Synovus Financial in Columbus, Ga., is bracing for a smaller balance sheet and a second wave of loan deferrals in coming months.
Excluding $2.7 billion in originations through the Paycheck Protection Program, total loans at the $54 billion-asset company fell by 3% during the second quarter, to $37.2 billion.
While loan deferrals have decreased from a peak a few weeks ago, executives said they might need to grant another $860 million to $1.3 billion in 90-day deferrals to commercial clients, including $400 million to hotel operators, this quarter.
Synovus’ home state and neighboring Florida, where it expanded with last year’s purchase of
“It's been 130 days since the declaration of the national emergency … and the consequences continue to weigh heavily on individuals, families, businesses, certainly our economy overall,” Synovus Chairman and CEO Kessel Stelling Jr. said during the company’s quarterly earnings call.
“No one knows when normal will return or what it will look like when it finally does,” he added.
With PPP activity slowing down and shifting toward the forgiveness phase, executives warned that loan growth will be hard to achieve. They said deposits could decline, while historically low interest rates will pressure the pricing for any loans Synovus puts on its books.
Credit quality held up in the second quarter, largely because of forbearance and the gradual reopening of the economy in May and early June. But a recent spike in coronavirus cases — the U.S. has reported record daily increases multiple times in July — has executives concerned about an economic setback.
In preparation, Synovus set aside $142 million in the second quarter, increasing its loan-loss allowance to 1.63% of its overall portfolio. Nonperforming loans and charge-offs were stable, though that reflected 90-day deferrals granted to a number of commercial and retail borrowers.
Special mention and substandard loans — those viewed as vulnerable — increased by 18% from a quarter earlier, to $570 million.
“We generally expect some pressure on these credit metrics over the next few quarters, which are aligned with the reserve builds in the first half of the year,” Jamie Gregory, Synovus’ chief financial officer, said during the call. “It's important to note that we’re not seeing any widespread deterioration … and these ratios remain at or near lows for this credit cycle.”
Synovus said it expects to see an increase in the number of deferred loans in coming months.
Kevin Blair, the company’s president and chief operating officer, said deferrals could represent 3% to 5% of total loans in the third quarter, representing an increase from the current 2.3% rate. That would include extensions of existing forbearance and new deferrals.
Deferrals were as high as 13% of total loans at one point.
Given the economic and public health crisis uncertainty, Synovus said it would sharpen its focus on expense control. The company had already implemented an expense-cutting program prior to the onset of the pandemic designed to lower annual operating costs by up to $65 million.
Synovus, which closed six branches in the first half of 2020, plans to shutter another seven by the end of this year. The company also plans to scale back spending on consultants and other third-party providers.
Cost-cutting was “accelerated and has been quite fruitful,” Blair said on the conference call.
“We're reassessing everything these days, and we believe that there are opportunities” to cut more costs, Gregory added. “Our strategies will evolve as the environment evolves."
