Synovus Financial Corp (SNV) 2018 Q3 法說會逐字稿

Good morning, and welcome to the Synovus Financial Corp.

Third Quarter 2018 Earnings Conference Call.

(Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Steve Adams, Senior Director of Investor Relations.

Please go ahead.

Thank you, and good morning.

During today's call, we'll be referencing slides and a press release that are available within the Investor Relations section of our website, synovus.com.

Kessel Stelling, our Chairman and Chief Executive Officer, will be the primary presenter this morning, with our executive management team also available to answer your questions.

Before we get started, I'd like to remind you that our comments may include forward-looking statements.

These statements are subject to risks and uncertainties, and the actual results could vary materially.

We list the 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 as a result 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.

Certain subject matter discussed on this call has been addressed in a preliminary joint proxy statement, which we filed with the SEC.

We urge you to read it as it contains important information about the transaction with FCB.

Information regarding the persons who may, under the rules of the SEC, be considered participants in the solicitation of shareholders of Synovus and FCB in connection with the proposed transaction is set forth in the preliminary joint proxy statement and prospectus that has been filed.

(Operator Instructions)

Thank you, and I'll now turn the call over to Kessel Stelling.

Thank you, Steve, and good morning to everyone.

Welcome to our Third Quarter Earnings Call.

I'm delighted this morning to be joined by our Synovus senior leadership team.

And as usual, I'll walk us through the earnings presentation as well as a brief update on our continued progress on the Florida Community Bank acquisition.

Then we'll open up the line for questions, either for myself or for any others on our team.

I'll start in the earnings deck on Slide 3 (sic) [Slide 4], which provides a summary of our third quarter results.

Diluted earnings per share was $0.84 for the quarter on an adjusted basis.

Diluted EPS was $0.95, up 2.4% from the previous quarter and up 46.4% from the same period a year ago.

The $0.11 adjustment to reported EPS will be covered on a subsequent slide, but is largely due to merger-related expenses associated with the pending FCB merger and an earn-out liability associated with Global One.

The second quarter results were positively impacted by strong loan growth, continued expansion of our net interest margin, fee income growth and a lower effective tax rate.

Return on average assets during the quarter was 1.36% on a reported basis.

On an adjusted basis, return on average assets was 1.47%, up 4 basis points sequentially and up 42 basis points from a year ago.

Our total adjusted revenues increased 9.6% versus the third quarter last year, while adjusted expenses increased 3.9% year-over-year.

We continue to manage expenses and generate positive operating leverage during the quarter, resulting in a further reduction in the adjusted efficiency ratio, which declined to 55.6%.

On the balance sheet side, average loans for the quarter increased $376 million or 6% sequentially and $823 million or 3.4% versus a year ago, while average deposits grew $1.1 billion or 4.4% versus a year ago.

We continue to benefit from a relatively stable credit environment, with the nonperforming asset ratio improving further to 0.46%, a 4 basis point improvement from the previous quarter and an 11 basis point improvement from a year ago.

Lastly, in terms of capital management and returns, we continue to see improvement in overall capital efficiency, with an adjusted ROE of 15.69%, up 477 basis points from a year ago.

Adjusted return on average tangible common equity improved to 16.08%, up 489 basis points from a year ago.

Turning to Slide 4 (sic) [Slide 5], where we have a summary of adjustments made to the quarter's reported results.

I'll just walk through those briefly.

The first item relates to merger-related expenses of $6.7 million associated with our pending acquisition of Florida Community Bank, which have been excluded from adjusted EPS.

The second item relates to an $11.7 million increase in the earn-out liability associated with our 2016 Global One acquisition.

The increase is a result of our annual update to the 3-year earnings forecast for Global One.

Under the merger agreement, future payments are made as a percentage of the business' net income.

Given the better-than-anticipated growth in the business, we now expect future earn-out payments to increase as various minimum performance triggers are more likely to be achieved.

In connection with our redemption of Series C Preferred stock this quarter, we incurred a onetime noncash redemption charge of $4 million related to the original issuance cost of preferred stock.

This charge was recognized through equity in a manner similar to the treatment of dividends paid on preferred stock.

And finally, during the third quarter of 2018, the company recorded a $12.8 million discrete tax benefit, of which, $9.9 million was considered noncore and excluded from adjusted EPS.

The discrete tax benefits stem from analyses related to the finalization of the impact of 2017 tax reform, preparations for 2017 tax return and amendments to prior year tax returns.

Moving to Slide 5 (sic) [Slide 6].

Total loans of $25.6 billion grew $443 million sequentially or 7% annualized and 4.5% from a year ago.

We were pleased to see broad-based growth across all categories, with C&I up $228 million, CRE up $68.2 million and consumer loans up $148 million.

Commercial loan growth was led by our senior housing vertical, insurance premium finance, small business and our CRE investment properties, where we saw growth during the quarter due to solid production, construction line advances and the moderation of payoffs as we expected.

Our consumer portfolio experienced growth across all categories, including mortgage, lending partnerships, HELOC and credit card.

Moving to Slide 6 (sic) [Slide 7] and deposits.

Total average deposits of $26.39 billion increased a hundred

(technical difficulty)

[$1.1 billion] or 4.4% versus a year ago.

Excluding broker deposits, average deposits increased $269 million versus the second quarter of 2018, with strong growth in noninterest-bearing deposits, up $133 million as well as $146 million of growth in money market accounts and $296 million in time deposits.

This growth was offset, in part, by seasonal declines in interest-bearing checking deposits of $301 million, a large portion of which were comprised of state and county municipal accounts.

Given the solid growth in core deposit categories across all of our lines of business, we opportunistically reduced the overall level of broker deposits by $150 million during the quarter.

Brokered deposits represent 6.7% of average total deposits during the quarter through the third quarter compared to 7.3% in the second quarter.

We continue to be pleased with our growth in core transaction deposit accounts.

And given our stable customer base as well as the growth characteristics of our footprint, we continue to be optimistic in our ability to manage deposit cost well in a rising interest rate environment.

Moving to Slide 7 (sic) [Slide 8].

Net interest income was $291.6 million, increasing $7 million or 2.5% versus the previous quarter.

Compared to the same period a year ago, net interest income increased $29 million or 11.1%.

The net interest margin for the quarter was 3.89%, up 3 basis points from the previous quarter and up 26 basis points from a year ago.

The net interest margin improvement for the quarter was driven by an 11 basis point increase in loan yields due to the June and September short-term rate increases.

Partially offsetting the yield enhancement, the effective cost of funds increased 8 basis points sequentially to 69 basis points as the cost of interest-bearing deposits increased 14 basis points this quarter.

Deposit betas increased this quarter relative to previous quarters with an incremental interest-bearing deposit beta of 67% compared to 41% last quarter.

Excluding the impact of the shift in the time deposits, the non-time interest-bearing deposit beta was 52% for the quarter compared to 33% for the second quarter.

Despite the increase this quarter, our [cycle-related] interest-bearing deposit beta of 18% is evidence of the long-term value of our strong core deposit franchise.

Turning to Slide 8 (sic) [Slide 9] and fee income.

Total noninterest income for the quarter was $71.7 million, down $1.7 million versus the prior quarter and $63.7 million versus the same period a year ago.

As a reminder, the third quarter of 2017 included the $75 million Cabela's transaction fee, partially offset by an $8 million investment securities losses during the quarter.

Adjusted noninterest income of $71.2 million decreased $3.5 million versus the previous quarter and increased $2.8 million or 4.1% versus the same period a year ago.

Core banking fees of $35.7 million decreased $1.7 million sequentially and were flat versus the prior year.

The sequential quarter decline is largely due to a $1.7 million decline in SBA gains.

On a year-to-date basis, SBA is up 7.8% over the prior year.

Fiduciary asset management, brokerage and insurance revenues of $23.9 million decreased 3.3% sequentially and increased $2.8 million or 13% from a year ago.

We continue to be pleased with the growth in this business, surpassing $15 billion in assets under management during the quarter, an increase of 16% from a year ago.

Strategic additions to our talent and markets remain the key driver of our outsized growth at these business units.

Mortgage revenues of $5.3 million were up $451,000 or 9.3% sequentially and down $313,000 or 5.6% year-over-year.

Turning to Slide 9. Total noninterest expense of $220 million increased $16 million or 8% sequentially and increased 7.1% versus the same period a year ago.

As noted earlier, the quarter included an adjustment for the earn-out liability associated with Global One of $11.7 million as well as FCB merger-related expenses of $6.7 million.

Adjusted noninterest expense of $201.6 million decreased $1.1 million or 0.5% sequentially and increased $7.5 million or 3.9% from a year ago.

The sequential decline in expenses is a result of a $1.5 million decrease in advertising expenses and $1.7 million decrease in fixed asset impairment charges, partially offset by a $2.5 million increase in compensation expense due primarily to midyear merit increases.

We remain very disciplined in managing our expense base, but we'll continue to make appropriate investments that drive sustainable growth, enhance our customer experience and our back office efficiency.

As we evaluate these opportunities, we'll continue to generate positive operating leverage, yielding ongoing improvements to our adjusted efficiency ratio, which improved again during the third quarter to 55.55% from 66.41% (sic) [56.41%] the previous quarter and 58.59% the prior year.

Moving on to credit on Slide 10 (sic) [Slide 11].

You'll see that our loan portfolio continues to perform well.

Our NPA and NPL ratios both experienced meaningful reductions during the third quarter, declining to 46 basis points and 42 basis points, respectively.

Past-dues moved up 9 basis points but still remained at relatively low levels at 31 basis points for total past-dues greater than 30 days and 2 basis points for past-dues greater than 90 days.

Net charge-offs for the quarter were 24 basis points annualized, down from 29 basis points in the prior quarter.

Year-to-date, our net charge-offs are 20 basis points, well within our guidance of 15 to 25 basis points.

And we still expect to end the year within that range.

The allowance for loan losses decreased 2 basis points to 98 basis points but was essentially flat from a dollar standpoint.

Coverage ratios of reserve to NPLs remained strong at 232% or 288%, excluding impaired loans affording the expected loss has been charged off.

Again, these metrics demonstrate that our credit profile remains very strong.

We're very pleased with our bankers and our credit teams for continuing to demonstrate a disciplined growth approach, and we remain very committed to that approach.

As you all know, 2 major hurricanes over the last 6 weeks have caused devastation to areas within our footprint, with Hurricane Florence impacting much of the Carolinas and Hurricane Michael impacting the Florida Panhandle and much of Southwest Georgia.

Following each storm, we deployed our bankers to check on customers in the affected areas to assess any impact and develop a plan.

I want to walk through those 2 events.

With Hurricane Florence, there was no material impact to Synovus' portfolio and very few customers have requested payment relief.

With Hurricane Michael, we're still in the process of compiling and analyzing information.

We do know that Synovus' total exposure in the FEMA-designated areas of impact in Florida and Georgia is approximately $500 million, which is only about 2% of the loan book.

Thus far, it appears that the losses experienced by our customers are fully covered by insurance, leading us to believe that our company will not experience a material impact to our portfolio from Hurricane Michael.

We remain, though, very committed to helping our impacted customers in every way as they work to recover from the storm.

And our thoughts and prayers are with our team members, customers and everyone else in the impacted areas, whose lives have been affected.

We've taken several steps to support our customers in these counties, again, declared disaster areas by FEMA in the Carolinas, Florida and Georgia.

These steps include refunds of late fees, refunds of ATM charges, temporary suppression of credit bureau reporting for those in impacted areas.

And when requested by impacted customers, we'll offer up to a 90-day deferment of payments.

Moving on to Slide 11 (sic) [Slide 12] and capital.

Our capital ratio did come down slightly during the quarter, as expected, due primarily to the redemption of our $130 million Series C Preferred stock on August 1, along with a higher level of risk-weighted assets from growth in loans and unfunded commitments during the quarter.

All ratios remained well in excess of regulatory minimums and reflect a strong capital position.

Our capital actions this quarter included share repurchases totaling $58 million in common stock.

We had continued to repurchase stock during the fourth quarter, and we anticipate fully completing our $150 million authorization this week, which should result in a year-to-date reduction of 2.5% to our total share count.

Moving to Slide 12 (sic) [Slide 13].

Again, it outlines our original 2018 guidance for key financial metrics along with our year-to-date results.

As you can see, we're performing within our guidance on these metrics in all areas, with a few exceptions worth noting.

As we indicated last quarter, we believe that we'll achieve loan growth of 4% to 5% for the year on a period-end basis, while our original guidance called for 4% to 6% growth on an average basis.

Payoff activity remains a challenge, particularly in CRE, but we see our overall production trends and pipelines point to continued loan growth in the fourth quarter.

Regarding taxes, given the finalized adjustments from 2017 tax reform and the execution of our tax strategies, we expect our effective tax rate to be in the 21% to 22% for the full year, which is 200 basis points lower than our original estimate.

And finally, as I mentioned on the previous slide, we'll fully complete our share repurchase authorization for 2018 this week.

Before we wrap up and turn to questions, I'd like to, on Slide 13 (sic) [Slide 14], provide some color regarding the progress on the pending acquisition of FCB.

Before I do that, I really want to share an e-mail, which I think sums up our view.

And this is actually from Jonathan Rosen, who's our CEO of Global One.

In his quarterly update to me in preparation for this call, he added a little editorial color to his great financial update.

I'm just going to read to you a couple of lines from his e-mail.

He said, "It's a rare success story when the integration of an acquired business can yield not only winning financial results, but also a winning combination of culture.

Integrations are hard, and I wanted to express my appreciation for the environment you all have created to make our team a part of the Synovus family.

As the team embarks upon the integration ahead in Florida, we're excited about the future of the institution and are confident that Synovus can create another, much bigger, success story." Again, that's from Jonathan Rosen, but I think it truly sums up how we feel as we move into this integration.

So again, strategically, the transaction diversifies our footprint and elevates our growth profile by incorporating some of the strongest markets in Southeast into our existing Florida footprint.

It will also add a large number of high-performing experience bankers to our team in a market where we're well positioned to compete from a position of strength.

And additionally, as we've spent more time with Kent Ellert and the FCB team, we've seen that their talent, their expertise and their sense of urgency in delivering solutions to their commercial clients are truly what have enabled them to win in the market.

Financially, we continue to see that our stated 6.5% EPS accretion is not only achievable, but conservative.

We can see more than one path to outperformance in this target, whether it be from optimization of the liability side of the balance sheet, realization of revenue synergies or simply accelerated recognition of cost savings ahead of our initial time lines.

And by pricing this transaction at a level that we had felt comfortable with from day 1, we're confident in our ability to earn back tangible book value dilution in less than 3 years.

Our plans for integration are well underway.

We've created an integration management office to oversee all the day-to-day activities of the merger.

We're also aided by a number of very experienced third-party advisers.

To date, we validated our earlier due diligence assessments.

We've confirmed our cost savings assumptions and revenues synergy opportunities as well as conducted talent reviews in order to build out the best possible team going forward.

Through this process, we held steadfast to the guiding principle that the customer and team member experience must be front and center of every decision that we make.

As you can see on the time line at the bottom of the slide, we've achieved a significant number of milestones already.

And as we look ahead, we're targeting a shareholder vote on November 29; and pending regulatory approval, would look to close early in the first quarter with a full conversion during the second quarter of '19.

So there's our update on FCB, and you can see there's a tremendous energy around that work, but I want to assure everyone there's no less focus and energy around doing what our bankers and financial services experts do every day to successfully deliver our core products, services and capabilities to customers.

We and they all remain keenly focused on generating fundamental organic growth, the primary driver of our improved performance quarter after quarter.

Our team's also excited about our continued investments in a better customer experience and fortified competitive position.

We built a strong digital road map, and we'll be launching several key components of that customer-facing technology over the coming months.

We also continue expanding our presence, not only in South and Central Florida with FCB, but also through investments in new talent, the opening of additional physical locations in high-growth markets, like Nashville and Atlanta.

Strategic expansions like these will continue as we assess areas of greatest opportunity where it makes sense to invest, and where we should deploy -- redeploy current investments.

Last month, we announced an agreement to sell 2 branches in Mobile and one branch in Daphne, Alabama to Jefferson Financial Federal Credit Union.

This action, along with other branch closure and optimization strategies, is all a part of our ongoing effort to assess our best market opportunity and then direct our investment and talent acquisition efforts accordingly.

And then finally, before we go to questions, I want to talk about our most important investment, and that's in our people and in our communities.

We were so proud to be recognized as one of American Banker's Best Places to Work on top of being named among the top 10 most reputable banks by American Banker again this year.

Our team members are tremendous, and they know that.

And we're constantly looking at fresh ways to care for them and foster a work environment and a reputation that attracts the best and brightest in our industry.

We mentioned earlier the impact of Hurricane Michael on some of our customers and the steps that we're taking to support those who need special considerations.

We also took steps, as always, to care for any impacted team members and customers by establishing a matching internal fund, from which, local market leaders can distribute dollars as they see immediate and short-term needs for shelter, clothing, food or any kind of storm-related aid.

We also sent our facilities team to some of our more impacted areas to distribute generators, address minor repairs, tree removals from team member homes and our branch locations.

And we'll continue to be here for our affected communities as they work to recover and rebuild from this impactful storm.

But the work and the attitude of our team was truly inspirational as they tackled this tragedy for many of our communities.

So with that, operator, we'll open the line for questions, and we have our team standing by.

(Operator Instructions) The first question comes from Ebrahim Poonawala with Bank of America Merrill Lynch.

So Kessel, just wanted to hit upon -- so you give an update on the buybacks.

I guess looking forward, just if you could talk to us, given the pullback in your stock and the group, one, should we expect that $150 million you bought back this year, would that number go higher next year or stay the same?

What's your expectation today?

And can you remind us of the blackout period that we should be aware of around the shareholder approval, the deal closing?

Like, if the next round of buyback's going to happen only after the deal closes?

Yes, Ebrahim.

Let Kevin and I tag team that.

So we'll announce our 2019 capital plan, which is in process right now, being shared with regulators and boards.

So I hate to get ahead of that.

But certainly, share buyback at these prices would be very high on our priority as we go into '19.

So let me just answer it somewhat vaguely until we get a little further down the path.

But capital efficiency, share buyback, is a very high priority, again, certainly at these levels.

Kevin, I'm going to let you take the blackout.

Yes.

I'll echo what Kessel said.

You look at the IRR, Ebrahim, of the repurchase at these price levels, they're much higher.

So as we roll out our capital plan for 2018 (sic) [2019], I think you'll see that, that may have a higher priority than it may have had in previous years.

As it relates to the blackout period, as Kessel mentioned in his prepared remarks, we're actually going to complete our authorization this week.

So there will be no more repurchases for the rest of this year.

And then as Kessel mentioned, you would see us resuming into a share repurchase program in 2019, based on the updated capital plan.

Got it.

And I guess my follow-up tied to the same thing.

Can you remind us, Kevin, around capital ratios, like the level at which CET1, TCE are today?

Is that kind of where we want to manage to?

Is there more room to bring them down?

Because if I recall correctly, I don't think the deal is going to consume a ton of capital.

No, actually I think as we've said, we have an opportunity to optimize the capital stack once we complete the merger.

We'll bring in the FCB balance sheet, which is a little overweighted on the CET1 side.

So I think we'll have opportunities to continue to optimize CET1.

They currently today do not use any subdebt or any preferred, so there's an opportunity there to try -- or to optimize different parts of the capital stack while continuing to repurchase shares.

So our levels today are, as Kessel mentioned, at sufficient levels within our targeted ranges, but there is room to bring some of those levels down.

And to your point, once we complete the merger, there will be some incremental capacity that, that creates.

Got it.

And deal closing, we are still shooting for some time, probably Jan of next year?

We missed that last piece, Ebrahim.

Like January 2019, is that the most likely when the deal will close or likely to close?

That's our target, early in the first quarter.

Yes, that's correct.

The next question comes from Brady Gailey with KBW.

Maybe we can just start with the efficiency ratio.

I think over the years, you all talked about getting that ratio under 57%, which you're clearly at now.

Once you layer in FCB, that will further improve that ratio.

Bigger picture, as you look out a year or 2, do you think it's realistic that you could get the efficiency ratio into the high 40s?

I'll take that, Brady.

I think there's a lot of speculation in that, and there's a lot of moving pieces, as we discussed before, bringing FCB into the fold.

As we start to invest in business units today that they do not have, that may have slightly higher efficiency ratios out of the start gate.

So I think long term, anything is possible.

What we want to focus on versus having just an absolute efficiency ratio is continuing to have a positive operating leverage.

So as we look out into 2019 and beyond, we believe that we'll be able to calibrate and be agile enough to manage our expense growth relative to what we can provide on the revenue side.

So the 2x operating leverage that we have this year in a rising rate environment, it may come down slightly from 2x once the rate hikes are no longer happening.

But we do believe that we'll continue to manage to positive operating leverage, which will allow us to continue to bring down the efficiency ratio over time.

Where that terminal value is really depends on the economic environment and the level of revenue growth.

All right.

And then my second question is on the margin.

LIBOR kind of went against you in 3Q.

It appears 4Q will be a better backdrop.

I mean, with the September rate hike also out there, I mean, do you think that you could see a NIM -- a linked quarter NIM increase in that kind of 4 to 6 basis points, like you talked about before, in 4Q?

Brady, that's a -- there's a question mark there.

I mean, what we said last quarter was we thought we would see 1 to 2 basis points in the fourth quarter.

We see a stable margin to an increase of 1 to 2 in the fourth quarter with, to your point, the one variable being LIBOR.

And I just -- I want to make sure that you understand the quarter and what happened for our margin this quarter.

I think a lot of people are going to talk about deposit betas and the increase there, but we were able to offset the increase in the deposit betas by having better-than-average growth in DDA and by, as Kessel mentioned, reducing our focus, our reliance, on wholesale funding.

So despite the increase in interest-bearing deposit pricing, our total cost of funds only went up 8 basis points, which is the exact amount that it went up in the second quarter.

To your point, what changed in the third quarter was that earning assets were up 11 basis points versus 16 the prior quarter.

And that is a function of the average increase quarter-over-quarter in LIBOR was only 14 basis points versus 32 basis points in the second quarter.

So as I look out into the fourth quarter today, we already have an 18 basis point increase in LIBOR, so there's a little bit of upside there.

Depending on how deposit repricing continues, we feel really bullish on the margin in the fourth quarter, but there are a lot of variables.

So we're going to stick with our stable to up to 1 to 2, but knowing that there's potential upside if the assets beta increased from what we saw this quarter.

The next question comes from Jennifer Demba with SunTrust Robinson Humphrey.

My question is on the FCB integration.

You mentioned you were using some third-party advisers to assist you with that integration.

Can you give us some more detail about that?

Jennifer, it's just normal workflow just to augment that we know how important the integration is, not just from an operational standpoint, but from a business as usual for our team and for their team post legal day 1. So we just got some extra resources, making sure that the 20 hours a day that I think our team is working has some additional help.

We don't want to leave anything to chance.

We have a -- we believe we have a great plan.

And just as a reminder, FCB has a lot of merger and integration experience as well.

I received a full briefing yesterday from our integration management team, as did our entire senior team.

Our audit and risk committees will get a briefing later today and our full board will get a full briefing tomorrow.

So nothing out of the ordinary, other than just making sure that the merger and integration plan, which we developed 3 or 4 years ago, that we vetted and tested have run the play a couple of times, is just well -- not just well-executed, but leaves nothing to chance.

So maybe some additional consulting expense, not material, I think, this quarter.

But certainly, we will leave nothing to chance on a successful merger and integration.

Okay, my second question is on lending competition.

Maybe this is for Kevin Howard.

But when you look at the heightened competition out there, can you quantify maybe how many loans you didn't get to do because the structure was just too aggressive or pricing was too low or what have you?

Yes.

I'd say it's competitive, but it's always been competitive.

And it's a great footprint we're in, in the Southeast.

And we're in some really good markets.

So it's always been competitive.

I don't know if I could quantify how many we lost because -- I mean, there has been a little term pressure from time to time.

We're not going to succumb to that.

Pricing, on the CRE side, we -- certainly, when you get some of your best customers being called on, you've got to make some adjustments.

And I would say the CRE pricing has definitely come down from this -- from the beginning of the year to this time last year.

So there's been some pressure there.

And again, if we think there's a good, full relationship there, we'll match that price.

And if we don't, we'll probably let that go.

But Jennifer, I mean, it's definitely -- the C&I has been that way ever since we came out of the recession, probably last 4 or 5 years.

So I don't know that it's really much different than what we've seen over the last couple of years.

And Jennifer, I'm just going to add to that from a spread perspective.

When we looked at our new and renewed loans for the third quarter, we actually saw on the commercial side an increase in yields in the third quarter.

So we were able to generate the 7% growth and from a production standpoint, increase our yield.

So to Kevin's point, we're staying resolute to using our risk-adjusted returns and making sure that the pricing makes sense for us in order to do a deal.

The next question will be from Brad Milsaps with Sandler O'Neill.

Kevin, thanks for all the color on the margin.

Looks like, as you mentioned, you benefited from some mix change as well.

But just kind of curious.

As you think about deposit growth over the next several quarters as you start to on-board FCB the first part of the year, how does your deposit strategy change?

Will you still look to reduce some of those wholesale sources, do you take the loan-to-deposit ratio higher?

Just trying to get a sense of kind of how you're thinking about the balance sheet going forward relative to the current size.

Yes, no, Brad.

I'll start with fourth quarter.

As you know, we have a sizable amount of state, county and municipal deposits that typically run out in the third quarter.

And if you looked at our period-end balance sheet, we had to replace that with some FHLB.

In the fourth quarter, we plan to pay off some of that wholesale funding as those state, county and municipal receipts start to come back in.

And that's good source of deposits for us in the fourth quarter.

It's a fairly low rate deposit, so we expect to see good growth in the fourth quarter on deposits.

We also see an inflow on the noninterest-bearing DDA.

So we think we'll finish out the year strong with good growth and having a mix that meets our objectives from a margin standpoint.

As we enter 2019, as we've shared in the past, we will have an opportunity to optimize the liability side of FCB.

To your point, initially, we can manage up the loan-to-deposit ratio a little bit and allow us to run off some of the wholesale deposits that FCB has on their balance sheet today as well as some of their public funds, which carry a higher rate.

Being able to leverage our deposit-generation capabilities will allow us to replace some of their promotional deposits as well.

So in total, we believe that we'll be able to relatively manage down their cost of funds while continuing to manage the rate of growth that we're going to see on our own deposit pricing.

So we think we have a plan in place, but we'll see how that plays out in the first quarter of next year, and quite frankly, really throughout 2019 into 2020.

No, that's helpful.

And just a follow-up on FCB specifically.

They announced earnings today along with you guys.

I think, when you announced the deal, that The Street was looking for something in the neighborhood of over $13 billion in average earning assets in 2019 for that company.

Think they finished this quarter somewhere around the neighborhood of $11.6 billion.

Kessel's comments, I mean, I think, addressed it, but you still feel good about those guys hitting their targets.

They had really strong loan growth this quarter, but we've seen a lot of companies kind of pull back the reins there.

Just any additional color on kind of thoughts around growth, as that's a big part of kind of making the deal work as you guys hope that it will.

Brad, maybe we'll tag team that as well, and Kevin Howard might jump in.

Because as you know and as disclosed in our filings, we have the ability to monitor certain activities up until the time we close the deal.

And I'll tell you this, that since we have announced our affiliation, we've seen nothing that would give us pause for concern.

In fact, I think our credit teams see more and more alike and have really been impressed, again, by what we've seen in our interactions.

I don't want to go too much into the inner workings there, but they're in high-growth markets.

Again, we don't see them having an appetite for credits that we wouldn't have an appetite for.

If we had some of the bankers with their skill sets in the middle market CRE space in some of the markets in which they operate.

So as you know, when we talked about this, we said Synovus was a mid-single-digit loan growth company.

And with the addition of FCB in '19, that would maybe go to mid- to high single-digit loan growth.

But we still feel good about what they're doing.

Again, I'm not commenting on their earnings for this quarter, I'll let them speak for themselves, but we've seen nothing but quality in terms of our interaction with them to date and our credit teams are very much in sync.

The next question comes from Ken Zerbe with Morgan Stanley.

I guess first question, just sort of ticky-tacky stuff.

In terms of the tax rate, the guidance that you have that's going to be, it sounds like it's going to be a little bit lower.

Was that solely due to third quarter?

Or are there items that could persist to drive lower tax rate going forward?

Sure, Ken.

We had items in first and second quarter.

As we rolled out -- as you may recall, we were carrying net operating losses right up until 2018.

And now that we have eliminated those federal carryforwards, we've enacted certain tax credit strategies that we'll continue to do going forward that will have the effect of lowering our effective tax rate.

What you'll see in the fourth quarter, based on our guidance, is the effective tax rate would be closer to a 23% in the fourth quarter, which would push us towards that 21% to 22% range that Kessel mentioned earlier.

But now that we've exhausted those NOLs, we would look to continue to exercise our tax credit strategy into the near future.

Got it.

Understood.

Okay.

And then follow-up on expenses.

Obviously, on an adjusted basis, expenses were very good, very low, especially versus our expectations.

Is that -- I know you're targeting positive operating leverage, but presumably, your 0% to 3% full year guidance, like, could it be -- could you be even below that on an adjusted basis for the full year?

Yes, Ken, and that's where I think there's a little bit of confusion on our $821 million to $845 million was on a reported basis.

So that would include the unknown merger expenses that we had.

When we started the year, obviously, we didn't know about FCB, of $7 million.

It also includes the $12 million earn-out that we talked about for Global One.

If you were to exclude those 2 items, it is fair that we would come in below our guidance on an adjusted basis as it relates to the expenses.

But including those 2 items that we had this quarter, we'll be slightly above the low end of the range.

The next question will be from Christopher Marinac with FIG Partners.

Was curious if you could talk about the digital build out and to what extent that helps you get additional funding in your core footprint.

Again, kind of back to Kevin's talk about the deposits and evolution once FCB comes in.

Yes.

We might tag team, Chris.

But we're really excited about our new customer portal.

We've spent a lot of time, energy, resources, extra money, which I constantly remind our team.

We previewed it last week and again yesterday at our [Audio Gap].

It has a very sleek look and feel.

We think, by the way, that our digital efforts have to be complemented by the in-person experience.

But we're really excited about the ease of doing business with Synovus and what that might do for us in terms of online account origination, online loan origination and overall look and feel and customer experience as you interact with us digitally.

We're still very excited about some of our new physical additions as well in the Reynoldstown area of Atlanta at our new Overton building, where that -- those new, more technology-friendly branches are producing outsized performance relative to some of our older branches.

But a lot of digital initiatives on the table now and coming in, in 2019.

But Kessel, on the big picture as you move beyond closing FCB in the future, does this allow you to grow without doing M&A, and therefore, kind of just continue to organically expand, even in the new markets or into existing markets where you're small, like Nashville?

Yes, absolutely, Chris.

That's what we like to do.

There are a lot of opportunities, again, as you just touched on, in existing markets like a Nashville.

We had an economist speak to our board last month and highlighting some of the markets around our footprint and markets that might not make everyone else's radar screen, but like a Greenville, South Carolina or a Huntsville, Alabama, where we have, in Huntsville, good market share continue to win business.

So we think organic growth, strategic additions to talent and strategic investments in both digital and physical capabilities are the recipe and will allow us to produce strong organic growth in 2019, '20 and '21.

So absolutely, internal organic growth is where our focus is.

And I think we're -- historically, we've proven we can do it.

Our team did it again in the third quarter.

We're optimistic about the fourth quarter.

And certainly believe, when we bring these 2 companies together, we can again expand end markets.

Again, like in Orlando, in Central Florida, where FCB has a stronger presence than us, we have a presence.

And we think there is another 1 plus 1 equals 3, whether you need physical facilities or just more bankers.

And I've spent some time over the last couple of weeks in Florida with both customers and prospects, and I can tell you they are excited about the organic opportunities for our companies as we come together in Florida.

(Operator Instructions) The next question comes -- is from Ebrahim Poonawala with Bank of America Merrill Lynch.

Guys, just had a quick follow-up question.

Kevin, you mentioned about capital optimization post deal closing.

Should we think about any balance sheet restructuring, either in terms of the loan portfolio or deposits, following the deal?

There won't be anything substantial following the deal right after the deal closes.

But over time, where we think there's opportunity, as we've shared, FCB does not currently have a large consumer portfolio outside of their mortgage book.

We think that we can bring a -- the direct installment product to FCB.

We also believe that we have other vertical specialties that we can provide that will assist them in growth in their footprint, including things like our small business loan generation as well as senior housing and some of the other verticals that we have.

So on the asset side, I think what you'll see is an expansion of asset classes based on things that we do today.

On the liability side, as I mentioned earlier, we think there's an opportunity to rightsize their mix, to put some emphasis on generating lower-cost deposits and replacing some of their higher-cost deposits with sources that we have within our footprint.

So the balance sheet restructuring you'll see there will be more slowly completed over time as we're able to add these asset classes in and then introduce new liabilities and new customer segment channel strategies that we think will bring in a lower-cost deposit.

Understood.

It doesn't sound like the -- go ahead.

And as I say, and the investment securities as we've talked about in the past, they have a slightly higher-yielding investment security portfolio.

We expect to maintain that.

But asset cash flows, we may replace that with more liquid asset classes that we use today within our investment security portfolio, but nothing that would be a big impact from a net interest income perspective.

Got it.

Because we've seen some competitors prune their loan books post deal.

So it doesn't sound like that's going to be the case here.

And just one follow-up question in terms of -- I think you talked like about expenses staying flat going to 4Q.

Was that relative to the reported $220 million number?

Like do we expect a similar merger charge going into 4Q?

Or you were talking more on the $202 million adjusted expense?

Yes, no, no.

I was talking about it would be flat relative to the full year $821 million.

So you should expect to have -- that's excluding the earn-out adjustment and the increase in merger-related expenses.

What you should expect to see in the fourth quarter as it relates to expenses is an increase, and it's for 2 primary reasons.

We expect to have advertising expense increase to the tune of $3 million in the fourth quarter.

That's seasonal, but we had a low third quarter.

And then as Kessel mentioned and Chris asked about, we have an investment in our digital portal and we have professional service fees that will come in, in the fourth quarter that will also be a fairly significant increase quarter-over-quarter.

So for the year, when you look at the numbers, excluding the 2 onetime items we had this quarter, I said we'd come in below the $821 million.

If you were to include those 2 items, we'll be within the range, but in the lower end of the range.

Ladies and gentlemen, this concludes our question-and-answer session.

I would like to turn the conference back over to Kessel Stelling for any closing remarks.

Okay.

Well, thank you very much.

Thanks to all of you who dialed in today to hear the update on our progress.

I want to especially thank our team on 2 fronts.

As we have visited with shareholders and the investment community over the last couple of months, it was impressed upon me how important it was for our team to continue to grind out the solid results that we've been grinding out for the last 5 years.

And I not only assured investors, I put that pressure back on our team, that the real key to our success is to continue to execute the way you've been doing.

So I want to thank our team for another quarter of very solid operating results across all fronts.

And I want to thank them for the way they embraced the communities and the customers who were really hit by these horrible storms, loading up trucks in Atlanta and Columbus and heading south on their own, on weekends, to help take care of those that really needed a helping hand.

So again, as always, the team continues to inspire me.

And then to our FCB team members, who will be joining us, hopefully, early next year, just our excitement about welcoming them to our Synovus family as we continue under our single brand, this theme of one Synovus.

We think it's an exciting end of the year, an exciting start to next year as we, again, welcome the FCB team members and customers into the Synovus family.

We look forward to updating you all on the first quarter call about that, our 2019 capital plan and other exciting events.

So with that, we'll close.

Thank you very much, and look forward to being on the phone with you guys in January.

Thank you.

And thank you, sir.

The conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect.