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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.
Just last month, six months, after converting to drive-through appointment only, our retail branch network reopened to walk-in customers.
Although things are far from back to normal, we're fundamentally a relationship bank, and I've enjoyed so much hearing from our front-line team members who take such pride and pleasure in serving our customers in person, even if it's across a plexiglass barrier or from a distance of six feet.
Our team's response to this ongoing pandemic continues to demonstrate what's unique about this company, our culture of service, our focus on customers and communities, our adaptability in changing circumstances and our ability to execute.
All of those, along with continued economic recovery contributed to our strong performance in the third quarter of 2020.
Diluted earnings per share was $0.56 per share compared to $0.57 last quarter and $0.83 a year ago.
Adjusted diluted earnings per share was $0.89 per share compared to $0.23 last quarter and $0.97 a year ago.
The primary difference between reported and adjusted figures for the quarter was a $0.30 per share impact from a goodwill impairment of our mortgage reporting unit that Jamie will detail shortly.
Period-end loan balances of $39.5 billion were down $364 million from the prior quarter, with commercial loan growth partially offsetting declines in the consumer portfolio.
1% of loans had a full principal and interest deferral at the end of the quarter, down from 15% in May.
Total deposits of $44.7 billion were up $471 million from the prior quarter.
Broad-based core transaction deposit growth of $1.6 billion allowed us to accelerate our deposit pricing and remixing strategy, which led to stable net interest income at $377 million.
The net interest margin declined three basis points to 3.10%, slightly better than we expected as headwinds from student loan sales and bond portfolio repositioning completed in the second quarter were partially offset by the favorable trends in deposit pricing and remixing.
Adjusted non-interest revenue of $116 million was strong, up $20 million from the prior quarter.
The improvement was led by quarter-over-quarter increases in net mortgage revenues of $8 million and core banking fees of $5 million.
Adjusted non-interest expense of $269 million was down $8 million from the prior quarter, led by an improvement of $5 million in employment expenses.
Provision for credit losses of $43 million were down $98 million from the prior quarter.
The ACL ratio increased six basis points to 1.80%, excluding P3 balances.
The past due NPA and net charge-off ratios remained relatively stable.
The CET1 ratio increased 40 basis points to 9.3%, following strong core performance in the settlement of transactions we executed in the second quarter.
The total risk-based capital ratio increased 46 basis points to 13.16%, the highest level since 2014.
Jamie will now share more detail about the quarter.
Before moving to Slide 4, I'd like to provide an update on goodwill.
We have been conducting evaluations of goodwill in response to market volatility and expectations for a lower for longer interest rate environment referenced by the FOMC in August.
As a result, there has been a goodwill impairment for our mortgage reporting unit of $45 million.
This is a noncash charge that has no impact to cash, liquidity, tangible book value or regulatory capital ratios.
Beginning on Slide 4.
Total loans declined $364 million in the third quarter as commercial loan growth helped offset reductions from P3 loan payoffs of $77 million and strategic asset dispositions of single service loans.
Excluding the impact of asset dispositions and P3 payoffs, we had net loan growth of $245 million in the quarter.
Commercial loans, excluding P3 balances, increased $291 million.
Although pipelines are lower than they were pre-COVID, we continue to see demand, especially in middle market businesses and our higher growth and higher opportunity markets, such as Atlanta, Birmingham and South Florida.
Consumer loans declined $578 million, led by the disposition of roughly $185 million of non-relationship mortgages, along with continued declines in our lending partnership portfolios.
Additionally, a portion of the decline can be attributed to the continuation of our GreenSky strategy, which we highlighted last quarter, and which to some degree, is offset by an increase in balances within our held-for-sale portfolio.
While we will continue to evaluate opportunities to efficiently manage our balance sheet, there are currently no existing plans for material dispositions, such as those we made the last two quarters.
We expect loans, excluding the impact of P3 forgiveness, to be relatively flat in the fourth quarter.
As shown on Slide 5, we had total deposit growth of $471 million.
More importantly, we're continuing to strategically reposition the portfolio.
Broad based core transaction deposit growth of $1.6 billion offset the strategic declines in time deposits of $1.2 billion and broker deposits of $381 million.
We estimate approximately $2.3 billion or 80% of deposit balances associated with P3 loans remained on the balance sheet at the end of the quarter.
The cost of deposits fell by 14 basis points from the previous quarter to 39 basis points due to a combination of rates paid and deposit remixing.
For context, this compares to a low of 26 basis points in the third quarter of 2014.
We continue to believe there are further opportunities to reduce deposit costs through CD turnover, repricing and remixing.
These activities in an environment of lower for longer interest rates, combined with strong growth in core customer deposits, should allow us to get our total deposit cost to the 26 basis point lows of the prior cycle.
Slide 6 shows net interest income of $377 million, stable from the previous quarter and included $12 million in fee accretion from our P3 loan portfolio.
There are $74 million of P3 processing fees remaining.
Earlier this month, the SBA announced a streamlined forgiveness process for certain P3 loans of $50,000 or less.
Approximately 7% of our P3 balances fall within this threshold.
There is approximately $10 million in fees associated with these loans, which will be accelerated when we receive the forgiveness proceeds.
Net interest margin was 3.10%, down three basis points from the previous quarter.
Consistent with our expectations, the current level of interest rates, combined with a nine-basis-point headwind from bond repositioning and student loan sales executed in the second quarter, put downward pressure on NII and NIM in the third quarter.
However, these headwinds were partially offset by a handful of factors, including further declines in deposit pricing and favorable deposit remixing trends.
Our guidance from the previous quarter largely remains the same, and we continue to expect modest downward pressure on NIM as the repricing within our fixed rate asset portfolio is partially offset by continued declines in overall deposit costs and further improvements in managing liquidity costs.
Excluding the potential impacts from P3 forgiveness, we expect NII and NIM will decrease slightly in the fourth quarter.
It was another strong quarter for non-interest revenue, which is shown on Slide 7.
Core banking revenue improved by $5 million from the second quarter, primarily due to increased transaction activity as most components are gradually returning to pre-COVID levels.
Net mortgage revenue of $31 million remained elevated, primarily due to increase in secondary revenues driven by higher loan sales and gain on sale.
Secondary mortgage production was $654 million in the third quarter, which is an increase of $19 million or 3% from the second quarter's record production.
We continue to see positive momentum in other fiduciary service business, including brokerage and trust.
Assets under management of $17.5 billion grew 6% from the previous quarter.
Other income for the quarter included a valuation adjustment for tax credits and gained from the previously mentioned mortgage portfolio sales.
In the fourth quarter, we expect stable revenues from core banking fees, fiduciary services and capital markets income.
We expect to see declines in mortgage revenue and other income.
Slide 8 includes non-interest expenses, which were $317 million or $269 million adjusted.
Adjustments include $3 million in restructuring charges, primarily related to branch optimization, as well as the $45 million goodwill impairment previously discussed.
This goodwill impairment is limited to the mortgage reporting unit and results from a combination of factors, including the extended duration of lower market valuations, high volumes and refinancings that have reduced mortgage yields and the clarity around longer term policy actions designed to keep interest rates low.
Total employment expenses were $5 million less than the previous quarter, primarily due to lower commissions, lower headcount and reduced COVID-related staffing expenses.
Total COVID-related expenses for the quarter were minimal.
We expect further headcount reductions in the fourth quarter as part of the normal attrition and a voluntary retirement offer we recently extended.
The voluntary retirement offer is expected to result in a onetime fourth-quarter expense of approximately $14 million and have a two-year payback.
These savings are part of the Synovus forward initiatives and will help offset expected increases to other line items such as travel and advertising in 2021 as banking activity returns closer to normal.
We continue to focus on what we can control, which includes prudent expense management.
Excluding the upfront expenses associated with Synovus Forward initiatives, we expect adjusted NIE in the fourth quarter will be in line with the third quarter.
Key credit metrics are on Slide 9.
There were slight increases in NPA, NPL and past due ratios from the previous quarter, but we currently do not see widespread deterioration in the portfolio.
Our comprehensive reviews have largely isolated the elevated risks to certain segments, including hotels and full service restaurants, and we continue to work with borrowers who have been most negatively impacted by the pandemic.
Provision for credit losses of $43 million includes net charge-offs of $28 million or 29 basis points.
Downgrades in the hotel portfolio, one of the hardest hit industries, accounted for $603 million of the increase in criticized and classified loans.
There were $125 million in hotel loans that had principal and interest deferrals at the end of the quarter, which represents about 8% of the total hotel portfolio.
Our latest economic outlook includes an unemployment rate of about 8% as of year-end before declining modestly in 2021.
This, along with credit migration and other portfolio activity resulted in an allowance for credit losses of $665 million, up $15 million from the previous quarter.
The allowance for credit loss ratio increased six basis points to 1.8%, excluding P3 loans.
The amount of provision for credit losses going forward will continue to fluctuate based on a number of factors, including economic outlook, loan growth, loan mix, risk rate migration, as well as the timing and impact of future government stimulus.
Heightened levels of uncertainty and those factors could result in reductions of allowance less than net charge-offs.
As the outlook becomes more stable and uncertainty declines, we expect changes in allowance to rely more heavily on the traditional factors previously mentioned.
Preliminary capital ratios on Slide 10 continued to build from a combination of earnings and balance sheet activities completed over the past several months.
These balance sheet activities include the settlement of our second-quarter bond repositioning and our ongoing efforts to reduce single service loan portfolios as we prioritize our balance sheet for core client relationships.
CET1 increased 40 basis points to 9.3% this quarter, that's an increase of 35 basis points from the end of 2019 and was accomplished while increasing the reserve by $382 million.
The total risk-based capital ratio of 13.16%, up 46 basis points from the second quarter was the highest since 2014.
We remain focused on supporting our overall capital position and are targeting the higher end of our CET1 operating range of nine to nine and a half percent, given the heightened uncertainty in the current economic environment.
We expect core earnings will continue to support our capital position and allow us to achieve our strategic objectives, with consideration for our anticipated balance sheet growth and the payout objectives we've outlined previously.
As a reminder, we do not expect any share repurchases for the rest of the year.
I'd like to begin on Slide 11 with an update on deferments.
At the end of the third quarter, we had $337 million in loans on a full principal and interest deferral, which was less than 1% of total loans.
The aggregate amount in deferment was well below the 3 to 5% range we estimated last quarter and down significantly from the 15% we referenced in our first quarter 10-Q filing.
We attribute the lower P&I deferral activity this quarter to the strength of our borrowers and improving economic environment and support provided through various government stimulus programs.
Of the $337 million in deferment at the end of the quarter, 50%, or $169 million were in the consumer book.
These were predominantly consumer mortgage loans, which are largely comprised of physician and private wealth customers.
The $169 million in deferments represents approximately 2% of total consumer loans.
Commercial deferments as of 9/30 were $168 million, or 54 basis points of the total commercial portfolio.
Full P&I deferments were largely concentrated in the hotel and full-service restaurant segments, which comprise 85%, or $143 million of commercial deferments at the end of the quarter.
We have not only seen a significant reduction in the level of deferments.
We are also seeing strong performance from those that have exited a deferral status.
94% have made a payment, while another 5 to 6% have not had a payment due or were in a grace period at the end of the quarter.
Only approximately 20 basis points of loans that exited a deferral status were past due are moved to nonaccrual status at the end of the third quarter.
In addition to the full P&I deferment program, we have continued to work with other borrowers who have been impacted during the current crisis to provide flexibility in payment terms, which may include modifications such as interest only or amortization extensions.
Inclusive of these modifications, we estimate that total loans with accommodations, as of the end of September, remained below 3%, which was at the low end of the range we projected last quarter for full P&I deferrals.
Moving to Slide 12 and the COVID-sensitive industries.
We shared on the second-quarter earnings call, a second round deferral estimate for each of these industries.
Consistent with the loan portfolio in aggregate, these industries also had a lower than estimated level of P&I deferments at the end of the third quarter.
As we mentioned on the previous slide, the hotel and full-service restaurant segment had a total of $143 million with a full principal and interest deferment as of 9/30, well below the original estimates.
The hotel industry continues to be a segment that has been hit the hardest by the change in customer behaviors, which was reflected in the downgrades Jamie mentioned earlier.
But the vast majority of our portfolio continues to pay as agreed.
Despite the results to date, we continue to closely manage and monitor this portfolio as we do not see the normalized return of revenues in the near term.
We have, however, conducted in-depth reviews of the loans in the hotel portfolio.
And from a longer-term perspective, we feel that we are very well positioned in several ways.
These include low loan-to-value, high-quality hotel properties with great brands and sponsorship from guarantors with strong liquidity.
As it relates to the restaurant industry, we have seen signs of recovery since the reopening efforts of April and May.
Quick service and fast casual restaurants in our portfolio have largely recovered based upon our cash inflow data, and in some cases, are outperforming pre-COVID levels.
Synovus has $365 million of full-service restaurants, and using our portfolio cash inflow data, we estimate they are operating at an average of 85% of revenue compared to the prior year.
There were $18 million of full-service restaurant deferrals at the end of the third quarter.
It is worth noting that we do not have any shopping center customers in a second round deferral.
While we continue to closely monitor this portfolio, our customers have experienced improving rent collections during the last quarter, overall, due largely to the strength of the grocery pharmacy, discount and home improvement segments.
We are also seeing stronger recovery in in-line service provider tenants that alleviate much of the concern from spring and early summer.
Retail trade, art, entertainment and recreation, as well as oil-related industries also had no deferments in the second round, and we continue to be optimistic as to the ability for our customers to weather the short-term cash flow reductions experienced during the economic shutdown.
While the deferral trends are extremely positive to this point, we are keenly aware, additionally mandated closings from COVID surges in our markets would have the potential of impacting cash flows and would affect these segments more quickly and severely.
Therefore, we will continue to closely monitor and manage our exposure within these industries.
Moving to Slide 13.
It provides an update on our portfolio's cash inflows, consistent with what we shared on last quarter's call.
The graph shows continued improvement in year-over-year cash inflows, which serve as a proxy for revenues.
During the third quarter, we saw the portfolio year-over-year inflows improve from being down 6% in June to being up 3% in July and then settling in essentially flat with the prior year in August.
These results are largely consistent with various industry metrics, as well as the conversations we're having with our customers throughout our footprint.
In addition to cash flow improvements, we have also seen our customers making the necessary adjustments within their expense bases to further reduce the impact that crisis is having on their bottom line.
We've included trends for some of the industries that were considered to be more sensitive to COVID, including accommodations, retail trade, food services and other services.
Results in these segments show consistent trending with the portfolio as a whole, but also note the differing impact within industry segment, which has served as the basis for many of the K-shaped recovery scenarios that had been developed and discussed more recently.
We continue to use this data to inform our bankers, as well as support our COVID specific deferment and portfolio management programs.
As I close out my section, let me transition to a business and Synovus Forward update, which we've highlighted on Slide 14.
We have maintained three primary focuses on the business front in 2020.
Number one, proactively manage the credit environment through the current economic downturn.
As I've shared on the previous slides, we feel good about our progress and results to date in this area.
Number two, utilize our relationship banking approach to continue to serve our customers, expand share of wallet and attract new relationships.
Despite the challenges presented by the pandemic, we have continued to drive core loan, deposit and assets under management growth, while improving service levels and adding new technology to support our customers' changing needs.
Throughout 2020, we have accelerated the deployment of new digital tools and capabilities with enhanced servicing and online origination functionality, with the overarching goal of making it easier to do business with us, as well as the changing business dynamics associated with COVID.
Digital user enrollment is up 10% year to date, and we've experienced a 30% increase in the number of deposits being handled outside of our branch network.
We have achieved this success as we partner with existing and new fintechs to efficiently and effectively deliver these enhanced capabilities.
We fully recognize and remain committed that when we get to the other side of the current challenges we face, we want to be even better positioned to grow and win in our marketplace.
And that brings me to the third area of focus, Synovus Forward, we remain focused on the execution of this program to drive incremental efficiencies and sources of new revenue now and in the years to come.
Our original financial objective of an incremental $100 million of pre-tax income remains the baseline for execution.
We are beginning to realize the benefit of several of these initiatives while we kick off additional initiatives that will have 2021 deliverables and run rate benefits.
As we progress with these, we will continue to update and fine-tune the size and timing of the benefits.
On the expense front, we are executing on the $25 million third-party spend program with work streams continuing to be implemented through the early part of 2021.
Our plan for 13 branch closures in 2020 remains on track with additional back office real estate consolidation planned for 2021.
We are also in flight with our overall organizational efficiency program.
This program is a comprehensive portfolio consisting of many initiatives that will deliver reductions in personnel and other expenses, as well as cost avoidance and additional areas throughout the remainder of 2020 and 2021.
Execution on these initiatives are under way, as Jamie noted, the reduction in headcount during the third quarter.
Another example of progress is the voluntary retirement program, which we announced during the third quarter and will largely be completed in the fourth.
As Jamie mentioned, it is expected to have a onetime charge of approximately $14 million and have an earn-back period of less than two years.
We will continue to update and provide further details as we execute on the overall organizational efficiency program, and we remain confident in our ability to generate up to $65 million in savings overall.
As we previously noted, we will continuously evaluate the underlying economic environment to gauge the size and the timing of our overall expense management program.
While we've been more focused on the efficiency initiatives out of the gate, we are progressing with revenue opportunities that were identified during the diagnostic phase with continued confidence in the pre-tax income range of 35 to $55 million.
We have kicked off our pricing for value and customer analytics work streams.
These initiatives have the potential to begin creating revenue enhancement in 2021 through the repricing of solutions and products, as well as enhancing tools and capabilities to improve sales and retention efforts.
The dedicated teams leading these efforts are adjusting and enhancing the program on a continuous basis.
As we complete the programs and the execution and in-flight phases, we have additional initiatives that will commence, which are all part of our longer-term strategic road map and change management plans.
Before we move to Q&A, Slide 15 highlights a few accomplishments from the quarter that we believe are just as important as the numbers we've reviewed today.
I'll not cover each one in detail, but just to summarize, we expanded the talent and expertise of our already strong and diverse board.
We were named by Forbes as the best employer for women.
We celebrated as two of our senior-most female leaders in our executive and board levels were recognized for their contributions to our company and our industry.
And we formed a council comprised of some of our most senior African-American leaders to ensure accountability for continued progress in promoting racial equality.
We made significant investments in education, including donating $1 million to the United Negro College Fund to provide scholarships for African American students, who want to attend historically black colleges and universities or other higher learning institutions across our five state footprint.
We've continued supporting our communities through increased outreach and financial investments as organizations, schools, individuals, families and entire communities face unprecedented challenges, and we continue to deliver financial education across the footprint through our now virtual Raise the Banner program.
And finally, we've remained active participants in multiple CARES Act stimulus programs to help our customers recover sooner rather than later.
We're proud of these actions, and we believe they reflect our deep sense of responsibility for leading and strengthening the communities we serve.

user
compname announces q3 earnings per share $0.56.
q3 adjusted earnings per share $0.89.
q3 earnings per share $0.56.
non-cash goodwill impairment charge of $44.9 million, or $0.30 per share in quarter.

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