Synovus Financial Corp
NYSE:SNV
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Synovus Financial Corp
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Good morning and welcome to the Synovus Second Quarter 2021 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.
I will now turn the call over to Kevin Brown, Head of Investor Relations. Please, go ahead.
Thank you and good morning. During today's call, we will reference the slides and press release that are available within the Investor Relations section of our website synovus.com.
Kevin Blair, President and Chief Executive Officer will begin the call. He will be followed by Jamie Gregory, Chief Financial Officer. We will be available to answer your questions at the end of the call. We ask that you limit yourself to one question and one follow-up.
Our comments include forward-looking statements. These statements are subject to risks and uncertainties and the actual results could vary materially. We list these factors that might cause results to differ materially in our press release and in our SEC filings, which are available on our website.
We do not assume any obligation to update any forward-looking statements, because of new information, early developments or otherwise, except as may be required by law. During the call, we will reference non-GAAP financial measures related to the company's performance. You may see the reconciliation of these measures in the appendix to our presentation.
And now, Kevin Blair will provide an overview of the quarter.
Thank you, Kevin. Good morning, everyone, and thank you for joining our second quarter earnings call. 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 a $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 am 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 remained 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 solution 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 industry-wide 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 towards 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. Industry-wide 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 three, 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 pretax run rate benefit of $100 million by year-end 2021 and $175 million by the end of 2022.
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 non-interest-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 four 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.
With that serving as an overview for the quarter, I will now turn it over to Jamie for a more detailed financial update, and I'll rejoin you later for an update on Synovus Forward and our guidance. Jamie?
Thank you, Kevin. As shown on slide four, 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 in 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 five, we continue to grow core transaction deposits, which increased $702 million or 2% from the prior quarter. This was led by core non-interest 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 six 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 six 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 two 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 re-pricing 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 30, 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 absent -- 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 seven shows a total adjusted non-interest 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 non-interest 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 non-interest expense of $271 million is highlighted on slide eight. Adjusted non-interest 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, non-qualified 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 headcount 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 nine 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 four 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 one 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.
With that, I'll turn it back to Kevin.
Thanks Jamie. 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 pretax 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 headcount, as well as branch and corporate real estate consolidation. Approximately $50 million of the $75 million pretax 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 million to $40 million in pretax 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 pretax run rate benefits. The Treasury and Payment Solutions pricing-for-value initiative has resulted in annualized pretax 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 million 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 company-wide 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 FinTech's to build and deliver new products and solutions, and we have a roadmap 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 pre-payment 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 pre-payment 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 above 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.
With that I'll turn the call over to our operator for the Q&A portion of today's call.
[Operator Instructions] The first question comes from the line of Michael Rose with Raymond James. Please go ahead.
Hey good morning everyone. How are you?
Good morning, Mike. How are you doing?
Good. Hey just wanted to start on the loan growth outlook. It looks like if I exclude PPP and then the third-party loans which were up this quarter, you guys were down a little bit in both the first and the second quarter. And if I'm doing the math right, it looks like on a core basis ex those two lines that the guidance would imply some positive growth in the back half of the year. So, can you just kind of reconcile the comments around line utilization remaining low paydowns still remaining high and what would appear to be a positive inflection point in those kind of core loan balances? Thanks.
Yes. Michael, it's a great question. I think before I talk about the rest of the year, I think it's important to make sure that we're all clear on what happened this past quarter. When you exclude PPP as you mentioned, we actually grew $195 million for the quarter. A large piece of that was on the C&I side. We grew $220 million this quarter and that was on the backs of very strong production.
We were actually up 10% versus the first quarter and 19% versus the second quarter of last year. We also grew the third-party portfolio roughly $273 million. And as we've shared in the past that's really surrogate to the securities book. And we felt with the excess liquidity and capital we had, we would continue to make those purchases as long as the returns make sense.
I think on the CRE side, one thing that's lost in this quarter is that we also saw good increases in funded production there, up 35% versus the first quarter. But unfortunately, we saw unprecedented levels of payoffs as we saw borrowers start to take some chips off the table leading up to what they perceive to be an increase in the capital gains tax. So, we saw a runoff there of about $173 million.
So inside of the quarterly growth there are some underlying stories. We've seen our pipelines return to pre-pandemic levels, up 22% versus the previous quarter and in line as I said with previous year pipelines. As I mentioned production is increasing across our franchise, primarily on the commercial side, but production in total was up 12% from the first quarter.
When you look at our commercial lines of business, we actually had in our sublines business we have 12 -- 11 of the 12 actually grew during the quarter, only our CRE business declined because of those pay-offs and pay-downs. We also saw tremendous momentum going into June, where C&I loan growth in June was $160 million and CRE actually grew in June $10 million. And to your point on line utilization, it's not a Herculean task but it's up 1% from 39.1% to 40.1%. So we're starting to see a little bit of activity there.
And we saw broad-based industry growth, whether it was in the finance, insurance area, transportation, warehousing, healthcare across several of our industries. So in general, what gets us excited about the second half of the year is that we're starting to see some momentum build both through pipelines and production.
We're starting to hear from our customers that demand is picking up. And we think there's been kind of a secular move across the industry to hold more liquidity on their balance sheet, which means that they'll start to borrow again before the balances completely run-off from having the excess cash. So we're optimistic and we're planning for the second half of the year to deliver that growth to be able to achieve that 2% to 4%. But as we said, we think it will be towards the low half of that range.
That's great color, Kevin. I really appreciate it. And maybe just as my follow-up if we can hit on expenses. You gave a lot of color on the Synovus Forward and the progress that is continuing there. But I assume like everybody else you're continuing to invest in the franchise.
It looks like if I take kind of the midpoint of the guidance, it would imply that expenses on an adjusted basis would remain relatively flat at these levels in the next couple of quarters. Is that the way we should think about it? And then maybe if you could just kind of outline some of the reinvestment initiatives and what the priorities are? Thanks.
Yes. Michael, this is Jamie. You're right on the second half of the year and expenses are expected to be flat due to increases in a few different things. We have third-party servicing expense. Our portfolio there is larger than we had originally guided towards the beginning of this year.
We also have increased third-party processing expense associated with P3 for giving us. And lastly, we have variable compensation expectations. We do continue to invest in the franchise. Specifically, you see it in multiple areas. First, I would point to technology advancements to help us deliver our businesses better.
A good example of that as we recently launched the Accelerate AR program, which is an accounts receivable solution for our treasury customers. That's only six weeks old and we're now on track to receive about $2.5 million in annualized revenue from that just six weeks in. We're also looking at our verticals, we're looking at our customer-facing team members and growing frontline associates where appropriate. And all of that spend is embedded in our full year guidance for 2021.
Very helpful. Thanks for taking my questions.
Thank you, Michael.
The next question comes from Jennifer Demba of Truist Securities. Please go ahead.
Thank you. Can you hear me, okay?
Yes. Good morning, Jennifer.
Yes. Good morning, Jennifer
Good morning. Kevin you mentioned, you anticipate Synovus will migrate to a modern core over time. Can you give us some details on that comment?
Yes. Jennifer it's a part of our infrastructure investments that we believe we have to make over time. Now what you won't see is that Synovus will do a rip and replace and move off of our mainframe core today over into a cloud-based core tomorrow. What we'll do is we'll start by in a segmented fashion start to move over certain products and certain capabilities, potentially create new capabilities that we could add on to the modern core of our digital platform.
And then over time as it makes sense, we would then move the core businesses over there. We think that's the prudent approach versus doing it all in a kind of that rip and replace methodology. And it allows us to expand our capabilities and new functionality in that agile platform with that API connection where we really need it. And that's the real value of moving to the modern core as we've shared is it allows you to be much more agile in adding new solutions, adding new applications and new services for our customers. So that's how we would view the ability to move things over. And we'll do that over several years, where we have the opportunity to do that.
Thank you. I think the industry will follow that kind of pattern as well Kevin.
Yes. I think so Jennifer just because no one wants to hear that there's a massive increase in expense in order to do that. So the way that you do it in a more efficient fashion is to be able to go out and do it over time in components where you move parts of your business. And ultimately, then it allows you to have a pathway to get all of your business over to the modern platform.
Okay. Also, you mentioned you're rolling out the future of work operating environment third quarter. Can you just talk -- give us a little more detail there?
Yes. So it's -- for us, we call it, our here together program, Jennifer. But I think it's important to note for Synovus. We've already brought back roughly 60% of our team members in the office. So we have about 40% of our team members that continue to work remotely today.
And so, we've really spent the summer evaluating job family-by-job family to determine which one of those positions we felt like needed to be in the office 100% of the time and which team members needed to have more of a flex work schedule. And then, that left a third set of team members that would be 100% remote.
And so, as we're rolling this out, our next level of return to work will be in the middle of August, where we'll have those team members that now will come back to work full time. That represents about 400 additional team members.
And then, at the end of August, we'll roll out our flexible work schedule, which is about another 500 team members that will begin to come in the office three days a week and then two days off-site. And that leaves us with around 1,200 team members that will continue to work remotely 100% of the time.
We feel that it's important in today's environment for talent to assess which positions needed to work remote. Number one, we want to make sure we're testing and monitoring the productivity, which we can for those positions.
Number two, I think, for the competition of team members, it was important for the 1,200 that we identified, we felt like this was a work environment perk that was necessary to be able to retain and attract the right level of talent.
But with all of that, we look at this as the next normal. It's not permanent. We'll continue to evaluate the effectiveness of our workforce and make any adjustments that we need to make going forward.
If I could just ask one more thing. How much wage pressure are you seeing right now?
Jennifer, we're starting to see some increases in attrition in some of our entry-level positions. And we've seen some positions where individuals can work remotely for their job and that job could be in Texas or California or New York.
And so, we're starting to see a little bit of that. So you'll see -- and we've addressed that with our internal teams. We made an adjustment, a salary adjustment for all of our team members below kind of our median salary level.
And we also provide our leaders with additional pools of funds to make sure that we're continuing to match or combat what's becoming a fairly competitive landscape, as it relates to salary and compensation. But it's really started to hit us in the last couple of months and especially, as it relates to those entry-level positions.
Thank you.
The next question comes from Ebrahim Poonawala with Bank of America Securities. Please go ahead.
Good morning.
Good morning, Eb.
Good morning, Eb.
I guess, just wanted to follow up on the -- Jennifer's question around the modern core conversion, Kevin. Talk to us -- I mean, I understand you're doing it in a fragmented way. One, what's the time line of that? Is it 2023? Is it beyond that?
And in the meantime, does it not allow you to do certain things that a full conversion would. Just give us a sense of how important that conversion will be, both, one, in terms of the timing and the additional capability that Synovus could have in order to compete with banks or non-banks?
So, Ebrahim, it's a great question. We haven't set a time frame. And I think that's important as part of the story, because, to me, what will determine the ultimate conversion will be the success of some of these fragmented pilots that will run.
So if we set up a digital bank or move some of our products over on to the new core, we may test one vendor, two vendors. It really is a pilot for us to figure out what's the most scalable way to do that. But we'll learn from those pilots. And ultimately that will determine what the ultimate time frame is.
Now, to your question as to limitations by doing this in a fragmented approach, we don't believe so. I think, today, we feel like we can continue to add new products and solutions that are necessary. It just takes a little more time.
We can work with our core provider and make sure that we schedule out the time frame that's required. A great example of that is an example that Jamie mentioned earlier on the Accelerate AR. We were able to -- from contract to open it up for folks to apply was 171 days. And we did that with a mainframe core platform that needed to connect to that system. So, it doesn't prohibit us from doing things. We're just excited about the speed that what a modern core would bring to the table, where you can do things even more efficiently, and more -- less costly in the future, but it's not -- its not something that will inhibit our abilities in the short-term.
And just tied to that, would M&A make it easier to accelerate that in terms of undertaking that investment? Or is it easier for you to do that and then think about M&A of any large scale?
I think you can look at that either way Ebrahim. Obviously, M&A, if you can cut costs someplace else, it allows you to reinvest that. We've seen that with the messaging coming out of a lot of the -- the recent mergers. But we believe that, we can do it within our existing budget today. I mean, when I look at our technology spend this year. As we shared on the call, we're down in expenses on a year-to-date basis 3%, yet we've increased our technology spend by 8%. And the large majority of that increase comes in our special projects, where we're able to add additional spend to drive revenue growth and new client acquisitions.
So, I don't think that not having a merger take place is a limiting factor either. Quite frankly, we'll continue to utilize Synovus Forward to find efficiencies in other areas, so that we can redeploy that into the areas that we want to invest like talent and technology.
Got it. Thank you.
The next question comes from Brady Gailey with KBW. Please go ahead.
Yes. Thanks. Good morning, guys.
Good morning, Brady.
Good morning, Brady.
I wanted to start with the buyback. It's great to see you all reengage there. If you include what you've repurchased in July, I think you're about halfway there to your $200 million mark. But the stock is cheaper now I think you all repurchased around $165 million of tangible last quarter. It's now at $140 million of tangible. And to me, it seems like you could go a little beyond the $200 million. So maybe just talk about the pullback in the stock here and if it's possible that we could see buybacks actually exceed that $200 million kind of threshold that you all talked about?
Yes. Thanks, Brady. As we progress through 2021, we've been proactive in managing our balance sheet. You've seen that both in growth in our lending partnership portfolio as well as through share repurchases as you mentioned in the second quarter. As we look forward into the second half of the year, I expect those same themes will apply along with our expectation for the gradual pickup in core loan growth, our core customer loan growth.
And that's where our priority is ensuring that our balance sheet is position, so that we can serve our customers best. And we expect that to materialize in the second half of the year. 9.5% for us is not a point-in-time objective that we manage to -- it's really just a target that we use for medium-term objectives, and we're comfortable operating above or below the target in the short run.
As you've seen in the second quarter, we were actively purchasing shares. We've been actively purchasing shares quarter-to-date. We believe they are attractively valued and we will continue that plan as long as it's prudent. But as we look forward, we do believe that core earnings will provide enough capital to cover our core customer loan growth, and we should remain above target assuming no material changes in the operating outlook to facilitate the full $200 million in share repurchase as you mentioned.
Okay. And then my second question. So Jamie, I mean, you talked about getting the bond book up to 16% to 17% of average earning assets you're there. Now you're talking about maybe going a little higher. What's the max that you think we could see as far as how much of the bond book could continue to grow here?
Yes. It's a great question. And typically, when we think about the securities portfolio, you're thinking about as traditional balance sheet management. And this is a unique environment. Right now, we're managing at a time where our customer liquidity is at levels unforeseen and unexpected, and we're managing in that dynamic. We do believe that this liquidity environment will remain for the foreseeable future and we're managing our balance sheet accordingly, where we are growing the securities portfolio in a prudent manner at 17% of assets.
We're growing our third-party lending. But it's hard for me to give you an absolute level, because it really depends on what the opportunities are. We're being very specific in what we're targeting.
And if you look at the third-party loan purchases in the first half of the year, they're great examples. They are strong credit assets in asset classes that we are very familiar with, with shorter durations. And that aligns with our liquidity view. And as we look forward into the second half of the year, if we see opportunities that fit that profile then we will continue to pursue them. But it's hard for me to give you targets.
Yes. And Jamie what was the yield on the third-party consumer purchases this quarter?
The third-party purchases this quarter, the largest portfolio purchase -- there were multiple purchases in the second quarter. But the largest purchase was a little more than $300 million in auto loans with a gross yield a little more than 5%.
Great. All right. Thanks.
The next question comes from Steven Alexopoulos with JPMorgan. Please go ahead.
Hey, good morning everybody.
Good morning Steve.
Kevin, for you. I know there are quite a few initiatives already underway. But with this being our first call with you as the CEO, could you give us a bit of a deeper look into what you see as your long-term vision for the company?
Yes. It's a great question Steven. And look I'll start by saying, my goal for our company is to win. And I know our team members feel the same way. And similar to my comments earlier in the call, I feel like it's our job to build significant upside in our earnings power through a set of strategic actions that will allow us to improve efficiency and accelerate our top line growth. And I know with you we've had discussions in the past of what that growth looks like.
I think that's directly aligned with what our opportunity is and that we feel like we can build a high-growth low-risk bank that can continue to take market share and in a very attractive Southeastern market. And so we're building the -- and so I used the word transformation because our bank is extremely well positioned. I feel like we sit in a great footprint. We have a 133-year history of performing.
But as I look into the future, I think there are four areas we have to focus on to be able to be a bank that truly stands out. Number one is an ease of doing business. It's not rocket science what we do every day. It's important for us to recognize that our customers want a bank that is easy to do business with. Our team members want to come here every day and have a work -- a place that it's easy for them to get their job done. And so, we're investing time and energy and improving how we do business with our customers.
We process automation through our client journeys where we're going to shorten cycle times and improve the overall customer experience. That's important because it leads to great referrals stick to our prospects which generate growth. The second area of focus is around being able to seamlessly deliver all of our products and solutions across all of our segments.
As a relationship bank, we believe that we've earned the right to have a deeper share of wallet with our customers. And that means that we can't deliver in silos. We have to deliver as a team. And we feel that we do that today, but we can do a better job of delivering across our products and solutions and ultimately increase the type of solutions that we bring to our customers that will also serve as a source of revenue.
The third area as we talked about in the past is, we'll take our high-touch approach, I think which shows loud and clear with some of our loyalty scores and will apply a high-tech approach to match that and complement it. So, we'll bring new technology and new solutions to the table, along with analytics that will allow us to deepen the share of wallet again and expand our customer base.
And then lastly, we'll focus on our team members. This is a great place to work and we know that, but there's opportunities to continue to improve that through professional development and compensation and other perks for our team members but also continuing to attract the top talent in the industry.
So we believe that ultimately when you bring on those four areas of transformation along with the strong foundation we have, we think it puts us in a position to stand out in the industry and deliver growth that exceeds that of our peers and that of our marketplace.
I appreciate that color, Kevin. That's terrific. Can you realize that vision based on the current technology offering or do you need that modern core to get you where you ultimately want to be? Thanks.
Yes. Steven, I think over time I think to be able to compete in the very competitive landscape. We need to make sure that our technology is at par with our competitors. And so, do I think a modern core is important? Yes. We've done two proof of concepts since 2019. So I think we're well on the way of testing that out. The goal with the modern core as I said earlier is just to make us more agile and bring more services to our customers.
I think the great equalizer in our industry today is fintechs. We believe that partnering with fintechs allows us through the software-as-a-service model to bring new solutions to our customers. And we can do that without having to have an R&D shop inside of our bank and we can do it in a way that's extremely scalable and customizable.
So for us it's about things like the modern core, but then it's also about having partners that can continue to add new services and better solutions for our customers like our Synovus Gateway product or the Accelerate AR solution that Jamie mentioned earlier. So I think, its modern core, but it's also about having the right fintech partners to complement that.
Okay. Thanks for all that color.
Yes. Thanks Steven.
The next question comes from Jared Shaw with Wells Fargo Securities. Please go ahead.
Hi. Good morning everybody.
Good morning, Jared.
Right now the third-party consumer loans are around 5% of the total. I guess, looking at that dynamic of deploying the cash and with the 10-year down further, could we expect to see that as a percentage of the loan book maybe accelerate over the next few quarters versus putting incremental dollars into the security book down here? And if so how big would you be comfortable with that portfolio getting?
Yes, Jared. As we think about that portfolio, I bifurcate it into HFI and HFF. What you're referring to is the total combined portfolio, but the risk profile of the held-for-sale portfolio is very different than the health for investment portfolio. So I want to focus in on the HFI portfolio.
As we sit here today, we believe that we have the ability as far as our knowledge, our experience to grow this portfolio further and get back to that $2 billion pre-pandemic level on held-for-investment loans on balance sheet. What you should expect to see from us first is discipline.
We're not going to go out there and chase these assets just to grow the portfolio, but we have found strong risk adjusted returns in these portfolio purchases. And we believe that we're taking the appropriate amount of risk, which is actually fairly low on this portfolio and delivering incremental spread vis-à-vis the securities portfolio where you get that spread in duration.
And so we would much rather take it in prime -- credits like the prime auto securities, I mean, prime auto loans with a two-year duration versus extending out on the duration curve in the securities book. And so we feel comfortable with $2 billion. We're not there today. We're not going to chase that number, but that is something we have our eye to. And in this liquidity environment there's plenty of liquidity to support that.
Okay. Thanks. And then circling back on to the capital management side here and it sounds like maybe a little bit of a reluctance to extend that buyback. What's the thoughts on M&A? And what are you seeing, I guess, sort of out there in the market? Are there opportunities to potentially reengage or engage in an acquisition strategy to help accelerate some of those growth goals?
Hey, Jared, this is Kevin. I'll take that. So as we've said on previous calls, we remain focused on investing in Synovus. And I think the next $100 million in Synovus Forward will be our top-of-mind activity at this point and we need to be able to deliver those incremental benefits.
As I've shared in the past, I think, bank M&A often looks great on paper when you look at the pro forma financial metrics. But I think there are challenges that are present with system and cultural integration, as well as just creating growth off the acquired company's base. And I think all of those challenges are underestimated.
So we believe that we can focus on improvements here at Synovus. And with those improvements, our currency will improve and then that will allow us over time to consider alternatives and options in that bank M&A space. But for now I think the only M&A that we've evaluated or would evaluate would be smaller companies that provide solutions or capabilities that would be additive to our existing customer base. And those sort of businesses would have to provide elevated returns and a growth profile that align with our overarching strategies.
As it relates to what we're seeing as you know there's still a very active M&A environment. I know with the executive order that came out recently, I think there's been some questions as to how that will impact that activity. I believe that it's not intended to truly impact the mid-cap space in terms of mergers and acquisitions. If anything I think it will just hinder bank's ability to close branches and may increase the amount of investment that's required for community development. But I don't think it's going to slow it down. Obviously in this low rate environment where many banks are challenged and they look at their two and three-year forecast. It's resulting in them reaching out to a partner and that's why transactions are happening. We are very confident in our forward strategy in our ability to grow the bank. And, therefore, we don't feel like we have to go in that route -- go that route today.
Okay. Thank you.
The next question comes from Brad Milsaps with Piper Sandler. Please go ahead.
Hi, good morning.
Good morning Brad.
Good morning Brad.
Jamie, I'm just curious anything more to do on the right side of the balance sheet in terms of -- I know you mentioned continuing to optimize the deposit base. But just curious if there's anything on the horizon that might accelerate there on the brokerage side of things with those time deposits maturing or any of the other brokered accounts that you might be able to change on the right side of the balance sheet?
Yes. First off, we're very pleased with the progress we've made to date in closing the gap versus peer median, six basis points a quarter for each of the last two quarters. It is strong on total deposit cost improvement. We do expect to be able to continue to reduce total deposit costs albeit not quite at the pace you've seen in the last couple of quarters. Obviously as you get closer to zero gets more difficult.
But we do think there are opportunities. And to your point there are opportunities in broker deposits. We do have some of those maturing in the second half of this year even though a larger wave is in 2022 early 2022. We have about $1 billion -- $1.1 billion of CDs maturing this quarter, the third quarter at an average rate of around 70 basis points. And so that's an opportunity for us to reduce deposit costs.
As we mentioned in the prepared remarks, total deposit costs were at 15 basis points for the month of June relative to the 16 basis points for the quarter. So we think that we can continue to reduce them. We have opportunities on money market and non-maturity deposits. And so we do see opportunities to continue our work in closing the gap to peer median, and that's just one of our key strategic priorities as we head into the second half of this year.
Great. That's helpful. And then as my follow-up just I was going to see if you could just add a little more color to some of the fee income line this quarter. Obviously the mortgage is pretty self-explanatory but maybe down a little bit more than I thought. And then I know capital markets is an area that you guys have invested a lot in and been bullish on that business, maybe a little weaker than I thought but there may be some seasonality, some other things that you could add some color there as well?
Yes. What I would say is, if you look at fee revenue, it's a great success story of broad-based growth, which is offset by secular trends in mortgage as well as NSF. And so when we look at the growth in wealth, which is it's not just due to equity market increases. This is due to customer growth deepening relationships. We're seeing growth in account analysis. And we've spoken in the past about the work being done in treasury on pricing for value. This is extremely valuable to our company both as far as just the pure revenue, but as far as also acknowledging the value add of our expertise in that area.
We're seeing growth in card and other core banking fees. So what we are pleased with is we can't pipe the longer term industry trends in mortgage or in NSF to liquidity out there. But we are delivering in all of our businesses beyond those with those more secular headwinds. So we're pleased with the growth. We're expecting that to continue in those areas. We do expect continued normalization in mortgage. And so we would expect mortgage revenue to decline in the second half of the year versus the first, but we are pleased in the broad-based growth.
And Brad, the only thing I'd add on the mortgage front. I think when you look at the quarter-over-quarter results, there's -- although production was down slightly, there was a fairly sizable shift in the mix over to the portfolio side. So in first quarter about 70% of our production was in secondary. This past quarter, it was only about 53%. So as you see our production moving to more purchase money which it will over time. I think you'll see more move over into the portfolio which as -- just to provide a background is our private wealth and our physician mortgage product and less we'll go into secondary. The other thing this quarter that impacted mortgage revenue is the cash gain on sale in the secondary market was down in total from around 3% down to 240 which is where we had guided. But it's a very competitive marketplace, obviously with the pricing of mortgages, and that's an area that we expect to continue to see some pressure on that cash gain on sale.
Great. Thank you guys.
The next question comes from Brody Preston with Stephens Inc. Please go ahead.
Hey, good morning everyone.
Good morning, Brody.
Hey, Brody.
Hey, Jamie, I just wanted to circle back on the third-party loan purchases. So, I think the guidance that you all provided around the non-interest expense indicated that it doesn't include any significant changes from noncore balance sheet activity. And so, I'm assuming that those third-party loan purchases kind of fit into that bucket. And so, I guess just help me understand these loans are yielding about 5% and the step-up that you've seen in the third-party expense, the run rate on that kind of indicates that you're bringing these loans on at about a 50% efficiency ratio or so. And so just given how yields have trended over the last two months, I'm assuming that it's going to get more competitive for these type of loans which might actually push the incremental efficiency ratio back to neutral as to where you guys are running right now. So, I guess help me understand your thought process around the trade-offs between deploying liquidity into these loans, but also potentially kind of modeling the expense run rate from here relative to the guidance.
Yes. Brody, let me just add a few points on that. Our expense guidance for 2021 the down 1% to down 2% includes the associated expenses with the portfolio as it is today. And so, our point there is increases from here because we have not forecasted those increases that would -- that's what we're referring to. When you look at the second quarter growth in third-party processing expenses, it's actually a combination of two things. We did have an increase in the Paycheck Protection Program forgiveness fees as well as the process or servicing expense associated with third-party loans. And so, when you look at these portfolios, the servicing expense varies. But generally, it's less than 1% on these loan portfolios.
You are exactly right that it's a very competitive market and I very much agree with you that it will only get more competitive, as more people look to deploy liquidity. And so, we're very mindful of spread compression. We expect to see spread compression and we'll just remain diligent to make sure that these purchases actually add shareholder value. Obviously with this liquidity environment, we're leveraging the benefits of it on the right side of the balance sheet, just in line with the prior conversation to reduce deposit costs to optimize the mix there. And so, we're not compelled to grow assets. But we do believe that if we can continue to find assets like we found in the past that we will pursue that because we believe it's the right thing for the shareholder. We believe that's a prudent way to deploy the liquidity.
Got it. So perhaps once PPP is out of the equation that 1% kind of servicing of that third-party portfolio become a little bit clearer. I guess that's how I should think about it?
Yes. That's right.
Okay. And then I guess my follow-up would just be on the core banking fees. So this is I guess is a little bit of a loaded question because there's questions within the question. But I just wanted to ask if you could talk just a little bit more about it, what goes into the account analysis, the nice step-up you saw there? And what are the specific use cases that's driving that growth maybe from the new products that you've rolled out? And then on NSF you mentioned that it's become a little bit of a focal point for the industry. Other banks are getting rid of it. The CFPB seems to be willing to take a harder look here. Just given how low it is as a percent of your revenues have you given any thought to maybe just getting rid of it especially given the nice traction you've seen in other areas.
Yes. So, Brody this is Kevin. I'll take the -- on the core banking fees. When you look at it on quarter-over-quarter basis were up 9%, up 41% year-over-year. And you noted one of the categories the account analysis is largely a function of those treasury services that we're offering our customers. Some of that a large percentage of the increase comes from the repricing that Jamie mentioned that was pricing for value.
And the good news there is that it was well received by our customers. Any time you increase fees, you have to question whether it's going to lead to increase turnover or calls a problem. We saw a fairly favorable response in that we had very few customers try to negotiate that increase in fee. And that tells us that what we're doing from a value-added advice perspective is meaningful. And so they're willing to pay for those services.
The other part of that is just the increase in the amount of activity in the number of new solutions. And the -- whether it's a new solution or existing product that we're providing to our customers that's also -- the sales are up 40% year-over-year. So, our customers are continuing to request and we're offering additional solutions to be able to deepen that relationship and so that is a success story.
And outside of the pricing increase, we expect that line to continue to grow just based on our smart analytics tool which about 80% of those insights are leads our treasury opportunities. And so our bankers are starting to work those.
The other area in core banking fees that was up this quarter was card fees and that's just an increased spend. We were up about 11% and versus first quarter and 45% versus last year. But inside of that as we've also made some investments in our commercial card and purchasing card and that's starting to show up in that we're able to get more cards in our commercial customers' hands. And so that's a success story.
As it relates to overdraft you mentioned it. We're only about 6% of our fee income that is derived from NSFOD and that's down about 36% from where we were in 2019. And so we've embarked on our own overdraft assistance optimization strategy where we're evaluating the solutions we provide our customers today. We feel that we provide a variety of banking options. And for example we today offer a free checking account and a prepaid card that allows our customers to access their funds without allowing any overdrafts.
But we are considering some options that will add some new functionality and more specifically as it relates to the bank on standard that I think many of our competitors are talking about. And that will involve some product changes and some new digital tools and most importantly some education. But we'll do that and we feel like there's an opportunity to do that in the fourth quarter of this year or early first quarter of next year.
But to your point the fact that it represents about $24 million to $25 million of income where we're looking to offset any losses that we have there. It's in some of the businesses that Jamie mentioned earlier where you see our fiduciary business which is growing our brokerage and our securities area as well as our treasury and payment solutions. So, over time we think the growth in those other larger categories will be able to offset any reductions we have from a new product suite.
Got it. Thank you very much for taking my questions. I appreciate it.
Thank you.
And the last question will come from Steven Duong with RBC Capital. Please go ahead.
Hi, good morning, everyone.
Good morning.
Just a question on the C&I growth in the quarter. Can you give us some color on what industries or areas where you're seeing that growth? And do you expect the acceleration to continue for the end of the year?
So, Steven as I mentioned earlier the areas that we've seen some growth from an industry standpoint is the financial services and insurance area. We've seen growth in health care transportation and logistics retail trade and some construction growth. We do expect that to continue for the rest of the year based on our pipeline and based on the discussions we're having with our customers.
Ultimately, most of the growth that we're getting is coming out of our metro markets and I think that's where you're seeing the lion's share of activity but we're well positioned. I looked at this last quarter if you look at just our Tier 1 markets our largest markets it represented about 50% of our production, our Tier 2 markets, which are still large MSAs were about 40%. And we only had about 10% of our production from our rural smaller market. So from those industries I've mentioned, as well as our markets like South Florida and Atlanta and some medium-tier markets like Charleston and Columbia, South Carolina, Greenville, we think there's a tremendous opportunity and we think we'll grow C&I strongly in the second half of the year.
Great. I appreciate the color on that Kevin. And then just a follow-up just the commercial loan yields. They came in at $386 million. I guess if you were to strip out the impact of PPP, where would that be? And if you were to look out one year and the rate environment remains where it is, do you expect that to trickle a little lower?
So yes, look the way I look at that Steven, as I look at our loans on the books excluding all fees, the coupon rate in our portfolio today is about $363 million. And if you look at our production that we brought on in the second quarter, it came on around $330 million to $350 million. So you're putting it on let's say midpoint of that $340 million. So there will be continued pressure based on repricing on the new loan origination side as well as renewals that will continue to put pressure on the overall portfolio.
Now the good news is in second quarter those coupons were flat with first quarter. So we feel like the price competition that we've been seeing from both large and small banks is starting to normalize. And we actually are widening our spread, when you look at the credit spread and our cost of funds, when we look at that new coupon. So it is going to provide pressure and that's where as Jamie mentioned earlier, we'll continue to leverage the liability side to continue to cut our costs there to help to mitigate any impact and keep our margins stabilize.
Great. Appreciate the coloring that guys.
This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Kevin Blair for any closing remarks. Thank you.
Thank you, operator. And I want to thank everybody for your participation today, your questions and your ongoing interest in Synovus. Although, this is my first earnings call as CEO of Synovus, this month will represent -- or this next month will represent my fifth year at the company and participating in these calls. I'm humbled to lead such a great organization with passionate and driven team members who are working every day to help our clients achieve their financial goals and aspirations.
We have a lot of things to be proud of with our performance this year, so I'd like to thank our team members who are on this call for your efforts and your contributions. As you've heard in today's report, we are effectively managing the headwinds that have arisen through the pandemic and as we get to the other side. While we have also continued to invest in our business and to generate new sources of growth and profitability.
We're big believers in our strategy and our ability to win. By expanding existing relationships and continuing to take share from our competitors, we are extremely well positioned for future opportunities. But we also know that actions speak louder than words and I believe that we have completed another quarter of delivering on our commitments and plan to leverage our momentum to continue to deliver and we're eager to share our successes and report on our progress in the weeks and quarters ahead. So again thank you for your attendance today and I hope you have a great day.
Thank you. The conference has concluded. You may now disconnect your lines.