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Synovus Financial Corp  (NYSE:SNV)
Q3 2018 Earnings Conference Call
Oct. 23, 2018, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Synovus Financial Corp., Third Quarter 2018 Earnings Conference 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 would now like to turn the conference over to Steve Adams, Senior Director of Investor Relations. Please go ahead.

Steve Adams -- Senior Director, Investor Relations

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.

Due to the number of callers this morning, we do ask that you initially limit your time to two questions. If we have more time available after everyone's initial questions, we will reopen the queue for follow-up.

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

Kessel D. Stelling -- Chairman and Chief Executive Officer

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 three, 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 earnout 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 non-performing asset ratio improving further to 0.46%, a 4 basis point improvement from the previous quarter and an 11 basis points 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 four, 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 had been excluded from adjusted EPS.

The second item relates to a $11.7 million increase in the earnout liability associated with our 2016 Global One acquisition. The increase is a result of our annual update to the three-year earnings forecast for Global One. Under the merger agreement, future payments were made as a percentage of the business' net income. Given the better-than-anticipated growth in the business, we now expect future earnout 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 one-time non-cash redemption charge of $4 million related to the original issuance cost of the preferred stock. This charge was recognized through equity demand 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 non-core and excluded from adjusted EPS. The discrete tax benefit is stemmed from analyses related to the finalization of the impact of 2017 tax reform, preparation of 2017 tax return and amendments to prior year tax returns.

Moving to slide five, 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 a growth during the quarter due to solid production, construction loan 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 six, and deposits, total average deposits were $26.39 billion, increased (technical difficulty) $1.1 billion or 4.4% versus a year ago. Excluding brokered deposits, average deposits increased $269 million versus the second quarter of 2018 with strong growth in non-interest 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 brokered deposits by $150 million during the quarter. Brokered deposits represents 6.7% of average total deposits during the quarter -- during 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 costs well in a rising interest rate environment.

Moving to slide seven, 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% in the second quarter. Despite the increase this quarter, our slight (ph) interest-bearing deposit beta of 18% is evidence of the long-term value of our strong core deposit franchise.

Turning to slide eight, and fee income, total non-interest 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 in investment securities losses during the quarter. Adjusted non-interest 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 quarter. The sequential quarter decline was 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 market remain the key driver of our outsized growth in 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 nine, total non-interest 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 of the earnout liability associated with Global One of $11.7 million as well as FCB merger-related expenses of $6.7 million. Adjusted non-interest 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 a $1.7 million decrease in fixed-asset impairment charges, partially offset by a $2.5 million increase in compensation expense, due primarily to mid-year merit increases.

We remain very disciplined in managing our expense base, but we'll continue to make appropriate investments to 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% (ph) the previous quarter and 58.59% the prior year.

Moving on to credit on slide 10, 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 remains 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 from the prior quarter. Year-to-date, our net charge-offs were 20 basis points well within our guidance of 15 basis points 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 NPL remains strong at 232% or 288% excluding impaired loans for which 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, two major hurricanes over the last six 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 deploy our bankers and check on customers in the affected areas to assess any impact and develop a plan.

I want to walk through those two 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% loan book.

Thus far, it appears that the losses expressed 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, in capital, our capital ratios did come down slightly during the quarter as expected, due primarily 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 have 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, 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 provide some color regarding the progress on our pending acquisition of FCB. Before I do that, I really want to share an email which I think sums up our view. And this is actually from Jonathan Rosen, who is our CEO of Global One, and 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 email.

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 were hard, and I wanted to express my appreciation for an environment you all have created to make our team a part of the Synovus family. As the team embarks upon the integration ahead of 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 and into our existing Florida footprint. It will also add a large number of high-performing experienced 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 were 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 payoff to outperformance in this target, whether it be from optimization of a liability side of the balance sheet, realization of revenue synergies or simply accelerated recognition of cost savings ahead of our initial timelines. And by pricing this transaction at a level that we had felt comfortable with from day one, we're confident in our ability to earn back tangible book value dilution in less than three years.

Our plans for integration are well under way. 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 advisors. To date, we validated our earlier due diligence assessments, we confirm our cost savings assumptions and revenue synergy opportunities, as well as conducted talent reviews in order to build out the best possible team going forward.

Through this process, we've 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 timeline at the bottom of the slide, we've achieved a significant number of milestones already. As we look ahead, we're targeting a shareholder vote on November the 29th, and pending regulatory approval, we'd look to close early in the first quarter with a full conversion during the second quarter of 2019.

So, there is 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 is also excited about our continued investments in a better customer experience and fortify 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 where we should deploy -- redeploy current investments.

Last month, we announced an agreement to sell two 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 part of our ongoing effort to assess our best market opportunity and direct to our investment in 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 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 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 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 aids. 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 will open the line for questions, and we have our team standing by.

Questions and Answers:

Operator

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) The first question comes from Ebrahim Poonawala with Bank of America Merrill Lynch.

Ebrahim Poonawala -- Bank of America Merrill Lynch. -- Analyst

Good morning, guys.

Kessel D. Stelling -- Chairman and Chief Executive Officer

Good morning.

Ebrahim Poonawala -- Bank of America Merrill Lynch. -- Analyst

Kessel, just wanted to hit up on, so you gave an update on the buybacks. I guess looking forward just if you could talk to us given the pullback in your stock in the group; one, should we expect that $150 million you bought back this year, could that number go higher next year or stay the same? What's your expectation today? And can you remind us of the blackout periods that we should be aware of around the shareholder approval, the deal closing like if the next round of buybacks going to happen only after the deal closes?

Kessel D. Stelling -- Chairman and Chief Executive Officer

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 the regulators and board. 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 2019. 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.

Kevin Blair -- Executive Vice President and Chief Financial Officer

Yes. I will echo what Kessel said. You look at the IRR, Ebrahim, of the repurchase at these price levels they're much higher. So, as we rollout our capital plan for 2018, 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.

Ebrahim Poonawala -- Bank of America Merrill Lynch. -- Analyst

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.

Kevin Blair -- Executive Vice President and Chief Financial Officer

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 sub-debt 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'll be some incremental capacity that that creates.

Ebrahim Poonawala -- Bank of America Merrill Lynch. -- Analyst

Got it. Thank you. And deal closing, we are still shooting for some time probably Jan of next year?

Kessel D. Stelling -- Chairman and Chief Executive Officer

We missed that last piece, Ebrahim.

Ebrahim Poonawala -- Bank of America Merrill Lynch. -- Analyst

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

Kessel D. Stelling -- Chairman and Chief Executive Officer

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

Ebrahim Poonawala -- Bank of America Merrill Lynch. -- Analyst

Thanks for taking my questions.

Kessel D. Stelling -- Chairman and Chief Executive Officer

Thank you.

Operator

The next question comes from Brady Gailey with KBW. Please go ahead.

Brady Gailey -- KBW -- Analyst

Hey, good morning, guys.

Kessel D. Stelling -- Chairman and Chief Executive Officer

Hey, Brady.

Kevin Blair -- Executive Vice President and Chief Financial Officer

Hello, Brady.

Brady Gailey -- KBW -- Analyst

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 two, do you think it's realistic that you could get the efficiency ratio into the high 40s?

Kevin Blair -- Executive Vice President and Chief Financial Officer

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 of 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 date. 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 two times operating leverage that we have this year in a rising rate environment, it may come down slightly from two times once the rate hikes are no longer happening. But we do believe it will 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.

Brady Gailey -- KBW -- Analyst

All right. And then my second question is on the margin. Your 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, linked quarter NIM increase in that kind of 4 basis points to 6 basis points like you talked about before in 4Q?

Kevin Blair -- Executive Vice President and Chief Financial Officer

Brady, there's a question mark there. I mean what we said last quarter was we thought we would see 1 basis point to 2 basis points in the fourth quarter. We see a stable margin to an increase of 1 basis point to 2 basis points in the fourth quarter with to your point the one variable being LIBOR. And I just 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 or 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 basis points the prior quarter. And that is a function of the average increase quarter-over-quarter and 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 basis point to 2 basis points, but knowing that there's potential upside if the asset betas increased from what we saw this quarter.

Brady Gailey -- KBW -- Analyst

Got it. Thanks, guys.

Kessel D. Stelling -- Chairman and Chief Executive Officer

Thanks, Brady.

Operator

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

Jennifer Demba -- SunTrust -- Analyst

Thank you. Good morning. My question is on the FCB integration. You mentioned you were using some third-party advisors to assist you with that integration. Can you give us some more detail about that?

Kessel D. Stelling -- Chairman and Chief Executive Officer

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 one. 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 integration experience as well. I received a full briefing yesterday from our integration management team as that our entire senior team. Our audit and risk committees will get a briefing later today, and our full board will get a briefing tomorrow.

So nothing out of the ordinary other than just making sure than the merger and integration plan which we developed, three or four years ago that we vetted and tested and 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 integration.

Jennifer Demba -- SunTrust -- Analyst

Okay. My second question is on lending competition. Maybe this is for Kevin Howard a bit. 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?

Kevin J. Howard -- Executive Vice President and Chief Credit Officer

Yes, I'd say, it's competitive, but it's always been competitive. 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, I mean, we lost the calls. 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 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 pricing. 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 four or five years. So I don't know that it's really much different than what we've seen over the last couple of years.

Jennifer Demba -- SunTrust -- Analyst

Thanks so much.

Kevin Blair -- Executive Vice President and Chief Financial Officer

And Jennifer I'll just kind of add to that from a spread perspective. When we look 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.

Jennifer Demba -- SunTrust -- Analyst

Thank you.

Operator

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

Brad Milsaps -- Sandler O'Neill -- Analyst

Hey, good morning.

Kessel D. Stelling -- Chairman and Chief Executive Officer

Good morning, Brad.

Kevin Blair -- Executive Vice President and Chief Financial Officer

Good morning, Brad.

Brad Milsaps -- Sandler O'Neill -- Analyst

Kevin, thanks for all the color on the margin. It looks like, as you mentioned, you benefited from some mixed change as well. 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? Did 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.

Kevin Blair -- Executive Vice President and Chief Financial Officer

Yes. No, Brad, I'll start with fourth quarter. As you know, we have a sizable amount of state and county municipal deposits that typically run out in the third quarter. And if you looked at our period-end balance sheet, we had replaced that with some FHLB. In the fourth quarter, we planned to pay off some of that wholesale funding as those state and county municipal receipt start to come back in. And that's a good source of deposits for us in the fourth quarter -- excuse me, 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 non-interest 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 the 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.

Brad Milsaps -- Sandler O'Neill -- Analyst

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, The Street was looking for something in the neighborhood of over $13 billion in average earning assets in 2019 for that company. I 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, you know, they had really strong loan growth this quarter. But we've seen a lot of companies kind of pull back the ranges 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.

Kessel D. Stelling -- Chairman and Chief Executive Officer

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 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 and 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 2019 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.

Brad Milsaps -- Sandler O'Neill -- Analyst

Great. Thank you, guys.

Kessel D. Stelling -- Chairman and Chief Executive Officer

Thanks, Brad.

Operator

The next question comes from Ken Zerbe with Morgan Stanley. Please go ahead.

Ken Zerbe -- Morgan Stanley -- Analyst

Great. Thanks. 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 to be a little bit lower. Was that solely due to third quarter, or were there items that could persist to drive lower tax rate going forward?

Kevin Blair -- Executive Vice President and Chief Financial Officer

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 carry-forwards, we've enacted certain tax credit strategies that will 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 will be closer to 23% in the fourth quarter which would push us toward 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.

Ken Zerbe -- Morgan Stanley -- Analyst

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?

Kevin Blair -- Executive Vice President and Chief Financial Officer

Yes, Ken. 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 earnout that we talked about for Global One. If you were to exclude those two 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 two items that we had this quarter, we'll be slightly above the low end of the range.

Ken Zerbe -- Morgan Stanley -- Analyst

I see. Perfect. All right. Thank you very much.

Kessel D. Stelling -- Chairman and Chief Executive Officer

Thanks, Ken.

Operator

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

Christopher Marinec -- FIG Partners -- Analyst

Thanks. Good morning.

Kessel D. Stelling -- Chairman and Chief Executive Officer

Good morning, Chris.

Christopher Marinec -- FIG Partners -- Analyst

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 deposit and evolution once FCB comes in?

Kessel D. Stelling -- Chairman and Chief Executive Officer

Yes. Again, 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 in our (technical difficulty). It has a very sleek look and feel we think. By the way that our digital efforts have to be complimented 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 the Reynoldstown area of Atlanta, and 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.

Christopher Marinec -- FIG Partners -- Analyst

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 a Nashville?

Kessel D. Stelling -- Chairman and Chief Executive Officer

Yes, absolutely, Chris. And that's what we'd like to do. There are a lot of opportunities. Again as you just touched on any existing markets like a Nashville, we had an economist a 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 and 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 two 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 that's another one plus one equals three, 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.

Christopher Marinec -- FIG Partners -- Analyst

Great. Thanks very much for the background, guys.

Kessel D. Stelling -- Chairman and Chief Executive Officer

Thanks, Chris.

Operator

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

Ebrahim Poonawala -- Bank of America Merrill Lynch. -- Analyst

Hey 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?

Kevin Blair -- Executive Vice President and Chief Financial Officer

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 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.

Ebrahim Poonawala -- Bank of America Merrill Lynch. -- Analyst

Understood. So it doesn't sound like -- go ahead.

Kevin Blair -- Executive Vice President and Chief Financial Officer

And as I say, 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 assets classes that we use today within our investment security portfolio, but nothing that would be a big impact from a net interest income perspective.

Ebrahim Poonawala -- Bank of America Merrill Lynch. -- Analyst

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 about like 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're talking more on the $202 million adjusted expense?

Kevin Blair -- Executive Vice President and Chief Financial Officer

Yes, no, I was talking about it would be flat relative to the full year at $821 million. So you should expect to have -- that's excluding the earnout 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 two 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 into 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 two one-time items we had this quarter, I said, we come in below the $821 million. If you were to include those two items, we will be within the range but in the lower end of the range.

Ebrahim Poonawala -- Bank of America Merrill Lynch. -- Analyst

Thank you very much. Got it.

Kessel D. Stelling -- Chairman and Chief Executive Officer

Thank you, Ebrahim.

Operator

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.

Kessel D. Stelling -- Chairman and Chief Executive Officer

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 two 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 five years, and not only in 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 and 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.

Operator

And thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Duration: 52 minutes

Call participants:

Steve Adams -- Senior Director, Investor Relations

Kessel D. Stelling -- Chairman and Chief Executive Officer

Ebrahim Poonawala -- Bank of America Merrill Lynch. -- Analyst

Kevin Blair -- Executive Vice President and Chief Financial Officer

Brady Gailey -- KBW -- Analyst

Jennifer Demba -- SunTrust -- Analyst

Kevin J. Howard -- Executive Vice President and Chief Credit Officer

Brad Milsaps -- Sandler O'Neill -- Analyst

Ken Zerbe -- Morgan Stanley -- Analyst

Christopher Marinec -- FIG Partners -- Analyst

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