Synovus Financial - Earnings Call - Q3 2025
October 16, 2025
Transcript
Operator (participant)
Good morning and welcome to the Synovus third quarter 2025 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and one on your touch-tone phone. To withdraw your question, please press star and two. The call today will be limited to approximately one hour. Please note this event is being recorded. I will now turn the call over to Jennifer Demba, Senior Director, Investor Relations. Please go ahead.
Jennifer Demba (Senior Director of Investor Relations)
Thank you and good morning. During today's call, we will reference the slides and press release that are available within the Investor Relations section of our website, synovus.com. Chairman, CEO, and President Kevin Blair will begin the call. He will be followed by Jamie Gregory, Executive Vice President and Chief Financial Officer, and they will be available to answer your questions at the end of the call. Our comments include forward-looking statements. These statements are subject to risk and uncertainties, and the actual results could vary materially. We list these factors that might cause results to differ materially in our press release and in our SEC filings, which are available on our website. We do not assume any obligation to update any forward-looking statements because of new information, early developments, or otherwise, except as may be required by law.
During the call, we will reference non-GAAP financial measures related to the company's performance. You may see the reconciliation of these measures in the appendix to our presentation. Kevin Blair will provide an overview of the quarter.
Kevin Blair (CEO and President)
Thank you, Jennifer. Synovus reported strong third quarter 2025 GAAP earnings per share of $1.33 and adjusted earnings per share of $1.46, up 19% year-over-year. Adjusted pre-provision net revenue growth was also quite healthy, up 5% sequentially and 12% from the third quarter 2024. Our year-over-year earnings growth was primarily attributable to net interest margin expansion, healthy non-interest revenue growth, and lower provision for credit losses. On a linked quarter basis, our net interest margin further expanded, wealth management revenue and capital markets income both increased at a strong pace, net charge-offs remained low, and capital ratios moved higher. We also demonstrated continued hiring momentum with 25 new revenue producers added during the third quarter for a total of 74 year to date. While some anticipated that the merger announcement might distract from our near-term performance, our results this quarter tell a different story.
We delivered continued strength in loan production, sustained momentum in fee income generation, and grew our team member count by 43 this quarter, all clear indicators of our focus, discipline, and resilience. We feel highly confident that this momentum should continue in the final quarter of the year as we prepare to close out the merger with Pinnacle Financial Partners. We continue to expect our pending merger with Pinnacle to close in first quarter 2026. This strategically and financially compelling partnership should create the fastest growing, most dynamic regional bank in the country. Since the transaction announcement on July 24, we have engaged extensively with team members and clients in order to ensure a smooth transition and maintain momentum during the integration process. The Pinnacle and Synovus teams have been working diligently over the past few months.
As a result, there has been significant tangible progress demonstrated in our merger integration efforts. The entire leadership team has been finalized and communicated, and all headcount-related decisions and employee communication should be complete in the fourth quarter. We have communicated retention packages for key employees at both Pinnacle and Synovus. There have been significant technology and process-oriented decisions made as well, which will further reduce uncertainty for our teams as we move forward in the combination. Our integration management offices, which were established in late August, are working together diligently to complete the required work streams that are needed before and after the closing of the transaction, including our LFI readiness.
The merger-related financial assumptions we communicated in July are unchanged, but we now expect the company's pro forma CET1 ratio to be approximately 10.1% at the closing of the merger as a result of a more favorable rate environment and the strong third quarter capital generation. We plan to issue 2026 pro forma company guidance after the merger closes early next year. Now I will turn it over to Jamie, who will review our third quarter results in greater detail. Jamie?
Jamie Gregory (CFO)
Thank you, Kevin. Excluding merger-related expenses, Synovus generated positive operating leverage in the third quarter. Adjusted revenue increased 9% year-over-year, while adjusted non-interest expense rose 6%. On a linked quarter basis, adjusted revenue increased 4%, while adjusted non-interest expense increased 3%. Net interest margin expansion drove 3% linked quarter and 8% year-over-year net interest income growth. On a sequential basis, the net interest margin increased 4 basis points to 3.41% as higher loan yields, hedge maturities, and fixed-rate asset repricing more than offset higher cash balances. On a linked quarter basis, average loans increased 1%, while period-end loans rose 0.5%. Our high-growth verticals, particularly specialty lending, continue to drive loan growth, while institutional commercial real estate lending was also a strong contributor.
Loan production jumped 43% year-over-year, but the primary headwinds to our period-end loan growth were lower corporate and investment banking utilization and higher payoffs as a result of strong institutional capital markets activity. While lower corporate and investment banking utilization and payoffs were a headwind to third-quarter loan growth, overall corporate and investment banking loan commitments increased at a healthy pace. Period-end core deposits declined $231 million, or 1% from the second quarter, largely as a result of a strategic $370 million decline in public funds. Growth in time deposits and interest-bearing demand deposits was more than offset by a decline in money market and non-interest-bearing deposits. Our average cost of deposits was relatively flat at 2.23% in the third quarter. Synovus continues to grow non-interest revenue at a healthy pace. Adjusted non-interest revenue was $136 million, which increased 4% sequentially and jumped 12% year-over-year.
Linked quarter growth was driven by a 4% increase in wealth revenue, largely from brokerage and trust fees, and an 8% increase in capital markets income, primarily from client derivative and arranger fees. On a year-over-year basis, growth was very broad-based. We produced 11% growth in core banking fees, 5% growth in wealth revenue, and a 36% increase in capital markets income, primarily from client derivative and arranger fees. We remain disciplined with non-interest expense control. Adjusted non-interest expense rose 3% on a linked quarter basis and increased 6% year-over-year. There is $24 million of non-recurring expense related to our pending merger with Pinnacle, mostly for professional fees related to accounting, investment banking, consulting, and legal services. Sequential growth was driven by higher employment expenses, primarily as a result of an additional business day, incentive accruals, and technology-related spend.
Year-over-year non-interest expense growth was largely attributable to higher employment expense and technology spend. These expenses were partially offset by lower operational losses as fraud-related costs continue to be well managed. Credit trends remained very healthy in the third quarter. Net charge-offs were $15 million, or 14 basis points, while non-performing assets improved to 0.53% of total loans and real estate owned, down from 0.59% in the second quarter. The allowance for credit losses ended the third quarter at 1.19% compared to 1.18% in June. Finally, the capital position remained strong in the third quarter, with the preliminary common equity tier one ratio at 11.24% and preliminary total risk-based capital now at 14.07%. This is the highest CET1 ratio in Synovus's history. I'll now turn it back to Kevin to discuss our 2025 guidance.
Kevin Blair (CEO and President)
Thank you, Jamie. Period-end loan growth for the year is expected to be approximately 4.5%, with broad-based growth expected in the fourth quarter. The majority of the 2025 loan growth is from our high-growth verticals, while we are beginning to see momentum in additional asset classes such as institutional commercial real estate, community banking, and senior housing that have been headwinds to growth in recent years. On the deposit front, we project core deposit growth of approximately 0.5 percentage point for the year. In 2025, we have reduced promotional CD pricing, which has resulted in lower CD retention. In addition, we have experienced lower augmentation in public funds balances year to date, which has been offset in the P&L by better-than-expected deposit betas, which has driven an expanding margin.
The fourth quarter is typically our strongest for growth and should be led by continued focus on core deposit production across our business lines, normal seasonal benefits, and investments in deposit specialties. Our adjusted 2025 revenue growth outlook is 6.5%. Our interest rate sensitivity profile is now modestly more asset-sensitive to the front end of the curve as we prepare our balance sheet for the pending merger. During an easing cycle, the margin should still exhibit short-term pressure due to the timing lag between loan and deposit repricing. Assuming two 25-basis-point Fed funds cuts in October and December and a relatively stable 10-year Treasury yield, we believe that the net interest margin should be under some modest pressure in the fourth quarter. We anticipate adjusted non-interest revenue of $515 million-$520 million this year.
Execution remains solid in our core fee income categories, and we expect relative stability in the lines of business in the fourth quarter. Adjusted non-interest expense growth should be 2.5% in 2025. We will continue to be very balanced and disciplined in our core expense management, and as always, we will continue to invest in areas that support long-term growth. The credit loss environment remains favorable. We estimate that net charge-offs should be between 15 basis points and 20 basis points in the fourth quarter compared to 17 basis points in the first nine months of 2025. On the capital front, we are expecting a CET1 ratio of approximately 11.35% at year-end 2025, with the priority on capital deployment continuing to be loan growth and capital needs related to the merger.
Finally, the effective tax rate was 20% in the third quarter and should be approximately 21% for the full year 2025. In summary, our team delivered strong third-quarter financial performance, and we are entering the fourth quarter with confidence and momentum. Our leadership team has consistently delivered on the core principles that underpin financial strength, driving ongoing transformation into a high-performing, client-focused, and fiercely competitive organization. With our strategic combination with Pinnacle, this momentum will surge. Now that our new leadership team is firmly in place, the acceleration of talent acquisition has commenced, which will drive incremental growth in 2026 and beyond. Moreover, our proactive and detailed merger integration efforts with the Pinnacle team are progressing with precision, ensuring we are fully prepared for a successful close in the first quarter of 2026 and then turn our attention to systems conversion in the first quarter of 2027.
We have made great progress in aligning processes, operating models, and cultures. With robust fundamentals and a bold, clearly defined strategic path, we are exceptionally well positioned to transition to the Pinnacle operating model, one that is designed to drive top quartile growth in revenue, earnings per share, and tangible book value. While there is still much work ahead, each day I grow more convinced and convicted of the extraordinary potential and the power of our new franchise. With that, operator, we'll now open the call for questions. The merger-related financial assumptions we communicated in July are unchanged, but we now expect the company's pro forma CET1 ratio to be approximately 10.1% at the closing of the merger as a result of a more favorable rate environment and the strong third-quarter capital generation. We plan to issue 2026 pro forma company guidance after the merger closes early next year.
Jennifer Demba (Senior Director of Investor Relations)
Alex, we can go to questions.
Operator (participant)
Thank you. We'll now begin the question-and-answer session. To ask a question, you may press star, then one on your touch-tone phone. If you're using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. In the interest of time, please limit yourself to one question and one follow-up. Our first question for today comes from Catherine Mealor of KBW. Your line's now open. Please go ahead.
Catherine Mealor (Analyst)
Thanks. Good morning.
Kevin Blair (CEO and President)
Morning, Catherine.
Jamie Gregory (CFO)
Morning.
Catherine Mealor (Analyst)
I wanted to start maybe with the capital. It was nice to see the capital build, and now you're starting capital with a higher level coming into next year post-merger. Curious your thoughts on how quickly you think you'll be able to start buying back stock after the merger closes.
Kevin Blair (CEO and President)
Thanks, Katherine. We haven't given capital targets post-close yet, but I'll give you a little bit of context. We expect to close with 10.1% headline CET1. That's 9.9%, including AOCI. When you look at category four banks, 9.9% is right at the second highest of CET1, including AOCI, of the cap four banks. We think those are pretty strong levels. It remains our intent to build capital in the early quarters post-close, but we think we're starting from a very strong point.
When you look at capital generation through earnings, what I would point to is that the earnings power of this institution is so strong that before you consider risk-weighted asset growth, we believe we will generate 35 basis points-40 basis points of common equity tier one each quarter. That strength in capital generation gives us a lot of flexibility in how we deploy it. Obviously, our goal is to deploy it to clients. We want to grow this bank. We want to go out there and take market share here in the Southeast. If you look at what Pinnacle has done for decades, what we've been doing, we believe we have the right to win, and we will do that. That's priority one. There's a lot of capital generated through earnings that we will be balanced.
In the early quarters, you should expect to see a little bit of capital accretion, but beyond that, we'll be looking at the economy, the economic outlook, the loan growth outlook, and deciding what to do.
Catherine Mealor (Analyst)
Okay. That's great. Thank you. My follow-up is just on deposits. I know, Kevin, you talked a little bit about how fourth quarter is typically your strongest, and we should see better deposit growth into next quarter. I was just curious if you could give us a little bit more color on some of the trends that you saw this quarter. I know public funds drove some of that decline, but what kind of gives you comfort that we'll see better core deposit growth going into the fourth quarter and maybe what trends you're seeing underneath the surface there? Thanks.
Kevin Blair (CEO and President)
Yeah. You know, Katherine, it's a great question. To your point, when we look at deposits, you got to look at all the factors. We produced about $2.6 billion in new deposit production this quarter. It was actually up 18% versus the second quarter. We saw good momentum there. As you noted, the majority of the declines are just the seasonality around the public funds. We generally see a 20% increase from September to November in that category. We know that will come back in. We're pleased with the level of production we saw in CDs. We grew money market and non-interest-bearing or interest-bearing checking this quarter. If we keep the production levels higher, what we saw on DDA, you saw on a period-end basis, it was down, but on averages, it was flat. We think that will continue.
I think that's the third quarter in a row that we've seen average balances in DDA roughly flat. With production staying strong, with not seeing a lot of diminishment in average accounts, average balance per account declining, plus the seasonality coming in with public funds and some other deposits, we're pretty confident that the fourth quarter is going to be very strong.
Catherine Mealor (Analyst)
Great. Thank you.
Operator (participant)
Thank you. Our next question comes from Jared Shaw of Barclays. Your line's now open. Please go ahead.
Jared Shaw (Analyst)
Hey, good morning, everybody. Just maybe looking at the hiring pace, you called out being able to add 43 people this quarter and then talked about accelerating talent acquisition as we go forward. What's sort of been the tone of conversations with people that are looking to come to the bank, and what should we expect from the Synovus side of a hiring trend maybe beyond after this quarter going into fourth quarter and first quarter?
Kevin Blair (CEO and President)
Yeah, Jared, I would categorize the environment as general excitement. I would start with our own internal team members because as Pinnacle has shown, and I think we've shown as well, the ability to hire bankers starts with the people you have inside the four walls of your company, those that can serve as a testament on this being a great company to work for. As you can imagine, after the announcement in July, there were some concerns, and some of our team members wanted to understand the org structure, the new comp. We obviously, as we shared, gave some retention dollars out to our high performers. Ultimately, once we got our team members comfortable with moving forward and actually excited about the combination, it's easier to go and then talk to those individuals who are prospects to join our company.
When they look at the combined company and see that both companies pride themselves on customer service and making sure that we remove any of the red tape that generally comes into play with folks trying to fully manage their relationships and build positive client relationships, when they see that we're able to do that on a larger scale and have more products and capabilities, I think it leads to people wanting to join the company. Ultimately, I think it comes down to execution, but people are generally buying into the fact that this combined organization will be bigger, but also better.
Jared Shaw (Analyst)
Okay. Okay. Maybe shifting just a little bit on credit, you had pretty good trends in both reduction of non-performers as well as reduction in classified. What's driving that? Is that improvement in the underlying individual credits, or is it more that those weaker credits are being able to be moved off the books? What should we be thinking about sort of as credit trends continue to season from here?
Anne Fortner (Chief Credit Officer)
Yeah. Hi, Jared. It's Anne. Thinking about our non-performing trends, what we saw was really the latter point that you made. We did have about $30 million of NPL outflows that were related to our C&I portfolio. That was a combination of various payoffs as well as paydowns on those loans. We were encouraged by just the diversity of that activity in the C&I portfolio. The other impact came out of the foreclosure of our Atlanta office non-performing loans, as you've heard us talk about previously. That is why you'll see the disparity in NPLs versus NPAs for the first time this quarter that you hadn't seen in a while. We did take that property into OREO, and we are working with the tenants today in coming to a long-term resolution.
Kevin Blair (CEO and President)
Jared, just to put a bow on that, to your point, I know there are a lot of credit questions that have maybe been cropping up in the last week. This is our lowest net charge-off quarter in almost three years. Our criticizing classified ratios are the lowest they've been in two years. It was the third successive quarter of only having $25 million of inflows into NPL. Not only is it a positive trend, I think we have some stability in these levels. As we shared in the guidance, we expect charge-offs to remain relatively stable.
Jared Shaw (Analyst)
Great. Thanks. I appreciate that.
Operator (participant)
Thank you. Our next question comes from Jon Arfstrom of RBC Capital Markets. Your line's now open. Please go ahead.
Jon Arfstrom (Analyst)
Hey, thanks. Good morning.
Kevin Blair (CEO and President)
Morning, John.
Jon Arfstrom (Analyst)
Kevin, one for you. One for you, more I guess qualitative. What kind of external and internal, I guess call it critical feedback, are you receiving today compared to maybe what you were hearing three months ago? I know it was pretty difficult when the deal was announced, but can you talk a little bit about how that's progressed and what you're focused on and what you're hearing internally and externally today that might still be a little bit critical of the deal?
Kevin Blair (CEO and President)
Maybe, John, the way I'd answer that is let me give you maybe the five reasons I made the comment that I'm more convinced and convicted today than I was 90 days ago. This is maybe the questions we're getting and the responses I'm getting back. Number one, we've had 90 days to build a deeper familiarity with both sides' leadership teams. As we've gone through the due diligence on this, obviously, we didn't get to meet the broader teams on both sides. We've had 90 days to do that. We're building strong relationships with both executive teams. We're reinforcing culture alignment and starting to define what our strategic priorities are. Secondly, we're making progress on key decisions. We put that in the deck. Whether it's talent, we made another press release last night of our geographic banking and LOB org structures. We're also making decisions around technology.
Those decisions are well-defined. They're coming early in the process, so it's removing uncertainty from many of our team members and associates. Number three, you've seen retention and excitement within the key talent, as the earlier question was asked. Both organizations have retained their critical talent. We believe engagement levels are very high. Terry shared with me on his side that they did a pulse survey with their VOT, and it was actually higher than it was the prior quarter. I think both teams are energized about the opportunities ahead. On our side, our team's excited about the new model, the autonomy, the ability to grow. We've selected the best of best from both sides' benefits, both sides' products and capabilities. There's a general excitement about what's to come. The fourth thing is just revenue growth and synergy cases have been cemented.
We've started to dig in more to the revenue synergies. As you know, we didn't put anything in the model. There's a lot of opportunity there, not just on hold limits, but on sharing the specialties that both sides have built with very little overlap. Jamie and his team have worked with Harold to make sure that the cost synergies are aligned with our priorities and realistic, and they are. That's super important. The last thing I would tell you is we're continuing to make progress on the regulatory application process, that everything's on track. I think the discussions have been very constructive. I think it just reinforces the confidence that we have in our teams in building out a risk management organization that can fully meet the expectations of a category four institution.
Those are the questions we're getting, and that's what gives me a great deal of comfort and excitement as to the future.
Jon Arfstrom (Analyst)
Okay. That's helpful. I appreciate that. Jamie, one for you, also bigger picture. I heard the comments earlier on the accretion math being unchanged other than the capital comment. As you dig in a little bit more, is there anything that you think could be maybe too conservative or too aggressive in the initial projections, or is it just too early to tell? Kevin referenced the revenue synergies, but anything where you're leaning one way or the other?
Jamie Gregory (CFO)
We do feel good about the opportunity for the revenue synergies. There are a lot of different areas where Pinnacle complements Synovus, Synovus complements Pinnacle. We're pretty excited about those. Obviously, they're not in the model. The other thing I would say is that the model was predicated on consensus in July. It was consensus for Synovus plus consensus for Pinnacle. I think, as you know us well, you know, we try to outperform in all scenarios. I think if you had talked to Terry or Kevin in July, excluding this merger conversation, both of them would say, "We see those outlooks, you know, two years forward, and we expect to outperform." That's just inherent in both of these banks. I think what you'll see from us as we move forward is, you know, that's what you see these decisions being made so quickly.
You see the people decisions, the systems decisions. We're leaning in to make sure that we hit the ground running on day one, and we feel really good about our position. We're trying to minimize any uncertainty, minimize any lag, and be ready for day one so that we can, really, hit the ground running here in the Southeast.
Jon Arfstrom (Analyst)
Yeah, okay. That's helpful. Thank you very much.
Kevin Blair (CEO and President)
Thank you, John.
Operator (participant)
Thank you. Our next question comes from Bernard Von Gizycki of Deutsche Bank. Your line's now open. Please go ahead.
Kevin Blair (CEO and President)
Morning.
Bernard Von Gizycki (Analyst)
Hey, guys. Good morning. Just on hiring. I think you added low-teens hires in the first half of the year and thought you were looking to do similar in the second half. You noted adding the 25 revenue producers during the quarter. Is the combined deal a catalyst for you to add these incremental hires, which seems like you already started earlier than expected? Could you just provide a bit more color on what areas the hires are in and how we should be viewing the accelerated hiring going into the deal close?
Kevin Blair (CEO and President)
Yeah. Kind of a new definition, Bernie, on this quarter. We adopted the revenue producer definition that Pinnacle uses, and that's where the 25 comes from. Our initial recommendations where we were talking about adding 45 revenue producers in 2025 were specifically related to commercial, middle market, specialty, and private wealth banking. This new definition has expanded, which would include some additional roles. Those are kind of apples and oranges. I would just reference back to the slide that we put out about a month ago that said each year on commercial, private wealth, and our specialty businesses, we were targeting adding 45 FTE. Next year, we will increase that number by another 35, which will push us up to 80. Thereafter, depending on our success there, we put 35+. Just think 80+ in 2027. That's the goal.
As I mentioned, our teams are in place, and those individuals are already beginning the process and running the process that Pinnacle runs for identifying and starting to attract top talent from around the footprint, not only in the geographic banking space, but also in specialty. Again, I'm quite pleased with the leadership team we have. I'm quite pleased in where we are in the org structures. I think it's going to allow them to begin in fourth quarter starting to make some of those hires.
Bernard Von Gizycki (Analyst)
Okay. I appreciate that color. Maybe just staying on this theme, obviously, the pro forma bank, the growth profile, you know, when we think about legacy Pinnacle, you know, hiring over 600 of these, you know, revenue producers over the past five years, you know, you expect the pro forma bank to hire nearly 500 of these producers over the next two years. The legacy Pinnacle pipeline for those hires was, you know, expected to bring in a total of about $19 billion of assets, and, you know, from here, it's probably another $9 billion or so. What are your expectations for the ramp-up in asset and deposit gathering from your accelerated hiring plans and any timing you can provide on that?
Kevin Blair (CEO and President)
It's going to ramp up. Look, if you just go and look at the two consensus numbers and just look at what 2026 and 2027 would have meant, Pinnacle would be at that high single-digit, low double-digit number, and Synovus would have been mid-single-digit. On aggregate, it would say that we're about 6% in growth in 2026 and 2027. What you'll see, 2026 should be higher than that as some of those new hires start to come on board. Compounding that into 2027, it should be higher than that. By year three, I think we would achieve some level of parity as it relates to growth. Our goal would be to have that growth be in that high single-digit area.
Bernard Von Gizycki (Analyst)
Great. Thanks for taking my questions.
Kevin Blair (CEO and President)
Thank you, Bernie.
Operator (participant)
Thank you. Our next question comes from Michael Rose of Raymond James. Your line's now open. Please go ahead.
Michael Rose (Analyst)
Hey, good morning, everyone. Thanks for taking my questions. Maybe for Jamie, just as we look at the paydowns this quarter, was there any kind of acceleration there? And then assuming we do realize the forward curve this quarter and into 2026, do you expect any moderation in that level of paydowns? I think we've generally seen pretty good loan production this quarter, but I think the net numbers have disappointed a little bit, just given the elevated paydowns. We've had some other banks in the Southeast comment that they wouldn't expect paydowns to decelerate at all. They, in fact, potentially increase. You are going to have to run harder, a little bit harder. Clearly, you guys are hiring at a pretty robust pace that's expected to continue over the next few years, as was just mentioned in the previous question. I just wanted to get a sense for production versus payoff trends as we think about the forward curve and potentially on a standalone basis what growth could look like next year. Thanks.
Jamie Gregory (CFO)
Yeah, Michael, it's a great question. As we look at payoffs and paydowns, clearly they've been elevated, and that's been what's been slowing us down on overall loan growth. It's hard to predict exactly what will happen there. We would expect probably to see a little bit of moderation there, but we would have said that before, too, I believe. I think the real message here for us is the production. You look at the production this quarter and last quarter in a lot of our key businesses, and it's a real positive trend. If you look at the wholesale bank, we're really at peak levels, up 70% from a year ago.
The year-to-date numbers are up about 100% from prior year. Commercial banking production year-to-date is up 19% versus prior year. When we look forward for the fourth quarter, pipelines are up 14% quarter-over-quarter. We see a lot of tailwinds and momentum as far as the team, which is great to see. Kevin just walked through everything we're going through making these decisions on the merger, but the team is focused on our clients, and we're delivering. We expect continued strength in production, and hopefully, that leads to accelerated growth.
Michael Rose (Analyst)
Very helpful. Maybe just one more for me for Kevin. You know, pretty robust expected hiring numbers from the combined companies as we move forward. It seems like every bank, particularly in the Southeast, is trying to hire lenders. Can you just talk about the competitive aspect and hiring that many people over the next couple of years and what impact competition could have in kind of meeting those goals? I think there's just some concern out there that, obviously, the two hiring models are a little bit different. I know you guys are merging. I know there's the base versus bonus consideration there. As competition kind of heats up for talent, I think there might be a little bit of skepticism that you guys can actually meet those numbers or what the cost would be. Can you kind of step back and address that more broadly? Thanks.
Kevin Blair (CEO and President)
Yeah. Michael, it's a fair point. I mean, you listen to other banks, and there's one strategy. Everybody was going to go out and hire more people. I would just look back at the history of Pinnacle and their ability to continuously do this. Their model is one where they hire individuals from organizations, and then they ask those individuals to lift up other folks that work there that are of the same quality, and they're able to bring over those individuals in teams, not in onesie-twosie hires. That's the big difference that we'll make as we enter into that hiring strategy, trying to get teams of individuals versus onesie-twosies. What gives me great confidence, number one, is, again, the track record that Pinnacle has exhibited. That includes the comp structure that you referenced, where it's larger base, less variable comp, and also tied to the top of house. Number two, what we know, the number one factor that people are moving is generally not compensation.
They want a platform where they can fully serve their clients without having a bunch of bureaucracy. What we are both building is a stronger company that offers that to any prospective team member. We'll have bigger balance sheets. We'll have better product capabilities, and we'll still provide them with an environment that tries to remove all the bureaucracy and red tape that will allow them to do what they're doing. That's the big difference. That's why the people that both banks have been able to hire are generally coming from the larger banks that are looking for that environment. That will not change. Will there be greater competition? I'm sure. As long as we offer those value propositions, I think it's going to continue to provide a gateway for people to want to join our company.
Michael Rose (Analyst)
I appreciate all the color. Thanks for taking my questions.
Operator (participant)
Thank you. Our next question comes from Gary Tenner of D.A. Davidson. Your line's now open. Please go ahead.
Gary Tenner (Analyst)
Thanks. Good morning. Jamie, you kind of addressed part of my question with the comment about the pipelines being up 14% quarter-over-quarter. Just to dig in a little more on the kind of the fourth quarter growth outlook, to get to that kind of 4.5% number for the year, it puts you somewhere around 6.5%, maybe a little better than that in the fourth quarter. How much of that assumes a normalization of payoffs closer to the second quarter level, which I think was $1.4 billion versus $1.8 billion this quarter?
Kevin Blair (CEO and President)
Gary, you know, it's a good question. In our model, we have elevated production levels. We have strength in the fourth quarter, and we have payoffs remaining elevated, but not quite at the level of the third quarter. We think that'll net to 1%-2% loan growth, as you said, and we think that that'll come through with our core businesses. The trends have kind of bounced around a little bit over the last couple of quarters. In the third quarter, we saw a lot of strength in our commercial real estate book, diverse kind of term lending, which is a great positive. You see the strength in the pipelines and C&I in the fourth quarter. It's a diverse strategy, but we feel good about our expectations for this quarter.
Gary Tenner (Analyst)
Okay. Maybe just a follow-up in terms of the pipeline build over the last quarter, just a sense of how much of that is kind of ongoing, increased comfort by your customers as it relates to the economy and tariffs, etc., versus other growth dynamics. I get kind of a tough question, I guess. How much of it is just increased comfort generally, in terms of the underlying economic backdrop?
Jamie Gregory (CFO)
Yeah, I'll take that. I don't know that we can go through our pipeline and designate the purpose or the reasoning behind a new capital opportunity. I always like to go back to our quarterly client survey. What was interesting for me this quarter, given, again, another quarter of geopolitical risk and more talks around tariffs, generally, our clients feel better today than they felt entering the year. I say that because one of the questions we ask our clients was, "Are your expectations for the next 12 months greater, the same, or less, than it was as we entered 2025?" Ironically, 20% of our folks said that they expected it to be worse, while 40% expected it to be better, and 40% thought it would be about the same. I would submit to you, generally, people are more optimistic.
That coincides with some of the other data points that we look at. We also ask, "What's your business activity going to look like for the next 12 months?" 37% felt it would be the same. 42% of our clients expected business activity to increase. Maybe that's partly because we're in the Southeast that we're continuing to see a constructive environment. The one caveat that I would say that came out of the survey that was maybe concerning is that many people continue to see the raw input prices increase. We saw 46% of our clients said input prices were increasing, but only about 22% could push those increased prices out to their end user. I think what we are hearing and seeing is that you'll see some margin compression. I don't think that will take capital demand off the table. I think people generally feel constructive.
We also have an environment now where people generally think interest rates will decline. I think that has been correlated to line utilization and a little bit of growth that may stimulate the economy. I would submit to you this quarter is consistent with last quarter. People are generally optimistic. I don't think there's anything in our pipeline that suddenly the dam is broken and people are pulling things out of the pipeline or, conversely, putting things in. I think it's just normal growth, but people are more optimistic than they are pessimistic.
Gary Tenner (Analyst)
Good color. Thank you.
Operator (participant)
Thank you. Our next question comes from Casey Haire of Autonomous. Your line's now open. Please go ahead.
Casey Haire (Analyst)
Great. Thanks. Good morning, everyone.
Kevin Blair (CEO and President)
Morning, Casey.
Jamie Gregory (CFO)
Good morning.
Casey Haire (Analyst)
Question on the pro forma balance sheet. You guys have obviously had a few months here to look at the combined entity. In prior MOEs, we've seen management teams say, "All right, like, you know, maybe we don't need this loan portfolio," and make tweaks on the balance sheet. I'm just wondering if you guys have, upon further review, seen some things on the pro forma balance sheet that you might not like or might want to divest or just small tweaks for the overall balance sheet.
Kevin Blair (CEO and President)
You know, Casey, we have not. We continue, as we dive into these balance sheets, they really fit well together. We think that the mix of C&I and CRE with a little bit of consumer, we think that it all fits well. There's nothing that we would expect to divest. There's nothing that we at this point think that we will restrain or hold back. We think that we're well-positioned for the next few years here in the Southeast to drive client growth. The only thing I would say is our stance still holds that we will, like, as you head into crossing $100 billion, there will be liquidity considerations. We still believe that the debt issuances that we've put in our merge model, that those make sense. Obviously, we will assess those as we go through the next few years.
That's really the only balance sheet change would be on the liquidity side. It would be a kind of measured pace of debt issuances over time, as we kind of look at loan and deposit growth, and then potentially a little bit of remixing of the securities portfolio as you think about LCR.
Casey Haire (Analyst)
Okay. Great. Jamie, just one more follow-up for you on the merger math. The rate marks within Synovus, you guys have just under $900 million. That's amortized across 10 years, which seems a little long. I think the average term in the Synovus loan book is three or four years. Just, you know, why so conservative? Shouldn't that come in? Shouldn't those rate marks come in a little bit faster?
Jamie Gregory (CFO)
Yeah. We have different amortization periods for different parts of the rate marks. If you look at the AOCI, it's an 8-year. If it's held in maturity, it's 15-year. If it's a loan portfolio, it's 10-year. We try to be as appropriate as possible in how we looked at those. On the loan portfolio, it's sum of the year's digits, so it'll be a little bit front-loaded on that. We feel like those rate marks remain appropriate. We think that that's a good indication of how they will come through. I guess that's all I'll say about that.
Casey Haire (Analyst)
Great. Thank you.
Kevin Blair (CEO and President)
Yep.
Operator (participant)
Thank you. Our next question comes from Anthony Elian from JPMorgan. Your line's now open. Please go ahead.
Anthony Elian (Analyst)
Hi, everyone. On loan growth, you called out production was about $2 billion for a second straight quarter. I'm wondering if you can give us more color on any specific areas or drivers of that, and that has driven the strong production levels, and how sustainable you think that level is.
Kevin Blair (CEO and President)
Yeah. You know, Tony, it's really not any specific area that's driving the growth. I mean, when I look at our areas and I look at the production by group, we saw strong production in middle market banking this quarter. We saw strong production in our specialty lending area. CIB stayed on par, a little over $100 million. Senior housing had a really strong month in production. CRE has picked up. We had about $500 million in production this quarter, a lot of retail. That was up about 40% quarter-on-quarter.
What gives me confidence is that when I look down at all of our sublines of business, I don't see big buckets driving the production. As Jamie mentioned earlier, as we look into the fourth quarter, we think a lot of these areas will just continue to produce at similar levels. As he referenced, pipelines are up about 14%. That's really across a lot of these businesses. There's not any one area. We're seeing it in both C&I and CRE. I would mention that CRE, even at $500 million, is far below where it would have been years ago when rates and cap rates were at a different level. I think as rates come down, we could see that number build exponentially. Across the board, a lot of C&I contributors, and I think that will continue for the foreseeable future.
Anthony Elian (Analyst)
Thank you. On capital markets income, another good quarter in that line item. I'm wondering if you think, especially with the outlook for lower rates, that that line item can be sustained at the level you saw or if it can even pick up from here. Thank you.
Jamie Gregory (CFO)
Absolutely, Tony. When you think about $14 million, about 40% of that revenue came from derivatives. I think as rates move, you're going to still see people wanting to lock in fixed rates, especially as rates come lower. As production remains elevated and continues to grow, you'll continue to see the derivative income come in. This quarter, we saw about 40% of the revenue from syndication and lead arranger fees. That was a record quarter for Synovus. I will remind everyone, we really only entered this business several years ago where we're leading deals, participating out to others.
I think, again, as we continue to grow our businesses, produce larger loans, you're going to see that revenue pick up. About 10% was debt capital markets. That's something that several years ago, we wanted to make sure that if we're providing capital to some of these larger borrowers, we want to make sure that we're getting a piece of some of those debt fees, and we continue to get those numbers. Again, as we go up market, we continue to grow our book, we'll see those come in. The other businesses like foreign exchange hedging and small business sales and the Small Business Administration loans, I think those are two businesses we plan to grow as well. When I look at all the categories, I would not say that this quarter was episodic. I would tell you that the momentum continues to build.
As we join Pinnacle, I think there'll be some opportunities to share some of the things we're doing on the Pinnacle side and vice versa.
Anthony Elian (Analyst)
Thank you.
Operator (participant)
Thank you. Our next question comes from Christopher Marinac of Janney Montgomery. Your line's now open. Please go ahead.
Christopher Marinac (Analyst)
Thanks. Good morning. Kevin and Jamie, can you tell us a little bit more about your loans to private equity funds and other intermediaries? Is there a deposit opportunity that you have with that business that you've been building the last year plus?
Kevin Blair (CEO and President)
No. I would tell you, Chris, in the deposit opportunity, we talked about in the past that if you partner with some of these private credit or private equity funds, can you provide ancillary services? We're competing with them today on capital. If you don't want to provide warehouse facilities, is there a way to partner or provide some capital but get the benefit of deposits? We probably have a couple of relationships like that, but I would tell you it's not material. We are not significant lenders into the private credit, private equity markets. I know that NDFIs have picked up a lot of commentary in the last couple of weeks. I'll just remind everyone, about 60% of our exposure there is in our structured lending division. That group has a stellar track record for credit performance. We've never had a charge-off there.
We have no NPLs, no criticized or classified loans, and it's 100% senior secured. It's a business that we continue to grow. It's well structured. It's well underwritten. Most importantly, they monitor the collateral. I'll knock on wood, we won't have events that you've seen happen with others across the industry.
Christopher Marinac (Analyst)
Great, Kevin. That's helpful. The growth in NDFI really relates back to the expansion of that structured group, and that's much more to do with these balances rising than any other focus.
Kevin Blair (CEO and President)
Exactly, Chris. What I would tell you is remember when we did our risk-weighted asset optimization exercise, most of those loans, the large majority, get preferential risk-weighting treatment at 20%, which shows you how well secured they are and the strong legal protections and the collateral management that's behind those assets.
Christopher Marinac (Analyst)
Great. I appreciate that. I guess it's safe to presume that your reserves really already kind of capture that growth of that structured business already.
Kevin Blair (CEO and President)
Absolutely.
Christopher Marinac (Analyst)
Great, Kevin. Thank you very much.
Kevin Blair (CEO and President)
Thank you, Chris.
Operator (participant)
Thank you. This concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Kevin Blair for any closing remarks.
Kevin Blair (CEO and President)
Thank you, Alex. As we wrap up today's call, I want to thank the entire Synovus team for delivering another exceptional quarter. We are successful because of you. We're entering the fourth quarter with strong momentum, as evidenced by this quarter's highlights. Third quarter was yet another quarter of exceeding the street's expectations. We increased our revenue guidance to the high end of the range and lowered our expense guidance to the low end of the range for the year. We had the lowest net charge-offs in almost three years, the lowest criticized classified ratio in two years. We also had the highest quarter for core fee income and the highest CET1 levels in our company's history. To add on to that, we had profitability that continues to stand out with an ROA at 1.42 and an ROTCE at almost 18%.
These accomplishments serve as a strong foundation as we prepare to close our strategic merger with Pinnacle Financial Partners. Together, we're creating the nation's most dynamic regional bank: fast-growing, service-driven, best-in-class in every way. I also want to recognize the hard work of our merger integration offices, both at Synovus and at Pinnacle. Their dedication and collaboration have been instrumental in ensuring we're ready to operate as a larger and more capable financial institution. Let me be clear, this is hard work, and it is not lost on anyone. Success will be determined by our execution, and it will require a compromise based on a set of common goals and ambitions. Terry and I recognize that this merger will result in changes to both companies, but we're 100% committed to joining together by adopting the best of each.
In that regard, here at Synovus, we are already transitioning to the Pinnacle operating model, which means we will deliver through a strong geographic model, support local delivery with non-siloed expertise and specialty partnerships, add revenue producers at an accelerated pace, and have the entire team incentivized and motivated on delivering top-of-house growth and risk management goals. Things are moving at a very swift pace. I'd also like to use this opportunity to extend my congratulations to Pinnacle on their upcoming 25th anniversary. It's a notable milestone that reflects their decades of success and enduring commitment to service excellence, growth orientation, and entrepreneurial spirit, values that will align perfectly with our shared vision. I also want to express my gratitude to our Board of Directors for their invaluable advice and counsel through this transaction.
Their guidance has been critical in helping us navigate complex decisions and positioning Synovus for long-term success. Lastly, I want to thank our clients. Thank you for your continued trust and support. You're the reason we get out of bed every day, and you're at the center of every decision we are making as we bring these two high-performing organizations together. Terry stated that in his career, he has never seen a more advantaged competitive position than the one we will enjoy post-merger. I echo that sentiment, and I'm incredibly confident in the path ahead, and I'm completely energized by the opportunity we have to shape the future of regional banking. The best is yet to come. With that, Alex, this concludes our third quarter earnings call.
Operator (participant)
Thank you all for joining today's call. You may now disconnect your lines.