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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, and welcome to the Synovus Fourth Quarter 2022 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask a question. [Operator Instructions] Please note, this event this event is being recorded.
I would now like to turn the call over to our host, Cal Evans, Head of 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 Web site, 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 Web site. 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.
Thank you, Cal. In many regards 2022 was a banner year for Synovus. We began last year with an investor day which affirmed to the market who we are and detailed our path forward to become a more innovative, resilient, and high-performing bank. As the year progressed, we faced an increasingly volatile operating environment. However, our team rose to the challenge, continuing to execute the plan laid out in February. Given our strong footprint, the ability to monetize rising rates and the performance of our business units, we've demonstrated, throughout 2022, our ability to execute and deliver profitable growth, resulting in top quartile return on average asset, and efficiency ratio levels as compared to our peers.
We achieved this success while also investing in the future and pivoting where needed to address the changing economic, liquidity, and credit landscape. I want to thank our team for delivering on our purpose again, in 2022, enabling people to reach their full potential. Feedback through resources, like J.D. Power showing record client satisfaction scores, and 15 awards from Greenwich Associates for excellence in service to middle market and small business clients prove we remain trusted partners to a growing and loyal legacy client base across our geography. Credit for this kind of recognition goes to this exceptional team and our ongoing investments in strong, scalable capabilities and solutions that add value.
Today's report is shaped by continued growth and stability in our core banking franchise, given our ability to deepen the wallet share of existing clients and consistently attracting new relationships. We are also benefiting from investments in technology, process improvement, and innovation, as well as a common sense approach to expense, credit, and capital management. For these reasons, we exit 2022 a stronger company, with a tremendous amount of momentum as we continue to execute on our roadmap which will allow us to deliver sustainable, top quartile financial performance.
Now, let's review 2022 and fourth quarter highlights on slides three and four. We realized robust revenue growth in 2022 as net interest income expansion was fueled by double-digit loan growth and our overall asset sensitivity given rising rates. A challenging mortgage environment pressured fee income. However, excluding mortgage, client fee income collectively increased high single digits on a full-year basis, signaling the depth and breadth of our core client relationships. Our efforts to double down on the commercial client segment is producing outsized growth as our commercial lines of business generated $4 billion in loan growth, all at higher spreads, while adhering to our conservative credit standards.
To that point, credit metrics improved over the year, and currently stand at or near historically low NPA, NPL, NCO levels. We applied the same disciplined approach to capital management, growing capital in the quarter and ending the year with a CET1 ratio of 9.63%. Our two-year Synovus Forward initiative surpassed its $175 million run rate goal in the fourth quarter. And although the initiative is complete, the emphasis on expense control and efficient revenue growth is more deeply engrained in our culture. And we identify and act regularly on new opportunities to generate incremental value to our financial performance.
Despite increasing pricing pressures on the deposit side, we managed deposit costs well throughout the year, benefiting from prudent strategy and an extended lag on deposit repricing. Overall, deposit production rose 30% for the year, and was sourced from multiple lines of business. I was especially pleased with our sales efforts in the fourth quarter as our teams' increased sales activity resulting in overall growth of $900 million in new production quarter-over-quarter. The operating environment for deposits remains competitive, with the retention of client balances and growth in new production remaining primary focuses in 2023.
While delivering great financial performance during the year, we also continue to make progress with the development and rollout of the key initiatives that will allow us to deliver new sources of revenue in 2023, and well into the future. CIB continues to prudently grow and execute reaching 20 team members in the fourth quarter, and booking their first capital market fees and depository relationships. Maast also reached a key milestone as they were live with their first client, and have booked revenue during the month of January.
On the Treasury & Payment side, we fully completed our client migrations into the Gateway portal, and went live with our new foreign exchange platform. We continue to see traction with the investments we're making in Treasury & Payment Solutions as the growth in production and the associated revenue continues to outpace the underlying markets and our peer benchmarks. In order to continue to increase the capacity of our commercial relationship managers while improving the client experience, we are also investing in new technology and reengineering our processes to streamline the client underwriting and onboarding experience.
On the consumer side, we further streamlined our branch network by closing 36 locations during the year, while investing in analytics and digital capabilities to ensure we continue to efficiently and effectively serve our targeted client base. Simply, 2022 was a year of progress across our entire organization. I am extremely proud of our team and their accomplishments, and encouraged by our positioning as we enter 2023.
Jamie will now share greater detail on the key activities and financial results for the fourth quarter. Jamie?
Thank you, Kevin. I'd like to begin with loan growth, as seen on slide five. Total loan balance at the end of the fourth quarter, at $44 billion, reflecting quarterly growth of $1.1 billion. On an annualized basis, excluding PPP, this represents a growth rate of 11%, our sixth consecutive quarter of annualized double-digit loan growth. Both was again led by our commercial lines of business, and was diversified across multiple industries and segments. For both [C&I] [Ph] and CRE asset sites, growth was a function of moderated production and low levels of paydowns and payoffs. Particularly for transaction-driven sectors such as CRE and corporate M&A, activity and pipelines remain muted as a result of the current environment.
In addition, current underwriting standards account for higher risk in certain sectors. And where we are extending credit, we have been able to exercise greater pricing power to drive margins as reflected by increasing spreads on new floating rate commercial production in the fourth quarter. Moving aside fixed, the industry-wide headwinds for deposit growth remained in the fourth quarter as continued interest rate hikes, seasonal spending, and other liquidity deployment drove account diminishment. Despite these pressures, we were able to growth core deposit balances which increased by $373 million quarter-on-quarter.
This growth was a combination of a bank-wide focus on new deposit production and seasonal benefits from public funds. As evidence of deposit momentum we have around deposit production, when looking at the fourth quarter, new production excluding public funds increased over 50% from Q3. Our resent efforts, both to generate and retain deposits, have been encouraging. And our focus is on maintaining that positive momentum within what remains a challenging deposit environment. To that end, we will continue to ensure that we have a balance between prudently managing deposit costs while remaining competitive through this FOMC tightening cycle.
Our average cost of deposits increased 50 basis points in the fourth quarter, to 0.88%, which equates to a total deposit beta of 21% through Q4. As a result of pricing discipline and continued pricing lag, this beta continues to remain lower than the 35% to 40% range we had previously communicated as our base case for total deposit betas, this rate cycle. With recent deposit pricing pressures and a fed funds rate that appears likely to approach 5% in 2023, we still believe that we'll reach this range as the cycle matures.
Now to slide seven; disciplined deposit pricing, loan growth, and interest rate increases led to growth in net interest income in the fourth quarter. NII came in at $501 million, an increase of 5% quarter-on-quarter or 28% versus same quarter one year ago. The growth in NII for Q4 is supported by both higher loan yields which continue to outpace the deposit cost and the consistent pace of loan growth which I spoke to earlier.
The net interest margin was 3.60% in the fourth quarter, an increase of 11 basis points quarter-on-quarter. Supporting NIM are higher asset yields, which continue to increase alongside the recent pace of FOMC rate hikes and are supported by spread widening and the continued growth in our floating rate loan portfolio. While funding costs have also increased, the pace of increase in deposit rates has remained somewhat more consistent and measured than that of the assets are. This time it served to be a significant tailwind to the margin as we progressed through 2022.
As we look forward to the coming quarters and approach what is likely the later phase of the Fed tightening cycle, NIM is expected to be more heavily impacted by the delayed effects of deposit repricing. Assuming rates remain relatively stable from current levels, over the medium term the margin will be supported by fixed rate asset turnover and hedge maturity. And as we enter 2023, NII will continue to be supported by expected loan growth and pricing discipline.
Slide eight shows totaled adjusted non-interest revenue of $101 million, down $4 million from the previous quarter and down $15 million when compared to the same period in 2021. Negatively impacting Q4 fee income were two tax related valuation adjustment which in combination totaled approximately $5 million, and were partially offset by benefits recognized in the tax provision. Outside of these tax related valuation adjustments, we recorded another strong quarter of non-interest revenue. On the wealth side, revenue generated from client's movement in the short-term investments has provided a positive offset to industry deposit pressures.
On the commercial side, increase in client privacy continues to be a key strategic focus. We can point a progress made this year with syndication fees up 59% on a full-year basis despite a challenging capital markets environment. On the card side, we crossed a noteworthy threshold as commercial card spend exceeded $1 billion contributing to a 20% increase in full-year card fee. Commercial on all proceeds are also gaining momentum with strong pipeline heading into 2023.
Moving on to expenses, slide nine highlights total adjusted non-interest expense of $307 million, up $13 million from the prior quarter and up $22 million from the same period in 2021, representing an 8% year-over-year increase. When looking quarter-over-quarter, the majority of our expense growth was attributable to performance related cost, investments in new business initiatives, and infrastructure spend, all previously disclosed as planned increases in Q4. Similar factors drove the year-over-year expense increases. And our top quartile efficiency ratio of 52% for the year highlights are alignment between performance and expense growth.
Next to slide 10 on credit quality, our credit performance and the credit quality of our originations remain strong. The NPA and NPL ratios remain stable overall and are at or near historically low levels. The net charge-off ratio was 0.12% for the quarter in line with recent levels. In the fourth quarter, our ACL was $501 million or $1.15% of loans. As detailed in the appendix, given continued loan growth the ACL increased $22 million quarter-on-quarter while the ACL ratio remained relatively stable. This ratio reflects the positive performance in the loan portfolio, offset by a negative bias influencing economic scenario metrics for 2023 and 2024. We are confident in the composition, diversification, and strength of our loan portfolio.
As we recently discussed at industry conferences, when looking further at our exposures that are more sensitive to recessionary pressures, we remain convinced that our targeted and selective approach to industry and sector lending will provide protection from an economic downturn. We also feel that we are well-positioned to detect and respond to shift in commercial loan performance through tool such as our client specific cash flow analytic, originally introduced in the pandemic.
As seen on slide 11, the common equity Tier 1 ratio increased to 9.63%, reflecting our commitment to retain our strong organic earnings to support core client loan growth while also maintaining strong capital levels. For the year, we deployed over 70% of our organic earnings towards supporting core client growth, while also returning roughly 30% to our shareholders through our common dividend, both consistent with the capital management priorities we detailed during our 2022 Investor Day.
Looking into 2023, we will continue to prioritize capital deployment towards client growth. And we'll remain mindful of the evolving economic environment as we manage within our target CET-1 ratios. Additionally, our planned quarterly dividend increases 12% to $0.38 a share, subject to board approval reflects our confidence in our stable earnings profile.
I'll now turn it back to Kevin to cover our 2023 guidance.
Thank you, Jamie. Given the more uncertain economic environment, we have utilized wider ranges on estimates and have shared more detail on the assumption supporting these estimates. We expect loan growth of 5% to 9% in 2023. While lower levels of pipeline activity in some business units and a run down in our third-party portfolio will act as headwinds.
We have a number of existing businesses with strong pipelines as well as newer lines of business such as CIB that will support overall growth exceeding that of the general economy. We're also assuming a normalization of prepayment activity and utilization levels that are consistent with those experienced in 2022. It's also worth noting that pricing discipline is a key focus in the current environment, where pricing power continues to improve and we therefore expect wider spreads to persist in 2023.
The adjusted revenue growth outlook of 8% to 12% aligns with an FOMC rate that reaches approximately 5% in 2023. The wide revenue range accounts for less certainty in the deposit environment. On the fee income side, we expect mid-single-digit growth driven by continued expansion in core client fee income, impacting fee income, our checking account enhancements plan to be implemented in the first-half of the year that is estimated to negatively impact annual service charge revenues by approximately $5 million to $10 million.
On the adjusted expense outlook of 5% to 9%, the year-over-year growth is a function of three primary drivers. First, approximately 40% of the growth in 2023 is associated with core operating expenses. Secondly, we have two sizable environmental factors affecting our expense outlook. Health care costs and the rise in the annual FDIC assessment rate are collectively forecasted to account for 20% of the overall growth.
Lastly, we remain committed to our investments and new initiatives such as CIB and Maast, which in combination with other revenue based investments and projects will comprise approximately 40% of our 2023 expense growth. However, despite these expense headwinds, we have found ways to prudently trim cost and we are benefiting from a full-year of Synovus forward expense saves that will allow us to drive overall positive operating leverage and PPNR growth of 11% to 15%.
Moving to capital, as Jamie shared, we plan to maintain our same capital management philosophy in 2023, with a focus on prioritizing core relationship growth and maintaining a strong capital position, all while providing shareholders with a competitive dividend. While our Board approved a $300 million authorization for the year, as was the case for 2022, any share repurchases will be dependent upon loan growth and the overarching economic factors.
Lastly, while we don't talk about it often our tax rate guide of 21% to 23% accounts for a number of successful initiatives that we have implemented in recent years from affordable housing to solar tax credits. These initiatives offset forecasts that negative headwinds in 2023 and serve a dual purpose of consistently reducing our tax rate while also benefiting our communities given our focus on driving actions associated with our ESG objectives.
Our strong momentum has carried us well through the first few weeks of the New Year, and we are so proud of the 2022 accomplishments that resulted in solid financial performance and meaningful progress in nearly every area of our transformational growth plan. We're confident in our strategic plan and our ability to hit key 2023 financial targets outlined today, even as we navigate the volatile economic terrain.
2023 is a year of focused execution for our team as we emphasize investments and pour our energy into three key areas; first, advancing successful execution and productivity gains within our core businesses, allowing us to deepen relationships, grow our client base and enhance financial performance. Growth in core businesses enables us to invest in new and future sources of growth, including Maast, CIB, and new Treasury & Payment Solutions. Secondly, continuing to benefit from contributions generated by our new growth initiatives and adding talent in key businesses and markets to expand our presence and profitability. And then lastly, maintaining a cautious and resilient risk profile through capital management, deposit generation across all lines, and overall credit vigilance.
As we head into the Q&A segment, I want to thank our incredibly talented and passionate team again, and affirm our commitment to providing the best career and workplace experiences possible. In 2022, we progressed in our DE&I, launched our new leadership development program, increased base pay, and enhanced incentive plans and enriched benefits like parental leave. As a result, Synovus was again named the top fourth place in Atlanta, and designated a great place to work. But we cannot rest on our laurels. We're committed to listening and investing even more, in 2023, to meet the needs and exceed the expectations of our workforce.
I also want to mention a few examples of the success and achievements our lines of business delivered in 2022. Our Wholesale Banking team delivered record results, representing the largest growth engine for the company; $5.3 billion of funded loan production, $2.3 billion of deposits acquired, and $39 million in fee income highlighted the year. We also onboarded 55 new team members to support future growth. By focusing on empowering our local leaders, our Community Bank returned to a growth orientation in 2022, with both commercial and private wealth loan portfolios growing for the first time in many years. Moreover, our geographic banking units continue to serve as a portal of entry and a primary referral source, with over 6,000 referrals made to other lines of business.
Our wealth management units, including securities and trusts, grew fee income $10 million or 7% in a year, with significant headwinds from lower equity markets. However, the teams were able to overcome this given strong new client acquisition and the expansion of existing relationships. As referenced earlier, Treasury & Payment Solutions increased production and fees significantly in 2022 driven by success in core cash management solutions as well as commercial card and international services. And our consumer line of business optimized our branch network by closing 13% of our facilities, while expanding our digital and analytical capabilities which resulted in a more efficient and scalable organization.
With disciplined deposit pricing and high single-digit loan growth, the consumer line of business expanded their PPNR by double digits. And certainly, none of these lines of business results would be possible without the hard work and dedication of our corporate services support team. Lastly, I am pleased with our 2022 efforts to build and strengthen our communities. We launched a meaningful partnership with Junior Achievement in mid-2022, one component of more than $3 million and 24,000 volunteer-hours invested in our communities across the Southeast.
With that, operator, now let's open the line for questions.
We will now begin our Q&A session. [Operator Instructions] Okay, so our first question comes from the line of Steven Alexopoulos from J.P. Morgan. Your line is open. Please go ahead.
Hi, good morning, everyone.
Good morning, Steven.
Wanted to start first on the loan outlook, if I look at the loan outlook, it's very strong. Most banks are guiding to strong growth in average loans for 2023, but not strong growth in period-end loans. So, I'm curious, what's your assumption for the economy that underlies the forecast? And what gives you so much confidence at this point that you could deliver mid-to-high single-digit growth in period-end loans?
Steven, it's a combination of several factors. To your point, when we look at the economic forecast, that there are parts of the forecast, that would show in the latter half of the year, that you could see contraction in the economy. But we believe, in total, that when you look at our C&I pipeline, first and foremost, we think we will continue to see good growth on the C&I front. That comes from pipelines, but it also comes from some of the newer businesses that we've just initiated, like corporate and investment banking, where we really don't have a portfolio to this point but we'll be able to continue to generate growth from the new production.
Secondly, we continue to see a constructive environment on the home equity side as well as on portfolio mortgages. Obviously, that volume is down. But when you look at the need for home equity product given rising interest rates, we continue to see a good productive environment there. The area that we're seeing a decline is really on the CRE side, we've seen pipelines decline 60% to 70%. And so, when you think about this year compared to '23, the real difference will be that C&I will continue to grow in a double-digit fashion, consumer will be in that lower single-digit. And then, instead of being double-digit for CRE, it's going to be in the low single-digit for CRE -- or double-digit for C&I, low single-digit for CRE.
Part of that is just due to the fact that the pipeline is down, but the other part is we'll start to see payoff and paydown activities really start to pick up in '23. So, when we look at it by asset class and by business unit, we have certain units that are continuing to see pipelines expand; we've had others that contract. But, the end of the day, you kind of look at all of those and you'll kind of a mid single-digit growth rate next year.
Okay, that's good color.
Yes. The only thing I would add to that is just our non-core third-party portfolio. You should expect to see that attrite as we go through 2023.
Okay, that's helpful, Jamie. And then for my follow-up question, when I look at the net interest margin, basically in line with expectations in terms of the expansion this quarter. But given what you're seeing on the deposit side, right, talking about a further remix non-interest-bearing, Jamie, how do you see NIM trending in 2023, at this stage, I recognize it could change in a month, but right now, if we look at where you ended the fourth quarter, how do you think about NIM for 2023? Thank you.
Yes, it's a great question, and it's kind of the million-dollar question. As we look at 2023, we expect the margin to be down marginally from where we ended in the fourth quarter. And basically what will play into that is, in the first-half of the year we do believe that we will see the pressure of deposit lags. We expect like the quarters with the largest deposit cost increase to be the fourth quarter, that we just experienced, that we're talking about today, and the first quarter. And so, the first-half of the year we'll see the margin headwinds associated with those lags. But how this impacts the margin will depend on how long the lag is and how deposit cost increase as we go through it.
As you know, longer lags and cost outperformance would be margin tailwinds, and the opposite is true with shorter lags and higher cost. Our current expectation for the first quarter is that we see deposit cost increase at a little bit of a slower rate than we saw in the fourth quarter. But we do expect to see in the back-half of the year, the NIM headwinds that we'll see in the first-half turn to tailwinds as our fixed rate exposures become a tailwind with repricing. And all of this is contingent on the interest rate outlook. And so, our guidance today includes the Fed going to approximately 5% and holding there, consistent with their outlook. And so, that's embedded into this forecast.
Got it. Great, thanks for taking my questions.
Thanks.
Thank you, Steven.
Thank you. Our next question comes from Brady Gailey of KBW. Your line is now open. Please go ahead.
Hey, thank you. Good morning, guys.
Morning, Brady.
Maybe just to ask the net interest margin question a little bit, on your last quarter, we talked about NII dollars growing basically in sync with the loan growth in 2023. Is that still the right way to think about spread income dollars?
As we look at NII, looking through the full-year of 2023, I would just call it uneven as we progress through the year. Our base case for NII in the first quarter is for it to be similar to what we just experienced in the fourth quarter, outside of the impact of day count. And so, for that, for us that's about $10 million. But as we progress through the year, there are just a lot of uncertainty with monetary policy, competitive pressures on deposit pricing, and the timing lags. So, as we look at the full-year compared to Q4 annualized, there are scenarios where you could have NII increasing. And that would be driven by loan growth timing lags, betas at the lower end of our guidance. And our guidance hasn't changed through the cycle of 35% to 40% total deposit beta, but -- and the converse is true to that, faster repricing, higher deposit betas would obviously be a headwind. But again like I just mentioned in the response on Steven's question, we do think that the pressures from deposit cost are going to really be the highest in the first-half in the year, but then we have those tailwinds that'll flow through in the second-half of the year.
And Brady, I'll just -- I'll state the obvious, I mean you see it in the '23 guidance, but revenue growth of 8% to 12% obviously exceeding that of loan growth. So, for the full-year, Jamie is talking about relative to the fourth quarter, but full-year, margin will expand 22 to 23. So, NII would actually be growing at a faster pace than what loans would be growing.
All right, that's helpful. And then my follow-up, as I look at last -- you had the Investor Day, you ramped up service forward, you had the new initiatives from the corporate and investment bank, and also Maast, like there was a lot of new things announced. But as you look at 2023, will Synovus continue to be announcing some new initiatives or is this more a, "We have what we have, and it's time to execute?"
So, look, I think, Brady, you always have to have an eye on the future in looking for new sources of revenue. So, I'm sure that we'll have some new ideas and things that will begin to develop and initiate on, but we had in the back of the document, this is really a year of focused execution. We believe that we've made tremendous progress in core businesses and focusing on productivity gains and ensuring that we're getting full share of wallet. I was really pleased to see, as I said on the prepared remarks, when you look at our deposit production in the fourth quarter, total deposit production was about $2.5 billion. It's the first quarter I can remember that deposit production outpaced loan production. We only had $2.2 billion in loan production.
And so, there is opportunities to continue to focus on our core businesses to ensure that we're getting fulsome relationships and that we're delivering the highest level of value to our clients and profitability. The second part of that is making sure that some of these initiatives that we kicked off during Investor Day deliver. Obviously, in our expense guide for '23, we have a considerable amount, about 40% of the growth tied up with current initiatives. And we believe that that's prudent to continue to invest there given that, as we look at '23, and '24, and even '25, the amount of revenue that's going to be produced by those initiatives will more than offset the expense and be a major driver in top line growth.
So, we want to make sure we deliver on those. But we have a sandbox, and we need to think about what are the new items that we uncover as opportunities to generate growth or efficiencies, and that's what we really talk about Synovus Forward. We're not going to do a Synovus Forward 2.0. But what we try to do is embed in our culture the idea of coming up with better ideas to both drive new sources of revenue and define new efficiencies. And that's just something that we have to do going forward given the economic volatility and challenges that we'll face.
Okay, got it. Thanks, guys.
Thank you. Our next question is from the line of Michael Rose of Raymond James. Your line is now open. Please go ahead.
Hey, good morning, guys. Hope you're doing well.
Doing well.
Just wanted to touch on the -- okay, thanks, yes, just wanted to touch on the dividend increase, I think that was probably a little bit larger than I would have thought. And I saw that you -- looks like you've approved a $300 million share repurchase program. Just wanted to get some details around that and how active you plan to be as we move through the year, just given that you're within your CET1 range? Thanks.
Yes. As we think about the dividend policy, we try to pay out 30% to 40% of earnings to the dividend, and we think that's a good place to be, we think is what is right for our shareholders. But we really want to make sure that we're retaining as much capital generated through earnings for core client growth. And we believe that that gives us that flexibility, you know, [technical difficulty] scenarios, in scenarios where rates decline and the world changes, as well as scenarios where we continue to grow and that economy remain strong. So, that's how we think about.
With regards to the share repurchase program, that's the same approval as we had in 2022. And as you know, in 2022, we repurchased only $13 million in shares, but our expectation is that loan growth will be slower in 2023. And we're starting the year at a higher CET1 ratio, closer to the high end of the range. So, as we progress through this year, we are going to monitor our capital ratios. We are comfortable where we are. And as we get to the top end of our range, as we -- to 975, we are going to revisit our share repurchase strategy, and that's a point where you may see us out in the market buying shares.
Okay. And just to be clear, that's a program just for this year, right, the $300 million?
That's right.
All right. And then, just as a separate follow-up question, I think there is going a lot in the news about commercial real estate and resets as properties come up for renewal. There is an article in the journal about it today. I often hear from some investors that there is some concerns. You have got some third-party loans. You have got decent amount of commercial real estate. Obviously, there are issues pretty -- and going through the GFC, can you just provide some kind of overall context around your philosophy around the credit portfolio? Maybe where you are pulling back? And how investors can get more comfort just giving all the changes that you made over the years as we potentially got through another credit cycle? Thanks.
Hey, Michael, it's Bob. I'll start with that and Jamie or Kevin can certainly follow, but just -- let me maybe just quickly go back to what we said at Investor Day as it relates to sort of credit risk management. Obviously, our intent was to spread the balance sheet out. Building out corporate specialty lines of business I think that was our key focus for us. Secondly was to stay diversified within our concentration limits and to build those out. I think that's been accomplished. And then finally and probably most importantly was to make sure we've built a robust credit shops within our lines of business in the first line of defense with our OEMs et cetera. So, we've got credit resources deeply allocated in our business units.
So, from a Bob context that framework is what we are operating under. As it relates specifically to CRE, those same sort of overarching frameworks apply. We stay balanced. We're not outsized necessarily. We do have $3 billion in office. That gets a lot of attention. But if you back out the medical component, that's about half. Within that category, a large percentage is at or near hospitals, universities. So, we like our office. We are not immune to what is going in our office, but we certainly are either comfortable with where we are. Other asset classes are relatively balanced. And on the C&I front, that balance continues. So, that's our guidance from credit as it relates to policy exceptions and managing within our policy. We certainly are vigilant about that. And will continue to be so. So, I think it's just more of the same, but building it out at the frontline, Michael, and continuing to execute on what we laid out in February as we go forward.
And Mike, I'll jump in a little bit here. I mean we have a very long history in CRE. And that's what is getting a lot of attention today. And as you can see in the appendix of our deck on slide 19, we are trying to give investors the details they need to make their own assessment on the quality of the book because we feel very comfortable with where we are in an uncertain environment. And that's why you see us looking at the average LTVs but also the higher LTVs. Anything -- and we are using 70% which is fairly conservative as a tranche just to give a look into our portfolio. So, investors and analysts can come to their conclusions, but we feel comfortable with our strategy. It's one we have a lot of history in. And it's going to be as part of who we were in the past. And it's going to be a part of who we are in the future. And we feel good about that, but we try to get all the insights we can into that portfolio given the headlines.
And Michael, as a quick follow-up to that we are running internal stress test constantly on our CRE book under severe adverse conditions et cetera. And we like the way that way -- the results of those stress test. We do it by asset category. We stress a whole host of variables, but suffice to say that that work is being done. And we feel comfortable that the portfolio can absorb some stress. Again, we are not immune to credit challenges, but we feel really good about the results of that.
I appreciate all the color. Thanks for taking my questions.
Thank you. Our next question comes from the line of Jared Shaw of Wells Fargo Securities. Your line is now open. Please go ahead.
Hey, good morning, everybody.
Good morning.
Good morning.
I guess circling back on the deposits. The beta performance has been pretty good so far. As we look at that loan growth expectation, should we assume that deposit growth will match that? And maybe that's where we're seeing the accelerated beta, just bring those in and how should we be thinking about the level of DDA under that environment as well?
Yes, it's a very important question as we look forward to 2023, and just want to be really clear that as we think about our balance sheet growth in 2023, achieving the high end of our loan growth range requires stronger core deposit growth. And so, those do go hand in hand, but the environment is pretty uncertain, and it's too uncertain to precisely estimate, full-year deposit, core deposit growth, but we do expect to continue to see the strong production, we've seen the past couple of quarters. And our teams are focused, we've increased the focus on the teams, we've changed incentive plans, we have deposit initiatives in flight. And so, we think that organic client deposit growth will materialize in 2023. On the environment side, we do believe that diminishment will reduce as we go through 2023, similar to the trend of reduced diminishment, we've seen in third quarter and the fourth quarter, we believe this stability and Fed policy, both on rate and balance sheet will allow for a more stable deposit environment.
So, all in all, our current expectation again, which is uncertain that we expect core deposit growth to be in the low to mid-single-digits for 2023 and we expect the pressures that we experienced in last year and 2022 to continue albeit at a little smaller in the beginning of 2023. So, growth is likely going to be weighted to the back half of the year.
And so, Jared, on the business front there, so two sides of that equation, as Jamie mentioned, we're ramping up production on the deposit side, diminishment is starting to abate a bit, it's important to note when we look at the balances that we lose in a quarter, about 96% of the balances that we lose are with existing relationships. So, it's not losing deposits. It's not closure. It's folks that are using their cash, or in many situations that we had a record quarter in the fourth quarter of moving money off balance sheet again into treasuries on the security side. So, there's a lot of money movement that's seeking yield. And we think that will continue to slow that combined with increases in production will help to drive the production and growth that Jamie talked about.
The other side of the equation is loan growth, and I want to be clear that, our job is, as we've said, is to go out and deploy capital for our clients. And so, we're going to continue to be open to originate loans. And that's why our 5% to 9% guidance. But the other thing we can do is we come up on renewals of existing loans or we look at certain asset classes, we may make the decision that given our cost of funding, we may not renew it alone, if we're not getting the right level of profitability or particular asset classes, we may decide to downsize, similar to what we've done with third-party given the underlying profitability with wholesale funding.
So, I think you have to look at both sides of it. But we obviously are focused on generating faster growth on the core deposit side and continuing to serve our clients. But we have about $9 billion of contingent liquidity through securities and through FHLB. So, we really don't have a funding problem, we have a challenge to make sure that that funding comes on as cheaply as we can get it.
And to circle back to the NIB question, as I mentioned, there's a lot of uncertainty in the outlook, but within products, I would argue that the uncertainty increases. As an industry, we've seen a significant trend of clients taking advantage of rates and switching out of DDA, we expect that to continue in 2023. And that's embedded in our outlook. It's embedded in our beta assumptions through the cycle betas. But we're also expecting to see continued strong client growth in DDA that will serve to offset that mix shift, I just described. So, how those puts and takes play out in 2023 is uncertain. But our current estimate is they will fare pretty well offset each other.
Okay, thanks. And then, I guess just for my follow-up, looking at the expenses guide, it's a pretty wide range. And you talked about being able to be flexible there, I guess, with the backdrop that there are some increases in fixed expenses, like you said, with health care and cost of living and FDIC, what are those levers where can we see expense growth moderate if the overall growth isn't there?
When you look at our expense outlook first to kind of want to step back and kind of give components of it, we have core operating expense increases. So, you can think about things like merit, and just normal inflationary pressures in third-party spend, things like that. That's about 30% to 40% of our NIE increase year-over-year, when you look at our growth initiatives, those larger ones are CIB and Maast, that's about 40% to 50% of our NIE increase year-over-year.
And then, we have the environmental costs, like the FDIC increase, that are about 20% of the increase year-over-year. So, that kind of gives you a breakdown on where the expense increases are coming from. But to your question around, where's the flexibility, the first place I would point is on variable compensation. So, in a scenario where revenues are lower, it is likely that variable compensation will also be lower, and that's automatic, it happens naturally, and that's about 15% of our expense base. Second, in a slower environment, we have the ability to spend at a slower pace on some of our growth initiatives. And then, third, we have the largest expense categories. And so, that's personnel, that's third-party spend, and that's real estate. And so, as you've seen with us in the past, through the Synovus Forward initiatives, we can always go back and assess opportunities in those areas to reduce expenses.
Great, thanks.
Thank you. Our next question comes from the line of Brad Milsaps of Piper Sandler. Your line is open. Please go ahead.
Hey, good morning.
Good morning, Brad.
Good morning, Brad.
Thanks for taking my questions. Jamie, I'm just kind of curious on to extend the funding conversation, how much can the bond book sort of help you out to the extent you'd like to do that in case, deposit growth does fall short of your kind of loan growth targets, just want to think about, whether you plan to shrink that or kind of what the outlook might be?
Our outlook right now for the securities book is for relative stability. But Kevin mentioned that we have over $9 billion in contingent liquidity available to us, and that includes the unencumbered securities in the securities portfolio. So, if I were to shrink the portfolio by $500 million and get the cash from shrinking it, or if I was to repo securities at 100%, I could get the 500 million that way. So, it's a liquidity-neutral portfolio, just given the quality of the securities that we invest in. So, when we think about that, the liquidity is there as it is, and so our management of that book is a liquidity play. It's also an asset sensitivity play, because investing in those securities is fairly similar to receiving fixed except for you get a nominal spread. And so, that's philosophically how we think about it. And we expect as I said, relative stability in that portfolio as we go through '23.
Got it, thank you. And as my follow-up, you mentioned in your comments, opportunities around fixed rate asset repricing I think in the deck, 38% of the loan book is fixed. Are there any larger pieces coming up that that reprice, can you kind of give us a sense of what you might pick up and to the extent that the swap books would have offset any fixed asset repricing this year just kind of wanted to get a sense of kind of what you think the opportunities there in terms of, kind of fixed rate asset repricing this year?
Yes, when you look at the fixed rate assets on the portfolio, we have securities portfolio, $11 billion book value at just over 2% yield, that prepayments on that are slow, maybe around $75 million a month. And so, that'll be kind of a little bit of a tailwind, but not as material. I mean, the fourth, the jump in the fourth quarter was pretty strong, and we wouldn't expect to see increases like that, as we go forward.
Our residential mortgage portfolio, a similar duration as our securities portfolio around $5 billion and you look at that yield in the mid fees. So, as that pays off, that'll definitely be accretive and then we have kind of other fixed rate assets that are approaching or right at $12 billion. And that those are -- there are opportunities for increases there. Those are not as a material as far as increases as the other fixed rate assets as the mortgages. The hedge portfolio is a meaningful tailwind, and so you can see in the appendix when we put the hedge maturities in there, you can see them in the second quarter, we have a billion maturing. And you can see the jump up and the remaining hedge yield after those maturities, those maturities in the second quarter will be about seven basis points accretive to the margin going forward, just a second quarter billion. And so, we will see a tailwind from that, that benefit will happen in the third quarter and beyond, not in the second quarter itself, but that's how we think about those fixed rates, and we do believe that the opportunity is pretty material as we go through and have maturities and pay offs and pay downs.
Great, thank you.
Thank you. Our next question comes from the line of Kevin Fitzsimmons of D.A. Davidson. Your line is now open. Please go ahead.
Okay, good morning, guys.
Good morning.
Just was hoping to touch on the revenues. I believe you mentioned in the outlook, while you don't have a separate item in the outlook, I believe, and then the growth section that you expected to grow at a mid-single-digit pace. I just wanted to check that that's correct. And what kind of baseline that's off, and then it seems like I recognize that the valuation adjustments were probably not expected. But it seems like you've been adjusting to core fee revenue, and at the lower end of the range, as communicated just in early December. So, just wondering, was a mortgage or were there other items that were a surprise to how low they were?
So, Kevin, I'll start with the fee income guidance. So, yes, mid-single-digits is embedded in the revenue forecasts off a base of roughly $413 million. And what that is, as you know, we expect to see core client fees continue to grow, whether that's on the treasury and payment solutions side, whether it's on the card side, whether it's on private wealth, where we've continued to see growth, those are the areas that we've been investing. And that's where we actually saw growth in 2022. The headwinds obviously, on mortgage, although we don't see mortgage rebounding from a production standpoint, you won't see the year-over-year drag that you saw in '22. So, overall, we feel very comfortable in that mid-single-digit fee income growth level. And then, I'll turn it over to Jamie for the second part of that.
On the valuation, those are things that we analyze from time-to-time and run scenarios on these deals. And so, there're two different deals that impacted us in the fourth quarter. The first was a new market tax credit deal. And basically what happened there is when we ran the math, that's something that you basically reduced the valuation of the asset, as you take the tax credits, and the tax credits came through, and we reduced the value of the assets. So, that's why you see a lower ATR in the fourth quarter, as well as an offset. The other was solar deal that as we looked at the Forward benefits of that deal, they were reduced, and there's still a positive IRR, it still helps us achieve our ESG objectives. But it is reduced IRR. And so, that's why there's a valuation adjustment on that.
Okay, great, very helpful. And just we talked about the balance sheet already, but I just want to make sure I understand. So, the loan-to-deposit ratios, just a little below 90% here. So, given that the intent is to not necessarily utilize wholesale bonds much, but to fund loan growth with deposit growth for the most part, would you -- that ratio to migrate up only modestly over 2003 like what's your comfort level with taking that ratio?
That is our assumption for 2023 is for it to increase moderately. And again, I think the philosophy around liquidity management is similar to the answer that Kevin gave on loan growth. These all move in tandem. And we'll be monitoring loan growth in the context of core deposit growth as we proceed through the year but we're very comfortable with where we are. And there may be times where we choose to use broker deposits to fund growth. There may be times where we choose to use Home Loan Bank or other sources to fund loan growth but the loan-to-deposit ratio to us is more of an output, but yes, in our base case, we do expect it to increase moderately.
Great, thanks very much.
Thank you.
Thank you. Our next question comes from Christopher Marinac of Janney Montgomery Scott. Your line is now open. Please go ahead.
Okay, thanks. Good morning. Just a quick question about -- Bob, you mentioned about stress testing earlier. Does that lead to better pricing on new CRE loans that you have this year? And does that contribute turning to some of the revenue upside?
Yes, thanks Chris for the question. Yes, I would say answer is as Jamie mentioned in his remarks and we think we have got some pricing discipline in the market. We have got opportunity for spread enhancement when we do deploy capital in the loan account. So, I feel pretty good about that. On the stress test, that was more of a credit quality exercise versus a pricing exercise. But nonetheless as we do deploy capital, we -- particularly in CRE we have got a little bit of - we have got the ability to increase spread slightly.
And Chris, I'll put a explanation point on that -- to Bob's point. As we look at things like CRE construction, what we are doing as an organization is we are increasing the minimum requirements from a profitability standpoint to be able to do those. And it's not so much to your point. It's not a risk decision. But it's more of a profitability discussion. And to put some evidence behind our ability to generate incremental spread when you look at the second-half of 2022 and compare it to first-half, we saw about 40 basis points of incremental yield over index for all of our commercial loans. And so, I think for a -- when you look at risk rating for a better credit production level, we are getting much wider spreads. And that's something that we will continue to do given the higher cost of funding going forward.
Great. Thank you, Blair for that. That's helpful. And just a quick follow-up about operating leverage and the guide has it positive. Beyond '23, does some of the expense growth that you have this year create flexibility in forward years just to have less expense growth, and then maybe perhaps in easier time to get into ongoing positive operating leverage?
Yes, absolutely, Chris. And I'll let -- Jamie, I jumped in quick on this one. So, we will probably fight over who answers it. When you look at Jamie talked about the 40% to 50% of incremental expense increase this year for just new initiatives, over time those new initiatives are starting to put off revenue. You'll see revenue growth in '23 for things like MAS, CIB Analytics, new treasury and payment solution, the exponential growth in revenue will be much greater than what you'll see in expense in out year. So, you will see that sort of S curve with many of these new initiatives. And you won't see the same level of increase year-over-year from some of those new initiatives. So, we believe that '24 and '25 could be even better from an operating lever standpoint just based on those new initiatives.
Great, Kevin. Thank you very much.
Thank you. This concludes our question-and-answer session. I would now like to turn the conference back over to Mr. Kevin Blair for any closing remarks. Thank you.
Thank you, Candice. And I want to thank all of those who are listening on today's call and for you continued interest in Synovus. As we close out the chapter on 2022 and we focus our full attention on executing in '23, I personally remain confident in our ability to deliver on our goals and objectives as it relates to all of our stakeholders. I know that we have many team members who are listening on today's earnings call. And so, I just want to say to you I am so proud of what you do and your passion for delivering on our purpose. It's truly our team members that differentiate us with our clients and amongst our competitors. I am also very proud of what we achieved in 2022 and what we continue to build. Enhanced growth, efficiency, and profitability were all delivered during this past year.
But more importantly, we produced it in a way that will allow us to carry this momentum into 2023 and for that matter 2024 and beyond. And lastly, I am proud of the broad-based growth and diversification we are developing in asset classes, revenue streams as well as our business segments. Equally, I am proud of the pace of change and the overall agility of our company which will enable us to adapt more quickly as the environment changes. And it will change and to mitigate the challenges and risk that we face as we continue to execute on our strategic plan. As you have heard today, we have many things working very well. And we have many new exciting initiatives that are afoot. I also want to personally thank our senior leadership team for your hard work and dedication. You make all this change possible, and your commitment and your drive inspires me on a daily basis. As always, we're committed to regularly and transparently reporting our progress. And we look forward to, and appreciate the continued partnerships with each of you on the call today.
And then finally, I can't close out today's earnings call without thanking Kessel Stelling, who officially retired from our Board and our Company on December 31. I am grateful for his many contributions to Synovus, as well as his mentorship, friendship, and his continued investment in our success as he remains in an advisory capacity over the next couple of years.
And with that, Candice, we'll conclude today's call. Thank you.
Ladies and Gentlemen, this concludes today's call. Wishing you a fantastic day ahead, you may now disconnect your lines.