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Text: Kessel Stelling, chairman and chief executive officer, will begin the call.
He will be followed by Jamie Gregory, chief financial officer; and Kevin Blair, president and chief operating officer.
During the call, we will reference non-GAAP financial measures related to the company's performance.
And now here's Kessel Stelling.
Before I move to the financials, I just wanted to share a few comments and reflections on our industry and our company.
The defining characteristic of our industry has changed and I have certainly seen my share of change in my four and a half decades in this business, including this unprecedented pandemic and period of social unrest.
And although things are relentless, I've never been more convinced of the ability and responsibility of our industry to be a trusted resource for our customers and for the communities we serve.
Synovus, in particular, is built for times like these embedded in our markets, close to our customers, and able to quickly assess and anticipate needs.
And that continues to ring true as challenges linger even as we see glimpses of a slow and steady recovery.
The story we'll tell today is largely shaped by our model that has allowed us to respond to, plan for, and do our best to control the things we can control.
Adjusted diluted earnings per share was $0.23, compared to $0.21 last quarter and $1 a year ago.
Loan balances increased $1.7 billion or 4.3%, compared to the prior quarter.
Growth in Paycheck Protection Program loans of $2.7 billion was offset by a reduction in C&I line utilization of $775 million.
In the consumer book, loans were down approximately $700 million as reductions in lending partnership balances were partially offset by mortgage balance increases of $200 million.
Total deposits grew $4.4 billion or 11% from the prior quarter.
Growth was largely split between DDA and interest-bearing core deposits, which grew $2.9 billion and $1.2 billion, respectively.
We continued the strategy of allowing higher-priced CDs to run off, which led to a decline of $655 million in time deposits.
Net interest income was up $3 million for the quarter.
This included a full quarter of the 150-basis point reduction in short-term rates from March along with offsets, including over $9 million in fee recognition associated with P3 loans.
The net interest margin declined 24 basis points to 3.13%.
Adjusted non-interest revenue of $95 million was greater than expected largely due to outperformance in mortgage.
Net mortgage revenue was $24 million, up $11 million from the prior quarter led by secondary mortgage production of $635 million, up $380 million from the prior quarter.
Adjusted non-interest expense totaled $276 million, up $5 million from the previous quarter.
This included $7 million of COVID-related expenses and $7 million in fees associated with the implementation of certain Synovus forward initiatives.
Commission expense was $7 million higher than the prior quarter, largely resulting from record mortgage production.
These increases were offset by reductions in other areas, including seasonal employment fees and travel.
Provision for credit losses was $142 million and resulted in an allowance for credit losses ratio of 1.74%, excluding the P3 balances.
That's an increase of 35 basis points from the previous quarter and incorporates a more stressed economic outlook.
Credit quality metrics remain stable with the nonperforming loan ratio and net charge-off ratio of 37 basis points and 24 basis points, respectively.
Our CET1 ratio increased 20 basis points to 8.90% and our total risk-based capital ratio increased 41 basis points to end at 12.70%, a two-year high.
The 90-day deferral program we outlined on the last call has done exactly what it was intended to do by providing much needed support and assistance for our customers.
While it's too early to know exactly how deferrals will play out in the second half of 2020, reviews of customer cash flows, client surveys, and conversations and interactions with customers to date lead us to believe that somewhere between 3% to 5% of total loans will have a round two deferral granted for a 90-day deferment of principal and interest.
Jamie will now share more detail about the quarter.
As Kessel noted, this was a very eventful quarter for our company with considerable progress on a number of fronts despite headwinds.
The resulting impact on our balance sheet has been significant starting with loans on Slide 4.
As we shared in May, we funded $2.9 billion in P3 loans for approximately 19,000 customers, quite an undertaking, which required a coordinated effort across our bank.
The average P3 loan was approximately $150,000 and the customers that received those loans employ over 335,000 employees.
An offset to the C&I growth from P3 loans, which ended the quarter with a balance of $2.7 billion was a decrease in loan balances from C&I line utilization.
We ended the second quarter at a record low of 41% that resulted in balance sheet declines of $775 million.
We expect C&I line utilization to normalize in the mid- to upper 40% range as the economy improves.
Highlights in the consumer portfolio include mortgage loan balance increases of over $200 million on a production of a record $800 million.
As was disclosed during the quarter, we restructured our GreenSky relationship in a way that is mutually beneficial.
Our total exposure limit remains $1 billion for the relationship, but you'll see a shift of loan balances from held for investment to held for sale.
In the second quarter, we moved $266 million in loans to held for sale under this new arrangement.
Going forward, you'll see a shift in geography on the income statement from our GreenSky loans as we realize more non-interest revenue from transactions and servicing fees, as well as, a reduction in net interest income and non-interest expense.
The other meaningful item to highlight within partnership lending is a disposition of approximately $535 million in student loans.
In June, we moved those loans to held for sale, which contributed to the decline in consumer balances and resulted in an allowance release of approximately $12 million.
We have closed that transaction since quarter end realizing a modest gain which will be recorded in the third quarter.
We believe that the strength of the market for these loans is a testament to the quality of these loan portfolios and we remain committed to those relationships while also acknowledging their core customer base takes priority as we focus on managing our balance sheet in these uncertain times.
We continue to expect loans to be flat for the remainder of the year, excluding the impact of P3 forgiveness.
On Slide 5, you can see that we had unprecedented growth in deposits with DDA balances, up $2.9 billion and total deposits, up $4.4 billion in the second quarter.
Much of this growth occurred in conjunction with our P3 lending effort.
However, we also saw broad-based growth across interest-bearing transaction balances with money market and NOW up 11% quarter-over-quarter while savings balances increased by 14% quarter-over-quarter.
While lower cost transactional deposit growth has accelerated since late in the first quarter, we have continued to experience strategic declines within our core time deposit portfolio.
As you are aware, much of these declines have been intentional over the last several quarters as we've reduced exposure to higher cost CDs and public funds in certain markets.
One of the benefits of having a sizable time deposit portfolio is the ability to reprice as rates decline and that portfolio turns over.
With our transactional interest-bearing accounts approaching the lowest rates experienced since the great financial crisis, we expect further declines in rate paid on deposits to be led by strategic turnover within our core and brokered time deposit portfolios.
As a simple means of comparison to the prior cycle, Synovus achieved its lowest deposit cost in the third quarter of 2014.
At that time, total interest-bearing deposit costs were roughly 35 basis points.
While our deposit mix has evolved from that time, we believe a return to comparable levels is achievable in the coming quarters with continued pricing and balance sheet discipline.
We expect deposits to decline in the second half of 2020 as excess liquidity is deployed.
Slide 6 shows net interest income of $377 million, an increase of $3 million from the previous quarter.
This benefited from $9 million in fee accretion from our P3 loan portfolio.
In the coming quarters, P3 forgiveness may have a meaningful impact on our net interest income as unearned fees associated with that program are recognized into interest income.
P3 processing fees totaled $95 million.
In terms of net interest margin, we ended the quarter at 3.13%, down 24 basis points from the first quarter.
Beyond the anticipated impact associated with the lower rate environment, the significant inflow of deposits throughout the quarter resulted in an excess cash position, which while not impactful to net interest income, diluted the margin by approximately 8 basis points, as compared to the prior quarter.
Although we expect to maintain an elevated level of liquidity within the current economic environment, we also anticipate some reversal in that elevated position in the second half of the year, which should support the margin.
Balance sheet management activities in the second quarter, including securities portfolio sales, the student loan sale, and the GreenSky strategy change, will serve as a headwind to net interest income beginning in the third quarter and will put some additional downward pressure on the margin.
The impact of these recent transactions is approximately 9 basis points to the margin.
After adjusting for these impacts and excluding the impact of P3 loans, we expect the margin to remain relatively stable in the second half of 2020.
We were pleased with non-interest revenue of $173 million or $95 million adjusted, shown on Slide 7.
The transaction activities, including capital markets activities, mortgage originations, and credit card transactions exceeded our expectations.
And we had one of our strongest quarters in fee revenue.
We realized investment gains of $78 million which includes $70 million from repositioning the securities portfolio.
While these transactions were primarily focused on agency mortgage-backed securities, part of the repositioning included the disposition of our remaining $150 million in collateralized loan obligations in the investment portfolio.
Total net mortgage revenue was $24 million which was $11 million more than the previous quarter.
This is the result of an all-time high of $635 million in secondary mortgage production and an elevated gain on sale.
Looking forward to the third quarter, we do not expect net mortgage revenue to stay at the record level of the second quarter.
Led by normalization of mortgage revenue, we believe a reduction of adjusted non-interest revenue in the third quarter is likely before we see a return to consistent growth in fee revenue.
Noninterest expense of $284 million or $276 million adjusted is shown on Slide 8.
As expected, we had approximately $7 million in COVID-related expenses in the second quarter.
These included bonuses to certain frontline team members, as well as, efforts to improve the safety of our team members and customers.
Adjustments for the quarter of $8 million included expenses of $3 million related to branch closures and restructuring of corporate real estate, as well as, $5 million in expenses related to the Global One earnout liability.
Adjusted expenses included the $7 million in COVID-related expenses, as well as, an increase in commission expense of $7 million higher than the prior quarter due to elevated mortgage production.
The second quarter also had $7 million in upfront expenses related to efforts we've made to implement and execute certain Synovus forward initiatives.
These efforts will help us achieve sustainable top quartile performance that Kevin will provide an update for shortly.
Consistent with prior guidance, we expect expenses to decline in the second half of the year.
Current credit ratios shown at the top of Slide 9, which include NPAs, NPLs, and past dues remain stable.
We generally expect some pressure on these credit metrics over the next few quarters which are aligned with the reserve builds in the first half of the year under the procyclical nature of CECL.
Although loan deferrals have an impact on these metrics, it's important to note that we are not seeing any widespread deterioration in the portfolio and these ratios remain at or near lows for this credit cycle.
The net charge-off ratio was 24 basis points, up 4 basis points from the prior quarter.
Net charge-offs of $24 million largely resulted from a single credit that was moved to nonaccrual last quarter.
Provision for credit losses of $142 million resulted in an allowance build of nearly $120 million from the current expectation for longer-term economic headwinds.
After adjusting for P3 loans, the ACL ratio increased 35 basis points to 1.74%.
The economic assumptions for the current quarter include the estimated impact of stimulus and an unemployment rate declining to around 10% by the end of the year, and remaining elevated throughout 2021.
We anticipate moderate economic expansion following the dramatic spikes in real GDP expected in the second and third quarter of the year.
Economic uncertainty remains great due in part to the direct impact of COVID.
The ACL ratio could remain elevated due to this economic uncertainty and credit migration which could result in today's allowance for credit losses not fully funding future charge-offs.
Slide 10 includes a review of our capital position as we ended the second quarter.
Our focus remains on diligently managing our balance sheet and capital in alignment with our risk appetite and capital adequacy process.
And you can see the result of that effort in our capital ratios.
CET1 improved 20 basis points to 8.9% and total risk-based capital rose 41 basis points to 12.7%, the highest level in two years.
Actions included student loan sales and the settlement of security trades in July will further reduce risk-weighted assets and will benefit CET1 by approximately 20 basis points in the third quarter.
As it relates specifically to common shareholder dividends, we continue to be guided by two considerations: capital adequacy and long-term earnings.
We remain confident in our current capital levels which is supported by stress testing and sensitivity analysis.
We believe it's important for shareholders to receive current income on their investment and also for us to retain enough capital for our strategic growth objectives.
To achieve those objectives, a total long-term payout ratio of 70% to 80% is appropriate, with approximately half of that coming from common shareholder dividends.
Before handing off to Kevin, I'd like to summarize our thoughts on the balance sheet.
We remain confident in our capital position and the second quarter has shown we have the means to further support capital when needed.
From December 31st to June 30th, we increased our allowance by approximately $400 million while maintaining a stable CET1 ratio.
Given the elevated uncertainty, we are not planning to repurchase shares in 2020 and we'll use future earnings to build capital and grow our businesses.
We expect our primary means of capital return to be through dividends and accretion of our tangible book value.
I'll begin on Slide 11 with an update to the segments we highlighted on the last call that we defined as particularly sensitive to COVID-19.
Balances totaled $4.7 billion in these industries which is stable with the prior quarter.
When we implemented a 90-day deferral program in late March, we utilized a review process, particularly on our larger customers, to assess the impact of the economic conditions that warranted a deferment to help address short-term changes in cash flow.
As these deferrals end, we have once again taken a proactive approach and conducted thorough cash burn analyses on our customers to determine who will continue to see reduced levels of cash flows over the next 90 and 180 days.
What we found is that a large percentage of the companies experiencing a longer-term impact to cash flows are encompassed in five of the segments identified on this slide.
Let me touch on each industry briefly.
I'll start with the hotel industry which continues to see a 40% to 60% decrease in occupancy and revenue per available room.
Given the reopenings in the southeast and the increase in occupancy in various drivable vacation destinations, we expect cash flows to increase somewhat in the coming months, and as a result, the overall deferral rate of the hotel portfolio to range between 30% and 40% in the next 90 days.
As we shared last quarter, this portfolio maintains a strong loan value, slightly over 50%, and it entered the downturn with almost 2 times debt service coverage.
For non-grocery-anchored shopping centers, we expect to see deferments in the range of 20% to 30% as certain types of retail are performing well such as home improvement and electronics, while other retail reopens and resumes their sources of revenue.
Moving to restaurants, this industry benefited greatly from the P3 program and we are seeing more significant improvements in the quick-serve and fast casual businesses which will lead to a reduction in second round deferrals.
However, we continue to see a lag in revenue recapture in full-service and drinking establishments.
Similar to shopping centers, the impact on the retail trade industry is largely a function of the type of goods sold, but we are seeing an improvement here as well with overall cash flows increasing in June versus the previous year with solid growth in beer and wine, furniture, and grocery-related trade.
And therefore, we expect 10% to 20% of the portfolio to pursue a second round of principal and interest deferments.
Fitness, recreation, and entertainment centers are among the industry's hardest hit by the shutdown, but golf courses and country clubs are faring better.
Despite the softness in some of the entertainment industries, we do expect this industry to have low percentage of second-round deferments.
Our oil-related segment, totaling approximately $300 million in outstandings was initially of greater concern due to the negative oil futures and the impact of less travel.
Despite those concerns, we saw a lower percentage of first-round deferments and expect this portfolio to continue to perform well with minimal second-round deferments.
In aggregate, while deferral trends are positive to this point, we are keenly aware that any additional mandated closings from the COVID surges in our markets would have the potential of impacting cash flows, and therefore, increasing the need for additional deferments.
At this point, I would like to draw your attention to Slide 25 in the appendix.
Another notable segment that is often discussed as a COVID-impacted industry that is not on this list is our senior housing portfolio, which is over $2 billion in outstandings.
We have not included senior housing on this slide based on the solid performance of this portfolio and our outlook on future performance.
The reason for exclusion is supported by the fact that we have only seen 4% of the outstanding balances deferred in round one, which was comprised of five loans, and the expectation at this time is that we will have no further deferments in the portfolio during round two.
In addition, we continue to work closely with our customers and the industry associations, as well as, actively monitor cash flows which have trended down only modestly to date.
Our senior housing portfolio primarily includes private pay facilities that have better access to resources, including staffing and equipment.
This portfolio is led by a very seasoned team with a stellar track record dealing with longtime operators.
The portfolio carries strong LTVs and debt service coverage metrics, and is strategically aligned with sponsors who have access to liquidity and have demonstrated commitment to the space over several decades.
In terms of overall portfolio deferments, a significant percentage of our first 90-day deferrals have expired.
And at this point, we are seeing a relatively low level of additional requests which is partially due to the timing of payment due dates.
As of July 14th, 2.3% of the total loan portfolio was in a 90-day deferral status.
We will continue to gain additional insights in the coming weeks.
But based upon current conditions, activity to date and ongoing discussions with our customers, as Kessel mentioned earlier, we believe this percentage could increase into the range of 3% to 5% this quarter.
The process for granting a second deferral takes into consideration the borrower's current financial condition and liquidity, the impact of the borrower's industry from COVID-19, and the performance history of the borrower pre-COVID.
The strength of our portfolio coming into the crisis combined with the assistance from deferrals and government stimulus programs, should help many customers weather the storm and help to minimize defaults.
Combining these actions with strong loan-to-values and good sponsorship should help to mitigate and limit future losses.
Moving to Slide 12.
This is an example of the analyses we've conducted to identify and assess the financial strength of our borrowers.
This work is supported by our commercial portfolio transaction data where we have the primary operating accounts.
Approximately two-thirds of our commercial loan exposures have an operating account open with us.
And we have been comparing their cash inflows which can serve as a proxy for revenues on a year-over-year basis to assess and predict their ability to repay debt during this crisis.
Using this data, we have validated the impact to cash inflows between our customers who received a deferral and those who have not, as well as, the pace of improvement.
Our customers overall have experienced improved cash flows since the trough in April, with the month of June exhibiting only a 6% reduction in cash inflows relative to the same month last year.
This analysis is constructive in evaluating current conditions, but more importantly, it enables a more real-time analysis versus traditional underwriting criteria and provides a prediction of cash flows throughout the current economic cycle.
Predictive analytics allows us to determine which customers require intervention and whether, for example, a deferral or bridge facility could provide the support needed to supplement short-term cash flow disruption.
It also provides early identification of customers where the outlook is less optimistic, thereby, allowing us to take earlier action to reduce and mitigate losses.
As we turn from credit to Slide 13, before I talk about the future, let me briefly touch on the present.
Despite the challenging environment, our businesses continue to perform well.
You have heard from Kessel and Jamie on the financial results this quarter, and those results reflect the ongoing success we have across our geography and our business units.
I want to highlight several areas that continue to perform at a high level in this difficult economy.
Yes, the low-rate environment helped drive volume, but it's important to also note that mortgage loan originators recruited since January 2018 have produced 42% of the year-to-date volume.
Successful recruiting in the past two years has also proven to be a key factor in our mortgage growth.
Second, we continue to bolster our balance sheet and P&L through productivity gains.
With mortgage and wholesale banking leading the way, second-quarter funded loan production was up 43% versus the same quarter last year and deposit production with increases in all of our lines of business, was up 37% versus second-quarter 2019.
The deposit growth is a great example of how our relationship-based model continues to deliver results.
This quarter's results reflect the growth in both balances and accounts.
It is a function of new customers being gained through the P3 process, new talent that we've added, as well as, thorough, consistent prospecting efforts while continuing to see existing customers augment their balances.
Next, as we've also shared in the past, we have been aggressively adding talent and new services in our treasury and payment solutions area.
As a result, production revenue of $2.9 million in the quarter, was up 210% versus the second quarter of 2019.
Lastly, our Global One premium finance business unit continues to generate strong growth while improving returns and the overall efficiency of operations.
As a result of this continued success and the successful integration within Synovus, we have expanded the responsibility of the executive leadership to now lead our specialty finance division which includes structured lending and asset-based lending.
Underlying all of these results, we have seen more significant year-to-date growth in markets where we have made substantial investments in talent, in marketing, and in distribution channels.
Markets such as Atlanta, Tampa, Miami, Birmingham, and Greenville, South Carolina drive a large portion of our overall growth.
And speaking of talent, we have continued to selectively attract top talent in growth markets throughout this quarter across all of our businesses.
We have achieved these results while our customer satisfaction scores and our branches and our contact centers remain quite high, and they've actually increased versus historical levels.
All of these areas, as well as others I have not mentioned, give me great confidence in our ability to win.
And when we return to a state of normalcy, we will be even better positioned to do so.
As I close, let me transition to our Synovus Forward initiative which we've highlighted on Slide 13.
We remain focused on the execution of this program to drive incremental efficiencies and sources of new revenue in 2020 and beyond.
Our financial objective of an incremental $100 million in pre-tax income remains intact with the efficiency benefits being realized early in 2021 while the revenue benefits will continue to build throughout next year.
Our work on one of our largest expense initiatives, our third-party spend concluded last week.
This work stream was accelerated and has proven to be quite fruitful with the identified savings from the renegotiation and demand management efforts yielding savings of around $25 million.
These benefits will be fully realized in our run rate expenses in 2021.
We have also completed Phase 1 of our branch consolidation and corporate real estate optimization efforts and are diligently working on subsequent opportunities that will result in additional savings in 2021.
We remain confident in our ability to generate $45 million to $65 million in expense savings through this program.
While we have focused more intently on the efficiency initiatives out of the gate, we have also turned our attention to the revenue opportunities that were identified during the diagnostic phase with the total potential pre-tax income of between $35 million and $55 million.
Analytics enhancement is at the center of many of these opportunities.
As I mentioned previously during the second quarter, we utilized the resources on this work stream to build out our credit analytics and predict the modeling capabilities to create early warning mechanisms that will allow us to take actions to mitigate and reduce credit losses.
We will benefit from this work in the coming quarters, but this work will also serve as the baseline analytic framework to generate advancements in our sales and our service activities, as well as, improvements in our overall relationship profitability.
Moreover, as we enter 2021, we will be in a better position to optimize the pricing of our depository and treasury products and solutions through the deployment of new tools and processes.
We will maintain a dedicated team to continue to lead this work and we'll also remain flexible to adjustments and additions to the overall program.
This work serves as our North Star as we prioritize future investments and determine needs to continue to differentiate Synovus in what is becoming an increasingly competitive landscape.
We also recognize the uncertainty in the environment and the subsequent impact of financial results which may lead to a change in the scope and the sizing of the program.
And the management team is fully committed to execution and the delivery of the results.
I had the privilege last week of participating in our mortgage company townhall meeting where they were celebrating a quarter of not only record production, but significant increases in customer satisfaction surveys.
And I said to them, what I'll say to our entire team today, I've never been more proud to be associated with the Synovus team and I continue to be inspired by, not only what they do, but how they do it, putting our customers first in all that they do each and every day.
And in spite of all the challenges and uncertainty facing our industry, we continue to attract and retain the very best talent in the industry.

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q2 adjusted earnings per share $0.23.
qtrly period-end loan growth of $1.66 billion or 4.3% sequentially.
total loans ended quarter at $39.91 billion, up $1.66 billion or 4.3% sequentially.

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