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Text: Kevin Blair, president and chief executive officer, will begin the call.
We ask that you limit yourself to one question and one follow-up.
During the call, we will reference non-GAAP financial measures related to the company's performance.
And now Kevin Blair will provide an overview of the quarter.
Our team delivered another solid quarter with growth in revenue and earning assets while maintaining an expense discipline that resulted in year over year quarterly expenses declining 5%.
Additionally, we continue to see an improving credit outlook that produced a release in allowance.
Finally, we continue to successfully deliver on our Synovus Forward initiatives and investments with the $75 million in pre-tax run rate benefit achieved through the second quarter and an additional $100 million in pre-tax run rate benefits to come by year-end 2022.
Before I proceed, let me take a second to remind you of our performance to date as it compared to our expectations at the beginning of the year.
We shared with you that we would deliver loan growth, excluding PPP and ramp it up in the second half of the year.
We also said we would improve the deposit mix and lower our cost of funds to stabilize the margin.
Also, we would drive efficiency initiatives that will assist in returning to positive operating leverage while continuing to manage effectively through the uncertain credit environment and produce the planned benefits from Synovus Forward.
I'm pleased to share with you today that we are delivering on those objectives, and we concluded the first half of 2021 with considerable momentum and are optimistic about the prospects for growth and expansion moving forward.
Our commercial loan pipelines are back to pre-pandemic levels with continued growth in C&I outstandings and commitments and line utilization actually increased slightly during the quarter.
Client liquidity remains strong, which has allowed us to further optimize our deposit mix and reduce our cost of funds again this quarter.
We expect this trend to continue in this low rate environment.
Our Wealth and Treasury and Payment Solutions businesses are performing at a high level.
Continued growth and operating margin expansion in these fee income-generating business units will help to offset the industrywide reduction in mortgage activity.
Criticized and classified loans declined for the quarter, another proof point that the elevated credit concerns raised by the pandemic continue to abate and signal the opportunity to continue to move the allowance over time back down toward day one CECL levels.
And during the first half of the year, we continued to invest in the future of Synovus.
Key priorities to enhance the customer experience and deliver new sources of growth.
A couple of examples of this include: our Treasury and Payment Solutions business launched a new suite of integrated receivable solutions called Synovus Accelerate AR.
This solution has been well received, and the sales pipeline has already begun to fill which will create a new source of revenue while significantly benefiting our customers by saving them time and money.
We also have migrated approximately 25,000 business clients to Synovus Gateway, our new digital platform for business and commercial banking.
With expanded functionality and capabilities, we are making it easier for our customers to do business and promoting higher levels of business retention.
Lastly, our smart analytics tool, which we've shared previously, has been further rolled out across our bankers and our markets, and is beginning to have an impact on increasing pipelines and opportunities to expand the share of wallet from our customers.
We are also reminded during the second quarter that our focus on delivering a personalized and value-added customer experience matters and will continue to provide a foundation for future growth.
Industrywide consumer satisfaction surveys, again show that our clients are more satisfied and loyal than those of our competitors.
And we also received two awards of excellence for our family office during the quarter.
These scores and accolades are not success in and of themselves, but rather affirmation that our efforts and our approaches are having meaningful impacts for our customers.
For all of these reasons, as well as the vibrant economic expansion that we expect to continue in the Southeast, we remain confident in our path forward.
Moving to Slide 3, which includes our financial highlights for the quarter.
Total adjusted revenue of $489 million, adjusted expenses of $268 million and a $25 million reversal of provision for credit losses resulted in adjusted net income of $179 million or $1.20 diluted earnings per share.
Without adjustments, net income was $178 million or $1.19 diluted earnings per share.
Pretax run rate benefits from Synovus Forward of $75 million have increased by $25 million from the first-quarter results.
Our work on completed and future initiatives continues to give us confidence in our ability to achieve an aggregate pre-tax run rate benefit of $100 million by year-end 2021 and $175 million by the end of '22.
Total loans, excluding P3 loans, were up $194 million in the second quarter.
Growth in the quarter was delivered in our core C&I portfolio, as well as third-party consumer lending, given the continued high liquidity environment.
Despite solid production levels, elevated prepayment activity remains a headwind in our commercial and consumer real estate portfolios.
Core transaction deposits increased $702 million or 2%, led by core noninterest-bearing deposits growth of $601 million or 4%.
With the current loan-to-deposit ratio, we continue to remix the deposit base strategically reducing higher cost categories, including CDs and broker deposits.
Key credit metrics were stable with the NPA ratio declining by 4 basis points to 46 basis points, and the ACL coverage remains strong.
A more favorable economic outlook and a 14% reduction in criticized and classified loans supported further allowance releases.
The ACL ratio, excluding P3 loans, declined 15 basis points to 1.54%.
We remain well capitalized with the CET1 ratio increasing to 9.8%, while completing nearly half of our $200 million share authorization in the quarter.
We also executed on additional earning asset growth activities to monetize excess liquidity while keeping capital above our operating target.
As shown on Slide 4, we ended the quarter with earning assets of $51 billion.
Total loans declined $569 million, led by P3 balance declines of $763 million.
While gross production levels continue to improve, the liquidity environment continues to result in downward pressure on loan demand.
While our customers are utilizing less of their line commitments, we are continuing to grow overall commitments to new client relationships and deeper existing relationships.
The annualized growth rate and total commitments over the past two years is more than 3% compared to an annualized increase in funded loan balances of approximately 1%.
A material portion of that growth will translate into funded balances once C&I line utilization begins to normalize closer to the long-term average of 46 to 47%.
Based on market intelligence and conversations with our clients, we believe increases in line utilization will occur later in the cycle as client liquidity subsides.
Our base assumption included in our loan growth guidance is that line utilization will remain near current levels through year-end.
While commitment growth will support longer-term loan growth, our confidence in the forecast for the near term is based on continued strong production, growth in the commercial loan pipeline and our expectation that the elevated level of payoffs and paydowns will abate.
Another factor that gives us confidence in loan growth is more recent monthly data.
In June, total loans, excluding changes in P3 balances grew by approximately $200 million.
In the second quarter, further declines in consumer mortgage and HELOC portfolios of $98 million and $74 million, respectively, continued to be impacted by accelerated prepayment activity and excess liquidity.
CRE loan declines of $173 million this quarter largely resulted from accelerated payoffs as many owners are selling with the expectation that capital gains taxes will increase in 2022.
C&I balances, excluding changes in P3, increased $220 million with $469 million in commitment growth while C&I line utilization remained near historic lows.
As a reminder, a normalization in C&I line utilization would result in more than $700 million in funded balances.
We had approximately $150 million in fundings of round two P3 loans, net of unearned fees, which partially offset forgiveness of $927 million.
Total P3 balances ended the quarter at $1.6 billion.
There's more detail related to P3 loan activity in the appendix.
Lastly, as a function of this liquidity environment, we increased the securities portfolio about $616 million and third-party consumer portfolio about $273 million.
The risk profile of asset acquisitions was largely consistent with those completed in the first quarter with emphasis in mortgage-backed securities and secured third-party consumer loans.
Investment securities accounted for 17% of total assets at the end of the quarter and could increase further as we look for opportunistic deployments of liquidity in the second half of 2021.
As shown on Slide 5, we continue to grow core transaction deposits, which increased $702 million, or 2% from the prior quarter.
This was led by core noninterest-bearing deposit growth of $601 million or 4%, which offset strategic declines in higher cost deposits.
We continue to have success reducing our total deposit costs in the second quarter with a reduction of 6 basis points from 22 basis points to 16 basis points.
This was driven by a combination of deposit mix optimization with a continued focus on strategic reductions in high-cost time deposits, as well as a reduction in the expense associated with interest-bearing deposits.
While the pace of CD maturities will slow significantly, there are opportunities to further improve the deposit mix and reduce rates paid on other interest-bearing deposits as we progress through the second half of 2021.
For the month of June, total deposit costs were 15 basis points, and we expect further reductions in total deposit costs this year.
Slide 6 shows net interest income of $382 million, an increase of $8 million from the prior quarter.
NII increased as benefits from asset growth, reduced deposit costs and day count more than offset the reduction in P3 fee income.
The net interest margin of 3.02%, a decline of 2 basis points was primarily impacted by P3 forgiveness as P3 fee accretion decreased $5 million from the prior quarter.
Other dynamics are similar to recent quarters as the headwind from asset repricing is being offset by further reductions in liability costs.
As expected, slower prepayment activity in the latter part of the quarter helped to improve the yield on the securities portfolio, supporting both margin and NII.
Based on current mortgage trends, we'd expect modest further improvement in that yield in the third quarter as the impact of a full quarter of more normalized prepay activity is realized.
Deceleration of prepayment activity resulted in a $3 million reduction of premium amortization in the second quarter, down from $20 million in the first quarter.
In terms of asset sensitivity, we remain positively exposed to potential increases in interest rates.
That dynamic continues to be supported by the aforementioned shifts in our balance sheet, including funding mix, with the estimated exposure being split between both short-term and long-term rates.
As of June 30th, our loan portfolio is 54% variable and approximately 30% of those variable rate loans have floors at or above short-term index rates of 25 basis points.
Based on current market conditions and our expectations for loan growth, we reiterate our expectation that quarterly net interest income, excluding P3 fee accretion, should increase in the second half of the year driven by loan growth, deployment of liquidity, a deceleration of prepayments and further deposit cost reductions.
Using the quarter-end forward curve and absent rate hikes, we expect a NIM of approximately 3%, excluding the impact of P3, with headwinds from the lapse of P3 fee accretion being offset by the continued deployment of excess liquidity and with notable upside coming from increases in either short-term or long-term interest rates.
As we've shared previously, we estimate NIM dilution of approximately 6 basis points per $1 billion of excess cash on deposit at the Federal Reserve.
Slide 7 shows a total adjusted noninterest revenue of $106 million, down $6 million from the previous quarter.
Embedded in the continued strength in fee revenue is diversified growth across our fee revenue sources, partially offsetting the continued normalization of the mortgage business from all-time high levels of production.
Core banking fees were $41 million, up $3 million.
Increases were broad-based, led by $1 million increases in account analysis fees that benefit from our treasury and payment solutions team and our recently in-sourced merchant business.
NSF, or overdraft fees, which have received a lot of attention throughout the industry, were flat at $6 million, accounting for less than 6% of noninterest revenue and 1.3% of total revenues.
Net mortgage revenue declined $8 million in the second quarter to $14 million due to reductions in secondary production and gain on sale.
This remains above pre-pandemic levels, and we expect continued normalization in the second half of 2021.
Increases in fiduciary revenues of $3 million helped offset decreases in other areas, including capital markets income.
Assets under management grew 3% in the quarter and 28% from the previous year.
The build-out of wealth management and other fiduciary services, particularly in South Florida, will continue to provide meaningful growth opportunities.
Total noninterest expense of $271 million is highlighted on Slide 8.
Adjusted noninterest expense was $268 million up $2 million from the prior quarter and down $6 million from the prior year.
Adjusted items include the impact of an earn-out liability, nonqualified deferred compensation and restructuring fees primarily related to branch closures.
Employment expense of $159 million was down $1 million from the prior quarter as seasonal decreases in payroll taxes was partially offset by an increase in pay days, as well as commissions and other variable compensation.
Expenses of $42 million associated with occupancy, equipment and software increased $1 million from the previous quarter, largely due to an increase in the repairs and maintenance.
As Kevin will touch on later, we continue to evaluate and optimize our branch and non-branch real estate for additional efficiency opportunities.
Other expenses of $67 million were up $3 million primarily due to the $4 million increase in third-party processing fees associated with the expenses from additional P3 forgiveness and third-party consumer loans.
Our commitment to prudent expense management and profitable growth allows us to continue to invest in strategically compelling high-return growth vectors.
We have reduced our head count 6% year over year, approximately 85% of which was on the support side.
This reduction in headcount is a key priority in our expense management efforts, However, there are some offsetting costs as we promote team members who are taking on more responsibility and continue to hire customer-facing team members.
Our expectations for expenses and benefits from Synovus Forward remain unchanged.
Slide 9 highlights stable credit metrics, which remain near historical lows.
We continue to see improvement in the overall economic outlook, which is reflected in the reversal of provision for credit losses of $25 million and a 14% reduction in criticized and classified loans.
Support for the ratings improvements comes from client conversations and cash inflows.
As shown in the appendix, cash inflows from March to May are each up more than 10% compared to the same period from 2019, which we use as a pre-pandemic baseline.
The annualized net charge-off ratio for the quarter was 0.28%.
We expect net charge-offs to remain relatively stable in the second half of the 2021, assuming no material change in the economic outlook.
During the second quarter, the NPA ratio declined 4 basis points to 46 basis points.
Criticized and classified loans fell 14%, and we expect further reductions as we progress through the rest of the year.
The ACL ratio of 1.54%, excluding P3 loans, was down 15 basis points from the prior quarter and 27 basis points from the end of the year.
We continue to use a multi-scenario framework in our CECL modeling and a sign of 40% weighting to adverse scenarios, 55% weighting to the base scenario and 5% weighting to an upside scenario.
As noted on Slide 10, the CET1 ratio increased 1 basis point to 9.75% as a result of strong performance.
The building capital was deployed via risk-weighted asset growth, share repurchases and our common equity dividend.
In the second quarter, we repurchased $92 million of the $200 million share repurchase authorization in place for 2021, which resulted in a 1.3% reduction of average diluted outstanding shares.
We have completed approximately $15 million of additional repurchase activity in July.
Based on current conditions and economic outlook, we expect to complete the full authorization in the second half of the year.
We will continue to opportunistically deploy capital on our balance sheet and to our shareholders as we remain above our 9.5% operating target for CET1.
We remain well positioned to complete our key strategic objectives including profitable growth with the highest priority being multi-solution relationships.
At the beginning of 2020, we laid out our Synovus Forward plan to deliver significant upside in earnings power through a set of strategic actions to enhance our efficiency and accelerate top line growth.
The Synovus Forward initiatives are aligned with our strategy of building a high-growth, low-risk, nimble bank that can continue to take market share in our attractive southeastern markets.
As I highlighted earlier, throughout the second quarter, we have continued to add to our Synovus Forward pre-tax run rate benefits, now totaling approximately $75 million.
As you can see on Slide 11, we have delivered these results through a combination of expense and revenue initiatives.
Based upon our progress to date, as well as the ongoing plan and execution, we remain confident in achieving the 2021 and 2022 milestones of $100 million and $175 million, respectively.
Success to date on the expense front has largely come from three primary areas: a reduction in third-party spend, a decrease in head count, as well as branch and corporate real estate consolidation.
Approximately $50 million of the $75 million pre-tax run rate benefit we have achieved by the end of the quarter relates to these specific efficiency initiatives.
We have plans to increase the savings in each of these categories, but also are adding new initiatives and areas of focus to achieve an incremental 30 to $40 million in pre-tax benefits by the end of 2022.
Additional third-party savings, workforce optimization, a reduction in branch and non-branch square footage, process automation and additional tax strategies will all contribute to drive future efficiencies.
We have also had success to date on the revenue side of Synovus Forward with $25 million in pre-tax run rate benefits.
The Treasury and Payment Solutions pricing-for-value initiative has resulted in annualized pre-tax run rate benefits of approximately $12 million in the second quarter.
The realization of a broad-based increase in pricing has been supported by the competitive landscape, enhancements to our products and services and a commitment to providing proactive needs-based advice.
In addition, with the deployment of a new pricing tool and the continued low rate environment, we have also been able to reduce our cost of funds to levels lower than was originally expected, and we now have a more robust capability and tool to better manage customer rate elasticity as we move into a higher rate environment in the future.
Additional areas where we have seen incremental revenue include the in-sourcing of our merchant business, and expansion of our merchant sponsorship business and expanded solutions such as trade finance and international payment and currency capabilities.
As we turn to future plans and initiatives, the 60 to $70 million in expected pre-tax revenue benefits will largely be accomplished through analytics, new products and solutions, balance sheet management strategies, as well as ongoing talent and specialty team expansion.
As it relates to analytics, we continue to make progress on our aforementioned commercial analytics pilot, which we refer to as the SMART tool.
The feedback and utilization thus far are encouraging as our bankers are working to actionable leads and insights that are now translating into new sales and overall expansion of the share of wallet of our existing clients.
We will continue to pilot in the third quarter with a companywide rollout in the fourth.
In addition, we have begun to develop our retail analytics program, which will also have a meaningful impact in our ability to deepen the share of wallet of our consumer and wealth customers while reducing the overall levels of attrition.
We are expanding our premium finance and specialty lending businesses, adding strong new teams and highly attractive specialized verticals, as well as launching targeted, innovative products and capabilities to serve as new sources of revenue growth.
As I have noted in the past, Synovus Forward is a constant improvement mindset, not just a collection of initiatives.
I am pleased with our team members focused on the art of possible as we continue to innovate and find new ways to become more efficient and drive new sources of revenue.
And I would be remiss if I didn't end this slide with an update on technology in general.
We clearly feel that our competitive advantage will come from our high-touch approach, complementing our high-tech investments and partnerships.
We continue to make progress in enhancing both the consumer and the commercial client digital experience.
We are partnering with the right fintechs to build and deliver new products and solutions, and we have a road map to move to a modern core over time in a segmented and controlled fashion.
We will continue to focus on ways to increase online origination capabilities and evaluate new technological opportunities, especially in the payment and banking as a service areas.
Moving to Slide 12.
This includes our 2021 outlook, which have a few key changes.
With the first half of the year behind us and greater certainty in the economic outlook, we'd like to provide some updates and additional clarity.
I'll begin with loan growth.
We still expect to be within our 2 to 4% loan growth guidance excluding P3 loans, and third-party consumer loans.
However, we think it's likely that we're at the low end of this range due primarily to the elevated prepayment activity that we have seen to date that was not anticipated at the beginning of the year.
This assumes line utilization remains at current low levels and prepayment activity returns to a more normalized level.
As a reminder, we do not include third-party consumer loans in this guidance.
This asset class represents $1.5 billion in period-end balances, up $776 million in 2021.
Pre-pandemic, this portfolio was approximately $2 billion in held for investment outstandings.
Over the past five-plus years, we have had a successful track record with originating and managing these credits providing incremental revenue and solid returns.
We will continue to employ this strategy as long as the excess liquidity environment persists, as well as the relative returns of future purchases are constructive.
We're raising our expectation for total adjusted revenue and total adjusted expense.
As a reminder, it's appropriate to consider these together because areas that are providing additional revenue, including mortgage production and higher third-party consumer balances have associated expenses related to them, and these examples commission and servicing expense.
And while we remain committed to taking advantage of growth opportunities in the Southeast.
We also remain committed to achieving positive operating leverage, and that is one of our top priorities for 2021.
We are not incorporating any significant change in interest rates as part of the updated guidance.
Although it's important to note the increased asset sensitivity Jamie referenced earlier, as any increase in rate will provide a meaningful tailwind to NII.
Our capital management target now includes a CET1 ratio greater or equal to 9.5% target.
A continuation of strong operating performance and a stable economic outlook is likely to result in a CET1 ratio above 9.5%, even after completing the entire $200 million share repurchase authorization for the current year.
Additional focus and execution related to various tax strategies are expected to result in an effective tax rate of 22 to 24%.
Year-to-date, the ETR is 22% or 23% before discrete items.
The actions we've mentioned throughout today's call further position us for success in the second half of the year but also long-term success.
It's important to note that the efforts and continued investment in Synovus strengthens our currency and provides opportunities for strategic growth, both organic and inorganic.
We're looking forward to the second half of 2021, and I feel an increased level of excitement from our entire team as we roll out our future of work operating environment this quarter.
Our balance sheet is well positioned for growth with strong capital and liquidity.
Our team members are delivering, and they're very passionate about winning.
And our pipeline show that clients are poised to grow their business with Synovus as their partner.

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q2 adjusted earnings per share $1.20.
q2 earnings per share $1.19.

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