Synovus Financial (SNV) Q2 2022 Earnings Call Transcript

Synovus Financial (SNV -7.43%)
Q2 2022 Earnings Call
Jul 21, 2022, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Synovus second quarter 2022 earnings call. [Operator instructions] 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 -- Senior Director, Investor Relations

Thank you, and good morning. During today's call, we will reference the slides and press release that are available within the Investor Relations section of our website, synovus.com. Kevin Blair, president and chief executive officer, will begin the call. He will be followed by Jamie Gregory, chief financial officer, and they will be available to answer your questions at the end of the call.

Our comments include forward-looking statements. These statements are subject to risks and uncertainties, and the actual results could vary materially. We list these factors that might cause results to differ materially in our press release and in our SEC filings, which are available on our website. We do not assume any obligation to update any forward-looking statements because of new information, early developments, or otherwise, except as may be required by law.

During the call, we will reference non-GAAP financial measures related to the company's performance. You may see the reconciliation of these measures in the appendix to our presentation. And now Kevin Blair will provide an overview of the quarter.

Kevin Blair -- President and Chief Executive Officer

Good morning. Thank you, Cal, and welcome, everyone, to our second quarter earnings call. We're extremely proud of the accomplishments and the financial results we'll share this morning. They provide further proof points into the continued successful execution of our strategic growth plan while also continuing to demonstrate prudence as we prepare for the impacts of less certain economic conditions in the coming quarters.

Our path forward was built with potential challenges in mind and a level of flexibility that allows us to adapt quickly as needed. Knowing that there is greater level of uncertainty ahead, we are balancing our growth objectives with a keen focus on safety and soundness. But as you'll see today, we're entering these unsettled times in a position of strength with a focus on exiting the other side as an even stronger, more agile company. We produced another strong quarter of loan growth, while credit metrics are at historically low levels.

Net income growth this quarter was driven by the expansion of interest income, given the growth in loans and efficiently managing our asset sensitivity with low deposit betas on the rate hikes to date. As a result of another strong quarter of performance, we believe we will perform at or above our stated guidance and loan growth and expect revenue to be considerably above our original expectations for the year. We are also making significant progress in the new business initiatives and our strategic growth plan, which we clearly outlined during our first quarter investor day presentation, though it seems like that day was a long time ago and the environment is changing rapidly. Our commitment to execution is as strong as ever, and we feel very good about the progress we're making.

First, MAAST, our Banking-as-a-Service platform, is progressing nicely as we began beta testing with our first integrated software provider client late in the second quarter. With a pilot solution in place, we can expect to continue testing and enhancing our functionality and capabilities throughout the rest of the year. We are targeting four to five additional software providers to pilot the solution by year end with a focus across various B2B segments. A broader rollout of the solution is targeted for first quarter 2023, with $100 million revenue target still considered to be very achievable based upon the continued feedback interest we are receiving.

Second, the build-out of our corporate and investment banking team has continued this quarter. The leaders of our FIG and TMC verticals are in place and a leader of our healthcare vertical recently accepted our offer to join the team. In total, we have hired 12 staff members, including credit, product specialists, and support personnel. In the third quarter, we plan to make a broader public announcement of these hires and also expect this team to begin adding new business to the balance sheet and income statement.

In addition to MAAST and CIB, we have a number of initiatives underway aimed at deepening relationships and serving as new sources of growth. In this vein, I am pleased that we have completed the final migration of our commercial clients to Gateway, our new commercial digital platform. We also have continued to add new treasury and payment solutions. International and FX capabilities, card services, and integrated receivables functionality are all being significantly enhanced, and we have a road map of new functionality that will complement our already robust set of offerings in the quarters to come.

We are also enhancing our online account origination capabilities and then adding analytics to better support our consumer bankers and proactively addressing the needs of our clients. Within our wholesale banking segment, we continue to be an attractive platform for new middle-market bankers. Over the last two quarters, we have added five new middle-market bankers in Florida, and this quarter, we also added new leadership in the Nashville market. In addition, we continue to see traction in our restaurant Specialty Group with $200 million in loan growth this quarter.

And our recently built agent bank capability generated approximately $2 million in new fee income this quarter across multiple sublines of business. Overall, the momentum in our core businesses is generating growth and strong financial performance. This success helps to fund and support the ongoing investment in new business initiatives, which will deliver incremental financial benefits in the quarters and years to come. Let me now transition to financial highlights for the quarter.

Total revenue for the second quarter was $523 million, an increase of 7% year over year. When adjusted for PPP fees, total revenue increased 11% year over year, the increase was driven by NII growth, a result of continued strong loan growth, as well as margin expansion, resulting from higher interest rates. Loans increased $1.2 billion, excluding PPP, or 12% on an annualized basis with diversified growth across the wholesale community and consumer business lines, evidencing the strong momentum we have across all of our businesses and client segments. Commercial loans, again, served as the primary driver of growth as second quarter funded production was up 41% year over year, with a 1% increase in line utilization supplementing overall growth.

While today's economic outlook is trending more negatively, our underlying credit performance as evidenced by our credit metrics continues to trend positively. Our NPA, NPL, and criticized and classified ratios represent some of the lowest levels that we've experienced in some time. The performance of the loan book is largely a function of better diversification, high underwriting standards, and adherence to our disciplined credit framework. It is also worth noting that at this point, we remain cautiously optimistic on the short-term credit outlook and see that our clients are carrying unprecedented levels of liquidity into this more challenging economic environment.

Speaking of liquidity, continued balance augmentation, combined with account growth, led to quality noninterest-bearing deposit growth of $254 million in the second quarter. Over the last three years, we have grown noninterest-bearing deposits from 25% to 35% of our core deposit base. This ongoing remix will continue to pay dividends in the coming quarters as rates continue to rise. Our net interest margin expanded 22 basis points in the second quarter, with increases in short-term interest rates driving increases in loan yields, while prudent deposit pricing led to lower-than-expected deposit betas on a cycle-to-date basis.

Our strong second quarter financial performance with adjusted earnings per share of $1.17, return-on-average assets of 1.27%, return on tangible common equity of 19% and an efficiency ratio of 53.4% serves as validation that the team's continued strong execution and our success in meeting the needs of our clients is leading to profitable growth. Overall, we're very pleased with the current results. Our continued momentum and our ability to focus on our longer-term plans and objectives. Now I'll turn it over to Jamie to continue the overview of our quarter results in greater detail.

Jamie?

Jamie Gregory -- Chief Financial Officer

Thank you, Kevin. I'd like to begin with loan growth as seen on Slide 4. Total loan balances ended the second quarter at $41 billion. Excluding PPP balances, loans grew $1.2 billion.

On an annualized basis, this represents a growth rate of 12%, our fourth consecutive quarter of annualized double-digit loan growth. C&I loans were up $542 million quarter over quarter and CRE loans grew $358 million. Commercial loan growth was broad-based as 10 of 11 wholesale bank sub-businesses, and the community bank grew balances in the second quarter. The diversity of growth continues to be the hallmark of our commercial loan growth story.

This diversity brings consistency to our growth plan and also mitigates credit risk because we head into what could be a challenging economic environment in the second half of the year. Growth within CRE loans was led by the multifamily sector, as well as our specialty healthcare group, which focuses on lending to larger medical practice groups. We also continue to see growth in commercial production and line utilization. Commercial production increased 41% year over year and line utilization increased to 47.1%, up from 46.1% in Q1.

Higher utilization from lines existing at the end of the first quarter contributed approximately $185 million to loan growth in the second quarter. As we have previously noted, higher utilization levels are reflective of our clients' investment spend and inflationary pressures related to higher input and labor costs, among other factors. Consumer loan balances increased $252 million. This growth was diversified across multiple consumer products, including mortgage and home equity lending.

Third-party consumer loan balances remained flat quarter over quarter. This is reflective of our priority to allocate growth capital first to our core client base, which experienced robust growth over the quarter. While the residual effects of COVID and the recent tightening in monetary policy present notable macroeconomic headwinds, we remain confident that our geographic footprint puts us in a position to perform well relative to the rest of the country, and we remain optimistic about our continued strong performance over the remainder of 2022. As we turn to Slide 5, we continue to see positive trends within our deposit base despite industry headwinds and a more challenging backdrop relative to the record pace we saw in 2020 and 2021.

Regardless of the environment, our focus remains on serving our clients in a way that leverages our platform to deepen relationships, both with deposits, as well as across other financial products. The results of these efforts are evident as core noninterest-bearing deposits increased $254 million quarter over quarter. This marks the tenth consecutive quarter of consistent NIB growth. At 35% of core deposits, NIB is a meaningful component of our overall funding strategy and will help manage overall funding cost in a rising rate environment.

Money market balances declined $804 million quarter over quarter. In assessing the underlying drivers of the decline, there were multiple factors, including seasonal tax payments, as well as relatively normal deployment of liquidity by clients. Additionally, we saw impacts from the interest rate environment where certain higher-cost funds moved out of the banking system and into higher-yielding nonbank alternatives. In many instances, we were able to facilitate the reallocation of client funds and despite losing the deposit, we continue to manage the clients' assets.

Beyond our core portfolio, we also continue to use the broker deposit market as a means to manage our balance sheet and liquidity position in a cost-effective manner relative to other noncore funding sources. Year to date, we have grown broker deposits by $788 million. Following a $797 million decline in the first quarter, broker deposits grew $1.59 billion in the second quarter. Going forward, we will continue to prioritize core relationship deposit growth while continuing to use broker deposits as a secondary tool to manage our balance sheet.

With regards to deposit rates, our average cost of deposits increased 4 basis points in the second quarter to 0.15%. As expected, the initial hikes in March and May had a modest impact on deposit costs as we were able to limit rate increases across the majority of our products. However, given the FOMC's most recent 75-basis-point hike in June, as well as expected additional near-term increases, we are seeing some upward pressure on deposit cost as would be reasonably expected for this phase of the tightening cycle. Moving to Slide 6.

You can see that within June, the average increase in the FOMC's target rate was 113 basis points from the fourth quarter of 2021. And against that increase, our cycle deposit beta through June on interest-bearing non-maturity deposits was 12%; and for total deposits, it was 7%. This is lower than the 20% we previously estimated for interest-bearing non-maturity deposits for the first 100 basis points in short rate increases. However, we expect much of that variance to be attributable to the timing of repricing, and we still believe that our mid-30s interest-bearing non-maturity deposit beta is a reasonable estimate for an FOMC policy rate that is tightening to neutral.

This would translate to an approximate 30% beta for total deposits. With that said, we acknowledge that the FOMC has communicated the prospects for hiking rates beyond a neutral posture. When coupled with their policy on managing the Federal Reserve's balance sheet, this could put upward pressure on our assumed cyclical beta. In such a scenario, we remain well-positioned with an asset-sensitive balance sheet, which can withstand some further pressure on betas and still benefit from increases in long-term rates.

It is worth noting that approximately two-thirds of our reported asset sensitivity is attributable to short rate. And as shown previously, a 10% change in beta assumptions would impact our NII sensitivity by approximately 1.5%. We believe maintaining an asset-sensitive position in the current environment is warranted, particularly given the uncertainty around Fed policy. As we look forward, the continued growth in floating rate loans, hedge maturities, as well as fixed-rate repricing, will support our asset-sensitive profile, even as marginal betas increase past our through-the-cycle beta expectations.

Moving to Slide 7. The combination of strong loan growth I alluded to previously, coupled with the recent move higher in interest rates, served to support significant growth in net interest income in the second quarter, which came in at $425 million, an increase of $44 million or 11% year over year. When adjusted for the headwinds from slower PPP fee accretion, that represents an additional $60 million or a 17% increase versus the like quarter one year ago. I would note that with less than $100 million in PPP loan balances and approximately $3 million in unearned fees outstanding as of quarter end, the NII and NIM impact from PPP should be relatively immaterial going forward.

The net interest margin was 3.22% in the second quarter, an increase of 22 basis points from the first quarter. As shown in the NIM waterfall, the impact of higher short-term rates helped us support loan yields with some offset through higher cost on interest-bearing deposits. The combination of these two factors supported the margin by approximately 13 basis points and was a primary driver of NIM expansion in the second quarter. Additionally, the impact of higher long-term rates and our continued efforts to efficiently manage our liquidity position supported the margin in the quarter with the latter contributing approximately 5 basis points to the margin through a quarterly reduction in average cash balances.

Looking ahead, while the pace of FOMC rate increases and the timing of deposit repricing makes quarterly NIM guidance challenging, we continue to expect further expansion in the coming quarters. The wider margin is expected to be driven by the benefits of higher short-term rates, which are realized fairly quickly, and the benefits of higher long-term rates where fixed rate repricing serves to gradually support the net interest margin. Slide 8 shows total adjusted noninterest revenue of $101 million, down $6 million from the previous quarter and down $5 million year over year. The quarter-over-quarter decline is primarily related to a decline in mortgage revenue, lower SBA income, and a write-down of a minority fintech investment.

Offsetting these declines was an increase in wealth revenue, card fees, and capital markets income. As you can see on the slide, these same categories also grew year over year and are a key indicator of growth within our core client base. Wealth revenue grew year over year despite headwinds from a decline in the equity markets of 11%. This highlights the diversity of the revenue streams within our wealth segment in areas, such as trust and family office, which continue to grow client count.

Overall, approximately 40% of wealth revenues are not directly impacted by changes in market valuation. Core banking fees continue to benefit from card fees, which increased 21% year over year, a result of account growth, as well as higher levels of both consumer and commercial spend activity. And on the capital markets side, in Q2, we saw a broad-based contribution within our wholesale bank as multiple sub-business lines generated agent bank fees. Moving on to expenses.

Slide 9 highlights total adjusted noninterest expense of $284 million, up $4 million from the prior quarter and up $15 million year over year, which represents a 6% increase. Employment expense increased only 3% year over year, primarily attributable to the impacts of merit and elevated performance incentives. As a result of Synovus Board initiatives, we've been able to hold overall headcount flat year over year while adding headcount in areas associated with strategic revenue growth. On that note, when segmenting our year-over-year increase in expenses, approximately 60% is attributable to performance-related costs and investments in new business initiatives covered at investor day, such as CIB, MAAST, and the build-out of our middle-market banking segment.

As we look over the remainder of the year, we expect expenses associated with these new initiatives, as well as other technology- and operations-related costs to increase. Overall, increases in our expense base are oriented toward performance and growth, which we believe will reward shareholders over time. Moving to Slide 10 on credit quality. Our credit performance and the credit quality of our recent originations remained strong.

Key credit ratios remain stable to improving overall and at historically low levels. The NPA and NPL ratios declined 0.33% and 0.26%, respectively, the lowest we have seen in over 20 years. Total past dues remained low at 0.14%, and the criticized and classified percentage of loans decreased to 2.2%. The net charge-off ratio was 0.16% for the quarter.

In the second quarter, our ACL was $458 million or 1.11% of loans. Despite our continued elevated weightings to adverse scenarios, the ACL declined $4 million quarter on quarter. This was largely a result of the strong credit performance, including the decline in NPL. Our credit and relationship management teams remain diligent in monitoring our loan portfolio through portfolio reviews and the use of early warning indicators, such as our analytical risk management tool.

These support proactive engagement with clients. We see that our clients are well-positioned for volatility with significant levels of liquidity and a resiliency that has been tested most recently during the pandemic. The vast majority of our relationships are with long-tenured counterparties who understand how to navigate the current environment. We are also being judicious in approving new credit risk we take on our balance sheet.

Our loan portfolio has been built to better weather a downturn with greater diversification across industries, asset classes, geographies, and credit metrics that support the strength of the borrowers, as well as the collateral held. On the consumer side, our loan portfolio has an average FICO score of 774, and we expect prime borrowers to be resilient through a downturn. Our CRE portfolio has been constructed in a manner that is weighted toward sectors with a positive outlook, such as multifamily, warehouse, and medical office. Rent growth and occupancy metrics in our footprint outperform the nation, and we feel confident that will continue to be the case.

Strong demand has allowed our clients to partially offset the impacts of inflationary pressures. We are actively engaged with these clients so that we can react to any changes related to the current economic environment. As noted on Slide 11, the common equity Tier 1 ratio remained relatively stable at 9.46%. During the second quarter, we repurchased a modest $3 million in shares as organic capital creation was used primarily to support client loan growth.

Our capital position remains strong, and we continue to actively manage CET1 within our 9.25% to 9.75% target range. Going forward, our commitment remains to allocate internally generated capital toward our strategic priority of client loan growth while also maintaining a strong and efficient capital position. Based on our current forecast for client loan growth and given the uncertain economic environment, we will retain the capital generated through earnings rather than repurchase shares through the remainder of 2022. I'll now turn it back to Kevin.

Kevin Blair -- President and Chief Executive Officer

Thank you, Jamie. There are a lot of moving pieces, but due to the hard work of so many team members, this is another very successful quarter. Our engaged team members focused on meeting the needs of our loyal client base helped to deliver profitable growth, helping our clients to reach their full potential is our stated purpose, and I'm so proud of how we are living up to that promise on a daily basis. Reflecting back on our financial performance, we remain on track to deliver our previously communicated $175 million of pre-tax Synovus forward benefits by the end of this year.

Many of the benefits in 2022 have been revenue focused, but one large expense initiative within the program was the closing of approximately 15% of our branch network. In Q2, we closed 11 branches, bringing our 2022 total to 20 locations. We expect to close a similar amount in the second half of the year to complete the large-scale branch optimization program. As a result of our strong loan growth of 6% through the second quarter, excluding PPP loans, we expect to be at or above the upper end of our previous guidance of 6% to 8% for the full year despite the uncertainty in the economic outlook.

As a result of strong loan growth and the current forward rate environment in which Fed funds reaches a target rate of approximately 3% by the end of the year, total revenue growth, excluding PPP revenue, is forecasted to be considerably above the upper end of our communicated range of 9% to 11%. And on the expense side, we are currently forecasting to be at or slightly above the upper end of our 3% to 6% expense guidance, largely as a result of our strong performance and targeted strategic business investments. 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.

Also, as we shared earlier, our investments in our new business initiatives will accelerate throughout the remainder of 2022, which puts us in a great position to begin to generate incremental revenue in the quarter and years to come. Given the strong positive operating leverage and considering all of the updates to our full year guidance, our expectations for the year-over-year PPNR growth has now increased to the mid-20% range, excluding PPP income. 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. The effects of the current inflationary environment are impacting our team members, clients, and more broadly, the communities we serve.

However, we continue to rise to the occasion to provide a source of confidence and trust in a period of uncertainty. I want to thank, again, our 5,000-plus team members. You are the secret to our success and your efforts and contributions are not going unnoticed by our leaders, our clients, and our key stakeholders. And now, operator, let's open the call for Q&A.

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question today comes from the line of Jared Shaw from Wells Fargo Securities. Please go ahead. Your line is now open.

Jared Shaw -- Wells Fargo Securities -- Analyst

Hi. Good morning.

Kevin Blair -- President and Chief Executive Officer

Good morning, Jared.

Jamie Gregory -- Chief Financial Officer

Good morning.

Jared Shaw -- Wells Fargo Securities -- Analyst

I guess maybe just starting with a bigger picture question. You referenced the uncertainty of an economic slowdown, but your loan growth is great. Your deposit growth is great. Your credit is really good.

How do you think an economic slowdown would actually impact your business? Should we -- is that -- there's more variability on loan growth and that the utilization rates may come in? Or there's a bigger question around maybe credit costs as this flows through. I mean, because right now, things seem pretty good.

Kevin Blair -- President and Chief Executive Officer

Yeah, Jared. I think -- this is Kevin. Very good question. You nailed it.

I think where I would start is the biggest uncertainty going forward will be just on client demand, and we shared in the prepared remarks that we believe, given our strong growth year to date, that we would be at or above the upper end of our loan range for the year. And the real question there is, will there be economic slowdowns that result in a slower demand for lending. I think as we've proven out, our productivity continues to increase. And this quarter, I would tell you, loan growth was probably more diversified than we've had it, even in the previous three quarters.

So we remain very confident in our ability to generate loans but the demand side of that will drive the ultimate growth story there. The other areas I would point to, you mentioned credit cost. Obviously, we pointed to the fact that we've had some of the best credit metrics we've had in some time. So in the short run, we don't see accelerated credit cost.

But as you noted, that could change given the environment. And third, I would point to a couple of the NIR categories, whether it's wealth and just looking at equity markets and the pressure we get with assets under management there and just looking at overall core client fees that as people spend less, i.e., on the credit card side, we could see some headwinds on the interchange piece. So there's lots of variables and lots of impacts to different revenue items. But as we said -- as we sit here today, we remain cautiously optimistic.

Jared Shaw -- Wells Fargo Securities -- Analyst

OK. Thanks. That's great color. And I guess just a follow-up, more specifically on commercial real estate.

As we went into the end of the quarter and after the last Fed move, have you seen any noticeable impact on demand or on the impact of cap rates on customer demand for new CRE loans?

Kevin Blair -- President and Chief Executive Officer

Well, no, we had really strong production this quarter in CRE. We actually -- our funded production was up about 100% over where it was in the previous quarter. And that was primarily in two categories, multifamily and medical office. So where we've continued to grow is in some of our specialty areas.

It's not across all of the asset classes. We've actually seen slightly elevated payoff activity continuing. We're still about $200 million to $300 million over what we would consider the three-year payoff average. But demand is still there.

I think as cap rates start to increase, we expect to see payoffs and paydowns subside a bit just because that churn was elevated over the last several years just with developers taking money off the table. But productivity has been very high. And, Bob, anything you'd add on your side?

Bob Derrick -- Chief Credit Officer

Yeah, yeah. Hey, Jared. This is Bob. We clearly are beginning to see some slowing of demand as the economics of these projects, harder to make work given the higher input cost, labor cost, etc.

So we would expect that to have a headwind to real estate growth as Kevin mentioned, the payoffs have abated a little bit, but there's still ample capital out there to take -- to pay us off once these loans get stabilized. So all in all, I think it will slow, but I do think commercial real estate from a credit perspective has performed well. Our leverage attach points here are really good, loan to value, loan to cost are really good. We're dealing with a good group of clients we banked for a long time.

So we still feel good about the credit quality, but the velocity of growth should temper certainly over time as we go forward. Go ahead, Jamie.

Jamie Gregory -- Chief Financial Officer

Jared, this is Jamie. Let me add one more thing to this. You mentioned the credit cost and a slower growth environment. In the appendix, we put our waiting to scenarios for our allowance calculation.

And in there, you can see that one of the scenarios is a slow growth scenarios. So to give you a little bit of context, that slow growth scenario has approximately 1.6% annualized GDP for the next four years as unemployment rising above 5%. And as you're aware, we use a multi-scenario framework. But if we only use a single scenario, and if that slow growth scenario was the single scenario kind of like what you described in your question, our allowance would be very similar to where it is today.

Jared Shaw -- Wells Fargo Securities -- Analyst

Great. Thanks for that color.

Operator

Thank you. The next question today comes from the line of Kevin Fitzsimmons from D.A. Davidson. Your line is now open.

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

Hey, good morning, everyone.

Kevin Blair -- President and Chief Executive Officer

Good morning, Kevin.

Jamie Gregory -- Chief Financial Officer

Good morning, Kevin.

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

Just on the topic of growing net interest income. So are we kind of in a situation where it's going to be the percentage margin growing it? You were clear that you expect that to continue to expand. But I'm interested in what you think about average earning assets, the average balance sheet. Will that be flattish? In other words, will you -- if loan growth stays where it is or slows a bit, and we see deposits continue to decline, will you continue to step in with the brokered to keep that balance sheet growing? Or are you confident enough in the margin that you can just keep that flat or slightly up and still grow net interest income and the balance of the --

Jamie Gregory -- Chief Financial Officer

Yeah, Kevin. Thanks. Got it. As we look forward, there are a few questions embedded in that.

And as we look at the balance sheet, you should expect to see the balance sheet grow similar to the rate of growth of the loan book. And that's what you saw in the second quarter, that's what you should see in the future. The funding choice we make on that is purely economical. And so there are plenty of alternatives as you're aware, we have a lot of liquidity options over -- we have over 20% of total assets available to us when you add up cash on balance sheet, home loan bank advances, and unencumbered securities.

And obviously, we have deposit avenues as well that we can grow. So you should expect to see the balance sheet grow at the rate of growth of the loan portfolio. With regards to NII, it's a very interesting time period for NII, and the outlook for NII going forward because the pace of Fed rate increases is quick enough that it is growing faster than the rate of pace of deposit cost increase. There's a timing lag between the two.

And so that timing lag is highly accretive to NII to the point that when we look at the third quarter NII, we would expect to see NII growth somewhere between 9% to 10% in the third quarter based on the timing lag continuing and the market outlook for rate increases from the Fed here in the third quarter. That being said, that rate of growth -- that's not a sustainable rate of growth beyond that because you have two things happening. One, that timing lag does not benefit you forever. As a matter of fact, when the Fed stops raising interest rates, it will be a short-term headwind.

But our expectation is, once you get beyond that and excluding that impact of the headwind of timing lags when the Fed is done with this tightening cycle, we would expect to see NII grow at the rate of loan growth plus a little bit because of the benefit of fixed rate asset repricing.

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

OK, great. Thanks, Jamie. One quick follow-up. Kevin, this is more of a big picture question.

Like we've mentioned, we've been through a lot of detail on the growth initiatives, and you guys have made clear that the expenses are going up for that in the back half of the year. But we've also talked about the certain environment. And I'm just curious, was there any contemplation about delaying or slowing some of those growth initiatives and that spending for when the environment gets a little more certain? Or were these things really locked in and there was no way to consider doing that? Thanks.

Kevin Blair -- President and Chief Executive Officer

Yeah, Kevin. When you think about what we're spending, it really gets bucketed in a couple of different categories. First, MAAST. And we believe that being a first mover in our Banking-as-a-Service platform is going to be very important and quite frankly, opening up that channel to small businesses as we look toward the future environment is going to be very important.

So although we could have slowed it, we just didn't feel like that was prudent and we were continuing to move forward with our beta product, and we'll again roll it out next year and the full product in '23. When you think about corporate and investment banking, that's another area where I believe right now is an opportunity to not only gain talent from some of these larger institutions. But you've seen from some of the larger peers this earnings cycle that a lot of growth on the balance sheet has come out of the capital markets and back onto commercial banking balance sheet. And that's one of the areas we think we can play in the space, whether it's in the FIG, TMC, or healthcare space, we feel like we can play in that lower market CIB area where the clients need to use the customers' balance sheets.

And so we decided to, again, accelerate that initiative. The others, when you look at this expense, it's really around treasury products and it's around analytics. And I just think that if you're not investing in new solutions and products then you're not investing in data and analytics, you're going to get behind your competition. So in reality, we've had discussions around expense management, but I just think it makes a lot of sense given the returns on investment on these projects.

We looked at this full year. And if you think about those investments -- they represent about 2% of our expense growth. So when you think about the 6% we're up, they represent about 2%. But I look out into '23 and see that those same investments are going to represent 2% to 3% of our PPNR and you look out into '24, they're going to represent 6% to 10% of our PPNR.

So we feel very convicted to continue to invest there, and we've seen success in not only the talent front, but also in MAAST in building out the product.

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

OK, great Thanks, Kevin.

Kevin Blair -- President and Chief Executive Officer

Thank you.

Operator

Thank you. The next question today comes from the line of Brady Gailey from KBW. Please go ahead. Your line is now open.

Brady Gailey -- Keefe, Bruyette and Woods -- Analyst

Hey, thanks. Good morning, guys.

Kevin Blair -- President and Chief Executive Officer

Good morning, Brady.

Jamie Gregory -- Chief Financial Officer

Good morning, Brady.

Brady Gailey -- Keefe, Bruyette and Woods -- Analyst

I just wanted to ask a question on capital or balance sheet optimization. I heard Jamie say no more buybacks, which totally makes sense, given you those growth. But I mean, if you look at common equity Tier 1, you're kind of right in the middle of your range. You're seeing good growth opportunity.

Is there anything to consider on the balance sheet optimization side that that could give you a little more room to continue booking this robust growth?

Jamie Gregory -- Chief Financial Officer

Yeah, that's a great question, Brady. You're right. For the remainder of 2022, we expect to retain capital generated through earnings. That's -- we believe that there are opportunities on balance sheet to serve our clients.

We see the uncertainty in the economic outlook. And so we think that's the prudent thing to do. But you're right that there could be opportunities on the balance sheet for balance sheet optimization. And you're well aware of our third-party portfolio, how we think about that as a surrogate for the securities portfolio.

And so if the right opportunity came up there, our priority would be to deploy that part of our balance sheet to our clients. And so that portfolio is one that we consider as a tool we can use to manage in the environment. We have nothing, no updates on that today, but that is how we look at it, and there are possibilities that we use that portfolio to as a surrogate for the securities book and can look at deploying that capital to our clients.

Brady Gailey -- Keefe, Bruyette and Woods -- Analyst

So, Jamie, you think by utilizing the retained earnings, optimizing the balance sheet, you all can kind of self-fund this growth that there would be no need to raise any sort of additional debt preferred or anything to support the growth?

Jamie Gregory -- Chief Financial Officer

Well, on the capital side, we do believe that our earnings will generate more than enough capital to support our client growth. You heard our outlook on client growth getting to the high end of our range -- at or above the high end of our range of 6% to 8%. Organic earnings should be plenty to cover that -- the capital of that loan growth and build capital truthfully. When you think about debt, that's a different story, and it's liquidity both at the holdco and at the bank.

And we just manage that the same way we always have, and we will continue to look at holdco liquidity and bank liquidity and make sure that we are well within our coverage ratios.

Brady Gailey -- Keefe, Bruyette and Woods -- Analyst

All right. And then, finally, for me, the reserves, down to 1.1%. You guys are seeing good growth. It feels like the provision has to go higher.

It's not a bad thing. It's growth related, but it feels like the provision should be going higher here, right?

Jamie Gregory -- Chief Financial Officer

As we look forward with the allowance, we would expect it to grow, commensurate with loan growth. I mean -- and you know that our growth, if you look at the marginal growth that we're putting on balance sheet, it is lower risk than the average of our balance sheet. And so it's a positive or actually will reduce the allowance to loan ratio, all things constant. But you're right to expect that the allowance will grow with loan growth, assuming the economy and the economic outlook doesn't change.

And you do see our weightings to these adverse scenarios remains elevated given the economic uncertainty.

Brady Gailey -- Keefe, Bruyette and Woods -- Analyst

All right. Got it. Thanks, guys.

Operator

Thank you. The next question today comes from the line of Ebrahim Poonawala from Bank of America. Please go ahead. Your line is now open.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Hey, good morning.

Kevin Blair -- President and Chief Executive Officer

Good morning.

Jamie Gregory -- Chief Financial Officer

Good morning.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

I just wanted to follow up on deposits and liquidity, Jamie. One, just talk to us -- so you talked about mid-30s deposit beta for non-maturity and then 30 basis points for total deposits, which I assume includes CDs and NIB. So is your sense that if the Fed stops -- and you mentioned something about neutral versus above neutral, just trying to make sure we get the right message. If the Fed stops hiking at somewhere around 3.5%.

Would that be neutral? And in that world, do you expect total deposit beta to be in the mid-30s? Or would you expect that to be higher?

Jamie Gregory -- Chief Financial Officer

Ebrahim, when we think about neutral, we are defining that. If you look at the Fed dot plot, looking at the long-term expectations for Fed funds rate, which is in the low 2s, if you were to assume that the Fed tightens to the low to mid-3s, it would add approximately 5% to 10% through the cycle beta that we laid out.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Understood. So -- all right. So if the Fed actually goes as the forward curve is implying right now, maybe closer to 40% total deposit beta -- and just tied to that, it sounds like you're going to grow the loans and the balance sheet. Pre-pandemic, the loan-to-deposit ratio was closer to in the 9,500% range.

Do we see it going there? And what's the outlook on third-party loans? Does that portfolio shrink from here? Or do you expect to continue to buy into that?

Jamie Gregory -- Chief Financial Officer

So we do expect to see the loan-to-deposit ratio increase. However, we believe that's more of an output of balance sheet strategy than a target or an expectation, and we'll continue to use the various sources of liquidity as we see value. And so we compare broker deposits, we compare home loan bank advances as we think about how to fund incremental growth beyond core client deposit growth. And so that's really how we think about it.

When we look forward in 2022, we do believe that core client deposits will grow. We believe that we'll see 1% to 2% client deposit growth in the second half of the year. And if you think about loan growth, that is approximately what we have to get to the 8% high end of the range on guidance. And so that's our current outlook.

There's a lot of uncertainty in 2022 in the second half of the year on that. You saw the flows in the second quarter. And so that's our expectation here in the near term. With regards to the third-party portfolio, that portfolio, as I mentioned earlier is basically a surrogate for the investment portfolio.

But one difference is, is that we do have some flow arrangements, and we have partnerships embedded in there that are not things you just turn on and turn off. And so those continue. We're really pleased with those partnerships. We believe those are accretive to the shareholder through the cycle.

And so we feel really good about those. But there are also portfolios that we purchase. You're aware of the auto portfolio that we purchased. We like that profile because of a couple of things: One, it's up in credit; two, the collateral values are strong; and three, it has a shorter duration profile.

And so what we like about it is that it amortizes quickly. And so that portfolio is expected to amortize down approximately 40% in a given year. And so that's not something we would look to replace in this environment of uncertainty. And so that's our philosophy at the moment.

I would say that the flow arrangements or core partnerships that we have and then any portfolio purchases are really similar to securities portfolio and kind of more noncore.

Kevin Blair -- President and Chief Executive Officer

And, hey, Ebrahim, can I just add one thing back on the deposit side? Jamie is 100% right. When we talk about building an elevated growth profile, it isn't just on the lending side. We're focused on building an elevated growth profile on the liquidity side as well. And so as you think about some of our core businesses where we're growing today and commercial, we have an equal focus on generating operating deposit accounts.

And you saw this quarter another quarter of strong DDA growth. If you look at overall production for deposits this past quarter, we were up 30% over the first quarter, and so we are focused on generating new deposit relationships. We also have businesses that we think over time are going to help supplement that growth. MAAST will be a good deposit generator for us.

We have a money service business that we just launched on the treasury side that we think will provide good core deposits. And so when we talk about growth, it's about balanced growth. It's growing the asset side and the liability side. And over time, we think that the growth from the new clients will get in these businesses will help to feed some of the low-cost deposit growth that we'll need to be able to fund it.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Got it. Thank you.

Operator

Thank you. The next question today comes from the line of Brad Milsaps from Piper Sandler. Please go ahead. Your line is now open.

Brad Milsaps -- Piper Sandler -- Analyst

Hey, good morning.

Kevin Blair -- President and Chief Executive Officer

Good morning, Brad.

Jamie Gregory -- Chief Financial Officer

Good morning.

Brad Milsaps -- Piper Sandler -- Analyst

Kevin, maybe just a bigger-picture question. I appreciate all the near-term guidance. It sounds like everything is going better than you initially expected. The longer-term pieces that you laid out back in February, although seemingly a short time ago, a lot has happened.

If you had to kind of pick areas of that maybe where you're most concerned or on the flip side, areas where you think you might get there more quickly, it seems rates are going to be higher than you initially thought. Maybe the market has some concern over growth. Obviously, you've got a lot of initiatives going. But just kind of curious if you could hit those targets maybe more quickly than you originally thought? Or just kind of your thinking around those?

Kevin Blair -- President and Chief Executive Officer

Yeah, Brad. The real wild card there is just what would happen from an economic standpoint. And although the rates are providing a strong tailwind, will we see certain headwinds from slower economic growth that would slow our growth in certain areas. As it relates to our core businesses, we always talk about the new business initiatives, but our core businesses are performing at a very high level.

When you look at just loan growth this quarter, we had 13% growth in CRE, 11% growth in C&I and 12% growth in consumer. And so very balanced growth across all of our segments across our lines of business. And so that gives me a lot of confidence that the core businesses will continue to perform that allow us to fund some of these new initiatives. The new initiatives, we said that we would have a product available to test and MAAST by the end of the second quarter.

We are testing an NVP product with a service provider or a software provider. We're excited to get feedback from that beta testing. As we said, we'll add four to five new ISPs this year to be able to continue to test it, and we're actually accelerating some work on MAAST to add new functionality and capabilities outside of the payments and depository products that were going to be some of the first that we rolled out. So we actually could accelerate that and add new functionality.

On CIB, I feel like the talent that Tom Dierdorff has been able to bring in, in a short period of time has been extraordinary. I'm excited to have those guys in their seats in the third quarter, and I think you'll start to see that we're starting to book some business there. We actually feel that our long-term targets in CIB based on the talent we're bringing in, we actually will be able to accelerate when we achieve some of those balance sheet targets and PPNR targets. So in generally -- in general, I would say that we are as optimistic today as we were back in February.

The only challenge for us is just understanding what credit cost or what client demand would be through whatever this economic downturn is.

Brad Milsaps -- Piper Sandler -- Analyst

Great. And maybe just as a follow-up, just a couple of housekeeping questions for Jamie. One, I was curious if you had maybe the net interest margin for the month of June. And then secondly, within fees, I know other fees can bounce around a lot, falls in that category, only $2 million this quarter.

I know there was a $7 million investment write-down. But just kind of curious, anything else that might have fallen in that line item that might bounce back for you over the near term. Thank you.

Jamie Gregory -- Chief Financial Officer

Yeah, Brad. The margin for the month of June was materially higher than the quarter. But before kind of getting into that, I just want to caveat that it benefits from the timing lag, I described earlier. So I don't want to read too much into a one-month margin because there are the benefits of deposit pricing being slower than loan repricing.

For the month of June, the margin was 3.35%. And just with the caveats that I just described. On fee revenue, you're right, we had the $7 million write-down of the investment, which is largely due to market valuation swings and software-as-a-service companies. but there's really not a whole lot in fee revenue that I would point to that's more idiosyncratic to the quarter.I would say, as you can see on the slide, we laid out our core kind of client fee growth, excluding mortgage, which we believe is a very important part of the story, up $10 million year over year.

And then within mortgage, we do feel good about the growth there. Production remained strong in mortgage, and we believe that we could see some bounce back there from the $4 million in the second quarter.

Brad Milsaps -- Piper Sandler -- Analyst

Great. Thank you, guys.

Operator

Thank you. The next question today comes from the line of Jennifer Demba from Truist Securities. Please go ahead. Your line is now open.

Jennifer Demba -- Truist Securities -- Analyst

Thank you. Good morning. Your loan growth was really strong in the second quarter and for the last few quarters. Just wondering what the pipeline looks like right now.

And could it be double digits for the year?

Kevin Blair -- President and Chief Executive Officer

Yeah. Jennifer, the pipelines remain strong. They're down a little bit from where we were entering the second quarter. but not by a material amount.

So we are remaining optimistic on the third quarter production. Could they end in double digits? I mean, it's potentially they could, given that we've grown each quarter by roughly 3%. I think the wildcard there is just the uncertainty in the environment and what will happen with client loan demand. Bob mentioned earlier in their credit meetings, they're starting to see some slowing in just CRE activity.

But we remain fairly optimistic for the reasons I mentioned earlier. When you look at this quarter, we had very diversified loan growth and growing our three main asset classes. When you break it down on the C&I side, we had 14 NAICS codes that had growth and five categories that had over -- had over $50 million of growth. When you look at it by market, of our 47 markets we serve, 65% of those markets had growth this quarter.

So for me, what gives me optimism in being able to continue to grow the book, is just a level of diversification and the fact that we're getting it from so many different asset classes and so many different businesses and geographies that I think you'll continue to see it being able to call what the ultimate growth for the year is, is just so hard not knowing what's going to happen from an economic headwind perspective. But I don't want you to interpret our message today that we've seen a major shift in the customer sentiment for loans, but we do know that there's some uncertainty that's in the future.

Jennifer Demba -- Truist Securities -- Analyst

Thanks so much.

Operator

Thank you. The next question today comes from the line of Michael Rose from Raymond James. Please go ahead. Your line is now open.

Michael Rose -- Raymond James -- Analyst

Hey, good morning, guys. Thanks for taking my question. Just as we're thinking kind of longer term, just going back to investor day, which seems like eons ago at this point. I remember the day of investment day -- or investor day, the targets that you guys laid out were essentially in line with where consensus was at the time.

But those -- where consensus is now has kind of come in versus where those targets are? I know you guys are committed to kind of top quartile performance. But I guess as we -- if you were to do the investor day today, maybe if you can answer for us both strategically and from a target point of view, what you would potentially change? Thanks.

Kevin Blair -- President and Chief Executive Officer

I'll start strategically, and I'll ask Jamie to add on any targets. But Michael, as I said earlier, I'm not sure we would change anything within our strategy. I actually felt like our plan was built with some level of uncertainty and the ability to make modifications along that three-year journey. And so the investments that we're making today, I think we're doubling down on those investments in an interesting way going into an economic downturn.

I think that's the time you really do invest, and it gives you an opportunity to come out of the other side of whatever this downturn is, a stronger more diversified, more agile company. So on the strategic side, I don't think there's anything we would change. When you think about the targets, and you said this, and I'll let Jamie provide any absolute points that he wants to make. But the important part there is we gave you some numbers based on those forward curves and based on those forecasts.

But the important part is to know that what we committed to was top quartile growth. So regardless of what the absolute numbers are in those categories, we want to make sure we're in the upper 25% of our peer group in those metrics. And I think whether it's in a prolonged economic downturn or whether this is a short shallow recession that recovers quickly and we're back to high levels of growth. Whatever those absolute numbers end up being, we want to make sure that relatively speaking, we're in the top 25%.

Jamie Gregory -- Chief Financial Officer

Yeah. Really not too much to add from my perspective. Obviously, the interest rate environment, our outlook currently is higher, which will be supportive to interest income, so I would expect to see higher returns. And then I would also expect to see a higher return on equity when you think about both the higher top line, as well as the impact of tangible common equity where we are today.

And so to Kevin's point, we're focused on top-quartile performance. We believe in our growth initiatives. We believe that the decisions we are making today in this uncertain environment will position us for shareholder value over the long term, and so we're moving forward with our plan.

Michael Rose -- Raymond James -- Analyst

All right. Great. Thanks for taking my question. Appreciate you, guys.

Kevin Blair -- President and Chief Executive Officer

Thank you, Michael.

Operator

Thank you. The final question today comes from the line of Christopher Marinac from Janney Montgomery Scott. Please go ahead. Your line is now open.

Christopher Marinac -- Janney Montgomery Scott -- Analyst

Hey, guys, good morning. Kevin and Jamie, I had a question on credit as it pertains to the C&I book. And as we play through the cycle, was the 25 basis points or so charge-offs this quarter. Is that emblematic of what we should expect over time? I know the book is a lot different than it was in past cycles.

So I just kind of want to relate that to how that could play out.

Bob Derrick -- Chief Credit Officer

Hey, Chris. This is Bob. Just a comment or two on that. I appreciate the question.

I think charge-offs in general, and this is certainly true for the C&I book as well. we're kind of range bound right now in the short run. I mean, all of our early warning indicators are still green. Past dues are low, NPLs are low, as Jamie spoke of, down to historically low levels almost.

So specific to the C&I book, I think we're kind of in that range. We don't see anything specific that causes us concern right now from that perspective. Remember, we do have a third-party book that kind of gives us a quarterly -- some quarterly charge-offs, and then we have a small business book that we're following closely that hasn't seen really any deterioration, but certainly was a benefactor of P3 loans. And as that pulls back and liquidity pulls back, inflation pressures hit, we would expect some there.

But quite frankly, our past due levels and new nonaccruals just continue to be solid, and we're having to kind of counter that, if you will, with a heavier downward bias on our economic scenario. So --

Kevin Blair -- President and Chief Executive Officer

And I would just add to that, Chris, the charge-offs, any particular quarter, you can see in any of these asset classes and spikes. But Bob and I were talking, the level of inflows that we're seeing from an NPL's perspective are at some of the lowest levels. So although you may see a 24-basis-point charge-off in C&I one quarter. But in general, what we see from an inflow perspective has been very low.

So we would expect there, as we said earlier, on the short term, we're cautiously optimistic on the credit profile.

Christopher Marinac -- Janney Montgomery Scott -- Analyst

Great. That's helpful. And then I guess, as utilization continues to ramp up, does that sort of bump up the reserve allocation there just somewhat over time?

Jamie Gregory -- Chief Financial Officer

It does. And you saw that in the second quarter. The utilization impact on the allowance was $3 million increase in the second quarter.

Christopher Marinac -- Janney Montgomery Scott -- Analyst

Great. Thank you, all. Appreciate it.

Kevin Blair -- President and Chief Executive Officer

Thank you, Chris.

Operator

This concludes our question-and-answer session. I would like to turn the conference back to -- over to Mr. Kevin Blair for any closing remarks.

Kevin Blair -- President and Chief Executive Officer

All right. Thank you, Bailey. As we close out today's call, I want to, again, thank you for your attendance. Our goal as a leadership team is to continue to be extremely transparent around our actions, as well as our objectives and our results.

I believe our growth story is becoming more clear each quarter despite the changes in the economic environment. I want to thank our wholesale, our community, treasury and payment solutions, FMS, and consumer line of business teams. Your execution and your expertise are leading to growth in loans, operating deposits, and fee income across our markets and our client segments, and none of that growth will be possible without the support of all of our corporate service team members across our bank. Our success is because of the whole team.

We win together as one Synovus. Now, today's presentation and the Q&A portion focused a lot on the granular aspects of our business and the financials, whether it's NIM, betas, allowance, or run rates. As passionate as we are to provide the detail and answers to those questions, we are even more passionate about wowing our clients and growing the company with a laser focus on execution and investments that drive long-term shareholder value. Innovation is becoming an even more central part of our strategy as we expand our solutions and the services we offer.

We were recently recognized by the Technology Association of Georgia as a top 40 innovative technology company. TAG named Synovus is one of Georgia's 10 most innovative companies. As the only financial institution included on that top 40 list, this award speaks volumes about our team's strategic efforts to build the bank of the future and to stand out as an innovator in the competitive landscape of banking, finance, and technology. Finally, I'm proud of our continued investments in our communities, including our recent contribution to junior achievement from our "Here Matters" community fund.

This partnership with JA will bring relevant, hands-on financial education and career programming to more than 2,000 Title I students across the five-state footprint. I can't think of a better way to leverage our time and resources to make a difference by investing in our youth and helping to reduce income inequality. Again, thank you for your continued interest and your confidence in our company. We look forward to navigating with you through the challenges ahead while also continuing to deliver strong performance for our clients, our team members, and our shareholders.

With that, Bailey, we'll close today's call.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Cal Evans -- Senior Director, Investor Relations

Kevin Blair -- President and Chief Executive Officer

Jamie Gregory -- Chief Financial Officer

Jared Shaw -- Wells Fargo Securities -- Analyst

Bob Derrick -- Chief Credit Officer

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

Brady Gailey -- Keefe, Bruyette and Woods -- Analyst

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Brad Milsaps -- Piper Sandler -- Analyst

Jennifer Demba -- Truist Securities -- Analyst

Michael Rose -- Raymond James -- Analyst

Christopher Marinac -- Janney Montgomery Scott -- Analyst

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