recovery and rebuilding efforts.
As a longstanding southeastern bank, we understand the importance of hurricane preparation to ensure the safety and soundness of our clients, our employees, and ultimately of the bank. To that end, a comprehensive client and employee outreach program in addition to implementing network and operational safeguards are the keys to appropriately navigating potential impacts of a storm.
As the storm approached and passed, we fully implemented our business continuity plan with no disruptions to client account access throughout the storm, and we’ve conducted a comprehensive client outreach initiative beginning the day after the storm passed. To date, a low volume of deferrals have been requested by our clients and we have confidence overall that our customer base has not experienced damage that will produce permanent financial stress, collateral impairment, or long-term business interruption due to the storm.
We also continue to care for our team members, clients and communities impacted by the hurricane. Through generous donations of our team members and company contributions to our Here Matters disaster relief fund, we continue to help affected team members recover. We also made a significant contribution to the Florida Disaster Relief Fund to help with the long term needs communities will face as they rebuild.
Many of the leadership team joined me last week visiting our locations and team members in the southwest Florida region. The words that resonated the most with me were resilience and perseverance. Everyone is helping one another and displays a passion and commitment to rebuild and return to a level of normalcy.
Shifting to our third quarter financial performance, we’re extremely proud of the accomplishments and results we released earlier today. This was driven by continued solid loan growth and strong margin expansion coupled with excellent credit metrics and a 50% efficiency ratio. In evaluating year-to-date performance, I believe the third quarter is indicative of the year: strong loan growth, ongoing deposit pricing discipline, and prudent expense management have resulted in very strong net income and PP&R growth for the year.
However, we know there continues to be economic uncertainty ahead, therefore we will prioritize and remain resilient around the key safety and soundness components, including capital, liquidity, and credit. Nonetheless, with the continued strong performance of our core businesses as well as our new initiatives which will begin to generate income, we feel certain we will perform well through this cycle and reach the other side as a stronger, more diversified company, consistent with our longer term top quartile objectives.
Let me provide a brief update on some of our new initiatives, as I know Jamie will cover our core business performance story as he shares the quarterly financials.
Maast, our banking-as-a-service platform, continues to progress with beta testing of our first integrated software provider client. In fact, we expect to add a second client to beta testing in the fourth quarter and remain focused on an early 2023 official launch. With a pilot solution in place, we’re enhancing testing, functionality and capabilities throughout the remainder of the year. While we strengthen the product offering and expand the pilot into other B2B segments, we continue to recruit top talent to prepare for the launch and build out Phases 2 and 3 of the product offering. We remain committed and confident to this opportunity and our teams are working diligently to ensure we deliver a differentiated product early next year.
In addition, we announced last week we continue to build our corporate and investment banking team with coverage and credit product leaders on-boarded to our healthcare services vertical, as well as our leader for debt capital markets. We’ve also closed our first transactions in the technology, media and communications, as well as the financial institutions verticals. With all of our vertical leads now in place, we expect to accelerate adding new business in the months and quarters ahead.
We continue to make investments in our treasury and payment solutions that will serve as new sources of revenue, and we’ll roll out new analytical capabilities in the consumer business in the fourth quarter that will provide opportunities to strengthen and deepen existing relationships. We also continue to be pleased with one of our newest industry verticals, our restaurant specialty group. With $71 million in loan growth this quarter, this brings the portfolio to $545 million.
I’m also happy to announce that we raised our base wage to $20 per hour in the third quarter, which we feel will offset some of the inflationary pressures felts by our team members and ensure we have a competitive compensation structure to continue to attract and retain talent.
Overall, I believe we continue to execute exceptionally well on our strategic plan. This success is directly attributable to our 5,000-plus team members who serve our clients and internal partners with a purpose. This continued focus on execution allows us to perform at a high level regardless of the underlying economic conditions. I am truly humbled and proud of what you do every day.
Let me turn to Slide 3 and our financial highlights for the quarter.
Net income year-over-year was up 9% led by total revenue for the third quarter of $582 million, an increase of 16% year-over-year and 11% quarter-on-quarter. The revenue increase was driven by NII growth, a result of continued healthy loan growth, and a 27 basis point expansion in net interest margin. BP&R was $288 million for the quarter, an increase of 24% year-over-year, representing the highest levels seen in over 15 years. This performance led to adjusted EPS of $1.34, return on average assets of 1.39%, and return on tangible common equity of 21.4%, as well as an efficiency ratio of 50%, all representing excellent operating metrics which serves as validation of the team’s continued execution.
Loans increased $1.4 billion or 3% quarter-over-quarter with diversified growth across all segments. Commercial loans again served as the primary driver of growth. It is reaffirming to see loan growth in all of our business units again this quarter, leading to our fifth consecutive quarter of double-digit loan growth.
Deposits declined 3% quarter-over-quarter driven by balanced diminishment in rate-bearing balances. As we have shared previously, our clients continue to maintain average balances that are higher than pre-pandemic levels; however, during the third quarter, we saw a decline in average balances as clients utilized their cash in business related investments in commercial and consumers sought higher return alternatives. Despite the diminishment, net production has continued to increase and we remain focused on our efforts to grow deposit relationships over time.
Our underlying credit performance continues to trend positively as our NPA, NPL and criticized classified ratios remain stable, and quarterly charge-offs drop to historically low levels. As we have noted before, the performance of our loan book is a function of portfolio diversification and a strict adherence to our disciplined credit framework. We remain cautiously optimistic on the near-term outlook for credit. Lastly, capital ratios remain consistent quarter-over-quarter, representing both our strong earnings and our focus on deploying capital to client loan growth.
Now I’ll turn it over to Jamie to continue the overview of our quarterly results in greater detail. Jamie?
Jamie Gregory
Thank you Kevin. I’d like to begin with loan growth, as seen on Slide 4.
Total loan balances ended the third quarter at $43 billion, reflecting growth of $1.4 billion. On an annualized basis excluding the impact of PPP, this represents a growth rate of 14%, our fifth consecutive quarter of annualized double-digit loan growth. Once again, this growth was broad-based with contributions from wholesale, community, consumer and CIB business loans.
Growth was led by CRE, which increased $785 million quarter-on-quarter. This was a function of loan production paired with a slowdown in payoff velocity. Slower levels of payoffs relative to those experienced in the first half of the year contributed approximately $350 million to CRE growth in the quarter. Growth was once again led by the multi-family and medical property sectors, which represent the highest levels of credit quality within the CRE segment.
With regards to C&I, growth was led by the wholesale line of business. In addition, increased utilization from C&I commitments existing at the end of the second quarter contributed approximately $170 million to quarter-over-quarter growth.
Consumer loan balances increased $148 million driven by mortgage and home equity lending. Third party consumer loan balances remained flat quarter over quarter. As we’ve communicated previously, we leverage our third party consumer portfolio as a means to complement our overall balance sheet positioning, and as we look forward, we expect to redirect paydowns within that portfolio to support our core growth opportunities.
Turning to Slide 5, the third quarter saw a continuation of the industry-wide headwinds for deposit growth with our deposit balances declining 3% quarter-on-quarter. These declines were a result of a host of factors, including the pressure from high rate, non-bank alternatives as well as disciplined deposit pricing. Deposit production remained strong in Q3. Our focus remains on what we can control, and that is continuing to work to grow deposits, both from existing relationships and new business initiatives which over the long term should be the basis for value creation for all of our stakeholders.
As we look at deposit rates, our average cost of deposits increased 23 basis points in the third quarter to 0.38%. That compares to an average of 0.5% for the month of September, which equates to a total deposit beta of approximately 15% for this cycle using average rates for the month of September. This is lower than the 30% total deposit beta we previously estimated in July for a scenario in which policy rates reached current levels.
The existing variance appears to be attributable to the recent pace of interest rate hikes and the associated lags in deposit re-pricing. While this unprecedented tightening cycle is creating an uncertain environment for rates and deposit pricing, if the FOMC continues to tighten to the 4.5% area on policy rates, as is implied by the recent dot plot, we would expect some further upward pressure on total deposit beta for the cycle, placing it in the range of 35% to 40%.
Now to Slide 6. The combination of disciplined deposit pricing, continued strong loan growth and interest rate increases in the third quarter served to support significant growth in net interest income, which came in at $478 million, an increase of 24% year-over-year or 12% quarter-over-quarter. The net interest margin was 3.49% in the third quarter, an increase of 27 basis points from the second quarter. As shown in the NIM waterfall, the impact of higher short term rates boosted loan yields as greater than 60% of our loans are now floating rate. Higher loan yields were partially offset by higher deposit and wholesale funding costs.
As we look forward, the pace of NII growth will be impacted by the timing of deposit re-pricing, interest rate policy, and loan growth. We expect NII to be driven primarily by balance sheet expansion and long end re-pricing as we move past this rate hike cycle.
Slide 7 shows total adjusted non-interest revenue of $105 million, up $5 million from the previous quarter and down $9 million year-over-year. Our depth of relationships and stability in core banking fees and wealth revenue act as a source of strength despite volatile capital markets and a continued depressed residential mortgage environment. Notably, wealth revenue grew 5% despite a 17% year-over-year decline in the equity markets. This highlights the diversity of the non-bank, non-market based revenue streams within our wealth segment in areas such as trust and the family office. In addition, wealth revenue has benefited from fees generated from clients’ movement into short term investments such as repos. This is further evidence of the pressure put on deposits in Q3 from non-bank short term liquidity alternatives.
Moving on to expenses, Slide 8 highlights total adjusted non-interest expense of $294 million, up $10 million from the prior quarter and up $27 million year-over-year, which represents a 10% increase. Employment expense increased 9% year-over-year, primarily attributable to the impacts of merit, elevated performance incentives, and team member additions. As mentioned earlier, we increased the minimum wage to $20 per hour. This increase and other related compensation changes will result in additional spend of $2 million in the fourth quarter and an increased annual spend of approximately $9 million.
Similar to previous quarters, when segmenting our year-over-year increase in expenses, the majority of the growth is attributable to performance-related costs and investments in new business initiatives, such as CIB and Maast. We expect expenses associated with these new growth initiatives and infrastructure investments to increase $6 million to $7 million in the fourth quarter. Our third quarter efficiency ratio of 50% is evidence that we are effectively managing our expense base while making these strategic investments.
Moving to Slide 9 on credit quality, our credit performance and the credit quality of our recent originations remains strong. The NPA and NPL ratios remain stable overall and are at or near historically low levels at 0.32% and 0.29% respectively. The net charge-off ratio was 0.4% for the quarter, representing the lowest charge-off rate we have seen in recent years.
In the second quarter, our ACL was $479 million or 1.13% of loans. Given continued elevated strong loan growth, the ACL increased $21 million quarter-on-quarter while the ACL ratio remained relatively flat. This ratio reflects the quality of the loan portfolio offset by a more negative economic outlook.
Although we do believe that a more challenging economic environment could impact credit performance metrics, we are confident in the composition and strength of the loan portfolio. We have emphasized diversification and specialization across several facets of our commercial lending lines and we have been targeted and selective in the sectors and industries in which we lend. Lastly, our prime focused, conservatively underwritten consumer portfolio is well positioned for a potential downturn.
As noted on Slide 10, the common equity Tier 1 ratio remained relatively stable at 9.51%. Within the quarter, core earnings supported robust capital generation, which is largely redeployed back into prudent balance sheet growth. I would highlight that this is the fourth consecutive quarter of stable capital ratios near the midpoint of our 9.25% to 9.75% range, a result which is evidence of our focus on diligently managing our capital position consistent with our internally established targets.
Looking ahead to the fourth quarter, our focus remains on prioritizing capital deployment toward our core growth opportunities. The slower pace of loan growth expected in Q4 will likely result in a year-end CET-1 within the upper half of our 9.25% to 9.75% range. In light of the uncertain economic environment, we believe further supporting our capital position in the upper half of the range makes sense and, similar to this quarter, we do not expect any further share repurchases in 2022.
I’ll now turn it back over to Kevin.
Kevin Blair
Thank you Jamie. I’ll now continue with our updated guidance for the quarter, as shown on Slide 11.
We remain on track to deliver our pledged $175 million of pre-tax Synovus Forward benefits by the end of this year. At the end of the third quarter, our annual revenue run rate stood at over $160 million and the continued execution of our efficiency and growth initiatives will result in benefits in excess of our stated target. Synovus Forward is now embedded in a continuous improvement mindset that will continue long after this initiative is formally complete, especially as we continue to operate in more volatile economic conditions.
As a result of our strong loan growth of 3% in the third quarter, we are raising our total year loan growth ex-PPP guidance to approximately 11%, which implies fourth quarter loan growth tapering a bit from the growth levels delivered in Q3. This loan growth combined with a Fed funds target rate of 4% to 4.5% by the end of the year results in total expected annual revenue growth excluding PPP revenue of 15% to 16%.
On the expense side, we are expecting year-over-year adjusted expense growth of 7% to 8%, a result of incentives and costs tied to strong performance and targeted business investments. As we’ve stated previously, our employee incentive structures are tightly aligned with overall performance and as such, the strong forecasted revenue performance this year has resulted in higher incentive expectations. Given the strong positive operating leverage resulting from this year’s performance, our expectations for year-over-year adjusted PP&R growth ex-PPP is now 25% to 27%. I am pleased with the progress we continue to make as an organization and remain confident in our ability to deliver sustainable top quartile performance.
2022 is shaping up to be an outstanding year in terms of our financial performance, one that fully exceeded our original and most recent expectations. Reflecting back on our investor day in February, I could not be more pleased with our progress. We stated that we had to increase productivity, deepen client relationships, and deliver ongoing efficiencies while leveraging strategic investments to create an elevated growth profile. We have increased productivity in loans, deposits, and assets under management production during the year, deepened relationships utilizing analytics and good old fashioned partnerships, managed expense growth by closing 28 branch locations, and maintained progress on our new initiatives. Matching our actions with our promises in a manner our team has in 2022 is even more impressive given the volatility in the economy and many causes from which it stems.
Going forward, we will adjust and alter our path where necessary as we remain agile in navigating the ever-changing economic and competitive landscape. I want to again thank our 5,000-plus team members. You are the secret to our success and your efforts and contributions are not unnoticed by our leaders, clients, or key stakeholders.
Now Operator, let’s open the call for Q&A.
Question-and-Answer Session
Operator
[Operator instructions]
Our first question for today comes from Brady Gailey from KBW. Brady, your line is now open.
Brady Gailey
Thank you, good morning.
Kevin Blair
Good morning.
Brady Gailey
When I look at your capital with the AOCI impact, your TCE continues to move down here – you know, it’s now 5.5%. But if you look at common equity Tier 1, it’s still at a great level at 9.5%, but there’s such a differential between those ratios. As the TCE continues to move lower, is there any impact to Synovus from that?
Jamie Gregory
Brady, it’s Jamie, good morning. As we think about our capital ratios, we primarily focus in on CET-1, and the reason for that is if you look at the impact to tangible common equity of AOCI, there’s basically a timing difference and only a partial story of what’s happening as a result of interest rates. As you’re well aware, Synovus performs better in a higher rate environment, but when you mark to market components of the balance sheet, like the securities portfolio, you can see there’s parts of it where the value declines, whereas there are many more parts where the value increases.
As we think about capital and how we manage our balance sheet, how we protect the balance sheet, we primarily focus in on CET-1 and regulatory capital, and as you can see by our earnings today and our strategy for the rest of the year, it’s our intent to build capital through the rest of the year, retain earnings and build capital in dollar form. You can see that we’re deploying it to clients, which is our key strategic objective, and we expect to continue through year-end.
Brady Gailey
All right, and then Jamie, can you give us a little more color on the swaps that Synovus has added over the last year or so? I think as of the end of the second quarter, there was a little over $5 billion received fixed pay floating. Can you just help us think about the impact that those swaps have on earnings and if they have any impact on capital from a mark-to-market point of view, and any changes that may have happened in that swap portfolio in 3Q?
Jamie Gregory
Yes, it’s a great question. You did see a little bit of change in the swap portfolio in the third quarter, but it’s not what you would normally expect. It was more tied to hedging debt or deposits, brokered deposits. When I think about the core swap portfolio, swaps against our loan portfolio, it remains stable, and what we have right now is we have about $5.25 billion of exposure that will mature over the next few years, and it will be impactful to earnings. It’s not impactful to regulatory capital, but it is impactful to what we were just discussing on tangibles.
When we think about the impact to earnings going forward, unfortunately the maturities are somewhat lumpy, and so there will be some quarters where we have more maturities than others, and those maturities will be a benefit to the following quarters’ NII. The biggest quarter that we have coming up with maturities would be the second quarter, and we have approximately $1 billion of maturities at around 1.4% received fixed rate, and so that will be accretive to NII in 2023 once those mature, but it will be lumpy and it will come in over the next few years.
Brady Gailey
Okay, great. Thanks for the color.
Jamie Gregory
Yes, thanks Brady.
Operator
Thank you. Our next question comes from Steven Alexopoulos from JP Morgan. Steven, your line is now open.
Steven Alexopoulos
Hi, good morning everyone.
Kevin Blair
Good morning, Steve.
Steven Alexopoulos
I wanted to start on the deposit side. Prior to QE, non-interest bearing deposits were about 25% of the deposit base; now, they’re around 35%. How should we think about pressure on non-interest bearing balances from here – will it get worse than what we just saw this quarter, and ultimately are we headed back towards 25%?
Jamie Gregory
Hey Steven, this is Jamie. I’ll jump in first.
We spend a lot of time thinking about that when we think about our NIB as a percent of total deposits. We believe that they will be relatively stable, maybe decline a few percent as we go through this cycle, and the reason we believe that is, one, we’ve seen strong client growth, and so our relationship managers out in the field are bringing on new clients, they are driving that business, and we believe that over the long term, that will lead to sustained growth.
But then on a more technical side, we also looked at prior cycles, and so we looked at the cycle in the early 2000s, 2004 to 2007, and if you look at DDA during that cycle, you did see some declines, about 4%. But then when you look at the cycle form 2015 to 2018, DDA as a percent of total deposits did not decline, and so we think that that also gives us a little bit of comfort that you may see some slight declines net percentage, but we’re not expecting anything outside of those prior cycles.
Kevin Blair
And Steven, I’ll just add, interesting enough, when you look at non-interest bearing deposits relative to core deposits, they actually increased this quarter from 35% to 36%, and so as we’ve seen money market attrition, we’ve actually had DDA hold on better than some of the rate-seeking clients that have moved to other instruments.
To Jamie’s point, I think the great opportunity that we have in front of us is what we’ve been doing for the last three years in terms of investing in treasury and payment solutions, so when you ask yourself why would someone keep their money in a non-interest bearing account, they’re doing that because they’re receiving services from our treasury and payment solutions team and they’re offsetting that with their earnings credit rate, but as we continue to grow our commercial business, our ability to win business, as Jamie suggested, in that commercial space is very high and will actually continue to accelerate, and so as we continue to improve our products and solutions, we have the opportunity to have outsized growth in new production of DDA, which could help to mitigate any diminishment that we would see going forward.
Steven Alexopoulos
If we stay with that as my follow-up, so this quarter you saw very nice NIM expansion, but the question we’re asking everybody is, what’s the trajectory from here? It seems like for most banks, 4Q is going to be somewhat similar to 3Q, but does your NIM then peak? It sounds like a lot of banks are guiding to NIM peaking in the first half of next year and then the wildcard is, can you hold it at that level, or Jamie, you talked about this pick-up in deposit betas with a lag, does it trend down in the second half? How are you thinking about that from a high level here?
Thanks.
Jamie Gregory
Yes Steven, this is the key question. As we look at it, first, we’re really pleased with what the team delivered in the third quarter. I think that our performance on managing deposit costs, managing the balance sheet was strong, and it led to a strong quarter of NII, and so we are really pleased with that.
When we look forward, and this is embedded in our total revenue guide for the full year, the midpoint of that is an expectation that NII will be relatively stable in the fourth quarter from these elevated third quarter levels, and that’s a combination of you’ll see some of the impact of prior rate hikes on deposit costs in the fourth quarter, and we’re expecting obviously further rate hikes from the Federal Reserve. There are potential tailwinds to that which would be the liquidity environment and what happens outside of the banking industry, but that could also be a headwind, and so we will see as we go through the fourth quarter.
But to your real question, beyond that we would expect to see an NII and a margin headwind from deposit pricing lags once the Fed tightening cycle is over, and that will be a near term impact. For us, I believe as we look forward further out, that will be offset by the benefit of fixed rate asset re-pricing. I mentioned derivatives maturities earlier, also the re-pricing of the securities portfolio, also the re-pricing of our mortgage portfolio. It’s a little more than $20 billion of fixed rate exposure that will re-price over time, and that will be a nice tailwind for us.
So when I think about NII, we think that the fourth quarter should be relatively stable to the third quarter, but looking out beyond that when we look at 2023, and we’ll give full year guidance in January, but when we look at the longer term, we do believe that the benefit of fixed rate asset re-pricing will fairly offset the negative impact of deposit lags, and we may see NII in 2023 approximate loan growth year-over-year.
Steven Alexopoulos
Terrific, thanks for taking my questions.
Kevin Blair
Thank you Steven.
Operator
Thank you. Our next question comes from Jennifer Demba of Truist Securities. Jennifer, your line is now open.
Jennifer Demba
Thank you, good morning.
Kevin Blair
Morning.
Jennifer Demba
Obviously your asset quality was terrific this quarter. Can you talk about any signs of normalization you’re seeing in any different portfolios?
Robert Derrick
Hey Jennifer, it’s Bob. Just real quick, thanks for the question. I think where we sit today, we’re benefiting from the liquidity that was in the system through the pandemic. You look at our charge-off ratio over time, go back to maybe 2016 to 2020 when we were in the 20 to 30 basis point range, and then as we went through the pandemic, obviously it got on a pretty direct slope downward and we’re kind of levelling off here at fairly low levels, we would anticipate that you would see a return to something in that range as we go forward. My only caveat to that would be if we remain in a restrictive tight policy for a longer period of time, certainly we would expect credit costs to continue to perhaps move up another range or a higher level.
As of today, however, we just aren’t seeing the migration, we aren’t seeing the defaults, we aren’t seeing significant changes in modification requests, etc., so right now my bias is towards stable, but certainly looking ahead we could expect some headwinds there as it relates to credit.
Jennifer Demba
Okay, great. Kevin, could you talk about the CIB business and where it is today versus your expectations of maybe earlier this year, in February during the investor day?
Kevin Blair
Yes Jennifer, I think it’s exciting to see now that we have all three of our managing directors that are leading our verticals in place, and with the talent–as we’ve shared in the past, we’ve been very excited about the talent we’re bringing on and being able to recruit talent from some of the larger institutions, and now we have some credit product specialists, debt capital markets, and we’re starting to see deals being booked. We had two deals, as I mentioned in the prepared remarks, this quarter, our pipeline is over $100 million, and what’s great about that, Jennifer, is it’s not just about participating in deals. We have some lead opportunities in front of us, and I give Tom Deardorf and his team a great deal of credit in that they’ve been able to attract top talent that have hit the ground running.
I’m more optimistic today than I probably was even last quarter, just because we’re starting to see traction, we’re winning deals, the pipelines are building. Bob has brought in a credit team to support them, which we think has been an incredible help to the team in terms of prospecting, so I’m more optimistic today.
You may ask the question, how we would think about it going forward in an economic recession? I don’t–I wouldn’t think differently about it. I think the team we have in place today will continue to provide great credit opportunities and be able to cross-sell depository and treasury opportunities, even in an economy that’s not growing as fast, so for me, I’m just happy we have another lever for our growth engine as we think about the future with the market slowing potentially with a potential recession.
Jennifer Demba
Can I ask one more question about loan growth? You said it’d be slowing in the fourth quarter. Is that because you’re being more selective now with a more uncertain economy, or are you seeing the pipeline slow down from here?
Kevin Blair
Jennifer, it’s a really good question. As we just first talk about this quarter, when you think about $1.4 billion in loan growth, we saw fairly stable production. We also saw payoffs and paydowns slow considerably, predominantly in the CRE space, and so that contributed a little extra growth as we saw the payoff activity slow down.
As we look out into the fourth quarter, we are seeing some slowing in activity from our clients, pipelines are down 15%, 20% from where they were in the third quarter, so when you think about just a 20%, 15% reduction in production, that would produce somewhere around a $700 million to $1 billion loan growth for the quarter. Now, the variables there will continue to be what happens with the payoff activity and ultimately what happens with utilization. This quarter, we saw only a 20 basis point increase in utilization, and on the same line increase about $180 million, so it will slow a bit, but the wildcard there is what will happen with payoff activity, but yes, production is slowing just a little bit.
Jennifer Demba
Thanks so much.
Operator
Thank you. Our next question comes from Brad Milsaps from Piper Sandler. Brad, your line is open.
Brad Milsaps
Hey, good morning.
Jamie Gregory
Morning Brad.
Brad Milsaps
Thanks for taking my questions. Jamie, maybe I wanted to start with expenses. Appreciate you guys have had a great revenue year, and obviously the incentive comp has drifted up. Just curious, because of the great revenue, have you in your mind been able to pull forward any expenses, maybe from 2023, make any additional investments that maybe could soften some of the inflationary pressure that we’re seeing across the industry? I know you’re not giving 2023 guidance, but just kind of curious if you, in your mind, kind of brought any of that forward to kind of ease 2023.
Jamie Gregory
It’s a great question, but you know, on the expense side, I would say we have two things going, and this will be our story for 2023 as well. We have core expenses, which is how we operate our existing business, and then we have the spend for the future with our strategic growth initiatives. But when you look at our core expense base, it’s very well managed, and you see strong performance year-over-year, you see active management. But we’re not stopping or not spending–you know, we are not stopping spending when we need to.
Clearly this is an inflationary environment, you saw we just announced our minimum wage increasing to $20 an hour. We’re actively out there ensuring that we’re competitive, that we have the right compensation structures to have the strongest team out there in the southeast, and so we feel really good about what we’ve been doing on today’s expenses, and that’s what you should expect to see from us in 2023 – you know, active management of what we can control, ensuring that we’re doing everything we can to build the best team, maintain the best team, but then also our strategic plan is made for through the cycle.
This is clearly an uncertain economic environment, but if you look at our strategic plan, what we laid out on February 8 remains the same as what we’re saying today. These are all long term plans that we believe position us for the future.
Brad Milsaps
Great, thank you. As my follow-up, Jamie, it looked like average long term debt went from maybe just under $900 million to $2.7 billion on the average balance sheet, and I know some of these categories are lumped together but you finished the quarter with almost $4.5 billion of long term debt. Can you–I know there was a small issuance in August, but just kind of curious what you did there, maybe how it’s structured – you know, rate, term, etc., just kind of wondering about the moving parts to make sure I didn’t miss something there.
Jamie Gregory
Yes Brad, what you’re seeing there is largely home loan bank advances. Now, those are considered long term, but they are floating rate, cancellable at any time debt. When you think about those funding costs, I would just think about that as basically a Fed funds funding or a short term SOFR rate funding.
Brad Milsaps
Got it, thank you. I was a little confused since there was a long term [indiscernible]. Okay, appreciate the clarity. Thank you.
Operator
Thank you. Our next question comes from Kevin Fitzsimmons of DA Davidson. Kevin, your line is now open.
Kevin Fitzsimmons
Hey, good morning everyone. Just to dovetail a little on Brad’s question there, just curious, Jamie, how we should–I know there was a question earlier about non-interest bearing deposits, but just your outlook for overall deposit levels going forward, do we continue to see a modest decline, and I’m assuming a more modest decline going forward versus third quarter, and then do you continue to offset that with the borrowings you were just referring to, and more broadly, how you feel about that loan or deposit ratio, which I think now has gone up to 89%, where that stands relative to where you want to be longer term. Thanks.
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Jamie Gregory
Yes Kevin, as we look forward on deposits, and you can see in our loan guide, we’re forecasting, as Kevin mentioned earlier, strong growth in the fourth quarter, and we are expecting–and this is a highly uncertain environment on the deposit front, but we are expecting to see deposit growth in the fourth quarter. Now, it will be likely slower growth, but we are expecting to see growth in the fourth quarter and expect–you know, now that’s our current baseline, we’ve seen growth quarter to date. We expect to maintain that through year end.
When you think about the loan to deposit ratio, if you look back over the longer term, we have run for years in the upper 90s – you know, 96% to 98% loan to deposit ratio. It’s not our intent to get back to those levels in the medium term, but you should expect to see that increase, and so we will look to use all of the liquidity levers that we have, but you should expect to see that increase.
One of those liquidity levers that I would highlight is our third party lending portfolio. Clearly you’ve seen strong client growth from us for five consecutive quarters, and it is our intent and has always been our intent to use that third party portfolio as a source of liquidity, and so you should expect to see that attrite over time given this strong client loan growth.
Kevin Blair
And Kevin, given the topic, I told Jamie I’d want to jump on deposits. Obviously I think it’s important to understand what happened in the third quarter to be able to project what’s going to happen in the future, and our team’s done a good job of looking at the outflows this quarter. About 35% of our decline, our diminishment this quarter were a function of just seasonality. We had another 25% where our customers were deploying their liquidity predominantly on the commercial side, investing in new investments, expending their capital. That leaves about 40% of the decline, and about 20% of that we were able to move to alternative, higher yielding liabilities for them, and that included we added about $700 million this quarter off balance sheet in our repo products.
That leaves about 20% or $450 million that left the company to pursue higher balances, and so as we go forward, having a good understanding of how we mitigate some of that activity, but our production on the deposit side continues to increase. We saw another quarter, about 25% increase in net production and that included increased production in DDA, and we’ve gotten more active back in CD promotion.
So as we go forward, our actions around deposits will be very consistent. To Jamie’s point, we’ll continue to focus on generating new deposits, we’ll continue to focus on mitigating some of the diminishment that’s happening, and our investments over the last several years, as I mentioned earlier, with treasury will help. We’re also looking at some new industries and verticals that will help to supplement some of our asset generation with deposit generation, including money service businesses which we rolled out last quarter.
Our focus internally is understanding some of the diminishment, but continuing to focus on the new production that will allow us to generate growth going forward, to Jamie’s point.
Kevin Fitzsimmons
Okay, thanks Kevin and thanks Jamie, appreciate all that.
One quick follow-up, Jamie – I think you mentioned earlier about what the deposit costs were in September. I was wondering if you happen to have them handy, if you had maybe what the actual margin and what the loan yields deposit costs were for September, and then maybe any color you can provide on betas, like what they were last cycle, what you’re assuming this cycle would be great. Thanks.
Jamie Gregory
Yes, you know, I’ll focus in on the deposit side for the month of September. When you look at interest-bearing deposits for the month of September, it was approximately 72 basis points, total deposits approximately 50 basis points, as laid out in the deck. When you look at the through-the-cycle beta through September, from the beginning to September, you have a 15% total deposit beta, a 22% interest-bearing deposit beta, and if you were to look at period-to-period, quarter-to-quarter betas, it’d be 19%–I’m sorry, 25% interest-bearing deposit beta and 18% total deposit beta.
As we’ve said in the past, our expectation was, when we thought that that might end at current levels at 3.25, that our through-the-cycle total deposit beta would be around 30%. As we said in the prepared remarks today, if we assume that the Fed goes to the mid-4s, then we would expect our through-the-cycle total deposit beta to be somewhere between 35% and 40%. I want to give a little more color on that range.
The 35% would be what we would consider closer to our base case, and that implies beyond a 3.25% Fed funds rate, beyond that 30% through-the-cycle beta to 3.25%, that you have an incremental 50% total deposit beta, and that would get you to an approximately 35% through-the-cycle beta with a terminal Fed rate of 4.5%. That would be our current base case.
We do believe that through-the-cycle beta could be higher, which is why we gave the range, given what we saw last quarter with non-bank liquidity alternatives, with competition from non-bank alternatives to deposits, and if that were to continue, if that were to increase, then you could see higher through-the-cycle betas.
Kevin Fitzsimmons
Okay, appreciate all that color, Jamie. Thank you.
Operator
Thank you. Our next question comes from Jared Shaw of Wells Fargo. Jared, your line is open.
Jared Shaw
Hi, thanks. Good morning. I guess maybe just one quick follow-up on that. Do you think that we could get to–you know, could we see a faster acceleration to that through-the-cycle beta than we’ve seen so far, or do you really think that it’s just sort of a continued steady progression higher?
Jamie Gregory
If you go back and look at prior cycles, then you should expect to see an acceleration. If you look at the 2004 to 2006 tightening cycle, you definitely see an acceleration the further you get along in the tightening cycle. The same thing happened in 2016 to 2018, and that’s what we are expecting.
When you look at–you know, quarter-on-quarter, you have a total deposit beta of 18% and then we’re forecasting that just to continue increasing and, as I just mentioned, getting up to as high as potentially the 50% incremental beta, which leads to a through-the-cycle in the mid-30s, and that’s generally what we expect to see happen. But yes, you should see an acceleration in betas as we go through this.
Jared Shaw
Okay, thanks. Then just as my follow-up, can you give a little color on what the sentiment from your commercial customers is as we’re continuing into this period of maybe broader economic uncertainty? Are they still out there talking about growing and investing, or are you seeing them start to become more cautious and maybe pull back a little bit more?
Kevin Blair
Jared, I’ll start and I’ll ask Bob if he wants to add anything from a credit standpoint. I think in general, it’s still cautiously optimistic. I think you have to go back to what we’d talk about in terms of demographics in the southeast and the continued outperformance of our footprint in terms of population growth and business starts, and so I think relatively speaking, none of those elements have changed even though the economy is looking to slow a bit, so as there is continuing to be economic growth in the footprint, we’ll continue to have folks that want to deploy capital.
I do think, as I mentioned earlier in the call, pipelines have diminished a bit, and I think that’s correlate to the sentiment of our business owners, that they do see a slowing going forward. I think part of that has been there’s been a bit of backlog with supply chain and what’s been going on post-COVID, but in general there’s still a positive sentiment. We’re not seeing people that are overly concerned, but we’re seeing a level of prudence and people are being conservative.
Bob mentioned it earlier – they’re still carrying a lot of cash on their balance sheets, so they still have a lot of dry powder if things were to go negative, and quite frankly with rates rising, they’re able to use some of that cash instead of using higher cost debt. But I’m still cautiously optimistic, and I think that’s predicated on what we’re hearing from them.
Bob, would you add anything?
Robert Derrick
Yes Jared, the only thing I would add is we started last quarter with a commercial survey and did it again this quarter, so two surveys in a row, the difference I would highlight in those surveys is we’re beginning to see our customers tell us that their input costs are beginning to wane a little bit, and so early signs that perhaps inflation might be easing somewhat.
The other thing I would point to in those surveys that our customers still feel, as Kevin said, relatively optimistic about their pipelines and their businesses going forward, so not just anecdotal but results of that survey.
Jared Shaw
Great, thank you.
Operator
Thank you. Our final question for today comes from Christopher Marinac from Janney Montgomery Scott. Christopher, your line is now open.
Christopher Marinac
Hey, thanks. Good morning.
Kevin, you gave us the update on Maast earlier in the call, and I was just curious, as Maast comes online next year, to what extent can that be a positive contributor to kind of core deposit growth for the Synovus engine in ’23 and ’24?
Kevin Blair
It’s a great point, because I think we’ve talked a lot about Maast and its ability to generate fee income through the payment products, but it also can be a big deposit generator. It would be too early for me to prognosticate what those average balances are going to be, but as we’ve gone through this pilot with our first ISV, we’ve on-boarded over 800 recurring billers – these are the customers of the ISV. We’ve also opened up our website from a sales perspective and we’ve received 800 unique customers coming to the website with click-through rates that are three times the average of what you see in the industry. As we’ve talked about in the past, there continues to be a great deal of excitement from these software providers to the product.
The other thing is we’ve been talking to more folks about being able to deliver it in ’23. What we’re seeing is that the average number of customers per ISV is actually greater than what we had modeled, so I’d give you all that as background because the only thing I can use to project what it’s going to do for us is what’s happening with our pilot, the early interest that we’re getting from ISVs, and as we’ve shared on previous calls, it continues to be extremely positive, so I believe that not only is it going to be a generator of fee income, but it’s also going to generate deposits that will help our growth in some of the other areas of the bank.
Christopher Marinac
Great, thanks for getting into the detail there, and I presume that relatively speaking, the cost of those funds would be less–may not be zero, but would be less than some other funding that you have.
Jamie Gregory
Yes, you’ll have a DDA account that sweeps the receivables from the payment, but one of the things we want to offer is that they could sweep that money into other interest-bearing accounts, so you’d have a little bit of both. You’d have both a non-interest bearing component as well as interest-bearing, but it would be, I think, overall more attractive than any sort of normal funding or wholesale funding, for example.
Christopher Marinac
Got it, great. Jamie, just a quick one – you know, as you think about the level of debts, is there an upper bound to where you don’t want it to cross over a certain threshold? I know it’s not an exact science, but just kind of curious as you think through the next several quarters.
Jamie Gregory
As we look forward on the debt side, I guess I would bifurcate the difference between borrowing, collateralized borrowing at the home loan bank and facilities like that, than corporate unsecured debt. We have a lot of liquidity, a significant amount of liquidity at hand when you think about the ability to use home loan bank capacity, the ability to use–to grow broker deposits from here, the ability to grow core deposits, and so we have a lot of different levers at hand and we believe that using liquidity sources, like the third party portfolio, allowing that to attrite will benefit us, and we believe that those strategies can help hold off the need to issue any sort of corporate unsecured debt, which is clearly the highest cost of them all.
Christopher Marinac
Great, thanks very much for all the information this morning.
Jamie Gregory
Thank you.
Operator
Thank you. This concludes our question and answer session. I would like to turn the conference back over to Mr. Kevin Blair for any closing remarks.
Kevin Blair
Well, thank you Alex, and as we close out today’s call, I want to thank you again for your interest in our company. I really believe the results we shared today are further proof of our progress in executing on our strategic growth plan. I think most importantly, these results have been driven by our dedicated and hard-working team members here at Synovus. We have an outstanding team and a loyal client base who truly values the relationships we take pride in fostering, along with our exceptional advisory approach to serving our clients’ financial needs. I’m proud of the care our team members take to extend to our clients and the communities in which we serve.
We have a bright future here at Synovus, but we’re not just betting on what is to come; rather, we continue to deliver in the present. This year, our core business performance and our asset sensitivity has translated into income levels and operating metrics that are some of the best in our company’s history. Moving forward, rising rates may be less of a story and economic growth is likely to contract, but we remain optimistic that even in that environment, we will continue to perform in a strong relative fashion.
Continued enhancements in productivity, deepening of client relationships coupled with the traction of our new business initiatives, we will lead growth in loans, deposits and fee income and it will put us in a position to deliver positive operating leverage, allowing us to continue to outperform.
Again, thanks for joining our call today. We look forward to staying connected to this group as we continue to deliver for our shareholders, our team members, clients, and our communities.
With that, Alex, we’ll close out today’s call.
Operator
Thank you all for joining today’s call. You may now disconnect.
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